International Forecaster Weekly

The Loss of Momentum in the Markets All Too Apparent Now

Facing the music of the S&P downgrade, the loss of purchasing power, currencies falling against gold and silver, nobody will admit defeat and purge the system, correction now, rally into the election, what worth our safety, banks yet to recover, Fed knows monetization of the debt keeps the game going, nightmares of inflation of depression.

Bob Chapman | August 17, 2011

Since April the market as measured by the Standard & Poor’s stock index is off about 18% and momentum has fallen 40%. The recent catalyst for lower prices has been the drop in the debt rating by S&P of US Treasuries. In addition the economy is showing a pronounced slow down, as are many other countries. There is liquidity at major banks and corporations, but it has yet to be employed into the economy. Consumer spending is falling, as are savings and the use of credit has jumped again. Monetary surplus normally is put to work not only in the economy, but also in financial sectors, such as the stock market. This absent normal reaction presently is not present. If the banks and corporations won’t lend or invest then it is the function of the Federal Reserve to do so. That means QE 3 is needed not only to provide funds for purchases of Treasury, Agency and toxic debt, but also to spark and maintain a growing economy.

Personal consumption has fallen close to 2% and it continues under pressure. As we moved into the summer the manufacturing activity fell as well. Money supply has been increasing via QE 2 and stimulus 2 for 15 months, but has only been able to produce 1.3% GDP growth and the outlook for the second half of the year looks lower, as we predicted it would late last year. The rate of money and credit creation is close to 8% and has officially risen, which means we are still well into the system. Using 1980s formula inflation is 10.6% and climbing toward 14% by yearend. Deflationary bias has been overcome as it has been for the past 11 years. The flipside of this rescue plan is consumers are losing purchasing power and most all currencies continue to fall in excess of 20% versus gold and silver annually.

What the fed has to do is anticipate future needs of money and credit needed by the economy. One false step can lead to contractions of liquidity and a fall toward or into deflation. Thus far, recently the opposite has been true - there has been almost sufficient liquidity. The big problem on the other side is how to moderate inflation? As far as we know the Fed has not found that solution, nor has anyone else historically. We all know where double-digit inflation ends up. The next question is how to create real economic growth, which generally speaking has not as yet appeared. Further gunning the money and credit growth exacerbates inflation. Some $5 trillion in spending via QE and stimulus 1 and 2 has held the economy up, but has not provided real growth and wealth. This patchwork system has failed and the Fed has already embarked on QE 3, which will obtain the same result. The Fed knows this won’t work, but the only thing else they can do to solve the problem is to purge the system; they won’t do that because they will have to again admit defeat.

Some in the stock market community are recognizing the ongoing problems and they have moved in a large way into commodities and in a minor way into gold and silver related assets. Even sovereign nations have been buying gold. Thus, we believe finally a trend is in place toward the purchase of gold and silver and shares. We believe the stock market will move lower and additional funds will move into other opportunities. We have already seen this in gold and silver and we are now seeing accumulation of gold and silver shares, which we believe will continue. The positive aspects of the general stock market have exhausted themselves and real earnings could fall 30% over the next couple of years. It is better as well from a political viewpoint to have a correction between now and February with a presidential election on the way. That could set up for a rally, albeit transitory, into the election. Remember, there is no coincidences and nothing happens by chance. Deflation brings loss of control by the Fed and inflation allows control of the entire system. That has produced at least $2.5 trillion in additional money and credit via QE 1 & 2; most of which has been monetized and become inflationary. If you add in stimulus 1 & 2 you have a total out lay of about $4.2 trillion. If we are correct in our predictions QE 3 will aggregate about $2.3 trillion additional and that will keep inflation headed upward.

This kind of monetary inflation is classic and it is not surprising at all that those hoping to protect their assets have been moving their investment funds into gold and silver related assets. As you have seen the reaction in the stock market has been negative accompanied by wild swings. The downside was led by the financial sector, which is starting major layoffs and oil and gas companies that just saw oil fall $25.00 a barrel. At the same time worldwide sovereign bonds have been under pressure, the exception being the US Treasury market, which is perceived to be a safe haven supplying negative returns on a net basis. We could never understand the perception. Presently those investing in 10-year T-notes at 2.20% and looking at real inflation of 10.6% is a real loser of 8.4%. That makes no sense to us. Is supposed safety worth those kinds of losses? Perhaps in five years or so we can pick through the wreckage and discern whether these risk takers were correct in taking guaranteed losses.

