International Forecaster Weekly

We See Totally Surreal Markets

US dollar finding a temporary bottom, gold, silver, and commodities continue to make sense, mortgage scandals, surreal markets, dollar devaluation guaranteed, record deficits, US finally tries to live within its means.

Bob Chapman | October 20, 2010

As we write, the US dollar is in the process of trying to find at least a temporary bottom at 76.50 and to launch a countertrend rally. We would think a rally back to 80 is achievable, but we do not believe it’s sustainable - only some stabilization through the election. Japan drew a line in the sand at 82 and finished last Friday trading at 81.37. That does not smack of success, but we see improvement over the next two weeks.

One thing the weaker dollar has done is make exports cheaper for transnational conglomerates and that has helped the market along with these companies repurchasing their stock in the market. In spite of these subsidies the market went nowhere last week. That was probably because of the off again, on again, of quantitative easing 2. Half of the Fed members say lets do it and the other half says do not. In the middle of this verbal conflict is the ever-placid Ben Bernanke, who is answering the call of Wall Street by expanding aggregates via the repo market, which he has been doing since early June. At this point we can assume that the wise guys, who really make the decisions and just happen to own the Fed, have discounted an injection of $500 billion. In addition, they know long-term interest rates are headed lower, although a reduction in the ten year T-note of ½% to 1% is not going to change things much. It will only provide a comfort zone and make big corporations more profits. We do not believe it will have a big influence on home buying with the mortgage scandal in process, which could drag on for years. It will be interesting to see if any bankers are charged criminally. In all probability none will, they just pay fines, or their corporations do, which is all the government is interested in.

While this transpires and international business tightens, exporters all want cheap currencies, that has caused neglect of the dollar by the fed and Treasury and their antics have put the foreign exchange market into disarray. This in part has caused consumer confidence to fall generally worldwide. We see no end in sight and from our point of view this is part of a global trade war as greed distorts rational thinking. It had to come and it will benefit the US in time. You have China increasing aggregates at a 20% rate to cheapen the Yuan for trade purposes. If China does not cease and desist their policies will definitely lead to trade war as everyone else follows. In order to solve these currencies, trade and tariff problems, all these nations have to meet and agree on revaluation, devaluation and debt default settlement. If that doesn’t happen the entire system is going to break down.

This is why gold, silver and commodities make sense in this negative environment. Where else can you go that is safe, as countries are most all developing beggar-thy-neighbor policies? We must say the eurozone has refrained from quantitative easing, but how long can that last? The euro just rose from $1.19 to $1.40, and the 12% to 15% price advantage for exports is in good part gone. Germany and other members will continue to see falling exports and that will put great pressure on the ECB to loosen up and perhaps to reduce interest rates. We are seeing one reflationary cycle after another in most nations and that does not solve the problems. We have seen that in the US with the Bush stimulus, then QE1. That is why QE2 is futile. All it does is enable higher gold, silver and commodity prices. The gold and silver markets have been a lock since June of 2000, or for 10 years. Compounded annual gains of almost 20% a year. These kinds of profits have existed nowhere else over that period. In fact nothing comes close and it is going to continue. What you are seeing is classical economics at play. Not only are they an inflationary, hyperinflationary and deflationary depression play, but they are as well the ultimate currency play. The only entity or currency that has no debt or encumbrances. Today we even have ETFs, that are supposed to have physical gold and silver, but instead are loaded with derivatives. We had best hope the derivatives market doesn’t fold, because if it does all the players therein will have some serious problems, as well the highly leveraged LBMA and Comex.

Psychologically the new mortgage-gate scandal will put a damper on home and commercial real estate sales in the US. Recent G-20 meetings have produced little in the way of solutions on trade and foreign exchange. Derivatives are not even discussed. Protectionism is being forced on nations by greedy nations, as most all unilaterally act in their own interest. They believe they can continue to get away with what they have been getting away with for years. The US and Europe cannot simply look the other way anymore. This as Keynesians all trip over themselves and the fascist economic model. Nations cannot make people buy things and they are pulling their financial horns in worldwide. That means all that money and credit created does not go into plant, equipment and research, or consumerism. It ends up in speculative markets. It serves to beat off inflation, but it creates nothing, especially jobs and consumption. The insiders, insider Goldman Sachs, say the economic scenario is fairly bad and very bad. Does it get any simpler than that?

