International Forecaster Weekly

The Secrets of Liquidity

Result of the end of fed pumping up the economy,Markets torn by zero interest rates, The finances of many states now dire, greater risks for recession and depression, the folly of bond yields, Baltic Dry Index drying up, more COLA for the folks, contracting out an entire city, Hardest Hit fund, Goldman Sachs was not alone, destroying markets

Bob Chapman | June 26, 2010

Many investors wonder how are markets able to propel themselves back and forth as they do. How do corrections turn into rallies? The secret is liquidity and the question is where does it come from?

As you know the Fed up until 14 months ago increased what once was called M3 by 15% annually. Foreign major central banks did the same cutting back a couple of months sooner than the Fed. The Fed increased M3 for 5-1/2 years and the other central banks for about four years. Starting four years ago all currencies started falling versus gold. The US dollar started about ten years ago.

Contrary to what government officially has to say about inflation for the past 18 months the sources of liquidity, fiscal money creation by the debt route by the current administration has been $2.2 trillion. The Fed has added $1.2 trillion over that period, but we do not believe their figures for a moment. We believe the number is closer to $1.8 trillion. That is only for the purchase of MBS/CDOs from banks, Wall Street, insurance companies and other corporations. Then we have at least $500 billion in swap arrangements. Those funds were supposedly re-exchanged five months ago. Since then there has been another swap, but we cannot find out what the numbers are. Then there are zero interest rates, which force investors to seek more speculative returns. As an example, funds in money market funds have fallen about $1 trillion over the last 18 months. That is why bonds are at highs and the market can rally. Then there is the adding of liquidity by the Fed via the repo market. Finally, there has been the re-leveraging of banks, or at least the maintaining of 40 to one leverage, and the re-leveraging of corporate balance sheets, sovereign wealth funds and hedge funds, although the numbers are tame versus two years ago. There you have it. The foregoing on a net basis is larger than what existed at the beginning of the credit crisis almost three years ago. New liquidity has been created to replace that which was lost. As a result gold and silver have appreciated in a big way over that period. We see no proclivity to end this massive onslaught. In spite of official figures real inflation is some 7% and that is why currencies keep losing value against gold, which is the only barometer to measure the real devaluation of currencies as a result of monetary and fiscal profligacy.

Markets are torn by near zero interest rates and risk aversion. A trillion have left money market funds over the past 16 months. Some have gone into bonds, junk bonds and into the market. You cannot have it both ways. Bonds cannot go higher and the market is very dangerous, especially with three quarters coming up with passable to bad results. Then there is the possibility of tax increases next year to accompany 19 new taxes in the Medical Reform package. There is also the possible passage of Cap & Trade, which would double gas prices, illegal alien amnesty and government taxing or taking over your retirement plans. These issues are why it is so important to replace almost all the incumbents in November. Not to be treated lightly is the problems of sovereign debt. Not only for those 20 countries on the edge of insolvency, but for those who are owed the debt. There is an excellent chance 5 to 7 countries may leave the euro. The euro may then fade and the other 10 euro zone members may go back to their original currencies. It is any wonder gold is hitting new highs and silver is soon to follow. Gold is not rising to inflation and anticipated inflation, but because of unserviceable deteriorating debt worldwide. You cannot wait for the next crisis – you have to anticipate it. You have to be ahead of the curve and the crowd. Does anyone really believe bailouts and future bailouts and stimulus will solve anything? They haven’t up to now and they won’t in the future. They only make matters worse. What kind of insanity is it to have the Fed buy $1.2 trillion, that they admit too, of toxic MBS and 80% of Treasury issuance, with money created out of thin air? Small and medium-sized business cannot expand and hire new people. They supply 70% of all jobs. Government should be cutting taxes, not expanding them. They should be cutting costs and employees by 30% for starters.