The main reasons for higher gold prices has been 23 years of official suppression: ongoing inflation; zero interest rates at least for two more years; gold replacing the dollar as the world reserve currency; the denigration of sovereign bonds and the possibility some may default; the insolvency of many major banks worldwide; the ECB emulating the Fed by creating almost $1 trillion to buy bonds from collapsing countries and that people worldwide are finally realizing their fiat currencies are flawed to say the least. Who in their right mind would buy toxic sovereign debt except the Fed and the ECB and the Bank of England? On the other hand, who would say zero interest rates would be extended for two years?

The casinos known as banks have yet to recover from the credit crisis. They are trying disparately to recapitalize as housing and commercial real estate lie in a state of collapse. The economy has little or no growth and was it not for federal largess and Fed accommodation the economy would be in serious trouble. Without stimulus and QE 2 economic growth would be minus 5%, as price inflation stands at 10.6%. A QE 3 will buy Treasury and Agency bonds and assist in keeping US GDP from falling into negative GDP. There will be little room to supply stock market support. It will be there but on a limited basis. The “Presidents Working Group on Financial Markets” will be on their own. The Fed may admit what they have been doing in the markets, but the brainwashed public and Wall Street doesn’t care to realize how corrupt the system is and how the criminal cabal works. The Fed knows that it has to stimulate the economy and they will do just that. The Fed will form a 3-front attack. Buy Treasury bonds, assist the economy and the results of these first two will assist the stock market into a rally during the summer and fall of 2012. Again, these are short-term solutions. We also believe the Fed will have to continue to assist the Bank of England and the European Central Bank, as well as intervene in the US and other stock markets to assist them when they are under pressure. These actions would be typical for the corporatist fascist model of finance and economy.

By early September people will know just where Europe stands financially and it is not going to be appealing. The conditions in Italy and Spain will have complicated matters and brought to the forefront an eventual cost of bailout to $4 to $6 trillion, figures we offered 1-1/2 years ago when the EU was talking in terms of less than $1 trillion.

In the US a policy of zero interest rates, almost non-existent bond yields and the foolish dependence on interest rate swaps will lead to a bubble and hyperinflation. We do not think people and many professionals understand how dangerous this all is. It will lead to the complete collapse of the financial system. The alternative is to purge the system in a planned and positive manner. The result will be dreadful, but allowing collapse is much worse. The present course of action will suck the entire world financial system into the US-EU vortex, and take everything down with it. The antithesis of this official incompetence is gold and silver. When we wrote of $1,650 and $2,000 an ounce just a year ago investors froze in disbelief. Now we talk in terms of $8,000 or more and $500 silver. Those who listen will make great fortunes and their wealth will be protected. Wait until gold and silver coins and bullion are not any longer easily available and investors stampede into gold and silver shares.

Today product is hard to find as less than 1% of Americans own gold and silver related assets. Can you imagine the scramble when we have a replay of 1979-80 when 15% of Americans were buyers? In time, all the naysayers on CNBC and Wall Street will finally agree that gold and silver are the only real money, but by that time other investments will be wreckage and so will thousands of investors. This is a very serious game being played and from an investment viewpoint the only real winners well be those who have invested in gold and silver. Remember, he who owns the gold makes the rules. The US dollar is no longer the go to currency for protection. In fact, no currencies are. When we lived in Switzerland in the late 1950s the Swiss franc was 4.20 to the dollar. Today it is $.7700 and the Swiss are forced to defend their currency by creating more currency and lowering interest rates. Thus far, after spending billions of francs the currency refuses to fall in value. In time the franc will no longer be the stand-alone currency and only gold and silver will be left standing. The Japanese currency is experiencing the same problems as the franc. When all is said and done all you will want to own is gold and silver coins, bullion and shares – there are no other alternatives.

