International Forecaster Weekly

We Are Not Yet Buying Into The Idea Of Recovery

Dubai faces bankruptcy, profits coming from cost cutting, growth not what it is claimed, profits for offshore profits remain in tax-free havens, Fed in Congress crosshairs, stimulus package not reaching small business.

Bob Chapman | December 2, 2009

This past week was one of utmost turmoil in world markets. In the midst of an American holiday, Dubai faced bankruptcy for some $100 billion. Another unsuspected untoward event. The exposure of the Dubai event coming as it did could have been discovered at any given time, thus, we question the timing. We can understand why the London market was off some 300 Dow points, but exposure to Dubai was very limited in Europe, the US and in Asia. Could it have been an excuse to take down the US and European markets and gold and silver? We do not know, but we have come to question everything that happens.

We are predicting a very damaging year in 2010 for both stocks and bonds. One of the big questions is the implementation of Basil II and III and the FASB. If their stricter accounting practices are enforced the corporate world is in for a heap of trouble. Financial firms are in particular danger. In this past 3rd quarter non-financial corporate profits fell 12%. The result was that $97 billion of $123 billion in profits came from the financial sector. This is not a balanced performance. It is very disturbing because most of corporate profits come from cost cutting – that is firing employees. That method of fattening the bottom line cannot continue indefinitely. Lending is not supplying those profits, because loan origination is off 16.2% yoy. Loan defaults were up 10% and a record 5% of loans were not current. Lending fell $2.8 billion, the most since records began in 1984. Ninety percent of loans go to consumers and business, which means consumers consumption of GDP, has had to fall. It’s currently 69.3%, down from 72%. Loans to businesses have fallen 6.5% and small and medium-sized businessmen create 70% to 80% of all jobs. That means improving the employment situation is going to be very difficult. The exceptions are transnational conglomerates, which continue to offshore our production and outsource service jobs. Their profits are up 29%, but they have caused unemployment of 7 million good paying jobs over the past nine years. If you remove the financials, profits are up 7% off their lows. The financial stocks have appreciated 135% off their March lows, which we believe leaves them very vulnerable. Industrials are up 80%. While this was going on business profits fell 0.4% in the 3rd quarter with no relief in sight. Growth rates are falling at the highest rate in decades. We are hard pressed to believe that 3rd quarter growth was 2.8%. What growth there was came from the federal government. Not only is employment falling, but wages have been at a standstill and have been for two years. The government says inflation is 1.2%. We say it is 7-1/8%. Without higher wages buying power is falling 5% or so – hardly inducive for consumer consumption.

In addition to market vulnerability and a very questionable economic recovery we now have to watch world banking deal with the Dubai problems, which is going to bring on a currency warfare, which will bring trade warfare. Soon the accusations will fly and it will be every currency, or country for itself, and that will bring tariffs. We have already seen that with US increasing tariffs on steel and tires with China. The US may have many faults, but other countries are not blameless. All have been devaluing their currencies for years. The ultimate consequences for the world will create difficulties that could eventually lead to wars, domestic and social unrest, and additional unemployment in all countries. Whether you realize it or not this process has already begun. The only avenue left open to nations has been the unbridled creation of money and credit and monetization. That has been accompanied by the concept of too big to fail. This is why the Illuminist lending institutions are being saved and that is being paid for by the public. In 1990 it was decided that in order to keep the system from collapsing, derivatives would be created, as an adjunct to what we now call quantitative easing, a creation of the Federal Reserve. This is another reason why the Fed and its fellow elitists do not want HR 1207 and S604 passed. It will expose the giant Ponzi scheme they have created in partnership with Fed shareholders JP Morgan Chase, Goldman Sachs, Citigroup and others. The edifice is a house of cards. Professionals do not understand how important it is for the Fed to be terminated. It is the core of central control of not only the US economy, but also those of many other nations. Its demise will give America the opportunity to begin a new system not controlled by moneychangers.

