International Forecaster Weekly

Causes of Depression Yet To Be Addressed

More disruptions for the US dollar and UK Pound, international financial system too weak, GDP numbers are phony, more devaluation and default, Globalization a disaster, Purging the system still a good idea, Abolish the Fed, Gold and Silver your only safe haven, What can the market possibly do under such stress?....

Bob Chapman | July 30, 2009

As we enter August we are getting closer and closer to real disruptions with the US dollar, as well as problems with the British pound, as both economies feel the sting of rising inflation within a progressive depression. The stimulus package has exhausted itself for this year so the economy in the US can at best stay neutral at a minus 4% of GDP.

The causes of our depression have yet to be addressed as the Treasury and the Fed flood banking, Wall Street and insurance companies with funds to keep them afloat. The deterioration continues unabated as Wall Street and banking report higher earnings by laying off workers and by playing accounting games.

US debt is on it way to causing a retest of USDX to 71.18. The will cause higher interest rates. There will be a furious effort to re-liquefy the US economy causing ever more inflation. The entire international financial system is in no condition to meet such a challenge. The US Treasury is so busy trying to find buyers for Treasuries they have little time to solve anything, as unemployment at 20.5% throttles the nation. The economy is not going to recover by saving the anointed few in banking and Wall Street. Americans and Brits are no longer buying the ridiculous fairy tale of green shoots. People are catching on that the economy and the markets are being temporarily rigged. By the end of October we believe banks in the US, UK and Europe will be in serious trouble again. That should really knock markets and the world economy to new lows. It could also corrupt any improvement in GDP anywhere. The problems of 2007 and 2008 will return, because the façade of the public bailout of banking and Wall Street will crumble again. Further impoverishment is on the way. More and more will be laid off and they’ll be no new jobs available. Savings will be exhausted and most homes that have been financed will be under water.

You must put in dehydrated and freeze dried foods, a water filter and plenty of guns, ammo and clips. All stocks and bonds should be sold, except gold and silver shares and Canadian and Swiss Treasuries. All cash value life insurance policies and annuities should be sold. We’ll deal with pensions later. All IRA’s, Roth’s and 401(k)’s that you control should be in gold and silver shares, funds and coins.

The phony GDP numbers won’t fool actuality. You cannot have a recovery without an expanding jobs market and we are going the opposite way.

Devaluation and default are in the air and it is only a matter of time before it happens. Be out of dollar and pound denominated investment except gold and silver mining shares and gold and silver coins. Convert as fast as possible.

Following the collapse of both the US and UK economies, New York’s, Wall Street and the “City of London” will cease to be the centers of world financial powers. Then will come the real investigations and trials of those who stole from the people and committed treason. And, all the kings’ horses and all the king’s men couldn’t put the Illuminati together again.

Globalization has been a disaster for the US, Europe and the UK and Canada. It may have brought relative prosperity to the third world and transnational conglomerates, but overall it has simply been a method of redistribution of wealth. This deliberate policy by internationalists will eventually push us back into tariffs, a device that helped keep competition fair, not free. We found out in the late 1700s what damage British Colonialism, known as British mercantilism, visited upon our young economy.

The one-worlders who brought us free trade, globalization, offshoring and outsourcing brought us the collapse of our financial system. Due to their control of the Fed and the Treasury Department, Goldman Sachs and JP Morgan Chase brought about the demise of Bear Stearns and Lehman Bros., and caused Merrill Lynch to be bought out. It is handy when you have the power to destroy more than half of your competition. Not that they were not broke, they were, but so were GS and JPM. All these firms and banks and many others used 30 to 50 times leverage, which has and is insanity.

Making excuses for these players doesn’t wash. All they are doing is borrowing money at zero interest rates from the taxpayer, and these are the people who caused this disaster. Contrary to what the banks say, it will take a lot longer to work out from under their debts. They are just starting to get hit with credit card debt, commercial real estate debt and face three more years of foreclosures in residential real estate. We might add that former Treasury Secretary Paulson, on loan from Goldman Sachs, made sure that banks and Wall Street were rescued along with a cluster of insurance companies. Very little was done to assist some of the deserving public. Those who were saved were the ones who approved subprime, no-doc and option ARM pick-and-pay loans, along with the rating services, which committed fraud jointly in the sale of collateralized debt obligations. In addition, Paulson, who threatened Congress with insurrection in the streets if his demands were not met, raised $700 billion from Congress. This is the same Paulson who strong-armed the FASB to change the accounting rules from mark-to-market from mark-to model to allow financial institutions to falsify their books. We might also add that while he led Goldman he allowed 50 to 1 leverage and he was a major player in securitizing loans.

