International Forecaster Weekly

2010 Full of Uncertainty But Economic Knowledge Can Help

Rewards for incompetence again, few writers bearish anymore, unprecedented borrowing, conditions for business not improving, Wall Street backed up for next time, duties on steel entering China, Blackwater trial whitewashed, back to Glass-Steagall to bring order to the markets

Bob Chapman | January 2, 2010

US Markets

The move to give Fannie, Freddie and GMAC unlimited funds and outrageous salaries and bonuses as rewards for incompetence is disgusting, but to be expected from our government. This was the brainchild of our esteemed leader Mr. Obama.

The Hulbert sentiment tracking system shows bond sentiment has collapsed from 23.35 to minus 33%.

Stock pessimism among newsletter writers fell to its lowest level since April 1987, six-months before the equity crash known as Black Monday on October 19, 1987. Those bearish fell to 15.6%, which is a very strong contrarian indicator.

The seven-year note auction had a bid to cover of 2.52 to 1 versus an average price of 2.76 to 1. Indirect, foreign central bank participation was 44.7% versus 62.5%.

The White House is borrowing unprecedented amounts for spending programs. Debt has increased to a record $7.17 trillion in November from $5.80 trillion at the end of 2008.

For the past decade general equities were the worst investment. Gold and silver mining equities were the best performers. The Dow will finish the decade flat, but the dollar has lost 30% of its value rendering stock and bond investments as big losers. The dollar lost 75% of its value versus gold.

As of September 30, 2009, Goldman Sachs posted $42 billion in derivatives and had $115 million in assets. JPMorgan had $79 billion versus $1.7 billion in assets. Both are accidents ready to happen.

The federal government said Wednesday it will take majority control of the troubled auto lender GMAC, providing another $3.8 billion in aid to the company, which has been unable to raise from private investors the money it needs to staunch its losses. GMAC, which already has taken $12.5 billion in direct federal aid along with other forms of government support, is the largest lender to General Motors and Chrysler dealerships and to their auto-buying customers.

Supply Management

Order backlogs in the U.S. economy rose in December for the first time in over a year, according to a closely-watched survey of economic activity published Wednesday.

The Institute for Supply Management-Chicago said Wednesday that its headline business barometer climbed to 60.0 from 56.1 in November, topping the 55.1 market consensus and nearing a four-year high.

The survey, formerly known as the Chicago purchasing managers index, is viewed as a leading indicator, though even lagging components such as employment ticked higher in December.

The barometer is compiled by the Institute for Supply Management-Chicago. Readings above 50 indicate economic expansion.

After falling to a low of 31.4 in March, the barometer has climbed in all months except September, though the latest results highlight continued caution among purchasing managers. Order backlogs expanded for the first time in 16 months, rising to 53.0 in December from 46.5 in November.

December Chicago PMI rises to 60 from 56.1.

Foreign Exchange Reserves

Data released by the International Monetary Fund on Wednesday showed global official foreign exchange reserves rose to $7.52 trillion at the end of the third quarter from $7.18 trillion at the end of the second quarter.

Allocated reserves stood at $4.43 trillion, up from $4.27 trillion in the previous quarter. The amount of allocated reserves held in U.S. dollars stood at $2.73 trillion, an increase from $2.68 trillion in the second quarter but below the $2.81 trillion recorded in the third quarter of 2008.

The data showed U.S. dollar reserves account for 61.65% of allocated reserve holdings, a decline from 62.82% in the previous quarter.

Euro holdings edged up to 27.75% from 27.42%, while sterling holdings rose to 4.34% from 4.30% and yen holdings climbed to 3.23% from 3.12%.

Employment Outlook

Initial jobless claims fell by 22,000 to 432,000 in the week ended Dec. 26, the lowest level since July 2008, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance fell in the prior week to 4.98 million, and those receiving extended benefits jumped.

Economists forecast claims would rise to 460,000 from a previously reported 452,000, according to the median of 29 projections in a Bloomberg News survey. Estimates ranged from 430,000 to 490,000.

The four-week moving average of initial claims, a less volatile measure, dropped to 460,250 last week from 465,750 the prior one. Claims are down from a 26-year high of 674,000 in the week ended March 27.

Continuing claims decreased by 57,000 in the week ended Dec. 19, reaching the lowest level since February. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.

Today's report showed the number of people who've use up their traditional benefits and are now collecting extended payments climbed by about 199,000 to 4.82 million in the week ended Dec. 12. Twenty-nine of the states and territories where workers are eligible to receive government extension have begun to report that data, a Labor Department spokesman said. Two states have started reporting data on the latest emergency extension, he said.

Twenty-seven states and territories reported a decrease in claims, while 26 reported an increase. These data are reported with a one-week lag.

