International Forecaster Weekly

A Devastating Impact as the Market Unleverages and a Winter of Discontent

Two sets of rules on wall street, 50 billion ponzi scheme by Bernard Madoff uncovered, court case for the toxic waste coverup, Paulson's efforts are futile, commercial and residential real estate market alike now frozen, fed is frantic, an elitist engineered collaps of the U.S, derivative problems galore, and no real debate taking place in government

Bob Chapman | December 17, 2008

As we know there are two sets of rules in banking and on Wall Street - one for the anointed and one for everyone else. The anointed never go to jail for their crimes.
On Friday, it was reported that former Nasdaq stock market chairman Bernard Madoff was arrested for running a fraudulent investment business that lost $50 billion before he confessed to senior employees it was a “giant Ponzi” scheme.
    Federal investigators working through the weekend to unravel Bernard Madoff’s alleged $50 billion Ponzi scheme found evidence he ran an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries, two people with knowledge of the inquiry said.
    Clients of the undisclosed unit may have included hedge funds, according to the people, who declined to be identified or to name the funds because the probe isn’t public. Investigators from the U.S. Securities and Exchange Commission are looking for signs that others participated in the alleged fraud and are examining why Madoff’s wife’s name appeared on documents linked to transactions under scrutiny, the people said. His wife, Ruth Madoff, has not been accused of any wrongdoing.
We now are faced with another budding scandal, which is engulfing Robert Rubin former Treasury Secretary under Bill Clinton and his former disciple Chuck Prince for their roles in another Ponzi scheme that is now choaking world banking.
They and their accomplices over the past five years are named in a federal lawsuit for an alleged complex cover-up of toxic securities, which was administered worldwide. They caused part of what you see in CDO, Collateralized Debt Obligations, which have been responsible for trillions of dollars in losses. These disastrous securities that were sold by Citibank were off the books in shell entities. The actions of Rubin and his partners in crime were responsible for the collapse of Citigroup, which wiped out $122 billion in shareholder value.
What is equally onerous to shareholders is that Rubin and his gang of accomplices were able to hold Citigroup’s shares up in value while they cashed out $150 million worth - stock sales that were suspicious and calculated to maximize the personal benefits from undisclosed inside information. A trait Wall Street Illuminists are famous for.
Rubin made $30.6 million on the deal. What more would you expect from the masters of the universe?
Considering this suit we see a winter of deep discontent. It is the apparent result of twisted ideology or manifest sociopath behavior. Financial innovation was just another ruse to empty the pockets of the investor. This was an age of mitigating risk by spreading it throughout the system. It was thought that this would blunt the negative force of such scams. It did not work. This is what we forecast six years ago and which only became realty 1-1/2 years so. When the results of such antics began to take the financial system down.
Americans and others have no idea what is going on nor do they understand the gravity of the situation. This is an event that only happens once every 500 to 1,000 years. This is going to be one of the granddaddies of all collapses. The elitists had to play boosting the value of real estate to dizzying heights and then burying it in structured finance. In a world of stable real estate prices, SIV’s and CDO’s were relatively risk free, but this was not a stable environment. Professionals should have realized that normal rules didn’t apply. Foreign banks, hedge funds, insurance companies and other institutions bought 70% of what became toxic waste, as they poured dollars back into the US economy supplying at times $3 billion a day in investment to keep America from going bankrupt. The buyers knew that lending practices had changed dramatically and that risk had increased exponentially. Eighty percent of mortgages were being securitized.
Greed drove all the players from the borrowers to the buyers of what became toxic garbage. A daisy chain of corruption and greed. The buyers were not happy with a better yield, they had to borrow money and leverage the CDOs and SIVs 30 to 100 to one. As you know we have just witnessed the de-leveraging of this process and the devastating effect it has had on all markets and the world economy.
The Illuminists got the ball rolling by getting revenge on Bear Stearns by financially assassinating them and looting the valuable assets of the company. The recipient was JP Morgan Chase, a major owner of the Federal Reserve, which you loaned $29 billion to pull off this theft. This started the de-leveraging and the run on the derivatives. Lehman Brothers was next and their demise caused even more havoc. Just prior to that was the collapse of Fannie Mae and Freddie Mac, both derivative borne disasters. Taxpayers are on the hook for $9.4 trillion and climbing. The Fed refuses to say who received their largess and what the terms are. Citigroup will cost $1 trillion and AIG $500 billion. The Treasury is backstopping $600 trillion in derivatives and the Fed and the Treasury are doing the same for the entire structured finance segment. The latter and municipal bonds are essentially frozen. There are few buyers.