We see totally surreal markets, because the US government has been manipulating them under the fascist model for years As in 1984, good news is bad and bad news is good. Market manipulation is insanity and it guarantees a dreadful conclusion. There is no logic and the denizens of Wall Street go right along with the scam least they lose their jobs. Most all of the economic and financial news is bad and that is a fact. Markets cannot thrive on hope in the Fed or the administration or on QE2. The fundamentals simply are not there. Zero interest rates cannot last forever and neither can a never-ending, growing Fed balance sheet. The Fed’s policies have been losers. How can you have faith in a failed system driven by the greed and looting of the American public by Wall Street and banking, which owns the Fed? In fact we now see them praying for inflation so their system doesn’t collapse. They really believe they can propagandize the public into spending more again. That is going to be a very hard sell with real unemployment at 22-3/4% and real estate still collapsing. In June, the banks began to try to lend to the better quality, small and medium sized businesses. Thus far it has been a failure. In fact there is no upturn, or recovery, in sight. All the Fed is doing is creating another asset bubble in the face of mark-to-model and the carrying of two sets of books by major corporations, especially in Wall Street and banking. That means the downside risks are still latently present. What does Wall Street say about 30% of unemployed have been out of work for more than a year and 40% have been out for more than six months? The projection is 11 million homeowners are going to lose their homes unless government offers an effective modification program. How do you get 42 million people off of food stamps? Can the health care bill be reversed? We hope so, but we do not think so. Corporate America and banking have close to $5 trillion, but they are reluctant to spend it or lend it. This looks like a blind alley to us.

The kick off of QE2 began with the purchase of long-dated bonds. That plan we are told has a $500 billion price tag for openers. As we explained in an earlier issue the Fed will have to buy $1 trillion to $1.5 trillion in bonds. That should easily take the 10-year T-note down to 1.5%. This is an accepted fact on Wall Street and has already been discounted in the market. Profit growth is receding and costs are rising for corporate America. If they lay off any more people they won’t be able to function.

As you all know as the dollar falls foreign goods become more expensive in America and that fuels inflation. In addition commodity prices are rising at a very quick rate fueling further price inflation. These competitive devaluations aid as well the upward movement of gold and silver.

Historically the investments that gain in price and stature during currency wars and with the imposition of trade tariffs are gold, silver, platinum and palladium. Commodities gain as well in the flight to quality.

By way of a leap of faith, PIMCO has raised its holdings of MBS to the highest level in over a year just before mortgage-gate began. We find it of interest that PIMCO moved in before QE1 and now QE2. Could it be that this firm knew something that few others knew, or was it simply a stroke of luck? If PIMCO has an inside pipeline then we are assured that QE2 is already in place. We believe it has been for four months. All that knowledge by PIMCO could very well be for naught, if mortgage-gate blows sky high. Everything possible is being done to keep it under wraps in the media until the election is over. There is no question in our minds that the Fed will not be only buying Treasuries, but MBS and CDOs, as it adds more toxic waste to its portfolio in cleaning up banks’ books at $0.80 on the dollar and selling the garbage back at $0.20 on the dollar. Incidentally, you get to pay for the losses. If this mortgage fraud blows up, as we believe it will PIMCO could have serious problems.

At the heart of today’s financial problems is one of the greatest frauds ever pulled by American banking. This is the result of issuing fiat money and credit. This is the result of leaving the gold standard 39 years ago. The release of gold as an anchor ended any incentive to stop inflating. Government can spend as it pleases and the public gladly accepts inflation to have a better lifestyle, not understanding that debt piles up, taxes have to rise and in the end the bubble breaks as we have just seen in real estate. It has also ushered in fascist socialism that has allowed welfare, food stamps, and extended unemployment forever, Medicare, Medicaid and educational grants. The politicians, and those who control them, cannot and won’t stop the gravy train because if they do the system collapses in chaos. It is called a race to the bottom that began 39 years ago initiated by President Nixon, who said we are all Keynesians at heart. In other words, everyone wants a free lunch.

One thing we can guarantee is dollar devaluation, versus other currencies and gold and default. This is another lock Americans are going to have to deal with. Social Security and Medicare are already in default. Why do you think government wants to steal your retirement plans? How else can they keep them going with other government spending, such as wars of endless duration and creating employment in a staggering economy? The bank known as Washington has already been broken.

Even Mr. Bernanke, Chairman of the Fed, tells us today’s deficits are unsustainable, but few want to listen. It is just like in 1967 when we predicted that free trade, globalization, offshoring and outsourcing would be used to deliberately destroy the US economy, and no one wanted to listen. It has been a policy that has cost the dollar 98% of its purchasing power. What do you think gold, silver, platinum, palladium and commodities are telling us?

