International Forecaster Weekly

Dysfunctional Markets That Change Every Hour

markets too hard to follow, Euro bailout continues to fail, Fed the source of liquidity for ECB, Bank failures and home losses continue, layoffs rise, Goldman Sachs likely to payout for SEC suit, California pension pressures, deflation fears,

Bob Chapman | May 22, 2010

Keeping up with today’s dysfunctional markets is very difficult because they change hour by hour. The problems of Europe have stolen center stage from US problems. The focus is on Europe, but we all should remember trillions of dollars have been injected into the US financial system since mid-2007. All are attempting to maintain the façade that all is well, when in fact all is not well. Underlying assets are worth far less than their stated value. As a symptom of this corporate bank lending has fallen off a cliff and in Europe it doesn’t exist. Without such lending there can be no recovery. The American implosion will now be repeated in Europe. The green shoots of recovery have now turned into poison ivy. The abyss has again been filled with more debt and more fiat currency. In the process the Fed and now the ECB have lost all credibility.

The $1 trillion initial package to save the euro thus far has been a failure as the euro continues its decent. This bailout plan has US fingerprints all over it. The elitists figured they could take down the entire system in 1-1/2 to 2 years, but the poster child Greece didn’t cooperate, so all their plans have been split asunder. As far as the bailout is concerned will the effort be stopped in German courts and will the austerity programs in the weak countries work? Greek citizens say no. We will just have to see if they are serious. Do not forget that the bogus books in Greece are nothing different than almost all nations have been engaged in. Greece is no better or worse than the rest. Again, like the US, Europe is only trying to buy time. In fact, Mr. Trichet and Mrs. Merkel tell us officially that is what they are up too, buying time. This is not a situation where Greece acted alone; every nation has been doing something very similar. What is different this time is that the Greeks have responded with rage over the past month. As a result of that, the falling euro and skepticism as to whether the stimulus will work has pushed acceptance in the wrong direction.

Needless to say, all these machinations have led to deep disappointment in the wealthier EU member countries. At this point we don’t see cooperation between Greeks and their government and the bureaucrats led by a Bilderberger. On the other side the other members of the EU and the IMF refuse to conduct a bailout, which is supposed to protect the members. The Greek government may have signed the treaty, but the Greek populace hasn’t. Stringent austerity measures are not something they’ll stand still for encompassing the next ten years.

The question also arises is $1 trillion going to be enough? Germany and France alone own $635 billion in PIIGS bonds.

World banks, particularly European banks, made some very bad decisions in buying bonds from the PIIGS nations, and that is what this finally boils down too. - the loans and bonds, the money for which was created from out of thin air. What this amounts to is another giant bailout by world taxpayers for banks, particularly European banks in this case. You might have also noticed that the ZEW German Investor Confidence Index fell from 53 in April to 45.8, reflecting further German reaction to the $1 trillion aid package. Many believe the eurozone will collapse and many want it to, especially in Germany. As a reflection of that the ZEW Index fell from 53 in April to 45.8 in May. The Index aims to predict developments six months ahead. German confidence is waning. Prior to the allocation of $1 trillion to aid Europe’s basket cases, eurozone central banks bought the junk club med bonds. All the funds coming from taxpayers. If that had not occurred BNP Paribas, Unicredit, BBVA, Societe General and Santander would have collapsed. That is what this package is all about, bailing out the oligarchic banks. Of course, Mr. Trichet, head of the ECB, tells us we have not changed monetary policy, which flies in the face of reality. He also tells us all the money will be returned to the people, the lenders. Of course that isn’t true. Even if it was returned we have no way of verifying it, because everything is a big secret. What Mr. Trichet is not telling you is that secretly the Fed has been feeding liquidity into the ECB for 2-1/12 years, otherwise it would have been insolvent long ago. The euro has been a failure, as we predicted it would be 12 years ago. As the Fed feeds the ECB liquidity via swaps and other more subtle methods, the ECB feeds the banks fund to keep them from collapsing. In turn, the banks buy eurozone government bonds in another form of quantitative easing. Such phony antics don’t fool real professionals, who know from history what the results will be. This 3-card Monte game is not fooling the average European, who for the last month has been wiping out gold and silver coin dealers in Germany and Switzerland. The euro is history. It is just a question of when. The fight for supremacy is now being waged between the dollar and gold, a battle the dollar cannot hope to win. What you are seeing is a flight to quality, something we have described for more than 50 years. Presently, as far as the euro is concerned, it’s garbage in garbage out. The ECB and other central banks are buying junk bonds, toxic waste, how can it be expected the quality of their reserves are anything but junk? This is not only a euro-ECB problem, but it is also a Fed-dollar problem. How can any Europeans and Americans not want gold? Just like the dollar, and all currencies have been devaluing versus gold, so has and will the euro. The next steps for the eurozone and the US will be much higher inflation and perhaps even hyperinflation. This means Germany, the trading powerhouse, will become less competitive. They’ll lose business and their profits will fall.