There is nothing normal about this recession/depression. We are looking at the destruction of the system, which we forecast over eight years ago. Any entity with money doesn’t want to lend or to buy. That is ABS, CDOs, SIVs, CP, munis, auction rate securities and CDS. It is a semi-frozen to frozen system. In order to get banks to lend at all the Fed poured funds into domestic and foreign banks, and has forced down interest rates on Treasuries as well as the Libor.
Paulson’s attempt to revive loan securitization is an exercise in futility. The banks do not even want to borrow short and lend long anymore. No more 30-year fixed rate mortgages for now. They have too many bad debts and do not need any more foreclosures. Let the FHA handle the business until the smoke clears. The banks, Wall Street, government, and the Fed are putting out so many fires that they have little time to restore confidence. There is still no transparency. When you ask a simple question of government the answer is it is a state secret and cannot be divulged. The Fed arrogantly simply refuses to answer.
As we stated previously banks are lending but only to the best borrowers and loans are up 20%, but only in that category – and that includes mortgages.
The system falls deeper and deeper into trouble every day. The banks are holding on with Fed and Treasury help, as are most sectors of the economy. What is really vulnerable is Wall Street, insurance, pension and retirement plans, hedge funds and those in the stock market. The market is only 50% down. It has 50% more to go.
The stimulation brought forth by the Treasury and the Fed has to lead to a decline in the dollar and a rise in gold and silver. We are already into a dollar correction. The fight by the Treasury and the Fed to keep interest rates low will get more difficult and cost more money. They have again lost control of the dollar. This means gold and silver should break out again soon. Treasuries, the bond market and the stock market will all be under tremendous downward pressure. The perceived safety of Treasuries will soon be history. This is why we have recommended for those of you who want only safety to use Swiss franc Treasuries.
The dollar faces a $1.3 trillion fiscal deficit in September of 2009 and a trade deficit of $57 to $60 billion and a $500 billion balance of payments deficit. The M3 started rising again and will start to show up in inflation again in January. It is now only a matter of time before interest rates rise again from their ridiculous current levels.
As the dollar comes under pressure the Treasury market is experiencing fails-to-deliver of $2 trillion and that is hardly chicken feed. This certainly has to be a crisis of confidence for Treasury investors and another good reason to stay away from them. Who would want to chase record low yields and fails that range from $1.3 to $2 trillion? It is like who’s on first. As a result broker/dealers have stopped delivering bonds. Holders of US Treasuries are now scared to lend them into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worse, might go under.
Treasuries are some safe haven. It could be in time investors will refuse to buy Treasuries. That would make it increasingly difficult and expensive to raise money and rollover maturing debts. Due to fails-to-deliver the natural balance of supply and demand has been altered and the true price of Treasuries has been obscured. In addition, fails have spread across other bond markets. While this transpires the Fed sits on its hands and does nothing. They just told the players to sort it out for themselves. Could it be the Fed wants a collapse? The global economy has significantly contracted since the collapse of Lehman, which spurred this problem. The Fed’s attitude hardly instills confidence when 8.6% of all Treasuries failed in the first five months of the year.
Now that figure is 20%. As we said these fails have affected other markets and this problem is not new. In 2004, fails for government agency MBS was 40%. It really is a case of greed by the players not wanting government to interfere. Once the system breaks down, and it will break down, the pros and the institutions will get delivery but not the public. The profit lies with the institutions.
Another problem is that more bonds are trading than exist. That is due to naked shorting mostly by dealers. An investigation is underway, but as usual, nothing will happen.
As we warned some time ago not only residential real estate has serious problems, but so does commercial. The market is frozen because buyers cannot get financing. Months ago we brought to your attention in NYC the Stuyvesant Town-Peter Cooper Village and the Riverton Apartments in Harlem. There are developments all over the country that are in serious trouble due to lower revenue or cancellations. Bonds for such commercial projects are yielding on average 15.2% versus 8.5% in mid-November. Credit default swaps on such bonds on AAA securities rose 133.5 bps to 847.5, or $847,500 in annual premiums to insure $10 million of the debt. That is $619,000 more than at the end of October.
