International Forecaster Weekly

Weakness And Worries Throughout Reports

Bear rally soon over, foreclosures threaten everything, tax slaves become debt slaves, profits privatized and losses socialized, Greenspan sees a dire situation, job losses reported, insiders know how to profit from all the debt

Bob Chapman | October 3, 2009

The bear market rally will soon be over. It rallied 1,300 Dow points that it should have. All the back up data as to why this is in process was included in the last issue. The rally induced many investors to stay long and they did recoup as much as 80% of their losses in some instances. Now it is time to exit and move into gold and silver shares. Probably the biggest key is that gold recently spent two weeks above $1,000 and we believe gold is prepared for a breakout that will take its price anywhere from $1,200 to $1,700 an ounce. Gold’s long-term reverse head and shoulders pattern, one of the most powerful patterns in charting is in a breakout mode.

Yields on some short-term bills are so low we do not understand why anyone would buy them. Could Weimarization be just around the corner? The reality of investment today is that there is only one place to be and that is in gold and silver related assets.

We have abnormally high bond and stock markets that are headed toward serious trouble. In addition, Americans are looking at weaker residential and commercial real estate prices, higher taxes and inflation, more quantitative easing and government crowding out commercial borrowers, due to the Treasury’s constantly growing thirst for cash to keep the economy and the government from collapsing. They will also be an endless demand for cash to bail out banks, Wall Street, insurance companies and the chosen among American corporations. What else would you expect with a government that is growing four times faster than the economy? Over the next three and a half years the size of government will double. There will be millions more parasites to feed off the carcass of government. Throw in buckets of corruption and you have a failed government and a failed system.

The current FASB (The Financial Accounting Standards Board) rules allow lenders to carry most loans at cost, instead of marking them to market. They are allowed to be held to maturity or for investment. Loans are worth trillions of dollars less than shown on balance sheets. That means their financials are not worth the paper they are written on. In some instances loans are worth $0.40 on the dollar or less. This mark-to-model travesty has gotten much worse over the past year. Those who say the credit crisis is over are just dead wrong. Admitted bad loans in many banks are greater than equity. Some are bankrupt, even with TARP money, and some are very close. It was Paulson and Bernanke and members of the House and Senate that forced the Financial Accounting standards Board to abandon mark-to-market to virtually no standard at all, known as mark-to-myth. That was the result of an avalanche of campaign contributions used to pay off our political class. As this travesty goes totally unnoticed by the public the value of mortgages, residential and commercial, continue to fall, as do bad corporate loans. More than 13% of home loan are underwater. More than 1.5 million loans have gone to foreclosure and four million more are on the way, as the Fed desperately drives down interest rates and mortgage rates. There is an 11-month supply of loans on the market and 600,000 more are being held from listing. Some homes have been thrashed, some empty for 2 to 3 years and in some former owners are living in the homes and haven’t made a payment in two years.

Under these and other conditions zero interest rates and 20% increases in money and credit can never end, contrary to what the liars at G-20 have to say. These foreclosures threaten the entire housing edifice, which we are sorry to say is nowhere near the bottom and probably will bump along the bottom for 5 to 20 years. Americans’ greatest store of savings is being destroyed. The 50% that own their homes outright are about to lose almost everything they have in the way of savings, that was in their home. The fed is engaging in an exercise in futility, and they are quite well aware of it. They are preventing quick outright collapse so they do not immediately get hung. They are trying to ease down the damage. Due to the situation the $8,000 housing credit for first time buyers will probably be extended, but it will do little good, nor will the subprime loans being written by Fannie, Freddie, Ginnie and the FHA. Their failures will again start to hit the market next year along with ALT-A, option-ARM-pick and pay loans and prime loans, which presently make up 52% of foreclosures. As prices fall the market is monetized and worse yet, the American taxpayer gets to pay for it all. The Fed is not only buying mortgages from US lenders, but foreign lenders as well in the form of CDOs, collateralized debt obligations, which is money the Fed has created out of thin air, which is immediately monetized. This is one of the greatest frauds of all time and it is not yet half over. There are no regulators, there are no policemen, there is no Congress; everyone in NYC and Washington is in on it, except the poor taxpayers. Commercial real estate is just as bad and faces perhaps more than $1 trillion in refinancing next year. As we predicted four years ago losses in residential real estate would average 45% to 55% countrywide, and commercial would be hit for 70% and we are going to be dead on if not conservative. Over the next three years the total world financial system is going to collapse, the dollar devalued, massive default and the world will be brought to an economic and financial standstill. That is why you must have all your assets in gold and silver coins and shares. It is the only way you can preserve your wealth.

It is bad enough that Americans are tax slaves but most are debt slaves as well.

