International Forecaster Weekly

This Created Economic Crisis Now Complicated By Losses Across The Board

We have been in a recession since February 07, housing prices off greatly, earnings off massively, fed repeating actions taken in the 1930s, unemployment beginning to soar, deflation and inflation at war with each other, no amount of troops will make Afghanistan secure, but more are going anyways.

Bob Chapman | December 24, 2008

Our government still refuses to recognize we are in recession, although some private economists do. We said in February 2007 that we had entered recession. The only other economist we know of that joined us at that juncture was A. Gary Shilling.
Lender sales of foreclosures have sold for only 70% of the unpaid loan balance in the recent 3rd quarter versus 78% yoy 2007.
Mr. Shilling nailed the top of housing market at October 2005. We had it as June 2005.
Presently, the average home price is 20% lower than it was at the peak of the market. It is our opinion that when the bottom is reached nationwide, the average home will be off 30%, but in the 30 former hot areas, that you never hear about anymore, the average fall will be 45%. There will be pockets where prices will fall 65%.
Homeowners are still in denial regarding what has happened to house prices. Surprisingly, 62% believe their homes have appreciated in the last year even though 77% have fallen and only 19% have risen. Still 91% believe that a house is the best long term investment. Only 32% believe it is a good time to buy stocks. They’ve got that right, but how can they be so wrong about housing? Fifty-one percent still believe it is a good time to invest in a home. We are still a long way from the bottom in almost all areas. Government via the FHA, Fannie Mae and Freddie Mac are determined to prolong housings fall. By repeating the mistake of resetting loans and giving new loans to people who shouldn’t have them is going to repeat the painful process of foreclosures in two years time.
There are more than 300 thousand homeowner loans worth less than what is owed on them, and that number is growing daily. We expect more than half or 600,000 to be under water before this is over, a number we projected over four years ago. We are now seeing a political response, which is too little, too late. The serious damage has already been done. More than a trillion dollars will be wasted trying to save real estate. Another failed experiment.
The blame for this horrible experience that never had to happen lies at the feet of the Fed, the banks, the brokerage houses and the rating services. It was pure greed and quest for power that drove this criminal monstrosity. The financial battleground is littered with dead and dying corporations. The deceased are Washington Mutual, Wachovia, Bear Stearns, AIG and Lehman Brothers. That leaves the bankrupt zombies Citigroup, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Deutsche Bank and Morgan Stanley. All are on life support financially and all in some way will probably survive, but only with the help of the public. We must not forget Fannie Mae and Freddie Mac, which are owned by American taxpayers. These two political monstrosities were bankrupt 4-1/2 years ago.
Complicating matters, corporate financial earnings are off 95%, hedge funds; mutual funds, pension plans and private investors have lost 40% over the past year. We see markets headed substantially lower. Government cannot indefinitely bail out everyone. If they do the dollar will collapse and America will go bankrupt. Redemptions plague managed accounts and various funds as de-leveraging continues. Those who bought shares between Dow 7,800 and 9,000 are going to find they did not buy on the bottom. The geniuses of Wall Street are finding out you cannot put a slide rule to investing. Modern Portfolio theory via diversification does not work. Investing is an art form - a combination of fundamentals, technicals and the understanding of history, sociology and politics. A mosaic that has to be put together to understand markets and what drives them. People ask us, mostly other professionals, how did you do that? How were you able to figure all this out? Who helped you? No one helped us. It was experience, research, social and political knowledge, the fundamentals that brought us to our conclusions. As a result no newsletter has ever had the track record we have. What our competitors do not really believe and understand is that there really is a latent Illuminist force that has to be understood. One must figure out what the enemy is going to do before he does it. That is how you win. We certainly are not infallible, but whatever we’ve been doing for the past 20 years certainly works and we hope it continues.
In 2002 we forecast recession and depression beginning in 2005. As you can see it is here and it isn’t going away. $9.4 trillion of bailouts will become $20 billion or more over the next couple of years.
This depression will make the 1930s look like a walk in the park. Everything done by the Fed and the Treasury in the 30s is being done today. The episode of discretionary spending is over. Families are focusing on putting food on the table. As a result auto loans have a 9% delinquency rate. Volume is falling abruptly at credit card companies as delinquencies rise. Thus, we see rife throughout the system less spending and worse credit experience.