The 2006 funded ALT-A mortgages delinquencies averaged 20.3% and 12.5% for 2007 up from 16.9% and 12.2% just six months ago, and as unemployment rises these mortgage problems will worsen.
The credit crisis has begun to be reflected in a demand collapse. The downturn is the worst in 27 years. This unfortunately is what we predicted and it has come to pass. The Baltic dry index has fallen from 11,000 to 800 and China will shut down 100,000 plants this year. As we have reported previously rioting has been rife in major cities. In large exporting cities unemployment is over 10%. It is no wonder the Communist government is going to spend $650 billion on domestic infrastructure.
These problems will hit every economy and society. Versus gold every currency will fall. The chickens are coming home to roost. No matter what governments following Keynesianism say, every government will have to revert to a gold standard and God help those that do not have gold reserves. They will have to buy reserves back and that, of course, will send gold soaring. Yes, inflation drives up gold and silver and deflation does as well as it becomes a flight to quality. When nations currencies are not worth the paper they are written on gold becomes the standard. We do not know for sure where gold is going. Official inflation since 1980 would put it close to $3,000 and unofficial inflation over $6,000. If we return to a gold standard we could be looking at $9,000 to $10,000 an ounce, who knows. All we know is that is where all this is headed. We have seen one report that was looking for more than $50,000 an ounce.
November was the worst month in the US labor market since the oil crisis of 1974. The rising cost of corporate debt is flashing warning signals that far worse is to come over the next few months and job losses are headed for levels last seen during the “Great Depression” of the 1930s.
As investors flee risk in corporate bonds they pursue US Treasuries, which are just as risky. The pace of layoffs already happening in the US is indicative of panic. Mind you, what you are seeing are official statistics not real numbers, which are much worse.
As troops go into the process of leaving Iraq troop levels in Afghanistan have risen 20,000 and it is expected troops on the ground theme within the next 18 months will rise to 58,000.
Just like in Vietnam the conventional wisdom says these troops are absolutely necessary. While this goes forward we do not hear a peep from Congress. There is no debate it is just happening. The opium profits have to be protected and how else do you get unemployed young people off the streets?
Over the past three months the monetary base has risen $630 billion or 76% yoy. From 8/87 to 11/05 the monetary base rose at a 6.8% rate.
As an afterthought, the Fed’s portfolio of securities extended by $1.2 trillion over the past eight weeks to a record $2.2 trillion. Banks have increased lending to their best clients, but most of the injections ended up in dividends, bonuses and or the balance sheet. The legacy NYC banks under new law are getting interest 1% above the Fed funds rate. This will flood the financial system with unlimited amounts of money. This is part of quantitative easing that includes unlimited amounts of money and credit and zero interest rates. It also includes the purchase of toxic junk, ABS, including credit card packages, car loans and student loans.
In just over the last year more than $10 trillion has been lost in residential real estate, the inventory overhand is more than 10 months or some 3 million homes for sale.
The Fed and the Treasury are purchasing hundreds of billions of ABS and MBS from banks and Wall Street and from Fannie Mae and Freddie Mac. As a result of the latter, 30-year mortgages are being driven relentlessly lower. In addition the Fed and others have driven interest rates to their lowest level in over 50 years. The 10-year Treasury notes recently were driven down to 2.48%. As the Fed’s manipulation proceeds massive amounts of new Treasury securities are entering the market.
We are calling the federal deficit at $1.3 trillion for fiscal 2009. Some already believe it will go over $2 trillion. Tell us why would anyone want to be long US Treasuries or the US dollar?
As we predicted, in spite of a 4-1/4% drop in the Fed funds rate, housing continues to fall in value. We believe it will continue to do so at least for 2 to 3 more years. This while unemployment grows and consumer spending falls. The deflationary spiral is there. The question is how long can the Fed and the Treasury hold it off? Japan failed and the US will fail.
