International Forecaster July 2010 (#7) – Gold, Silver, Economy + More
By: Bob Chapman
Sunday, 25 July 2010
The talk of recovery pervades insider thinking. The major media worldwide plays the same refrain. This is a desperate attempt to befuddle the public with misdirected propaganda to preserve confidence in a system that is in a state of collapse. As CNBC leads the charge, loss of faith in the system grows with each passing day. In spite of control of the major media by elitists, talk radio and the Internet hammers away incessantly with the truth influencing more and more 24/7 worldwide. As a result of the success of the alternative media a good many investors realize we have a systemic credit crisis that has turned into a debt crisis as well. The residential real estate collapse is still collapsing with no end in sight. That has been joined by a commercial credit crisis, which has forced banks, Wall Street and corporate America to keep two sets of books – Europe and England as well. We called the beginning of the top of the residential real estate in the summer of 2005, warning our subscribers it was time to begin to move out of real estate and to personally rent. We were the first to make that call as a few others followed six months or more later. The failure of Bear Stearns was soon followed by Lehman Bros., and a crisis of confidence was underway.
The immediate move was to save the banks, Wall Street, insurance and elitist corporate America. A number of programs were initiated, some of which are still in place. During the crisis worldwide a number of people began to accumulate cash. Some cash in hand, some in money market funds and some in gold and silver related assets. During this period lenders called loans and an unprecedented de-leveraging took place that affected every investment. As a result today such cash and cash like holdings are more than 50% higher than they were five years ago. The system is under pressure, and was it not for government deficit spending of $1.6 trillion and the infusion annually of some $2 trillion by the Federal Reserve the system would have long ago collapsed into deflationary depression.
The Dow fell to 6550 in March of 2009 and then with the above spending rallied back to 11,200. During that one-year timeframe many investors left the market pouring into cash, money market funds and gold and silver related assets. There was certainly no incentive to buy bonds at zero interest rates and the market had again become too dangerous.
We are some 14 weeks away from congressional elections, which could be the most important in history. Will the electorate dump the duplicitous incumbents to try to regain control of their country and their freedom? We won’t know until we get there. If voters do not turn out these crooks we cringe to contemplate the future.
Talk today centers around a stillborn recovery that never quite held on long enough to materialize. Five quarters of 3% to 3-1/2% growth traded for $2.5 trillion. Money and credit was thrown at the system again, and again it didn’t work. Keynesianism at its finest.
The housing purchase subsidies are gone, and real estate sales and prices are again falling. Even with interest rates near 4-1/2% for a 30-year fixed rate mortgage there are few takers in the hottest sales period of the year. There are four million houses in inventory for sale or 1-1/2 years supply. That figure could be 5 to 6 million by yearend, as builders’ build 545,000 more unneeded homes. More than 25% of mortgages are in negative equity. Excess mortgage debt is $4 trillion and headed much higher. Government is so desperate that they have begun to take punitive action against those whose homes are under water, but they can still make the payments, but are bailing out. What a disincentive for anyone to buy a house. Will debtors prison be far behind?
There certainly have been strategic defaults, but not as many as government would have you believe. Twenty-five percent of all borrowers are stuck with negative equity, which we expect will worsen. That could mean a wealth loss of some $4 trillion. Obviously, homeowners are hoping for higher prices. If that does not happen you can expect more walk-away foreclosures. There are already four million homes for sale and many more could be on the way. Plus, more than 500,000 more new homes are being added to saleable inventory annually. Next year will be another bad year for builders. Some will fail and others will merge. Government is having ongoing meetings with three major builders in an effort to nationalize the industry, as they will do with banking. Government is doing the worst thing possible. It reminds us of Sovietization. The only thing government has going for it is that underwater homeowners usually do not default until they are down 62% from equity, but that could change. Interest rates at 4-5/8% for a 30-year fixed rate mortgage should keep them in their homes for now, but if interest rates rise that plus could become a negative. That leads us to believe that interest rates will stay that way for a long time. As a result the Fed must keep interest rates at zero for a long time to have millions of mortgages kept from falling into foreclosure.
At $15.3 trillion the world’s holdings of US dollar denominated assets in ten years rose from 60% of GDP to 108%. This in part has been caused by a never-ending current account deficit. This factor alone makes one wonder how the US dollar can be a strong international reserve currency.
In just six years from 2001 to 2006, mortgage debt grew to $14.5 trillion – a credit expansion unheard of in history. In the past almost two years government borrowings have grown 49% just slightly more than the 45% in 1934-35. The Keynesian game is the same, it is just the time frame is different.
Over a 20-year time frame total US credit rose from $13 to $52 trillion, or to 370% of GDP. A good part of these credit excesses have been exported to the rest of the world and they are increasing exponentially; almost 160% just in the last six years, or to $8.5 trillion.
The deliberate move to expose Greece’s problems, which those in government and finance had been aware of for years, backfired and exposed all the problems in Europe in the process. The impact of Greece, and the elucidation of the depth of problems in Portugal, Ireland, Italy and Spain curtailed the so-called global recovery and exposed extraordinary weakness in the euro zone throughout the EU and Eastern Europe. That in turn will ultimately cause problems for the US dollar and the pound. There is now no question that the dollar rally is over and the question is when will the dollar retest the 74 area on the USDX? The leverage in banking is still 40 times deposits and we see no way to easily reduce that. We believe dollar reflation will have to be the answer for the Fed.