The implementation 50 years ago of free trade, globalization, offshoring and outsourcing upset the balance of trade worldwide. It shifted production and sources to the East from the West. A battle that could not conceivably we won by the West with its much higher standard of living. The wealthy elitists don’t care about the living standard of the West, or anyone for that matter, except themselves. They have made the tax free offshore profits and with those further power to control nations. The Fed controls the dollar – the reserve currency of the world. They could do as they pleased. It created imperial America after WWII. Thus the unbalance caused the steadily depreciating dollar, currency manipulation and free trade have destroyed the world’s financial architecture. The result has been massive trade deficits in the West and surpluses in the East. The East and the transnational conglomerates call for freer trade and that is understandable as they have millions of people who will work for virtually nothing. This way the populace can be fed at the expense of the West. Without fair tariffs the world ends up in financial chaos and that is exactly where we are headed. Unfortunately economists and analysts won’t tell you the truth and give us conclusions, because they are perpetually compromised by the Illuminist system. If they tell the truth they are banned from the system. If they keep expressing the truth they are liquidated. All world leaders are well aware of the situation and go right along with the program to stay in power and enrich themselves. Again, next comes the escalation of currency war and tariffs. If you remember we mentioned recently that Germany’s businessmen were demanding a weaker euro, so they could compete in the middle of a depression. What they do not understand is that the dollar is a failed currency, that has to depreciate whether they like it or not. For the last ten years the eurozone has held a special position with an inexpensive currency. Now it is reality time. It is not the strength of the euro – it is the weakness of the dollar that is now perpetual. They are going to have to live with it. The easy days are over for everyone. You could read it in the tea leaves. For the last six years every country in the world’s currency has fallen versus gold. No one, but a few, wanted to recognize that the very sophisticated were exchanging currencies of declining value for gold. Now more are catching on and in time it will be a thundering herd. The nations of the world have exchanged their wealth for depreciating paper as a cost of entering foreign markets to do business. If they are lucky they will end up with $0.30 to $0.40 on the dollar, once official devaluation takes place a year or so from now. All the actions by imperial America since WWII have led to the current state of affairs. All the wars and the debt created have come home to roost. All empires end the same way. The toughest kid on the block eventually loses by being knocked out. The con of the Communist menace and weapons of mass destruction are not working anymore. Even the deal with China has broken down. Manufacturing would be shipped to China and China would fund US debt. Now the Chinese have found out it wasn’t worth it and are exchanging dollars for things, such as commodities and gold and silver. China has discovered that they have been had.

In the background beyond the things we know about, the Fed and its controllers, the investment banks, is the derivative market and the markets of securitization of assets, some synthetic and some real. As long as confidence in these markets prevail the system works. We do not believe that will continue and when that happens the results will be catechismic. We are talking $1.4 quadrillion or more in assets that in part do not exist created to leverage the system to save it and in turn enrich the key players and extend their powerful grip on America and humanity.

As a result of all this the only way the players can keep the game going is by inflating via quantitative easing and monetization. They know the game will soon end and the dumb sheep will be shorn again. The monetary collapse is on the way. If you read our last issue you know that the elitists expect to devalue the dollar officially by the end of 2010. It could take longer, but it is going to happen. The suspension of the Fed by Congress is on the way as is another war - a war extensive and powerful enough to destroy more than half of humanity. The system as we now know it is in the final state of collapse.

The masters of the universe, as they believe themselves to be, made a major error within the residential and commercial real estate bubbles. They couldn’t create enough virtual money fast enough and it was discovered that the assets were not AAA, but in fact BBB. Once the ruse was discovered confidence and trust was lost and now they are scrambling to keep the system afloat. In addition these geniuses ran out of real assets to play with. They needed a need of new assets to play with. They were to come from a stock market that was to rise from Dow 6600 to 10,500. The problem is the market rise turned out to be just a holding action. CNBC and its long list of Wall Street players would have us believe the market is under priced and ready for recovery. Not in your wildest dreams. The black hole has been entered. Each day fewer and fewer people worldwide refuse to believe that something is too big to fail. All the kings horses and all the kings men, including all the central banks, won’t be able to put this one back together again. Monetization is really virtual money – in creating a hoax. It is the transfer of funds made up out of thin air to its owners - the banks – to keep them from collapsing. This is the ultimate in moral hazard. The elitists get away with it because the public and our leadership do not understand what they do. They may well be catching on though, as 75% of Americans want the Fed audited and investigated. That has send cold shivers up the backs of our resident Illuminists.

The last time Congress wouldn’t heel to these destroyers Mr. Paulson told them that is fine, we will just let the system destruct. Our bought off Congress heeled and succumbed to their masters.