These problems are not evident only in the US, but worldwide. Rather than go into the sordid details of the tremendous amount of money and credit dispersed and the race to zero interest rates, all we’ll say is it cannot work and what they are doing is making the problems much worse.
As we said earlier, zero interest rates are killing retirees financially. The stock market is headed lower. That means pensions will be by law way under-funded and the pension payouts could drop precipitously. Once the markets hit bottom, like real estate, it will be years before they recover. This is why you need gold to keep you out of harms way.
Officially unemployment is beginning to soar and that will continue for at least the next three to five years. At the bottom we see unemployment over 30%. Next year’s numbers will show short-term unemployment at 10% to 12% officially. U6 will be a minimum of 17.5% and long term 21%.
Long-term drops in interest rates has accomplished very little other than to record that banks will only lend to clients with the very best credit history. They don’t and won’t lend to more than half of the public and business. Thus, the low rates do not help those at the lower end of the Totem pole.
Earnings for 2008 will be terrible and earnings for 2009 will be worse. Multi nations will be hit hard in 2008 due to several months of a very strong dollar. Profits in 2009 could be off as much as 50%. The US stock market cannot sustain current levels with these kinds of results. This means S&P operating earnings of $40 a share in 2009. At ten times earnings that does not look good for the market. This means a minimum 35% fall in S&P and the Dow. The Dow to 6,000 and S&P to 540 at 15 times earnings. We are going to 10 times earnings. You figure it out. Dividends are little help at 2.5%, because we expect lots of cuts soon.
The war between deflation and inflation continues. Assets continue to fall in value and central banks drop interest rates to zero and increase money and credit exponentially. This battle is five years old and will probably last another few years, as central banks try to hold off the inevitable. The public is backing off on using debt and they are finally saving. Consumers are expecting lower prices as they continue to watch the stock market tumble, commercial and residential real estate collapse along with banks, brokerage houses and insurance companies. That is not very encouraging. Deflation elevates the cost of debts and debt service since both remain fixed in nominal terms but the revenues and incomes used to repay them tend to fall with overall prices. That is part of the reason Treasury interest rates are so low. The saga continues.
Zero interest rates can only make matters worse. In combination with massive money and inflation it will bring about the collapse of the dollar. Shortly due to these monetized infusions, inflation will rise strongly from current levels. America and the 20 leading nations have never seen such massive monetary aggregate creation being deliberately coordinated.
Just to give you an idea the monetary base has risen from $820 billion to $$1.130 trillion in three months. The next few months will be the lull before the storm. The new catch phrase is “quantitative easing,” which we call out of control monetary creation. The system is being flooded to accommodate banking and Wall Street. We have been outlining this for years and except for a handful of other newsletter writers no one wants to listen. Analysts and economists should be shouting from the rooftops with outrage but we hear nary a word.
Over the past two weeks the price of gasoline has fallen $0.09 to $1.66 a gallon. Oil is about $40.00 a barrel. At that level many producers will be shutting in production.
We find it of interest that non-financial credit expanded $2.348 trillion during the quarter, down only marginally from 2007’s $2.5 trillion to offset deflation, the forces driving systemic collapse. Of this amount, the federal government accounted for almost 90% of the borrowings.
In conjunction with the Treasury’s efforts, the Fed expanded credit $2.353 trillion during the third quarter. $4.701 trillion was jointly expended to face down the onslaught of downward economic spiral and to accommodate de-leveraging.  
Contrary to public belief total bank credit expanded $1.365 trillion and these banks borrowed $515 billion from the Fed. That put total bank assets up $1.385 trillion or 12.7% yoy.
This continued credit injection is to insure a sufficient system. This is calculated to steady the bubble and perpetuate the massive flow of dollar finance out to the global financial system, which in the final analysis will not solve the problem. It insures permanent monetary disorder.
This is going to be very bad for the dollar in the long run. Some even think the dollar will win by default versus other currencies, but in fact they’ll all lose versus gold in varying degrees. A good point to remember is that this time the Chinese are not going to be around to bail out the $2.5 billion daily needs of the US Treasury.