Part of the liquidity game is not only to save the financial sector, but also to keep European stock markets from falling, much the same as the Treasury and Fed have done in the US via the Executive Order for “The Working Group on Financial Markets.” The result has been higher inflation, higher stock markets in Europe, and a loss in value of everything denominated in euros and, of course, a gain by gold against the euro and all other currencies. The public doesn’t see this nor do they understand. That is why we explain what is going on in simple terms in this publication. In Europe, as in the US, there is an all out war to keep stock markets from falling; least the public discovers they have been the victims of a Ponzi scheme. As you can see all things are not as they seem to be.

As a result of this monetary and fiscal profligacy we have a global financial breakdown in the works that no one will escape. Worse yet, no one has offered any solutions other than to throw money at the problem. Funds have been tunneled to the very parties that caused the problems in the first place. As a natural result gold has continued to rise in price as both the US and Europe have come to the realization that their political powers are controlled from behind the scenes by personages of great power and wealth and that part of the way to change that is to throw almost all incumbents out of office. This way at least for a time the control of these elitists can be neutralized and their power base rendered ineffective. That accomplished, legislation can be passed to reverse so many of the outrageous laws we have. The first issue would be to end corporate ability to keep two sets of books and mark assets to market, not to model. Such normal moves would rid us of too big to fail corporations; something our Senate has been incapable of doing. On Thursday the Senate is thought to be ready to pass a financial reform package and not a word has been spoken about cooking the books – like the situation didn’t even exist. Such legislation would bring all manner of lawsuits and criminal charges as well. It is absolutely incredible that no AG or law enforcement official has for as far as we can remember, brought criminal charges against these lawbreakers. Just as an example, trillions have been lost in real estate and no corporation or individual has been prosecuted for criminal fraud. Doesn’t that seem strange to you? It has been seven years since we declared Fannie Mae and Freddie Mac insolvent. They were and were taken over by the taxpayer and yet not even civil charges for looting the two GSEs. Is it any wonder few are left who trust government?

The Illuminists who control central banks have in the process of taking down the financial system irretrievably exposed themselves before the world. Talk shows and the Internet worldwide are exposing everything they are doing, thus, when the system finally collapses most people will know who is responsible. The world banking system is insolvent. Banks retain two sets of books, mark-to-model and hold vast inventories of residential and commercial real estate that they hold off the market. There lending has been curtailed by 20% and only then to AAA corporations. The Fed has just taken on $1.7 trillion in toxic CDOs, and it will only take a small adjustment to the value of assets for the Fed to show a negative balance sheet. We wonder as well, what the FASB, the Financial Accounting Standards Board, and the BIS, the Bank for International Settlements in Basel, were thinking when they allowed mark-to-model, as apposed to mark–to-market, and keeping two sets of books? All those earnings and the financial conditions of hundreds of thousands of companies are completely phony.

All this is augmented by quantitative easing, or by throwing money at the problem, which has solved nothing. If a new stimulus program is not implement and the Fed does not add liquidity the system will collapse. QE has not ended. That liquidity is still in the system, although some has been sterilized. That is why, irrespective of official phony CPI figures, America is going to have considerably higher inflation. Make no mistake the Fed has created another bubble via the printing press, which ends up in monetization and inflation. This is why gold is a lock to go higher.

Bank failures are up to 72. It looks like by the end of 2010 we will see more than 200 banks fail and perhaps 300. Some, 2,000 are under the control of the Comptroller of the Currency.

Seven million homeowners will lose their homes this year. The second half of the year will be disastrous and we won’t see the end of this until mid-2012, if we are lucky.

Financial ledgermain is the order of the day. Disclosure has lost its meaning. That is what happens when you hold assets of declining value off your balance sheets. Rules and laws are repeatedly broken and no one seems to care. Corporate desires are laws unto themselves, but what else would one expect in a corporate fascist society? Wake up America before it is too late. Kick out all sitting House and Senate members in November, with a few exceptions. If you do not you cannot affect change. If you do not you will end up fighting in the streets.

The commercial paper market fell $27 billion to $1.076 trillion this past week.

It should interest you to know that my Intel source inside the Fed says absolutely no later than November the banking system should implode. Presently 75% of banks have problems and that the top 5 banks will take over all the others in a general nationalization. There is tremendous fear and uneasiness in the banking world.

The number of mass layoffs by U.S. employers rose in April led by manufacturers who shed workers even as the economy began to recover.

The Labor Department said the number of mass layoff events -- defined as job cuts involving at least 50 people from a single employer -- increased by 228 to 1,856 as employers shed 200,870 jobs on a seasonally adjusted basis.