It is the same worldwide - in order to temporarily solve problems just print money and create credit. Just look at Europe that has to fund $4 trillion in debt over the next two years. The only place it can come from is from printing presses and digital entries. These are not solutions; they are traps that will be sprung at a later date.

The old bugaboo deflation has to be conquered, so let’s raise the rate of inflation to save ourselves. Have you ever heard anything so stupid?

Americans have to stop saving, spend, and further extend debt, until they finally end up in bankruptcy. People want to believe government inflation numbers of 1.6%, when they know inflation is closer to 7%, and worsening. They know unemployment is not at 9.8% and it is really 22-3/4%, but they do not want to face that. What does one think inflation will be when the cost of food again doubles over the next few months, 10% or 15% in the real world? The cost of health insurance and prescriptions are rising by a like amount, and that is already underway.

If there was ever any doubt in your mind why precious metals were rising, it should now be dispelled. We are only entering phase 2 of 3 to 5 phases of the greatest bull market in history and those who do not have any are going to have serious problems. We live in a world of crime without punishment. We live in an age where no one can be trusted; where conflicts of interest are legion and the court system and the government have been purchased for cash, just as the armies of Rome once were. The entire system has been bought and paid for including the lying academics, who have sanctified the rape of our financial system and way of life for pieces of silver.

Last week saw the Dow up 0.5%, S&P up 0.9%; the Russell 2000 up 1.3% and Nasdaq 100 up 3.5%. Banks fell 4.5% and broker dealers 0.4%. Cyclicals gained 0.7%, transports 1.4%, consumers 0.9% and utilities 0.3%. High tech rose 3.3%, semis 2.0%, Internets 3.5% and biotechs 0.3%. Gold bullion rose $22.00, the HUI rose 0.3% and the USDX rose 0.4% to 76.96.

Freddie Mac 30-year fixed rate mortgages fell 8 bps to 4.19%, the 15’s fell 10 bps to 3.62%, one-year ARM’s fell 3 bps to 3.43% and the jumbos fell 3 bps to 5.23%.

Fed credit rose $8.6 billion to $2.293 trillion year-to-date, credit rose 4.2% annualized and 8.9% year-on-year. Fed foreign holdings of Treasury and Agency debt surged $15.9 billion to a record $3.267 trillion. Custody holdings increased ytd $311.8 billion, or 13.4% annualized, yoy it rose 14.1%. M2 narrow money supply jumped $19.6 billion and is up ytd 3.3% and yoy 3.3%.

Total money market fund assets rose $5.1 billion to $1.128 trillion.

Total commercial paper outstanding increased $5.1 billion to $1.128 trillion. It is down 4.6% ytd and $199 billion yoy.

Brazil’s top economic officials will not attend the G-20 meeting in Seoul, S. Korea, due to currency issues. We have never seen this happen before.

Banks are sitting on $1.5 trillion and there is a good chance that figure could double or more with QE2. All this money will go into speculation and loans and very little of it will create jobs. All these funds are now sterilized and will become monetized, creating 14% or more inflation, as too much money chases too few goods. While this transpires the Fed will be injecting a further $2 trillion into the economy.

“There would appear all else being equal to be a case for further action...At current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight... and the “risk of deflation is higher than desirable,” Bernanke said. “High unemployment is currently forecast to persist for some time.”

The other unexpected development that appeared on Friday was another Fed ‘tri-party reverse repo’ operation, this time for $.780B. The ‘tri-party reverse repo’ is a mechanism for removing reserves from the system. Isn’t this incongruent with flooding the system with more QE? The official story is the Fed wants to insure that there is an effective mechanism in place to remove excess reserves when needed.

The financial center Fed district presidents are apparently angry at the market’s reaction to Bernanke’s speech on Friday. Two of the three financial center stooges (Evans and Rosengren) surfaced on Saturday to shill for more juice and asset bubbles.

`Liquidity Trap' Plagues U.S., More Stimulus Is Required, Fed's Evans Says Federal Reserve Bank of Chicago President Charles Evans said the U.S. is in a “bona fide liquidity trap” and needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.

“If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call,” the regional bank chief said in a speech in Boston today. He advocated targeting a path for the price level as a way to stop the inflation rate from falling.

