International Forecaster MidWeek Reading - Gold, Silver, Economy + More By: Bob Chapman, The International Forecaster
Posted Thursday, 21 June 2007
US MARKETS
Most major countries are raising interest rates and the Federal Reserve hasn’t raised rates for a year. Most rate hikes are to combat growing worldwide inflation and the massive creation of money and credit not only by the US, but also most major nations.
Higher interest rates mean that the leveraged buyout – private equity craze – will start to decline. Hedge funds will find it far more expensive to leverage their bets, which means less leverage will be used. The cost of business will increase and the real estate market will be hurt at probably the worst possible time. These conditions are bound to bring an end over the next several months to the boom in world stock markets. These higher interest rates come as mortgage lenders are tightening standards on subprime loans.
Corporate earnings are running at 6%, down from 18% growth for four years. The experts believed they would run at 13-1/2% this year. We’ll have to see what the remainder of the year brings, but a majority of corporate CEO’s are pessimistic.
There are troubles in the economic and financial world that are only exceeded by our current wars and revolutions, which in America’s case is funded by an ever larger commitment to debt.
Never in financial history has there been the excess of liquidity that exists in world markets today. Central banks are averaging M3 creation of about 12%, plus you have private credit creation and the carry trades. This liquidity bubble will for a time delay the fall in equity and bond markets, but just as sure as night follows day, the corrections are on their way.
Rising interest rates won’t reduce liquidity, but they will in time reduce the use of that sea of liquidity. We are still a year or two away from that happening. Our guess is the market correction will begin in the fall. Stocks are very overpriced so the correction could be sharp and deep. We have an unstable mixture of deadly financial dynamite waiting to be detonated by seemingly unrelated events. Higher interest rates are for protection against inflation and they also tend to make a currency stronger when the rates are the result of moves by a central bank. That is not the case where the dollar is involved. Dollar interest rates have gone higher only because the market has taken them higher. The Fed does not have a tight monetary policy. All the dollar is doing is catching up. Dollar rates should have been 1% higher for the past year, but because other central banks, Gulf oil producers, and hedge funds were willing to buy Treasury and Agency paper, yields didn’t move higher. The dollar may be the reserve currency, but it has still been a fiat currency since 8/15/71. It has been in a process of deterioration versus other major currencies for years. In the past several years it has lost 1/3rd of it value versus the euro, but on the other hand all currencies for the past 2-1/2 years have lost value versus gold. Thus, for the past six years the dollar has been the most fiat of all major fiat currencies. Even though these currencies decline more slowly against gold they are still declining. They are losing buying-purchasing power. The rate of decline of these other countries varies widely based on local interest rates, inflation and other social conditions. This decline of all currency values is perpetual – it’s part of the game of Keynesianism, and of hoodwinking the public. All the algorithms in the world are not going to arrest the decay.
We are facing a 35% to 50% devaluation of the dollar versus other major currencies. The adjustment versus gold, just to make up for the inflation since 1980, should be between $2,200 and $2,500 an ounce. The only reason gold presently is not at those levels is that the gold price has been suppressed by a collection of devices – the most powerful being the sale of gold bullion. It should be noted that the possibility exists that the dollar could collapse completely. This is why Foreign Affairs, the house organ of the Council on Foreign Relations, recently had an article regarding a new private currency backed by gold.
The misuse of the dollar over recent years has created global imbalance. The two main US problems are the current account deficit and the budget deficit. Americans have been living far beyond their means for some time. This course of action has been facilitated by a policy of maintaining weak currencies across the world, notably in Asia. This allowed them to compete and held down US inflation. The excess dollars these exporters accumulated, up until recently, went back into US Treasury and Agency debt, the US stock market and buy-ins into US companies. The purchase of Treasuries and Agencies has slowed considerably in just the last few months.
This fall our national debt limit will be reached again and Congress will have to raise the limit again, this time probably to $12 trillion. You can add that to the some $70 trillion in long-term commitments that government never wants to talk about. Seven percent of GDP has to be borrowed from foreigners or about $2.4 billion a day. Our current account deficit is about $850 billion or 7% of GDP.
The size of the US debt makes any further increase in interest rates virtually impossible unless the Fed wants a collapsing economy. That means rates have to go higher eventually to fund the twin deficits. That will be very painful in and of itself, and will doom the US economy at best to a long drawn out recession or depression.
It was less than two months ago that the Asian Development Bank told its members that the dollar could collapse. The tip-off that real trouble was ahead was the termination of M3 by the Fed on the flimsiest of excuses. Other big and many smaller central banks tolerate what is happening because they are all in on it. They are not in incredulous disbelief – they are part of the conspiracy. If you do not believe that you are dumb.
There is no question that all the central banks are not on board. Six years ago foreign exchange of central banks was 72% in US dollars. Today that number is under 64.7%. Obviously many are already bailing out.
Do you really think the stock market can go substantially higher on hot air and a sea of money? Do you really believe this LBO-takeover boom can last indefinitely? The prices being paid for companies is id/iotic and unsustainable. We predict once this bubble breaks stocks will fall, banks will loose large amounts of money, a number of hedge funds will fail and some private equity funds will fold.
A recession and falling stock and bond prices will create more unemployment to go along with that created by the real estate and construction industry bust. Services will be cut and taxes will retreat very little if at all. Consumer spending as a percentage of GDP will drop from 70 to 64.5, the long-term mean. Debt financed consumption will be all but over.