The number of mass layoffs in the manufacturing sector totaled 448 resulting in 63,616 initial jobless benefit claims, the department said. That was more than 24,000 higher than the previous month, but well below the 125,000 initial jobless claims in the manufacturing sector a year ago.

The Labor Department said the manufacturing sector accounted for 23 percent of all mass layoffs and 28 percent of the initial claims filed in April.

The U.S. jobs market is lagging the broader economic recovery that started in the second half of 2009. Since December 2007, when the worst recession in 70 years started, the U.S. economy has shed more than 8 million jobs and the latest data suggest it will take some time to make up for those losses.

Monthly data suggest employers are beginning to add jobs, but the overall unemployment rate remained stubbornly high at 9.9 percent in April, up from 9.7 percent the previous month, as discouraged workers started to look for work again.

In April, nonfarm payroll employment increased by 290,000, but was down by 1.381 million from a year earlier.

In the 29 months since the recession began in December 2007, the total number of mass layoff events on a seasonally adjusted basis was 58,793, resulting in a total 5.9 million initial claims for jobless benefits, the Labor Department reported.

Analysts predict Goldman Sachs Group Inc. will pay $1 billion or more to settle a Securities and Exchange Commission fraud suit that triggered a 26 percent drop in the firm’s stock. Extracting such a record-setting penalty may be easier said than done.

When it comes to presenting a settlement for court approval, the SEC will have to “have a good explanation and justification for the number,” said Donald Langevoort, a former SEC attorney who teaches securities law at Georgetown University in Washington. [Just as we suspected. Business as usual and no one goes to jail.]

U.S. Senator Arlen Specter, who switched parties a year ago, saw his bid for a sixth term ended yesterday with a loss to fellow Democrat Joe Sestak in Pennsylvania’s primary vote. Specter’s defeat came as Rand Paul, a favorite of Tea Party activists, won the Republican Senate nomination in Kentucky in a demonstration of the movement’s ability to convert anger against Washington into a political win. The two races and one involving Democratic Senator Blanche Lincoln in Arkansas provided further evidence of voter distaste for the political establishment.

Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse.

Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

The struggles for analysts at Goldman Sachs, which is fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors in a mortgage-linked security, show the difficulty of predicting market movements as widening budget deficits, a fragile global economic recovery and tighter financial regulations increase volatility. Stock and currency fluctuations rose to the highest in a year this month as Europe pledged about $1 trillion to stop a debt crisis in the region.

And now for the latest piece of news in a day that is just replete with green shoots. It appears Calpers has requested $600 million more in funding from the state government, completely disregarding that hours before Arnie was pressing legislators to cut the state's pension costs as he realizes that California with its $20 billion budget deficit is pretty much completely insolvent. As AP reports, "the development is driven largely by huge investment losses by the California Public Employees Retirement System, but also because people are living longer and retiring earlier." Well Austerity will take care of the latter, as for the former, Dr. Kevorkian is, unfortunately, unavailable. The onle winner out of this imminent fiasco: Leon Black, who as primary recipient of Calpers' generous capital, still continues to mindlessly blow money on soon to be bankrupt companies, with the hope that he can extract at least something out of them, even if it means taking a 70% IPO haircut (see Noranda).

The increase would be for California's next fiscal year, beginning in July, and would raise to about $3.9 billion the state's annual contribution to the pension fund, known as Calpers, the biggest U.S. public pension fund.

 Schwarzenegger in unveiling on Friday his budget plan for the next fiscal year, said that overhauling the state's pension systems to reduce their cost to the state's general fund is a top priority, an idea backed by fellow Republicans in the legislature's minority.

 Democrats, who control the legislature, are reluctant to take up the issue. 

Pubic employee unions allied with Democrats are concerned their members could be placed into a two-tier pension system in which new public employees would receive reduced benefits.

 The unions are also concerned their members would have to contribute more to their retirement plans. 

A Calpers spokesman said the fund's request for additional state money follows a study presented to the fund's board last month that forced new actuarial assumptions to account for longer life-spans. He said the request also takes into account declines in the value of fund investments along with a policy aimed at improving the retirement systems' long-term funding.

The percentage of loans in foreclosure or with at least one payment past due was a non-seasonally-adjusted 14.01% in the first quarter, down from 15.02% in the fourth quarter of 2009, the Mortgage Bankers Association said on Wednesday. But the seasonally adjusted delinquency rate for mortgages on one- to four-unit residential properties, which includes mortgages at least one payment past due but doesn't include those in foreclosure, rose to 10.06%, from 9.47%. Mortgages in the foreclosure process hit a record high at a non-seasonally-adjusted 4.63%, up from 4.58% in the fourth quarter. "The issue this quarter is that the seasonally adjusted delinquency rates went up while unadjusted rates went down," said Jay Brinkmann, MBA's chief economist, in a news release. "Delinquency rates traditionally peak in the fourth quarter and fall in the first quarter and we saw that first quarter drop in the data. The question is whether the drop represents anything more than a normal seasonal decline or a more fundamental improvement."