Banking leverage over the past ten years has risen form 19% to 50% versus tangible equity and is currently about 45%. In England it is 55%. UK bank assets are 5 times GDP, whereas they are 2 to 1 in the US.

It is not cavalier to demand a purging of the system. No matter what is done by the Fed and the Treasury the music must be faced with a deflationary depression. Yes, unemployment would go to 40%, but it is going to go there anyway. Little effort is being made to deleverage the banking system and that is one of the major problems. Remember, those banks and those on Wall Street and in insurance that were rescued by the taxpayer were all elitist firms.

U6 unemployment minus the birth/death ratio is 20.5%. Job losses are now equal to or greater than at any time since WWII. All job growth since 2002 has been totally wiped out. The average workweek is 33 hours as more and more companies request employees to take unpaid leave. That government says amounts to more than 9 million people, or 5.8% of the workforce. Those figures are greatly understated as factories work at 65% of capacity utilization. The average length of official unemployment is 24.5 weeks, the longest since stats began in 1948.

Unemployment is spreading at an unprecedented rate: 92% of this year’s stimulus was spent to pay down debt, as savings jumped to 6.9%. That spells sufficiently scared. That should shortly send consumption to less than 70% of GDP. The corporate bottom line is being fattened by layoffs. These problems are going to get considerably worse before they get better.

Homeland Security is going to change their program that allowed local police to enforce federal immigration laws. The law is very effective – catching some 60,000 illegal aliens annually, most of who are deported. Now we cannot have an effective law like that can we? Thus, it is being done away with. It increased deportation by some 24%.

There is no question that special inspector general Neil Barofsky’s quarterly report to Congress made intelligent heads spin. Our projection of the government’s financial exposure at $14.8 trillion was woefully short of Mr. Barofsky’s $23.7 trillion estimate. Incidentally, all of Mr. Barofsky’s figures are official releases of data. If we had the time we’d come close to the same numbers. Regarding our estimate, we saw only two similar estimates, one at $12.8 trillion and the other at $14.5 trillion. It should also be kept in mind that all government figures are bogus, thus, Mr. Barofsky’s real figure could be $30 trillion. He said that the federal government has devoted $4.7 trillion just to save the financial sector. We ask, what is the real figure? Perhaps $8 or $10 trillion? We’ll never really know, will we? That is because the Fed, a private corporation, says it is a state secret and won’t release any information. That is why we desperately need HR 1207 passed. The Fed has to be abolished; otherwise it will totally destroy the world financial system. If you are curious Mr. Barofsky’s estimate puts every American $88,000 deeper into debt, essentially to rescue the shareholders of the Fed.

One of the things that deeply disturbs Congress and we suppose is one of the reasons Ron Paul’s HR 1207 has 276 sponsors, is that the Fed absolutely refuses in detail to discuss the quantity and quality of assets backing all of their programs. This means, at this time, losses to taxpayers could be upwards of $50 trillion. Worse yet, the Comptroller’s Office doesn’t – can’t account for $12 trillion in an audit of the Fed. They won’t even tell us who the TARP recipients are and how they used the funds. In the final analysis neither the Treasury nor the Fed have any credibility left. They either lie or stonewall on every issue. These are the people who are running the financial sector of our economy.

On Thursday, the S&P 500 broke out of a large head and shoulders reversal pattern, which dates back to last summer. The question is will the breakout persist or reverse. Industrial production and unemployment are at the lowest levels since the Great Depression. Commercial paper and bank credit have been collapsing for two years and bank non-performing assets continue to rise.

For the past year treasuries owned by foreigners has stayed steady at $1.7 trillion. T-bill holdings have increased from $226 billion to $586 billion. Custodial holdings of foreign central banks at the Fed of GSE, Agency and mortgage debt has fallen from $968 billion to $807 billion. T-notes have increased from $226 billion to $586 billion. T-notes and bond holdings rose from $412 billion to $618 billion and GSE mortgage debt has increased an eye popping $639 billion from zero. This is where the Fed is training for its demise. Could it be that foreign central banks are finally preparing for dollar devaluation and all that money the Fed and Treasury has been printing for banking and Wall Street?