What we have observed over the past two years is that the credit crisis has not improved one bit. In time it will be much worse than it had to be because banks, Wall Street and insurance companies had to be bailed out. Instead of having a purged system and a two-year depression, we are now facing years of depression and the blame lays squarely on the actions of the Fed, banking, Wall Street and government.

Cash for Clunkers just took future buying into the now and cut future sales. The housing credit was another subsidy that created the same effect. Like price controls, none of this will work. Neither will taking bad assets, such as CDOs off banks’ balance sheets and monetizing them. We find it of interest that the Fed won’t divulge what they paid for this toxic waste. Currency swaps won’t work either; it is more monetization and that produces inflation. Manipulation of currencies, the surreptitious foreign purchase of US Treasuries and back door bailouts are only temporary solutions that cause more inflation and make the problems worse. Government has been insuring subprime loans again; 70% of which will fall into foreclosure a year from now creating a whole new pressure on the housing market. What we see are a group of criminals who are above the law.

What we see is privatizing of profits and socializing of losses for the rich. Where are the Congressional investigations to stop front running euphemistically known as flash trading? It accounts for 70% to 90% of daily trading volume as both investors and professionals get screwed over and over again. This is outright theft. We have still yet to see the SEC stop naked shorting. That is because trading departments are profitably stealing from the public and the SEC is in on it. There is one civil suit against rating agencies, but no criminal or civil actions against rating agencies for deliberately misrating collateralized debt obligations. They conspired with banks and brokerage houses, and the Fed, to mislabel and misrate bonds. Trillions of dollars were lost and no prosecutions. Nobody goes to jail. They just neither admit nor deny and their firms pay a fine to get them off the hook that shareholders get to pay for. On top of these criminal acts the SEC and the FED allows 40 to 1 leverage for banks, brokerage houses and hedge funds. What absolute madness. The banks and brokerage houses are still using 40 to 1 leverage. Where is the up-tick rule for shorting? We still do not have it back. Then there is $1.3 quadrillion in derivatives. A failure of only 5% will wipe out the world financial system. The lurid tale goes on and on. It has to be stopped and the participants have to all be tried and thrown into jail. That moment is fast approaching and vengeance will be ours.

The number of home foreclosures in process and delinquent mortgages rose 16% in the second quarter to 2.9% of serviced mortgages and home retention actions, such as loan modifications rose 21.7%.

The Dow Jones Economic Sentiment Indicator fell for the first time in seven months to 34.1 in September from 35.5 in August.

As of 9/30/09, the FDIC is broke. It has admitted its DIF is negative. That means no bank accounts are insured.

The top four banks, JP Morgan Chase, Bank of America, Citigroup and Wells Fargo, now control 39% of American bank deposits, up from 32% before the collapse.

Amherst Securities says housing inventory is 7 million houses, not the consensus 2 to 3 million. 7 million is 1.4 times the number of houses currently sold in the country each year. This is the shadow inventory the banks won’t tell you about.

August personal income rose 0.2% as July was revised to 0.2%. Spending rose 1.3% and July was revised to 0.2%. Adjusted for inflation spending only rose 0.9% in August. The recovery isn’t happening as yet; at best growth is lethargic. Real disposable income rose only 0.1%.

Planned layoffs at US firms fell in September to 66,404 versus 76,456 in August. That is 30% lower than the 95,094 jobs last year. This brought the 3rd quarter figure to 240,233, the lowest since the first quarter of 2008.

August spending on construction projects rose 0.8%, the largest increase since September 2008, after a 1.1% drop in July of 0.2%. Year-on-year it was off 11.6%.

Pending sales of existing homes rose sharply, up 6.4% to 103.8, the largest month-on-month gain in history, or since 2001. This is the result of the issuance of a major number of subprime loans and the $8,000 credit for first time buyers.

Consumer loan late payments rose to 3.35% from 3.23% in the second quarter. Credit card delinquencies rose to 5.01%, the highest since 1974.

Late payments on home equity loans set records, rising to 4.01% from 3.52% on loans to 1.92% from 1.89% on lines of credit.

Commercial paper expanded for a 7th week as companies rebuilt inventories to meet demand in a gathering economic rebound. The CP market rose by $19.7 billion to $1.232 trillion. Asset-backed CP rose to $522.3 billion from $520.8 billion. Unsecured financial issuance rose $23.3 billion versus an increase of $14.4 billion in the prior week.

Former Fed Chairman Greenspan says Americans will have to both tighten credit and raise taxes in order for the economy to pull out of the worst recession since the 1930s.