Zero interest rates may fatten the profits of major manufacturers and transnational conglomerates, but it does little for anyone else, except Wall Street and banking. Interest rates on credit cards have risen, not fallen as banks fatten their bottom lines at the expense of the populace. That is why retail sales have fallen over the past two months and probably will continue to do so. A battle wages over M3. Some say it is negative, some say it is in double digits. We will certainly find out shortly. The housing stimulus and credit is now over and prices are falling. Unemployment is rising and risk taking is falling. Now that the dollar has had a large appreciation there is ample reason to believe it could well have a sharp correction. Those in the carry trades know that sovereign debt has a much greater degree of risk than in the past. That means more caution and less liquidity.

On the state level the financial situation is dire. Illinois sold $300 billion in Build America Bonds at a yield 40% higher than Treasuries. Worldwide credit is being bought judiciously. Greece and the other PIIGS have intractable problems, but so do the lenders who bought the toxic waste. As a result the cost of credit default swaps have risen substantially. States and countries in the euro zone cannot print money as the Fed and the ECB can. The market is nervous and it should be. We see major unavoidable trouble ahead, so watch out below.

As we predicted the risk of a double-dip recession /depression have risen substantially over the past two months. Retail, housing and employment are fading and fading fast. It points out that the US economy cannot function positively without massive stimulus. Bank credit is falling as well as individuals pay down debt. In addition exports are starting to fall in the face of a strong dollar, which gives the euro zone participants a 15% price advantage. This is a big price to pay to enrich Wall Street and take down the euro as the dollar’s competitor. We do not believe the dollar can maintain current levels, but damage will continue for another 6 to 12 months. Can you imagine the fallout with the euro at parity? Not only does Europe and the US have trouble, so does China that has to unravel bad bank debt domestically, a market fall that already is off some 25%, but worse they have to deflate a property bubble that will be very painful. De-leveraging for the US, Europe, China and Japan has really just begun and this is why a year or two from now there will be another meeting like the Smithsonian in the early 1970s, the Plaza Accord of 1985 and the Lourve Accord of 1987, where everyone will devalue, revalue, and default. An Illuminist jubilee. That could be triggered by a bond market collapse. A market that has been in a bull market for 29 years. Timing of events is very difficult. We could be off by one to five years. The point is bad – things are on the way, so prepare yourself.

The economy is beset with slowing retail sales, a plunging housing sector and falling credit usage. You might call this individual austerity. Consumer sentiment is consistent with recession. Job creation is negative as are loans to small and medium-sized businesses that create 70% of the jobs. The dollar’s strength is wreaking havoc for US exports, which had been improving.

Greece and Spain are in the soup prominently followed closely in the euro zone by Portugal, Ireland and Italy. China has seen a 9-month 25% fall in their stock market and they are facing a collapse in credit and in real estate.

We no longer consider the oil spill a major factor. It can be solved and turned off any time the Illuminists want to do so.

Politically, Israel has finally gone a step too far and Turkey finally realizes that the EU is never going to accept them due to religious reasons. Turkey is now in the Muslim block. That will be a problem for some of the pro-US-UK Muslim states in the Gulf in the future. Geopolitical risks abound and they are worsening along with sovereign debt problems.

Those who have been reaching for bond yields will eventually pay a very high price. The bond market is no longer a safe place to be, whether it is sovereign foreign bonds, corporates or US paper. The US still has 7% to 8% inflation that isn’t going to go away soon, and in all probability that inflation will soon worsen. Those 10% to 20% returns cannot continue indefinitely, as the US government manipulates the US bond markets. Who would want to buy Treasuries yielding from zero to 3.2% with real inflation of 7%, when you can own gold and silver coins and shares that are appreciating? We know most of the funds entering mutual funds are in bonds. These “boomers” who are the big buyers are looking for safety and will continue to do so. As you can see not as much money will be going into the stock market. In spite of losing money on bond holdings those in their 50s and upward are staying away from new market commitments. They want safety, or at least perceived safety, not capital appreciation, but capital preservation. The market on a net basis has been even for 11 years and that includes a bear market rally and a real estate boom. Incidentally during that period the gold and silver shares have done well. AEM from $5.00 to $83.50 presently $62.70 is a perfect example. The price of gold went from $252.00 to $1,265.00. This was one of our recommendations, but then again what do we know. We are not, and never will be on CNBC, because they cannot handle the truth, and they do not want the public to know the truth. Mind you, during those 11 years, the US government relentlessly suppressed the prices of gold, silver and the shares. They cannot do it indefinitely. Just last week equity funds saw an outflow of over $2.9 billion and bond funds saw an inflow of almost $5 billion.