The elitists engineered the collapse of the US, Canadian and European economies now they’ll have to deal with the workers they’ve dispossessed. They know who was responsible for their plight. The public has worked their entire lives and has little or nothing to show for it. Their pensions and 401k’s have been decimated and they are trapped unable to stop the decimation of their wealth. What has transpired over the past eight years has been a massive transfer of wealth from the workers to the very wealthy. This time even the upper-middle class and the middle-class are being pulled apart. Wall Street and banking are responsible and ironically they are bailing themselves out leaving the workers with very little.
These, the world’s most productive workers, who work longer and harder, see shrinking wages and falling purchasing power the victim of stealth inflation. The greed and corruption of the Illuminists knows no end. They have left 50 million people without health care.
Business has converted full time jobs to part-time jobs to eliminate benefits and in the process lower the pay scale. It just doesn’t end. It goes on and on and can only get worse.
Word on the ‘Street” is that JP Morgan Chase is a systemic risk problem and they do not know how to solve the problem. Merrill put out a sell on Morgan. They have derivative problems not only with their own paper, but also with that inherited from Bear Stearns. It could be gold and silver that takes Morgan to the edge. We could be talking trillions of dollars in losses. Morgan is one of our recommended shorts at $39.36. It closed at $28.60. We are pulling our first short cover at $23.00 and leaving it open. Morgan is going much lower.
The wreckage in the $500 billion subprime and $1 trillion ALT-A mortgages will get much worse. The foreclosures are headed even higher than expected.
We are not even close to discounting the credit-market meltdown that will stretch well into the future.
The FDIC is looking to hire about 125 new workers in order to cope with more bank closings in 2009. The starting salary is $156,000 a year.
The municipal bond market lost 8.2% in 2008.
As you know we are short a number of major homebuilders. We believe almost all of them will be wiped out, because how can you build and sell when there are millions of unsold home inventory on the market. The option-ARM resets will be a killer.
The SIPC has been wiped out by the Madoff Ponzi scam. It will be interesting to see what government does next.
Diary Farmers of America and to former top officials will pay $12 million in penalties for a 2004 scam to manipulate milk futures.
Bristol Myers Squibb is going to cut an additional 800 jobs, or 10% of its workforce.
Interest rates at zero or 0.25% make little difference. Fourteen months ago rates were substantially higher and lowering them has not extracted us from the financial credit crisis. The lower rates won’t make bad loans good. These psychological boosts have withered each time they have been produced. Tuesday’s Fed rate lowering will accomplish little and the market will come tumbling back down. Worse yet, the Fed has played its last interest rate card. They have accomplished little since this deadly fiasco began. Their efforts have not stopped the recession nor have the mountainous creation of money and credit – they are a complete failure.
They created a stronger dollar for five months; now the dollar has collapsed again.
The Fed can only increase money and credit in greater volume, as inflation becomes hyperinflation and gold and silver soar. The Fed is trapped, they are in a box and they cannot get out. They and their lies and corruption are going to go down in flames. There can be no miracles, reality is what it is. Truth is about to triumph. The Ponzi scheme is in its final stages. All the prosperity since the 1970s has been a big lie. You must have all your investible assets in gold and silver related assets. It is your last chance to capitalize at inexpensive prices.
The lack of trust in the financial world over counterparty risk is accelerating and contracts of all kinds are being forced to be settled. Derivatives in the trillions of dollars are being forced to be settled and JP Morgan Chase is in serious trouble. Morgan is the biggest Fed shareholder and that means the Fed and the Treasury will bail them out for trillions of dollars. That means money and credit will have to be created at breakneck speed. The scandal at Citigroup with Robert Rubin, the mirror Madoff catastrophe, only $50 billion and now we have JP Morgan Chase on the ropes. Wall Street, banking and Washington are trying to keep the problems at Morgan under wraps.
    The Fed, by cutting its official rate to 0 to 0.25%, is just putting the Fed’s target rate in line with the effective or real rate.  But the Fed, via its communiqué, is admitting that it is petrified of what is occurring in the economy and financial system so it is now in all out money/credit dump mode.
    Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.
    The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
    As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
    The Fed is frantically signaling that it wants asset prices to inflate and will engage in any and all activities that will force asset prices higher.  The Fed announced that it will monetize the entire debt market if necessary. As we have asserted, the Fed has bet the entire ranch.  Now we get to see if it works.