International Forecaster Weekly

The Reason Behind The Dreadful Numbers

The reason behind the dreadful numbers... land confiscation... bailing out water and bonds in Missippi and Louisiana... Alan dreams of bubbles... golden words of monetary wisdom... where not to buy...

Bob Chapman | September 25, 2005

We get a laugh when we observe writers trying not to offend their subscribers, apologize, and then do it anyway. They do not want to seem partisan but they are anyway. We all are. If you are not partisan you do not inform. That includes both sides of any spectrum. The idea is to expose as much of the truth as possible. We have paid a terrible price personally for being so truthfully outspoken and it disturbs us to watch fellow journalists act like worms.

George W. Bush and the neocons are proposing a reenactment of the Great Society (Guns and Butter) and the New Deal (a chicken in every pot.) There is nothing conservative or right wing in these programs. They will entail this time the marriage of corporatism and government as opposed to just government. The neocons are about to unleash upon us a corporate and public spending program unrivaled in history. A program that will make FDR and LBJ just footnotes in the chronicle of political big spenders. Back in 2000 when we advised get out of the market and buy gold and silver related assets, we also said the economy was headed for big trouble, so expect a war in the Middle East as a diversion. We have the war and the economy is still headed for the ditch on a sea of liquidity, so we need another distraction and a new excuse to spend money we do not have. That excuse is the spending of $200 billion we do not have that will have to again be provided by foreigners because we have no savings. We will not go into the details of reconstruction; you can read about them in the kept media. We just want you to realize that what is being proposed are enormously expensive and among other things it is a diversion to buy more time to keep the economy from collapsing. This new WPA will not solve the problem but Bush, the neocons and Republicans will use it as an excuse as the economy heads downward. We can promise you Congress will pass any such program, not out of altruism, but out of survival. Everyone in Washington knows exactly what is going on and they do not want to be blamed for what is on the way. Do not forget this hybrid plan is not conservative or right wing. We already know you cannot fund such a vast new program and two wars without creating enormous additional debt. There are no tax increases on the horizon to pay for this. In fact, Republicans are insisting on tax cut extensions. That leaves foreigners or better yet, foreign central banks the job of printing money to pay for the project. Foreign taxpayers, to an extent are going to pay this bill. They just don’t know it yet. We expect with the underlying inflation and the additional inflation that these foreign lenders will demand higher rates of interest for their generosity. We say this because there is no other way to pay for such a guns and butter economy. In addition, we see no tax increases and we can detect no additional fiscal restraint coming from Congress. That means our fiscal and monetary positions are going to deteriorate further and we are going to head into hyperinflation. The additional $200 to $300 billion in Treasuries that will be used to finance these programs will drive down their bond prices and drive up interest rates, which will expedite the economy’s problems. It will also be injurious to holders of dollar denominated assets as the dollar falls further as a result of these events. This is the dollars swan song. At first a slowing stagnant economy followed by recession as the financial blow-off occurs. This is 1929 and 1974 all over again, only worse. All the pieces are in place. Get out of debt; sell real estate, stocks and bonds. Take your pensions early in cash and above all put all your assets in gold and silver related assets. After 46 years of following events we believe this is it. Last week consumer confidence fell to a 13-year low as gasoline prices climbed to historic highs and the emotional force of Katrina hit the American public. This is tough medicine for a society that for the most part has never had a bad day in their lives. The big question is, do the dreadful numbers herald a recession or are they a response to Katrina? They are probably a response to both. The problem is both problems are not going to go away. The tip of the balance has to be on the downside. The Katrina reconstruction will be in the news for a long time to come and the economic and financial problems are manifest. Current conditions dropped to the lowest level since 12/03 and the expectations index plummeted to its lowest point since 2/92. If you take an average of polls you will find as well that President Bush’s approval ratings are about 37%. His loss of approval has occurred over the past several months mainly as a result of Iraq, Afghanistan and their occupations; the escalation of insurrection and deaths in Iraq, the audacity to try to privatize Social Security and the outright purchasing of CAFTA votes. The public has grown sick and tired of criminal politics as usual. The polls also show his economic management approval at an average of 35%. That means 65% disapprove of the way the economy is being run in spite of a recovery on a sea of money and credit and in spite of unbelievable real estate prices. Again these ratings have been coming for the past four months. We are not optimistic.

Now that the US Supreme Court ruling in Kelo versus New London the eminent domain case is final, the City of New London, CT is not only taking property but they claim the owners have been living on borrowed land and owe the city money. That is rent for the duration of the lawsuit, which was five years. We believe it is retribution. The rent could be hundreds of thousands of dollars and it could be more than the actual value of their properties in 2000. This is what corporatist American is all about today. Government acts as an intermediary confiscating land from private owners to transfer title to another group of private owners, all of who will be politically connected. Only in corporatist fascist America could this happen. The ratio of average pay for the chief executive officers of $11.8 million to worker pay of $27,460 increased from 301-1 in 2003 to 431-1 in 2004. A good many of the corporate executive increases came from extraordinary war profits.