New orders for long-lasting US manufactured goods fell for the first time in May in six months, off 1.1%, the sharpest drop since 8/09.

Weekly jobless claims were 457,000, off 19,000 from the previous week.

Issuance of commercial paper rose $15.4 billion to $1.099 trillion.

The Baltic Dry Index, a key indicator of future international trade activity, closed at 4,209 on May 26. In less than a month it collapsed to 2515, a 40% loss. This thing was the same as in the late spring of 2008, shortly before world equity and commodities markets collapsed. This is a big red flag.

The Census Bureau fired 243,000 people in June. When reported the total number is the one to watch. The contraction in June payrolls should be 250,000, a loss of 70,000 in June versus a gain of 431,000 in May. This could mean a 10% U3 in June.

July and August will see 330,737 job losses of census hires.

For months, both initial and continuing jobless claims have been revised higher for the previously reported week. This occurred again on Thursday when initial claims were revised up to 476,000 from 472k. This allowed the media and intractabulls to exaggerate the decline in this week’s claims (457k vs. 463k exp) – even though the odds tell us that they will probably be revised higher next week.

Continuing Claims are 4.548m, 4.550m exp; but the previous week is revised to 4.593m from 4.571m. Numerous pundits extolled the 2k decline in continuing claims while ignoring the 22k upward revision.

Senate Democrats abandoned on Thursday efforts to provide fresh aid to cash-strapped state governments and extend emergency unemployment benefits for millions of jobless workers, leaving in limbo President Obama's push for more spending to bolster the economy.

Emergency jobless benefits, which provide up to 99 weeks of income support, expired June 2. Since then, more than 1.2 million people have had their checks cut off, according to estimates by the Labor Department. That number is expected to rise to more than 2 million people by the time Congress returns from its weeklong break. Unless Congress acts, the program would phase out entirely by the end of October.

Since we’re stuck in a monetary system that allows a tiny private sector clique to control everything (business, government, military, non-profits, schools, families, etc) by putting everyone else in debt, we’ve been living in financial dictatorship for a long time.  It has been a soft PR dictatorship of Hickey-Freeman suits and Sax 5th Avenue ties, Harvard pedigrees and fratboy schmarm.  But hard dictatorship has been coming out of hiding for several years, especially since 2001.  Not only can the money powers steal trillions from the masses to hand over to themselves, but they can suck the military into conquering poor countries that aren’t subject to their usury vortex system, build Homeland to spy on Americans.


The Richmond Fed manufacturing activity skid down in June. The reading showed a 3 points decline from 26 last May against the present 23 value.
Sales revenues in the service sector performed the worst, with the index falling in May (from 8 to 5). June data showed retail sales revenues dropping to -1 from 0 in May.

The Housing Price Index released by the Office of Federal Reserve Housing Enterprise Oversight showed US home prices surged by 0.8% in April compared to a revised 0.1% in March, instead of the previously noted 0.3%.

Despite Government tax credit programs favored the increase on prices, it is a positive factor to see the housing market picking up, which acts as a reliable indicator of the US economic situation.

US ABC/Washington Post Consumer Confidence up to -43 from -45 in the week of June 20.

For the first time in history, Congress will not allow an increase in the social security COLA (cost of living adjustment).

In fact, the Henry J. Kaiser Family Foundation predicts there may not be any COLA  for the next three years. However, the per person monthly Medicare Insurance premium will be increased from the 2009 premium of $96.40 to $104.20 in 2010 and to $ 120.20 for the year 2011.