The government is scheduled to release its December payrolls report on Jan. 8. In November, the economy lost the fewest jobs since the recession began two years ago and the unemployment rate receded to 10 percent from a 26-year high of 10.2 percent the prior month.

The Institute for Supply Management-New York reported its Current Business Conditions index fell to 59.7 in December, from 62.9 in November. But a reading above 50 indicates a faster pace of activity, and this was the fifth consecutive month that the index was in expansion territory, the report said. The Six-Month Outlook index jumped to 80.2 from 74.4 in November. It was the first time since 2006 that the index broke above 80.


The dollar’s share of global currency reserves fell in the third quarter to the lowest level in a decade while the euro’s share rose to a record, according to the International Monetary Fund.

The U.S. currency’s portion dropped to 61.6 percent in the period ended Sept. 30, from 62.8 percent in the prior quarter and 64.5 percent a year earlier. The euro’s share rose to a record 27.7 percent from 27.4 percent while the yen gained and the pound was unchanged.

US stocks added to losses in late morning trade Thursday, after the Chicago Institute for Supply Management revised lower its December business activity index to take into account seasonal factors, only a day after issuing its initial assessment. The December index was revised to 58.7 from Wednesday's reported 60.0. Readings from September to November were also revised lower. [This is a perfect example of government market manipulation. It is in your face and arrogant, that is what these people think of you. Bob]

Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue.

The third quarter was the fourth consecutive quarter in which tax collections were below year-ago levels. Through the first three quarters of 2009 state and local tax revenues totaled $875 billion, nearly 8% below the $951 billion collected in the first three quarters of 2008. In the same period, federal receipts were down nearly 19%.

Read the legislation

To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.

Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives…It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more- bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.


China imposed duties on Thursday on imports of certain specialty steel products from the US and Russia, in the latest sign of trade tensions between Beijing and its main trading partners.

The Chinese commerce ministry said the duties were a response to the dumping of products in the Chinese market by companies from the two countries. Beijing also alleged the US companies were receiving what were in effect subsidies as the result of “Buy American” legislation. [Trade war begins.]

The US will impose tough new duties on Chinese steel piping imports, raising tensions with its biggest trading partner and emerging geopolitical rival.

With Chinese piping imports worth $2.8bn in 2008, the case is the biggest against China brought before the International Trade Commission, a US trade body.

Friction between the US and China has been building this year after disputes over tariffs on tyres, cars and chickens. China denounced a move by the US earlier this year to tax imports of Chinese car and light truck tyres as a “serious act of trade protectionism”.


Treasury Debt Sales Top $2.1 Trillion for Year Next year, the Treasury is expected to sell about $2.45 trillion in notes and bonds, setting another record. But yields may need to rise to entice buyers, particularly as the economic recovery gathers pace.

Republican attorneys general in 13 states say congressional leaders must remove Nebraska's political deal from the federal health care overhaul bill or face legal action, according to a letter provided to The Associated Press...

"We believe this provision is constitutionally flawed," South Carolina Attorney General Henry McMaster and the 12 other attorneys general wrote in the letter to be sent Wednesday night to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid.


A federal judge on Thursday threw out charges against five Blackwater Worldwide security guards accused of killing 14 people in a 2007 shooting in downtown Baghdad.

In a 90-page opinion, U.S. District Judge Ricardo M. Urbina ruled that the government violated the guards' rights by using their immunized statements to help the investigation. The ruling comes after a lengthy set of hearings that examined whether federal prosecutors and agents improperly used such statements that the guards gave to State Department investigators following the shooting on Sept. 16, 2007.

"The explanations offered by prosecutors and investigators in an attempt to justify their actions and persuade the court that they did not use the defendants' compelled testimony were all too often contradictory, unbelievable and lacking in credibility," Urbina wrote.


A record 20 million-plus people collected unemployment benefits at some point in 2009, a year that ended with the jobless rate at 10 percent.

As the pace of layoffs slows, the number of new applicants visiting unemployment offices has been on the decline in recent months. But limited hiring means the ranks of the long-term unemployed continues to grow, with more than 5.8 million people out of work for more than six months.

Wall Street Fallout

Goldman Sachs Group Inc. helped YRC Worldwide Inc. complete a debt swap to avert bankruptcy after the Teamsters union said the bank was trying to profit from a failure of the largest U.S. trucker by sales.

A group consisting of Goldman Sachs, Deutsche Bank AG, Aristeia Capital LLC, Silverback Asset Management and a Smith Management LLC unit, “got us over the goal line by going into the market, buying bonds and tendering them,” YRC Chief Executive Officer Bill Zollars said yesterday.

YRC extended the deadline for the bond exchange six times in December as it sought to overcome resistance from bondholders owning derivatives that would pay out if the company defaulted. YRC, which has posted $1.7 billion in losses in the past five quarters, needed to complete the exchange by Dec. 31 to avoid a bank payment that would have left the trucker in an “unsustainable” position, the Overland Park, Kansas-based company said in a regulatory filing two weeks ago.