Revisiting Monetary Policy in a Low Inflation Environment:

[Rosengren’s] Remarks at the Federal Reserve Bank of Boston’s 55th Economic Conference Perhaps the best summary of this concern was provided those ten years ago by Kazuo Ueda, who is on the policy panel again this time. His summary of policy when the zero bound was hit was that “it will be a lot more painful than you can possibly imagine.” Unfortunately, his comments have been accurate and prophetic and quoted rather prominently of late

Similarly, the Bank of Japan has more than tripled the size of its balance sheet since 1990, to try to combat deflation…

This experience may indicate that a gradual response may not be as effective as a more active response to arrest deflationary pressures before they become embedded in thinking that can affect household and business spending.

From a policy perspective I take several lessons from the Japanese experience. First, should deflation occur, it can be quite difficult to overcome. Second, insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it. Finally, financially fragile economies may be particularly vulnerable to negative impacts from premature austerity measures.

Individual investors have been relentless sellers of stocks because they need the money to pay for the necessities of life. Unless the Treasury starts dropping dollars from heaven, Ben can monetize all the US debt he wants; but it won’t boost jobs or income and Americans will be squeezed even harder because the inflation of the necessities of life will accelerate. Then, Revolution!

Fortune’s Allan Sloane in Wash Post: In this recovery, Washington has less power over the economy than you think [because this time it’s Austrian and a massive restructuring is necessary]

Let us tell you an Ugly Truth about the economy, a truth that no one in power or who aspires to power wants to share with you, at least until after the midterm elections are over. It's this: There is nothing that the U.S. government or the Federal Reserve or tax cutters can do to make our economic pain vanish overnight.

The Fed wouldn't let us interview Bernanke about the limits of the Fed's power. It's easy to see why: He'd risk diminishing what remains of the Fed mystique by talking on the record about its limitations and problems. "The public has been sold this notion that somehow we can control the economy that we can fine tune it so we don't get inflation on the upside, we don't get recessions on the downside, [that] when something happens, they can step in and offset it," says another longtime Washington insider, Douglas Holtz-Eakin. "The economics profession is painfully aware that this is just not true, and [that it] has a terrible impact on politicians, presidents in particular."

Our final little secret is that the United States is now being forced to live within its means, and that's not fun.

The state has given Anthem Blue Cross and Blue Shield the go ahead to raise premiums by as much as 47 percent for some members, and says health care reform is the reason why. This won’t show up in CPI, so Ben can claim a low inflation environment and monetize more US debt.

GE tumbled because revenue was much weaker than expected and lower loan-loss reserves boosted profits. GE, its apologists and bulls are trying to blame the shortfall on the $1.1B loss GE took for the sale of a Japanese consumer lending company. But GE’s revenue from its industrial businesses declined 6%. Increased profits were derived from lower loss reserves at its GE Financial subsidiary the same scheme that big banks are using.

For the second year in a row, the nearly 54 million retirees and other Americans who receive Social Security benefits will not get any cost-of-living increase in 2011, US officials announced yesterday.

The lack of an increase for consecutive years is unprecedented in the roughly 35 years that payments have been automatically adjusted according to the nation’s inflation rate. The Social Security Administration made the announcement moments after the Labor Department released the latest figures for the consumer price index. They show that prices for the third quarter of this year rose by 1.5 percent compared with 2009, but fell by 0.6 percent compared with the same period in 2008.

In a symptom of the weak economy, last year marked the first time since the automatic formula has existed that consumer prices fell, so Social Security recipients were given no increase in their checks.

This year, the slight rise in prices makes the picture more complicated — and is likely to produce louder complaints over the lack of an increase.

The U.S. government posted its second straight annual budget deficit in excess of $1 trillion as lingering unemployment constrained tax revenue.

The shortfall totalled $1.294 trillion in the fiscal year ended Sept. 30, second only to the $1.416 trillion deficit in 2009, the Treasury Department said today in Washington.

A jobless rate projected to exceed 9 percent through 2011 points to the difficulty of narrowing the budget gap even as the global economic recovery boosts company profits and produces more corporate tax receipts. Growth in government spending may slow because of declining costs associated with the financial crisis that spawned such rescue plans as the Troubled Asset Relief Program.

“We still have a long way to go to repair the damage to the economy and address the long-term deficits caused by the crisis,” Treasury Secretary Timothy F. Geithner said in a statement.

The Treasury Department finances the shortfall between taxes and spending with borrowing in financial markets. The national debt totals more than $13 trillion, exceeding the size of the economy, unadjusted for inflation. The government’s fiscal year runs from Oct. 1 to Sept. 30.

The Obama administration in July projected in its mid- year budget review that the deficit would be a record $1.47 trillion during the 2010 fiscal year.