In the final analysis the game is in the process of ending. The game of bookkeeping entries is over. Reality is in the process of taking command. Zero loans from the Fed to their owners in the form of money made up out of thin air, then turned into interest bearing deposits is ludicrous on its face. How can any educated person believe in such chicanery? We give the banks money and then pay them for holding it for them. We call that free money – a gift – that no one else in the nation gets, except for these anointed banks. No jobs are created, less money is loaned and the malefactors are rewarded. What kind of a system is this? Few say anything for these elitist control the media as well and are shamed into silence even newsletter writers.

America’s military force is become less and less as a factor. The world markets are simply reflecting the reality of the monetary and fiscal problems. No military in the world can defeat this reality. You cannot conquer bankruptcy. America can never pay its debt. The powers behind government blinked and their bluff have been called. The problem is there will be no winners. Every person on this planet will be a loser. 2010 will signal the beginning of the end for the world financial system. The US and world economy will begin spiraling out of control. First by official devaluation and default, and by an implosion into violence. There won’t be money to keep the system afloat.

Desperate people do desperate things. Why would the Fed be buying Treasuries, mortgage backed securities – toxic waste, Agencies – Fannie, Freddie, Ginnies and FHA toxic waste, why would they be guaranteeing the Libor market or doing swaps, and lending money so banks can make interest off of the taxpayer if they were not in desperate straights. They are bailing out big banks, brokerage houses and insurance companies at our expense. The whole thing is insanity and we do not hear a peep from Congress.

There is no recovery and there won’t be any recovery no matter how much money is poured into the system. There still isn’t adequate capital and there never will be. The system has to be purged and the Illuminists won’t allow it until their power is taken away from them. This Fed, this lender of last resort, is a criminal enterprise. Do not expect any help or any admission relating to what they have done. Bank loans are off 16.2% yoy, and Citigroup is hoarding $244.2 billion and JP Morgan Chase $453.6 billion. While this goes on our currency continually is debased. It won’t take long for the roof to fall in. Just be patient and own gold and silver related assets.

Last week was quite a week. The Dow slipped 0.1%, the S&P was unchanged, the Russell 2000 fell 1.3% and Nasdaq rose 0.1%. Banks fell 1.5%; broker/dealers 4.4%; cyclicals 0.1% and transports 0.6%. Utilities rose 0.1%; high tech rose 0.1%; semis 0.6% and biotechs gained 2.2%. Internets fell 0.4%.

Two-year T-bill yields hit a new low of .50%; the 10’s fell 17 bps to 3.20%. German bunds fell 9 bps to 3.16%.

The Fed is determined to put residential real estate back into working order, but its attempts will be futile. Freddie Mac 30-year fixed rate mortgage rates fell 5 bps to 4.785. the 15-year rates fell 3 bps to 4.29% and one-year ARMs were unchanged at 4.35%. Jumbo 30-year fixed rates fell 5 bps to 5.90%.

Fed credit fell $1.6 billion to $2.190 trillion. Fed foreign holdings of Treasury and Agency debt fell $2.7 billion to $2.925 trillion. Custody holdings for foreign central banks have risen have risen 18% ytd, and yoy they are up 17.1%.

Total money market fund assets fell $8.9 billion to $3.330 trillion. The ytd decline has been 14.5% or $501 billion, or 10.4% yoy.

Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.

“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that

Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.

A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote. Two-thirds of small-business owners surveyed last month by Toluna Research at the behest of Angrisani Turnarounds (which specializes in what its name implies) said that they are concerned or extremely concerned about their firms' surviving for two years. Their fears aren't unfounded, considering that small-business bankruptcies rose 44% in the third quarter of this year, from the same quarter in 2008, according to Equifax, a credit-reporting agency.

"Our survey data over the last three months concludes that we're going to be looking at an acceleration of the failure rate," says Al Angrisani, head of the turnaround firm, who was chief employment advisor to President Ronald Reagan during the last Great Recession, in the early 1980s. Angrisani worries that small businesses not only haven't seen much benefit from the $787 billion stimulus plan, but will be further squeezed by rising state and federal taxes, particularly if health-care reform passes. Another survey, by Employers Holdings, a workers' compensation provider, found that 50% of small business decision makers won't start hiring again for another six months.