If you were wondering why the yield on the 10-year note was 2.20% it was not the disintermediation of funds from stocks to bonds. It was caused by interest rate swaps, a $250 trillion market. Those yields are a fraud, but Wall Street, banking and Washington do not care as long as yields continue to fall. The Fed is shooting for 3-1/2% to 3-3/4% 30-year fixed mortgage rates, so the banks can qualify buyers of residential real estate. As you can see everything is manipulated. This shows you how desperate the elitists really are.

The Fed knows full well that monetization of debt keeps the game going, while causing ever higher inflation and solves no problems permanently. If the Fed knows how to stimulate the economy they are sure keeping it secret. What will the Treasury and Fed do when extended unemployment ends and puts three million unemployed on the street? Perhaps Congress will find funds to continue to fund it by creating more debt? They do not want a replay of last week in what we saw in London. Low or negative real interest rates are what continue bull markets in gold and silver, just wait and see. How can any sensible person take no yield with 10.6% inflation? As time goes on such rates will kill confidence in dollar denominated assets and the flight to quality will head straight to silver and gold. As they have for the past 11 years, all major currencies will fall 20% or more as they have annually versus gold and silver. Central banks must inflate to survive and that has to mean higher gold and silver prices. What one currency is worth versus another to us is meaningless. It is what that currency is worth versus gold and silver. You saw the manipulation of the silver price from $50.00 to $32.50 via changes in margin requirements. That is what is in store for gold as well. Two changes upward in one week from $4,500 to $7,500. They’ll take them higher if for no other reason to relieve their members that are naked short. Gold is a much bigger and liquid market than silver and the manipulators will have nowhere near the success they had with silver, which incidentally has shaken off the dealer advantage and trades close to $40.00 again. Two short term palliatives that won’t work. We recommend buying on any and all weakness. If you hadn’t noticed gold and silver shares are under major accumulation by professionals, because they see low P/E’s as a gift along with the leverage that these stocks have as gold and silver climb higher. The game being played cannot ignore all the problems out there. Just to give you an inkling of some things in store for Italy, they have $100 billion in debt due by the end of September and $250 billion due by yearend. By the end of 2013 they’ll need to sell bonds worth more than $700 billion. Is it any wonder that German citizens do not want to bail out the six losers? Almost every country has debased their economies, currencies and financial structures. This and inflation plus gold’s new role as world reserve currency will cause more major investment demand from all quarters. All the naysayers are going to get permanently buried this time.

Even with the market comebacks arranged by your government’s manipulation the Dow fell last week 1.5% S&P 1.7%, the Russell 2000 fell 2.4% and the Nasdaq 100 fell 0.6%. Banks fell 8.9%; broker/dealers 6%; cyclicals 2.3%; transports 1.5%; consumers 1.7%; utilities 1.2%; high tech 0.9%; biotechs 1.0% and semis rose 1.5%. Gold bullion surged $83.00 in spite of having to give some $50.00 back due to increased, manipulative higher gold margin requirements. The HUI un-leveraged gold share index rose 7.0% and the USDX, dollar index, was unchanged at 74.61.

The 2-year T-note fell 9 bps to 0.19% yield, the 10-year T-note fell 31 bps to 2.25% and the 10-year German bund fell 1 bps to 2.53%.

The Freddie Mac 30-year fixed rate mortgage fell 7 bps to 4.32%, the 15’s fell 4 bps to 3.50%, the one-year ARM’s fell 13 bps to 2.89% and the fixed 30-year jumbo rates fell 3 bps to 4.95%.

Federal Reserve credit rose $5.2 billion to $2.855 trillion. Credit rose $447 billion year-to-date and $546 billion year-on-year, or 23.6%. Fed foreign holdings of Treasury and Agency dept rose $6.8 billion to a record $3.470 trillion. Custody holdings for foreign central banks rose $120 billion y-t-d and $306 billion from a year ago, or 9.7%.

Get this, M2 narrow, money supply surged and unbelievable $159 billion to a record $9.475 trillion. That is a 12.2% pace ytd and 9.6% yoy.