Unadjusted US Consumer Price Index (CPI) reported a negative 0.1%, a decrease or deflation, month on month in the face of market expectations of continuing 0.1% increases. Annual CPI reported a year on year increase of 2.2%, below market expectations of 2.4% and a notch down from last month's 2.3% reading.
Excluding Food and Energy, there was no change in monthly CPI despite market consensus of a 0.1% increase, and the annual rate fell to 0.9% from last month's 1.1% despite market expectations of a slightly milder decline to 1.0%.

Deflation, an overall drop in prices of goods and services, implies companies are loath to invest on the risk the prices of goods will fall lower, which can spell a continuation of recessionary conditions.

The number of homeowners who missed at least one mortgage payment surged to a record in the first quarter of the year, a sign that the foreclosure crisis is far from over. More than 10 percent of homeowners had missed at least one mortgage payment in the January-March period, the Mortgage Bankers Association said Wednesday. That number was up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier.

Those figures are adjusted for seasonal factors. For example, heating bills and holiday expenses tend to push up mortgage delinquencies near the end of the year. Many of those borrowers become current on their loans again by spring.

Without adjusting for seasonal factors, the delinquency numbers dropped, as they normally do from the winter to spring.

More than 4.6 percent of homeowners were in foreclosure, also a record. But that number, which is not adjusted for seasonal factors, was up only slightly from the end of last year. Jay Brinkmann, the trade group's chief economist, said the foreclosure crisis appears to have stabilized. Seasonal adjustments may be exaggerating the change from the previous quarter, he added.

"I don't see signs now that it's getting worse, but it's going to take a while," he said. "A bad situation that's not getting worse is still bad."

Economic woes, such as unemployment or reduced income, are the main catalysts for foreclosures this year. Initially, lax lending standards were the culprit. But homeowners with good credit who took out conventional, fixed-rate loans are now the fastest growing group of foreclosures.

Those borrowers made up nearly 37 percent of new foreclosures in the first quarter of the year, up from 29 percent a year earlier.

The risky subprime adjustable-rate loans that kicked off the foreclosure crisis are making up a smaller share of new foreclosures. They made up 14 percent of new foreclosures in the January-March period, down from 27 percent a year earlier.

Mortgage purchase applications sank 27.1 percent to the lowest level since May 1997 in the absence of the popular government support, the group said. U.S. housing groped for footing after more than a year of homebuyer tax credits worth up to $8,000 expired on April 30. Requests for home purchase loans have fallen almost 20 percent over the past month despite low borrowing costs. "It's disturbing," said John Canally, economist at LPL Financial in Boston.

"It seems that every other data point for housing is pretty good -- high affordability, low interest rates, relatively low inventory, home prices are up -- so I'm leaning toward the hangover from the tax credit but I'm going to need to see a couple of more weeks of data." Overall loan requests were down 1.5 percent, on a seasonally adjusted basis, in the week ended May 14, cushioned by a 14.5 percent jump in mortgage refinancing applications as home loan rates neared historic lows.

Average 30-year mortgage rates fell 0.13 percentage point last week to 4.83 percent, the lowest since last November, the MBA said. The record low was 4.61 percent in March 2009, based on the group's survey, which has been conducted since 1990.

Refinancing applications jumped to a nine-week high and accounted for about 68 percent of all applications last week.

But buyers took a low profile after rushing en masse to take advantage of the tax incentive. "The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season," Michael Fratantoni, the industry group's vice president of research and economics, said in a statement.

The MBA separately reported that total U.S. home loans that are late paying or in foreclosure eased in the first quarter but remained near record highs, largely because the country's unemployment rate remains elevated.

One out of seven U.S. households with a mortgage ended the first quarter late on payments or in the foreclosure process.

With the tax credits gone, home shoppers will take more time to find the right property, said Marc Demetriou, branch manager/mortgage consultant at Residential Home Funding Corp in Bloomingdale, New Jersey.

"Unemployment is definitely still an issue and inventory is still an issue, but it's definitely a buyer's market," he said. However, "people that were serious about buying worked very hard and spent a lot of time and effort to find the right house to get in for April 30," when the tax credit expired,

U.S. borrowers have gotten a hand from Europe, on worry that roughly $1 trillion in emergency funding might not be enough to stabilize euro zone debt markets. Investors have fled for the safest securities, slicing the U.S. Treasury yields that are used as a peg for mortgage rates.

Low borrowing costs and stabilizing home prices are being offset by the near double-digit U.S. unemployment rate and a looming supply of foreclosed properties yet to hit the market. The worst of the housing crisis is over but recovery will be long and slow, most economists agree.