French oil workers expanded a strike yesterday over government plans to raise the retirement age, while European discontent over belt-tightening measures flared up in Portugal, Italy, and Greece.

All of France’s oil refineries were on strike after two more plants voted to join the protest yesterday. The government deployed police to force the reopening of several fuel depots that had been blocked, raising concerns of possible gas shortages.

French students clashed with police and labor leaders planned more demonstrations today and Tuesday.

Across Italy, thousands of students and teachers staged demonstrations to protest planned cuts in higher education, while Portugal’s minority government faced a battle in Parliament over its plan for abrupt tax hikes and deep spending cuts.

Meanwhile, a labor dispute that kept out thousands of visitors for three days from debt-ridden Greece’s most famous monument, the Acropolis, ended only after employees were dispersed by riot police using tear gas.

France’s transportation system was running more smoothly yesterday, after severe disruptions hit air, rail, and road traffic earlier in the week.

French truckers blocked highways and officials deployed police to prevent strikers from cutting fuel supplies as the standoff hardened over President Nicolas Sarkozy’s plans to raise the retirement age to 62.

With all the country’s refineries on strike, industry groups said about 15 percent of service stations are dry, and the Interior Ministry activated a crisis committee to manage energy supplies.

Prime Minister Francois Fillon said the government won’t give in to demands that it suspend parliamentary debate on the pension bill and keep the minimum retirement age at 60. Sarkozy’s ministers sought to guarantee fuel supplies, as police moved to ensure access to storage sites amid a second week of refinery strikes.

“When there is a blockade, we will take the necessary measures,” Industry Minister Christian Estrosi said on RTL radio today. “We respect the right to strike, not the right to put up blockades.”

Unions have called for a day of protests tomorrow, to be accompanied by the fourth national strike in two months. The Senate is scheduled to complete passage of the pension bill the following day. France’s eight major unions will meet on Oct. 21 to decide how to continue their movement.

France’s civil-aviation authority has asked airlines tomorrow to cancel half their flights from Paris’ second airport at Orly, and 30 percent at Roissy-Charles de Gaulle, the largest. Air France SA said it will limit cancellations to domestic and European destinations.

German investor confidence fell to a 21-month low in October as weaker global growth and a stronger euro dimmed the export outlook.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped for a sixth month, to minus 7.2 from minus 4.3 in September. While the reading was the lowest since January 2009, ZEW’s gauge of the current situation jumped to 72.6, a three-year high.

European construction output fell for a second month in August, led by declines in Germany, the Netherlands and Spain.

Construction in the 16-nation euro region dropped 0.4 percent from July, when it slumped 3.2 percent, the European Union’s statistics office in Luxembourg said today. From a year earlier, output fell 8.5 percent. In the 27-member European Union, construction output rose 0.3 percent in August from the previous month.

Construction in Spain, which is working through an excess of empty homes following a decade-long building boom, slipped 1.8 percent from July, today’s report showed. In the Netherlands, output dropped 2.6 percent, while in Germany it fell 0.4 percent. French production declined 0.1 percent.

Swiss private banks withstood assaults on client secrecy by the U.S., France and Germany to attract more than 50 billion francs ($53 billion) of assets since the end of 2007.

While UBS AG customers withdrew 248 billion francs during the past two and a half years, those redemptions were exceeded by net flows into the nation’s 19 other biggest banks by client assets, according to data compiled by Bloomberg.

Credit Suisse Group AG, Pictet & Cie. and Bank Sarasin & Cie. won the most funds, bringing in almost 196 billion francs between them. Swiss firms opened branches elsewhere in Europe to keep clients who no longer want to bank in Switzerland, and invested in Asia, where the number of millionaires rose 26 percent last year.

“The Swiss private banks have been underrated by those who said they were on their last legs,” said Sebastian Dovey, a managing partner at Scorpio Partnership, a London-based consulting firm. “The reality shows that while they may have been badly bruised during the financial crisis, their businesses are relatively intact and are poised for growth.”

The industry was shaken on March 13, 2009, when Switzerland agreed to work with countries investigating tax evasion to avoid being blacklisted as a haven by the Organization for Economic Cooperation and Development. The Swiss have initialed or signed 28 tax treaties since then to implement international standards and help track down tax evaders. Only 16 percent of the 863 billion francs held in Swiss banks by European nationals were declared, according to estimates last year by Geneva-based broker Helvea.


Bank of England 'must be prepared' for more quantitative easing

The debate over economic stimulus sharpened in Britain on Friday, as a senior Bank of England policymaker said creating more money was a possibility, although it may yet be avoided.