 Let's send this to all seniors that you know--remind them not to vote for ANY incumbent senators and congressmen in the 2010 and the 2012 elections.           

And don't forget - CONGRESS GAVE THEMSELVES A HEFTY PAY RAISE THIS YEAR. So who is watching out for you?  Not Congress.  Not Washington.
The city of Maywood will lay off all city employees and begin contracting police services with the Los Angeles County Sheriff's Department effective July 1, officials said.

In addition to contracting with the Sheriff's Department, the Maywood City Council voted unanimously Monday night to lay off an estimated 100 employees and contract with neighboring Bell, which will handle other city services such as finance, records management, parks and recreation, street maintenance and others. Maywood will be billed about $50,833 monthly, which officials said will save $164,375 annually.

"We will become 100% a contracted city," said Angela Spaccia, Maywood's interim city manager.

Deputies from the East Los Angeles Sheriff's Station will begin patrolling the 1.2-square-mile city by the end of the month, said Capt. Bruce Fogarty of the Sheriff's Contract Law Enforcement Bureau. The annual cost of providing those services for the small city is estimated at $3.6 million, Fogarty said.

At a council meeting Monday night, city leaders said they were forced to dismantle the Police Department and lay off city workers because they lost insurance coverage as a result of excessive police claims filed against the department. They also blamed years of financial abuse and corruption from the previous council. "We're limited on our choices and limited on what we can do," Councilman Felipe Aguirre told the standing- room-only crowd.

We will have an overview on the financial reform package in the next issue. We do know banks will continue to handle foreign exchange, interest rate, and gold and silver swaps and to hedge their own risks. Cleared and uncleard commodities, agricultural, energy and equities swaps and credit would have to move to an affiliate within two years. Why were silver and gold exempted? We know why, so that the market manipulation could be continued. Congress is telling us they completely know the scam and are paying off the bankers and Wall Street. This they hope will continue the charade of fiat money and it won’t work.

The final on first quarter GDP was up 2.7%, of which 1.7% came from stimulus. That puts the second quarter at even to minus; third quarter at minus 1% to 2% and the fourth quarter minus 2% or more. Some recovery!

The ECRI leading indictor has collapsed to a 45 week low of minus 5.7. The most precipitous slide in 50 years.

The Fed’s next step over the next 2-1/2 years is to run and gun money and credit, as inflation becomes hyperinflation.

The former stimulus and the Fed’s purchase of $1.8 trillion in toxic assets and $200 billion in treasuries shows a net combined increase in money and credit of $2.8 trillion last year. During this year and the next two years there will be lots more. Weimar here we come. More unemployment, less income, less buying power from a falling dollar and rising gold and silver will follow.

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that reportedly is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion and rising, the New York Times reports. The Congressional Budget Office has predicted that the final bill could reach $389 billion. Some analysts even estimate the total may reach $1 trillion, which Sean Egan, president of Egan-Jones Ratings, recently told Bloomberg is “a reasonable worst-case scenario." Egan told Bloomberg that the final tally could hit $1 trillion assuming a 20 percent loss on the companies' more than $5 trillion in loans and guarantees, similar to what other big mortgage companies, like Countrywide Financial, suffered. The two government-sponsored enterprises (GSEs) now own more houses than there are in Seattle and are foreclosing on homeowners whose mortgages they guaranteed, the Times said.

Fannie and Freddie maintain the houses for a while, then resell them at a huge loss. In many cases, they also underwrite the new mortgage for the new buyer, generating even more bank fees taxpayers must ultimately absorb. On average, they recoup less than 60 percent of the amount borrowers failed to pay. Costs for selling a house generally are usually about $10,000. Fannie and Freddie hire people to clean up the foreclosed homes inside and out, replace missing appliances and maintain the properties until they are sold. The grass-mowing bill alone is more than $10 million per month; All told, the GSEs spent more than $1 billion on upkeep last year. “We may be behind many loans on the same street, so we believe that it’s in everyone’s best interest to aggressively do property maintenance,” said Chris Bowden, the Freddie Mac executive in charge of foreclosure sales. Short sales are a growing alternative to foreclosure. In the past, a short sale was an unusual alternative, one real estate agents rarely presented to sellers, realtor Erek Gass told the York Daily Report. “Now, they are common because of the devaluation of the housing market,” Gass says.