All Americans are going to have to get used to a whole new way of life. They will be walking to the mall to visit the few remaining shops that are still open there. The public is completely unprepared for the difficult life they face. The brainwashed, brain-dead, propagandized in our society are going to be forced to face reality. Comfort and convenience will be a thing of the past. It will be a struggle for food and to pay the mortgage and car payments for those lucky enough to have jobs.
What makes it worse is that there really has been no credit crisis. It’s been created by Illuminists to bring the economies of Europe, Canada and the US to its knees to force them to accept world government.
It wasn’t bad enough that Treasury and Fed funds were used to bail out Illuminist firms and they used the funds for bonuses, stock dividends and to fatten their balance sheets.
Worse yet, TARP legislation gives the Treasury a blank check to use the funds anyway it chooses. When asked how it’s dispersed, they invoke executive privilege, because it is a state secret.
Government, banks and Wall Street deliberately caused the credit crisis so that connected firms wouldn’t fail, although they were bankrupt, and gave the banks, chosen banks, the funds to buy out other banks insiders deemed to be failures. In order to assist, the FDIC has changed rules for lending at smaller banks, so big banks can take away that business. Then we have Bank of America using part of taxpayer’s loans to buy into a Chinese bank and bankrupt Citigroup, putting $3 billion into a Spanish toll road company. TARP is nothing more than a gravy train for the rich.
      While security is important in Afghanistan, “no amount of troops in any amount of time is going to make this successful in the long run,” Navy Adm. Mike Mullen told reporters Saturday.
    The chairman of the Joint Chiefs of Staff was participating in a press conference at Camp Eggers in Afghanistan. He stressed the emphasis must be on the economic and developmental aspects of the country, and the political and governance initiatives.
    He said additional U.S. troops would be sent to the country next year. The commander in Afghanistan, U.S. Army Gen. David McKiernan, has expressed a requirement for additional forces for a long time. The need, Mullen said, is more than just more ground combat forces, there is a large requirement for “enablers” – medical, engineering, aviation, intelligence, surveillance and reconnaissance.
    The rate of U.S. home mortgage borrowers defaulting after their loans are modified is rising and shows no signs of leveling off, U.S. banking regulators said on Monday.
    "This trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable," John Dugan, head of the Office of the Comptroller of the Currency, said in a statement.
    The data showed that after six months, nearly 37 percent of mortgage loans modified in the first quarter were 60 or more days delinquent.
    Economic activity weakened in November, as autumn job losses signaled the U.S. recession shows no signs of letting up, the Federal Reserve Bank of Chicago reported Monday.
    The Chicago Fed's National Activity Index's moving average for the three months ending in November fell to -2.49, the lowest in almost 27 years. For October, the Chicago Fed downwardly revised the three-month average to -2.40, from its original reading of -2.09.
    For 11 of the past 12 months, the three-month average was below -0.70, indicating an "increasing likelihood that a recession had begun in December 2007," the Chicago Fed stated in a news release.
    The three-month average for November was the lowest reading since January 1982, when the average was at -2.59.
    November marked the first time since a period of May through July of 1980 that the three-month moving average was below -2.00 for three consecutive months.
    For November alone, the headline index stood at -2.47, from a downwardly revised -1.27 in October. The September reading of -3.11 was the lowest since the spring of 1980.
    The Chicago Fed also found "little inflation pressure from economic activity in the coming year."
    Lack of inflation provided some comfort to the Federal Open Market Committee, which last week reduced its target federal-funds rate to an historic low range of 0.25% to zero. In doing so, the FOMC indicated that it is continuing a policy of quantitative easing, by flooding credit-strained financial markets with liquidity.
    All four of the broadest categories that make up the index made negative contributions in November. The worst performing component was the job sector. Employment-related indicators contributed -1.03 to the November index, from a -0.82 contribution in October.
    The Labor Department reported that the economy shed 533,000 non-farm payrolls in November, from a loss of 320,000 jobs the previous month.
    The index's production and income category also made a large negative contribution, according to the Chicago Fed. It registered a -0.76 reading in November compared to a positive contribution of 0.21 in October. The Chicago Fed's findings come as U.S. industrial production dropped 0.6% in November, and the Institute for Supply Management's manufacturing index fell to 36.2 in November from 38.9 the previous month. ISM readings below 50 indicate a contraction in the economy.