What most pundits and commentators missed in the Jobless Claims report was this disturbing fact from the Bureau of Labor: States reported 3,275,213 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Sept. 12, an increase of 99,832 from the prior week. There were 1,559,198 claimants in the comparable week in 2008.

The goofy BLS Net Birth/Death Model, which has manufactured thousands of jobs in excess of last year’s B/D rate, created only 18k jobs for September of 2008.

A court-appointed examiner investigating Lehman Brothers Holdings Inc.'s bankruptcy has been exploring whether the Federal Reserve improperly cut in front of other creditors owed money in the $613 billion bankruptcy case, records show.

The Federal Reserve and the New York Fed -- which lent Lehman $46 billion in cash and securities before its bankruptcy filing last September -- were paid promptly and in full, while tens of billions of dollars in other debts were left to be sorted out in court. It remains unclear when and how much Lehman creditors will be repaid…

Should the examiner determine that the Fed got preferential treatment, bankruptcy administrators could pursue court claims to recover assets for Lehman's creditors from the Fed.

Such a finding would have little legal precedent and could turn politically fraught, bankruptcy lawyers say. Yet it could bring a focus to one of the unresolved questions of the financial crisis: just how much special treatment the federal government receives above private-market players when it becomes a direct participant in the markets.

Yesterday, the US Treasury announced another $138B of debt auctions.

October 5: $30B of 26-week Bills and $30B of 13-week Bills; $7B of TIPS

October 6: $39B of 3s

October 7: $20B of 10s

October 8: $12B of 30s

Raising questions about the strength of this recovery, the pace of layoffs didn't slow much in September. Private-sector jobs in the U.S. fell 254,000 in September, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. (ADP) and consultancy Macroeconomic Advisers.

The ADP loss is greater than the 240,000 drop projected by economists in a Dow Jones Newswires survey. The estimated change of employment from July to August was revised from a decline of 298,000 to a decline of 277,000.

The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers. Economists surveyed by Dow Jones expect the BLS to report September job cuts totaling 175,000, down from 216,000 jobs lost in August. However, the ADP survey, along with other worse-than-expected data, suggests some economists may raise their estimate of job losses before Friday's number.

Finance ministers and central bank governors of the Group of Seven (G7) nations may not issue a communique at the end of their meeting in Istanbul this weekend, two G7 sources said on Wednesday.

A decision not to release a communique could be seen as a sign of the G7's declining importance in policymaking. Traditionally, the group of the world's richest countries has issued a statement on the global economy after its meetings, often moving financial markets.

But the Group of 20 (G20) nations has supplanted the G7 during the financial crisis as the main forum for managing the global economy, as a summit of G20 leaders in Pittsburgh last week underlined. The G20 includes big developing economies such as China and India.

John Williams: 2nd-Q GDP Decline Narrowed in Revision (to -0.8% from -1.0%), but GNP and GDI Contractions Deepened (GNP to -1.0% from -0.8%, GDI to -2.6% from -2.1%) - Annual GDP Contraction Remained Worst of Post-World War II Era

John Williams explains: Gross Domestic Income (GDI)" is the theoretical equivalent to the GDP, but it is not followed by the popular press. Where GDP reflects the consumption side of the economy and GDI reflects the offsetting income side. When the series estimates do not equal each other, which almost always is the case, the difference is added to or subtracted from the GDI as a "statistical discrepancy." Although the BEA touts the GDP as the more accurate measure, the GDI is relatively free of the monthly political targeting the GDP goes through.

"Gross National Product (GNP)" is the broadest measure of the U.S. economy published by the BEA. Once the headline number, now it is rarely followed by the popular media. GDP is the GNP net of trade in factor income (interest and dividend payments). GNP growth usually is weaker than GDP growth for net-debtor nations. Games played with money flows between the United States and the rest of the world tends to mute that impact on the reporting of U.S. GDP growth.

The Street, US government and financial media reported and followed GNP until 1987 because at that time the US turned from a net creditor to a net debtor; and GNP sank on the outflows of cash.

‘Gross Domestic Purchases” declined 2.3% in Q2; ‘final sales to domestic purchases declined 0.9%. How did GDP get revised to -0.7% with income and sales declining far more? Government expenditures contributed 1.33 (federal +11.4); Imports contributed 2.09, exports subtracted .45, so trade provided 1.64.

‘Cash for clunkers’ and the first-time home buyers’ credit boosted GDP and will do so in Q3. But will the US economy expand at the Street’s forecast +2.6% rate for the second half of 2009?

Separate Commerce Department data on Wednesday showed that weak domestic and global demand meant second-quarter corporate profits after taxes rose 0.9 percent, much lower than the 2.9 percent estimated last month. They increased 1.3 percent in the first quarter.