Bridgestone, the world’s second largest tire maker, said it’s US and Canadian units will raise prices as much as eight percent on 11/1/05 because of rising costs for oil and other raw materials.

A debate is in process concerning whether and how the bonds sold by insurers in Louisiana and Mississippi should be bailed out. Issuers have sold 3,612 separate bond issues totaling $48.6 billion since 1995. That includes bonds sold by the states themselves and their localities and authorities and includes general obligation and revenue bonds, insured and uninsured. This means the Katrina problem is a lot larger than the $10 billion cited by rating companies.

If municipal bond issuers in Louisiana and Mississippi default on their loans it will make it difficult for all municipal borrowers in the future to attract lenders. This will drive up borrowing costs.

Unfortunately, the bond industry not only wants Katrina bond holders to get bailed out by the federal government but all bonds in distress that were not previously insured. A fight is brewing and its outcome could change the way municipalities raise funds in the future.

Sir Alan Greenspan believes that his strategy of addressing the bubble’s consequences rather than the bubble itself has been successful. Highly aggressive monetary ease was doubtless a significant contribution to stability. Yes Alan the Federal Reserve injected some $8 trillion in money and credit into the system. Wage growth has been a disaster. Low interest rates have temped homeowners to cash out or get home equity loans, because wages have not grown with inflation. People are spending more than they are making. The Fed has so overloaded lending institutions with credit that anyone can get a loan from 2000 to 2005, home equity loans more than doubled from a rate of $90 billion to $221 billion. Risk was not only expanded – it turned into a financial free for all. Refinancing is now offered with no employment documentation. Homes are bought with nothing down, 110% financing using adjustable rate mortgages and interest only loans. ARMS have grown from 18% to 72% from 2001-2005. Twenty-three percent of all homes bought in 2004 were for investment speculation and another 13% were vacation homes, which were up 16.3%. From 2001-2005, interest only ARMS grew from 3% to 50.9%. We now have 1% ARMS on any credit, any income, no document loans. Bankruptcy and foreclosures are okay. Withdraw cash, pay off bills and skip two payments – credit approval regardless of credit history.

Now after Greenspan has millions of people buried financially, he warns, “Such an increase in market value is too often viewed by market participants as structural and permanent. But, what they perceive as newly abundant liquidity can readily disappear.” So now he tells us! This isn’t negligence; it is criminal.

The IMF tells us, “The most virulent busts were those that occurred in conjunction with the break down of pegged exchange rates and oil shocks.” The price corrections during housing busts averaged 30%. These housing price crashes lasted about four years. In California, between 1989 and 1992, the average home fell 40% and the debt burden was nothing like it is today and interest only loans and adjustable rate mortgages were none existent. Are you getting the message?

During such corrections private consumption falls as does employment and private investment in machinery and equipment and construction experience major corrections.

Average private consumption fell from 61.5% to 36.5% of GDP. Today it is 70%. Private investment in machinery and equipment fell from 19.8% to a negative 19.1% of GDP. Investment in construction fell from 10.4% to a negative 32.7% of GDP. Then, of course, come the foreclosures and bankruptcies and then lending institutions start going under.

There is no escaping the coming financial and economic storm and each day the cost of inaction grows greater. We can promise you this event is going to make the events of the 1930s look like a cakewalk.

We must comment again as to why Iran is being pushed to the wall and why George and the neocons want to use nuclear weapons to destroy the country’s military capabilities because Iran may want to have nuclear weapons. If the US attacks Iran and uses nuclear weapons there will be a great outcry from the world and many nations will sell their US dollar holdings. On the other hand, if the oil exchange opens in Tehran on March 16, 2006, and trades oil in dollars, the US dollar will no longer be the reserve currency of the world. Gold will again be the world’s reserve currency.

Gold-back currency, of course, is the answer. Gold stocks are very, very cheap. The entire market value of every gold mining company in the world is $200 billion; where as GE’s market value alone is $300 billion. It should also be remembered that gold is only $50 higher than where it was almost 10 years ago. Over that period oil rose 7 times off its lows. That would put gold at $1,750 an ounce.

The ten areas with the most overvalued real estate are: Nassau County on Long Island; Suffolk County on Long Island; NYC; Providence, RI; Miami, FL; West Palm Beach, FL; Fort Lauderdale, FL; San Diego, CA; Los Angeles, CA and Orange County, CA. Prices in these regions would have to fall at least 35% to come in line with income. Nationally, the average home is selling for 3.1 times the average household income compared with 2.6 times during the past 45 years.