The financial terrorists that inhibit our banking system and Wall Street still remain confident that inflation caused by quantitative easing won’t show up for years, if ever. What else can the Fed and ECB do except use stimulus? The sovereign debt contagion in 20 major countries and as many creditor countries, is not going to go away anytime soon. These are systemic, structural problems. We certainly do not see the likelihood of the dollar proving any safe harbor. Those who have flocked to the perceived safety of the dollar are going to be very unhappy with the results.
Many countries are enmeshed in major debt and in the case of the US the debt is colossal. It is hard for markets to appreciate this in Europe, the UK and US. The problems of the credit crisis are not over and there won’t be a recovery, unless the Fed injects $5 trillion into the economy. That will keep the economy going sideways for two years as inflation rises. Small and medium sized business cannot get loans, so they cannot expand and hire. About 23% of large corporations may expand and hire. Offshore US corporations have far too much excess capacity already. As you all know there are many speed bumps on the road ahead. You had better be prepared for them.
Switching gears again, we find very little coverage of the problems in Eastern Europe. Hungary is a good example. Financial exposure is Austria $37 billion, Germany $32 billion, Italy $25 billion, Belgium $17.2 billion and France $11 billion. This kind of exposure to the banking systems of these countries could be very painful. It will be interesting to see if national governments, or the ECB step in as they did in Greece, and manage the problems. The world should be paying attention because there are 20 major countries in the same dilemma. The sovereign debt crisis is just getting underway as observed with foresight. There has been no containment and 56% of Hungarian real estate loans are in Swiss francs. The problem, which we have been citing for some time, could cause a domino effect across Europe and we wonder if the solvent nations and the ECB can handle the debt rescue. Our answer is no. The next shoe to drop could be in this region and surprise almost everyone.
We have to laugh at the amateurish journalists who work for government agencies. There are a number of them that pop up here and there from time to time to give you what government wants you to hear. We caught on to this in the late 1970s. We lived in a town where a certain writer supposedly lived. He had a P.O. Box there and we found out from the postmaster that his mail was picked up weekly by a spooky guy who then mailed it elsewhere. From time to time this journalist pops up, in far away places, or in a very important position, usually with a counterpart. In this case it was with a well-known friend of many years who we know is part of British intelligence’s controlled opposition.
The latter was front and center on the coming depression, which both believe was caused by government intervention. It was, but that is only part of the story. These two journalists gave up the old paradigm of the Democrats cause depressions. The writer goes on to tell us how he is exceedingly suspicious of conspiracy theories, because one must have evidence. Writers do not have access to CIA files, Fed records or Wall Street criminal gangs, but we can sure back into situations. We know misdirection and misinformation when we see it, and that is what these journalists were up too, as well as being the purveyors of information on our current depression, which the average American and European is well aware of. Thus, the depression is not a conspiracy, it just happened, because we have no evidence that the depression was deliberately caused by the Bush administration. It, of course, was simple incompetence.
The left-right paradigm again comes into play. The socialists are responsible for our troubles in America and Europe. The unexplained alternative of course are the fascists who not that long ago were removed from office. What is missing from the writing of these journalists is that the same group of people controls both political groups from behind the scenes. The answer is finding out who controls whom.
Over and over again it’s socialism and incompetence, not a conspiracy. These miscreants want failure because it gives them power. That may be true, but it is only part of a larger design, which is if people are economically and financially in dire straights they may be more than willing to accept world government and perpetual enslavement. This is what psychological warfare is all about.
Of course, the fascist wing of the international revived America, so it could live happily ever after by creating just as much debt as the socialists did. The representative of success is Ronald Reagan. We knew Mr. Reagan, many around him and some who had known him for years. We know many things about the man you don’t want to hear. The main message is the powers behind government control almost all the players. It is a great play and every asset is his or her job to complete.
The writer after weaving his web of misdirection and deceit tells us the Democrats may well create a false flag event more damaging then 9/11 in order to maintain power in the House and Senate. He then tells us, “conspiracy theorists who believe that our own government, led by President Bush, perpetrated the first 9/11 attack on America are fruitcake Kooks and part of their brain is unhinged.” Thus, Democrats are really capable of such terrible acts, but Republicans are not. Considering such acts as possible preventative strategy should be established. That message should be sent out to all the Democrats who want to take action with a false flag event.
Now you can see how propaganda and psychological-war is conducted. Every once in awhile the writer pops up from nowhere and has perfect cover and backing and the message is sent. We look for this all the time and we find a number of writers are involved in misinformation. That often is how we know something is going to happen and it is usually bad.
The commercial paper market rose $2.4 billion last week to $1.100 trillion. We now have another $34 billion unemployment benefit extension. Congress, in spite of coming elections, were terrorized into extension. Our representatives and senators do not care a wit about deficits nor do they have any understanding of economics, finance and the dollar. They know deflation has to be avoided at all costs. It neutralizes the financial sector and politicians. More than 50% of Americans feel we are entitled to full employment, no inflation and early retirement, as government deficits expand. Is this not the Keynesian way?
The only answer, as we pointed out before, is for the nations to have a meeting, execute global currency revaluation and devaluation and placing gold perhaps at $10,000 an ounce to back the dollar or some substitute currency. If the choice was the dollar then we’d have to have to see just how much gold the US really has. What it doesn’t have it would have to purchase. In that process the Federal Reserve should be relieved of its charter and its functions returned to the US Treasury. That would stop the unlimited issuance of money and credit.
That could be accompanied by legislation to enact tariffs on goods and services. This would stimulate the economy, create jobs, return production and services and get America going again. This would stop asset price inflation. The current free trade situation is like Smoot-Hawley in reverse a devastation of the US economy.
The massive injection of money and credit have to end and they will end. We will return to a gold standard and the way back will be painful.