Total money fund assets jumped $52.8 billion to $2.621 trillion.

Total commercial paper outstanding fell $6.4 billion to $1.169 trillion. It is up 28% annualized.


Home sales in Southern California fell 4.5 percent last month from a year earlier as mortgages were hard to obtain and the U.S. debt crisis rattled some high- end buyers, according to DataQuick.

A total of 18,090 houses and condominiums sold in July in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties, a 12 percent decline from June, the property research firm said today in a statement. The median price paid was $283,000, down 4.1 percent from July 2010 and the fifth consecutive decline on a year-over-year basis.


Homeowners buffeted by unemployment, declining stock portfolios and sagging property values are delaying kitchen, bathroom and other projects. Second-quarter sales at Lowe’s stores open for more than a year declined 0.3 percent, compared with the company’s projection in May for a 2 percent increase.


Builders began work on fewer homes in July, indicating residential real estate is failing to contribute to U.S. growth two years into an economic recovery.

Housing starts fell 1.5 percent to a 604,000 annual rate, in line with the median forecast of economists surveyed by Bloomberg News, from June’s 613,000 pace that was less than previously estimated, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, also dropped.


Building tracks for the first section of California's proposed high-speed rail line will cost $2.9 billion to $6.8 billion more than originally estimated, raising questions about the affordability of the nation's most ambitious rail project at a time when its planning and finances are under fire.   A 2009 business plan developed for the California High-Speed Authority… estimated costs at about $7.1 billion.


Chinese banks have poured more than $1 billion into real estate loans in New York City in the past year. Investors from China are snapping up luxury apartments and planning to spend hundreds of millions of dollars on commercial and residential projects like Atlantic Yards in Brooklyn. Chinese companies have signed major leases at the Empire State Building and at  1 World Trade Center, which is the centerpiece of the rebuilding at ground zero…  The Chinese investments are occurring with little fanfare, in part because Chinese executives tend to shun publicity. But back home, their government is urging them to invest overseas to diversify China’s foreign-exchange holdings, develop business partnerships and improve the country’s leverage in international affairs.


Global demand for U.S. stocks, bonds and other financial assets weakened in June from a month earlier as the White House and Congress wrangled over raising the debt limit, government figures show.

Net buying of long-term equities, notes and bonds totaled $3.7 billion during the month compared with net buying of $24.2 billion in May, according to statistics issued by the U.S. Treasury Department today in Washington. Including short-term securities such as stock swaps, foreigners sold a net $29.5 billion compared with net selling of $48.8 billion the previous month.

The Treasury’s reporting on long-term securities is a gauge of confidence in U.S. economic policy, and today’s report may reflect concern about the government’s ballooning debt. Earlier this month, the Standard & Poor’s rating company downgraded the Treasury’s debt rating after the budget stalemate between Congress and the White House.


California, the most populous U.S. state, collected $538.8 million, or 10.3%, less revenue in July than projected as higher taxes adopted in 2009 expired.  Sales taxes were 12.5%, or $139.4 million, below forecasts, while corporate taxes were down 19.3%, or $69.5 million. Personal-income taxes were 2.9%, or $89 million, higher than projected in May… The July numbers widen the gap between actual receipts and additional revenue on which Governor Jerry Brown and Democrats based their new budget, Chiang said. That $86 billion spending plan signed into law June 30 cut spending by $12 billion and counted on $4 billion in higher-than-forecast tax revenue from a recovering economy.


The cost to protect against a default by U.S. banks soared a second day and a benchmark gauge of corporate credit risk reached a 14-month high amid fear that Europe’s debt crisis will infect the global financial system and sink the economy back into recession.  Credit-default swaps on Bank of America surged to the highest since April 2009…  A swaps index that gauges the perceived risk of owning junk bonds, which falls as sentiment deteriorates, plunged to the lowest in almost two years.