The Reuters/University of Michigan Surveys of Consumers says July sentiment fell to 66.0 from 70.8 in early June. Expectations fell to 63.2 from 69.2 in June. The current conditions index fell to 70.5 from 73.2 in June.

Our Illuminists, Treasury Secretary Geithner, says the Treasury is not in a position to give an estimate of taxpayer losses due to bailouts.

Not only is the housing market not stabilizing, but it is getting worse. The housing crisis as bad as it is shows that rental vacancies are surging and rents are declining. The bottom is a long way off at the end of 2012. Housing prices will fall 20% to 30% more.

Capital One’s shares jumped as a result of better than expected earnings. This was accomplished by not declaring costs of paying back TARP funds and by not increasing provisions for loan losses. The income was created out of thin air, a fantasy. Their earnings were really flat, or less than declared. This bank, like many other banks, has serious problems and is to be a voided like all bank shares should be avoided. This is an example of the lies and chicanery being employed to deceive by almost all large banks, probably on orders from the Fed.

This week the Treasury will borrow $203 billion. If they do that each month that would aggregate $2.4 trillion. If this happens weekly that is $10.5 trillion a year.

World economies, particularly those of G-7 countries, excepting Canada and Germany, are so buried in debt that they cannot respond positively to further economic stimulus. The current debt driven crisis within the G-7 means the euro won’t survive if Ireland, Spain, Italy and Portugal default. The mainstream economists are finally realizing that the system has to be purged, something we believe the ECB-eurozone is already attempting. The growth of their M4 will determine which direction they will go in.

Next the mainstream will finally discover the manipulation of all markets by the Fed and the outrageous suppression of gold and silver prices. That is why gold and silver are so important. They are your only safe haven.

Last week markets were pushed upward by phony earnings reports, particularly by financial institutions. The Dow gained 4%; S&P 4.1%; the Russell 2000 rose 5.6% and Nasdaq rose 4.7% as the 2-year credit crisis wears on and the economy feebly chugs along. Cyclicals rose 10.1%; transports 6.7%; consumers 3.3%; utilities 5.5%; banks 0.6%; broker/dealers 6.7%; high tech 4.5%; semis 3.6%; Internets 5% and biotech 26.9%. Gold bullion gained $14.40 and the HUI gold index rose 3.8%.

Two-year T-bills rose 1 bps to 0.96%; the 10-year notes rose 1 bps to 3.66% and the 10-year German bund rose 8 bps to 3.48%.

Freddie Mac’s 30-year fixed rate mortgage rates rose 7 bps to 5.20%; the 15’s gained 5 bps to 4.68% and the one-year ARMs rose 1 bps to 4.77%.

Fed credit fell 41.1 billion. Year-on-year it is up 128%. Fed foreign holdings of Treasury, Agency debt rose $4.8 billion to a record $2,787 trillion. Custody holdings for other central banks under a new secret formula has risen 19.3% ytd and is up 18.4% yoy.

M2, narrow money supply, fell $15 billion, up 8.5% yoy.

Total money market fund assets increased $8.9 billion to $3.656 trillion. Assets are up 8.2% annualized.

Total commercial paper fell $3.4 billion having fallen 63% annualized. Asset backed CP fell 44.5 billion yoy, a fall of $313 billion.

The dollar declined 0.7% to 78.77 this past week.

Most professionals and investors are surprised to see the Dow over 9,000 again. Stocks have again become totally divorced from reality and economic fundamentals that when the next drop comes, which it will, most will be caught flatfooted. There is a total disconnect between the equities market and the credit market. Of course, the summer’s thin volume has masked the upside moves.

The Treasury has borrowed last week and will this week some $235 billion, a colossal sum.

The Rasmussen survey tells us 25% of those polled say the stimulus helped the economy; 31% said it has hurt the economy.

The week before last the Fed pumped $80.2 billion into the bond market and other markets as well. Last week they removed $33 billion. The more important earnings releases are already history, so we ask what can the market do for an encore?