The Treasury Department awarded $1.5 billion to aid homeowners in California, Florida, and three other states with high foreclosure rates.

Under a program known as the Hardest-Hit Fund, Arizona, Michigan, and Nevada also will receive money, which will be distributed to state housing finance agencies, the Treasury said yesterday in a statement.

“These states have identified a number of innovative programs that will make a real difference in the lives of many homeowners facing foreclosure,’’ Herbert M. Allison Jr., the Treasury’s assistant secretary, said in the statement.

The program is estimated to help 90,000 people having difficulty paying their mortgages or living in homes that are worth less than the loans they secure.

Seventy-five percent of such homes are in the five states awarded aid, said Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office. Half are in California, and Florida, Caldwell told reporters.

The hardest-hit fund is part of a mosaic of programs from the Obama administration to stop the spread of foreclosures, which are expected to climb to 4.5 million this year from 2.8 million in 2009, according to RealtyTrac Inc., an Irvine, Calif.,-based research firm.

The effort, which is funded from the $700 billion Troubled Asset Relief Program, aims to curb foreclosures and stabilize housing prices in communities with high concentrations of delinquent borrowers and states where much of the population lives in regions with 12 percent or higher unemployment.

The Census Bureau released the weekly payroll data for the week ending June 12th this morning (ht Bob_in_MA). If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment. The Census Bureau releases the actual number with the employment report.
he number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. The Census payroll decreased from 573,779 for the week ending May 15th to 330,737 for the week ending June 12th. So my estimate for the impact of the Census on June payroll employment is minus 243 thousand (this will be close). The employment report will be released on July 2nd, and the headline number for June - including Census numbers - will almost certainly be negative. But a key number will be the hiring ex-Census (so we will add back the Census workers this month).

Goldman Sachs wasn’t alone either in its astute “foreknowledge” of the collapse of BP’s stock value due to the Gulf disaster as BP’s own chief executive, Tony Hayward, sold about one-third of his shares weeks before this catastrophe began unfolding too.

But according to this FSB report the largest seller of BP stock in the weeks before this disaster occurred was the American investment company known as Vanguard who through two of their financial arms (Vanguard Windsor II Investor and Vanguard Windsor Investor) unloaded over 1.5 million shares of BP stock saving their investors hundreds of millions of dollars, chief among them President Obama.

For though little known by the American people, their President Obama holds all of his wealth in just two Vanguard funds, Vanguard 500 Index Fund where he has 3 accounts and the Vanguard FTSE Social Index Fund where he holds another 3 accounts, all six of which the FSB estimates will earn Obama nearly $8.5 million a year and which over 10 years will equal the staggering sum of $85 million.

The FSB further estimates in this report that through Obama’s 3 accounts in the Vanguard 500 Index Fund he stands to make another $100 million over the next 10 years as their largest stock holding is in the energy giant Exxon Mobil they believe will eventually acquire BP and all of their assets for what will be essentially a “rock bottom” price and which very predictably BP has hired Goldman Sachs to advise them on.

Important to note is that none of this wealth Obama, Goldman Sachs, and other American elites is acquiring would be possible without this disaster, all of whom, as the evidence shows, “somehow” knew what was going to happen before it actually did, including the US energy giant Halliburton who 2 weeks prior to this disaster just happened to purchase the World’s largest oil disaster service company Boots & Coots”.

How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment

On the subject of HFT systems, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second -- as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn't seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was even more bizarre and can only be evidence of either faulty programming, a virus or a manipulative device aimed at overloading the quotation system.