Central bankers from the U.S. to China may have to decide which is their worst nightmare: the Great Inflation of the 1970s or Great Depression of the 1930s.   As stock markets slump worldwide and the global economy sputters, monetary-policy makers are struggling to come up with new strategies to spur growth. The catch is that they risk adding to price pressures if they pump more money into the financial system as inflation climbs.   It’s what ‘are you most scared of’ -- the risk of spiraling prices or a plunging economy, said Vincent Reinhart, who was the Federal Reserve’s chief monetary-policy strategist from 2001 until 2007 and is now a resident scholar at the American Enterprise Institute in Washington.


Manufacturers in the U.S. churned out more cars, computers and furniture in July, easing concern that one of the mainstays of the recovery was giving way.

The 0.9 percent increase in production at factories, mines and utilities was almost twice the median forecast of economists surveyed by Bloomberg News and the biggest gain of the year, according to data today from the Federal Reserve in Washington. Another report showed homebuilders cut back last month.

Part of the jump in manufacturing reflects a rebound from the supply shock caused by the earthquake in Japan, indicating it will be difficult for factories to maintain this pace of output as consumer spending and exports cool. At the same time, companies have kept inventories lean, limiting the need for large-scale cuts that could trigger an economic slump.

“Given some of the other negatives in the economy, I think you still have to point to manufacturing as a bit of a bright spot,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who correctly predicted the gain. “It’s not great, but a decent outcome.”


Manufacturing in the New York region unexpectedly contracted in August for a third straight month as orders dropped and managers became less optimistic about the future, signaling the industry that has led the economic recovery is at risk of stumbling.

The Federal Reserve Bank of New York’s so-called Empire State Index fell to minus 7.7 from minus 3.8 in July, a report showed today. The median forecast in a Bloomberg News survey called for an index of zero, the dividing line between expansion and contraction. The bank’s six-month outlook gauge dropped to the third-weakest level on record.


Prices of goods imported into the U.S. rose in July, led by gains in costs of fuel, industrial supplies and clothing.

The 0.3 percent gain in the import-price index followed a revised 0.6 percent drop in June, Labor Department figures showed today in Washington. Economists projected a 0.1 percent decrease for July, according to the median estimate in a Bloomberg News survey. Prices excluding petroleum rose 0.2 percent.


Suspect actions have seen at least twice in U.S. stock market trading during the last week.

First was the late-afternoon rally on Friday, August 5th, in advance of the S&P announcement of the downgrade to the U.S. sovereign debt rating. The U.S. government knew the downgrade was coming.

If, as indicated by Allen Greenspan that the PWFGM intervened in the markets as the news was breaking on the planned invasion of Iraq, it most likely also would have acted in advance for something as market-rattling as the downgrade. Second was the stock rally following the FOMC announcement on August 9th. Interventions purportedly are worked through purchases of stock futures, handled by large investment banks, on behalf of the PWGFM, as directed by the New York Fed.


[Top advisers admit only symbolic acts can be enacted]

Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors





The U.S. Postal Service, which predicts a loss this year of as much as $9 billion, may seek to break union contracts so it can slash 220,000 jobs by 2015 and withdraw from federal health-benefit and retirement programs, according to draft proposals.


The U.S. Environmental Protection Agency is forcing local governments to spend $100 billion to improve their sewage systems…   The EPA is enforcing clean-water regulations in 772 municipalities that it says release too much raw sewage into lakes and rivers during rainstorms and snow melts. The mandates add to the fiscal strains of governments already burdened by falling tax revenue.


The Illinois fiscal 2012 budget doesn’t address the state’s ‘sizeable backlog of unpaid bills and an unsustainable ascent’ in spending for pension benefits, Moody’s… said… The increase in state corporate and individual income tax- rates that took effect in January will contain growth in total liabilities of almost $120 billion.


Speculative-grade bonds worldwide are inflicting the biggest losses on investors since November 2008 amid the credit-market seizure on mounting evidence that the global economy is in danger of tumbling into recession. Investors withdrew an unprecedented $2.1 billion from junk mutual funds on Aug. 9, research firm EPFR Global said.


Junk corporate bonds in Europe are losing money this year, erasing their returns in the first half as the region’s deepening debt crisis forced investors to flee all but the safest assets.