International Brotherhood of Teamsters President James Hoffa said in letters last month to regulators and lawmakers that Goldman Sachs and Deutsche Bank were among banks that “have a history of making markets in these types of derivative financial products.”

Goldman Sachs spokesman Michael DuVally said Dec. 17 that the bank was “actively exploring ways to help” YRC.

Bondholders with 70 percent of YRC’s $150 million of 8.5 percent notes due in April offered to tender, meeting the required threshold, the company said yesterday in a statement. That’s an increase over the 59 percent that participated by Dec. 29. Holders of 88 percent of all of the company’s outstanding bonds, with a face value of $470 million, participated in the exchange, the company said.

Health care, the municipal bond segment with the highest proportion of downgrades in the first three quarters of 2009, yielded the year’s best return.  The Standard & Poor’s index of hospital, life care, nursing home and related bonds led total returns at 28%.

Back to Glass-Steagall Act

A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc.  Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.  Those walls came down with passage of the Gramm-Leach- Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages.

Supply And Demand

A 26-mile-long line of idled oil tankers, enough to blockade the English Channel, may signal a 25% slump in freight rates next year.  The ships will unload 26% of the crude and oil products they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of $30,000 a day next year, compared with $40,212 now, according to the median estimate in a Bloomberg News survey. ‘The tanker market has been defying gravity,’ said Martin Stopford, a director at Clarkson Plc, the world’s largest shipbroker. More than half of the ships are in European waters, with the rest spread out across Asia, the U.S. and West Africa. Lined up end to end, they would stretch for about 26 miles.

The Outlook for the future

Most Americans have a dim view of the first decade of the 21st century, a survey suggests.  Those who have a negative view of the decade outnumber those with a positive view almost 2-to-1, the Pew Research Center survey found.  The results stand in sharp contrast to the public’s assessments of other decades. The 1960s, 1970s, 1980s and 1990s all polled more positive than negative feelings, Pew found.  In the latest survey, respondents associated the decade with words like downhill, decline, chaotic, disaster and depressing.

Fed Manouverings

Federal Reserve officials are considering a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet as part of a range of tools for withdrawing record monetary stimulus.  The Federal Open Market Committee discussed asset sales at its November meeting, with some members in favor and others warning that it would cause ‘sharp increases’ in longer-term interest rates, according to minutes. A middle route now being studied would allow small amounts of bonds to be unloaded at announced times.

Fannie Mae and Freddie Mac

The US government’s expanded capital backstops and portfolio limits for Fannie Mae and Freddie Mac increase “the prospect of large-scale” purchases by the companies of delinquent mortgages out of the securities they guarantee, according to Credit Suisse Group analysts.  The Treasury Department announced Dec. 24 that the two mortgage-finance companies, which were seized by the US almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. It reworked caps on Fannie Mae and Freddie Mac’s mortgage-asset portfolios to require the holdings to fall to $810 billion each by Dec. 31, 2010, rather than about $690 billion.  ‘This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence,” Mahesh Swaminathan and Qumber Hassan, the Credit Suisse debt analysts in New York, wrote.

State and local tax collections fell for the fourth straight quarter. Collections in the three months ended Sept. 30 fell 6.7% from the period last year to $266.5 billion.

Wall Street, banking and government have set a very dangerous precedent. They have created the financial and moral atmosphere that has and will continue to foster debt default. In this past year it is estimated that strategic default by those whose homes are under water will total over one million homes. The conclusion for borrowers is we can walk away from just about any debt. Obviously people are not concerned about their credit ratings, and that is probably due to settlements being allowed by many lenders. Borrowers have learned that borrowing is a two-way street and that lending institutions are 80% responsible for lending, at least as far as the blame game goes. It should be noticed as well that corporations are defaulting in large numbers as well.


What we are seeing is a whole new attitude toward debt and because of this loans for both business and individuals are going to be very hard to come by in the future. Do not forget America’s success was founded on debt and that debt to some degree won’t be there in the future.

We have been informed by our contracts in Washington that debt failure, the bankrupt or near bankrupt conditions at lenders and the lack of loans available for the past couple of years suit the administration just fine. Mr. Obama believes that the more small and medium-sized companies that go under the better it is for his economic program. That means large corporations and government will supply the jobs and subsequent control of the people. Debt doesn’t matter when the goal is a one-world society, nor does unemployment. These Illuminists are going to rip this country piece by piece. In addition, as we said six years ago, when we said Fannie and Freddie were bankrupt, the government wants to end up owning 40% of US housing in order to completely control 40% of Americans’ lives. Once in full possession they further dictate how Americans will live.