We broke the story on the Carlyle memo that said what we have been saying, and that is, that the use of credit will start to slide in a year or so, perhaps 1-1/2 years. It will take at least 1 to 1-1/2 years for inflation to work its way through the system, thus we are looking at two to three years before depression. Inflation should peak in 1-1/2 to 2-1/4 years. All those highly leveraged junk bonds will also collapse along the way.
The average American, deep in debt, will get decimated. The former 30 hot real estate areas will see 30% to 60% equity losses. Those on pensions, public and private, will get 50 cents on the dollar. Social Security could get cut in half. Cheap credit is over, that is what the higher rates of the past two weeks are telling us.
China is using dollars to access natural resources worldwide and to purchase influence. They now control US policy. The alternative is either to let the bottom fall out and leave the Chinese stranded or have a war.
America’s way of life will change dramatically for the worse. The 1930s will appear attractive. There will be massive civil unrest to be dealt with by 300,000 mercenaries and 200,000 gang members in our Army and Marines. You had better get ready and fast. Hold gold and silver related assets. Have an assault weapon with one thousand rounds of ammo and ten 30-shot clips for all in your household over ten years old. Have a generator, extra fuel, and water access and dehydrated and freeze dried foods. It is not going to be nice.
The housing bubble marches on. Builder Standard Pacific said new orders in April and May fell 16% due to prolonged weakness in the Florida and Arizona markets. Cancellations were 28% versus 35% yoy. After this peak-selling season, which included further price cuts, it looks like cancellations are going to worsen again. That means additional price cuts until next March.
In the first quarter Reston Homes reported a $12.3 million charge for abandoning projects, up from a $7.2 million charge yoy. Homebuyer traffic fell 11% and prices fell 16%.
At Countrywide, subprime loans fell 43% and pending foreclosures as a percentage of unpaid principal rose to 0.9% from 0.45% yoy and 0.85% in April. They funded $2.3 billion pay option loans for May versus $6.6 billion yoy.
This housing slump is not going to go away anytime soon as we predicted. Wall Street, government and the real estate and building industry are finally realizing this correction is going to be expensive and last a long time. A long time to Wall Street is by the end of 2007. They are either fools or liars.
There is a giant glut of homes and condos. The building industry never thought things would turn out this way. There are at least 2.2 million vacant single-family homes and condos for sale nationwide. That is one million over the norm.
New federal guidelines on underwriting low-initial-payment mortgages to people with flawed credit calls for lenders to take into account the highest possible monthly payments or their ability to repay loans at higher levels. Of those who got loans at a fixed rate last year for two years that after that term switch to market rates, about 1/3rd of them wouldn’t qualify now. The bottom line is lenders will make 50% fewer subprime hybrid adjustable-rate mortgages as a result of the new criteria.
Wall Street says the market downturn could linger for years but doesn’t pose a major risk to the overall economy. They must think we are terribly dumb. In fact, the situation in the home building industry is that CEO’s totally refuse to give interviews.
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As we saw last week foreign central banks have been sellers of US Treasuries. Whether this will persist only time will tell. This was accompanied by much higher international interest rates, the most noticeable of which was the move from 4.70% to 5.30% for the US Treasury. The 10-year note as we mentioned has broken down and a 24-year bull market in bonds has ended. All this happened in just two weeks. Higher rates change everything. That is higher carrying costs for business, hedge funds, and mortgage borrowers and for the US government in new debt as well as old debt that is being rolled forward. Those who want to initiate new debt will find it more difficult to get, and fewer will find they can afford to borrow. The era of low interest rates is over.
A major change in the world is about to take place. The generation of low interest rates is now part of history. It will take about three years, perhaps less, for the current hyperinflation to burn itself out. We will know when it’s coming when the speculators become risk adverse and stop using the massive credit available to them. You can print all the money you want and create all the credit you want, but if people do not use it you then have deflation and depression. The stealth game of increasing interest rates and, at the same time, increasing money and credit to offset it is over. The move to cash, gold and silver and real assets has begun.
We will see the US and world economy enter recession in which the US economy is already mired. Bankruptcies will rise and tax revenues will fall along with the stock, bond and real estate markets. Business and governments will cut health care and retirement benefits. Some nations will print money like in the days in the early 1920s of the Weimar Republic in Germany. Some will call in their currencies, issue a new currency and default on their debt. The US is a candidate for such a bankrupting move.
History tells us as bonds fall, yields rise and stock markets fall. If you are in the market, get out. It’s your last chance to save your hide. The break will come sometime over the next year to year and one-half. The first move will be to 10,300 to 11,000 on the Dow. Then to 9,500 – then to 8,500 – then to 7,268 – and, probably much lower. This is it ladies and gentlemen, the beginning of the beginning of the end. The downside will in part be predicted by the end of the private equity boom and the end of stock buybacks by corporations, part of the artificial structure that is holding the market up, along with hedge funds and the “Working Group on Financial Markets.”
Foreigners have been accumulating dollar denominated paper assets at the rate of over $5 trillion a year. We will find out over the next three months if the foreigners and other central banks will continue or if they will stop buying dollar assets or bailout. Foreign central banks are diversifying and buying more foreign bonds. They already own over $5.7 trillion in dollars and dollar Treasuries and oil exporters have another $2.5 trillion. As these central banks sell or stop buying US Treasuries, or cut back, they put downward pressure on the dollar. A sale now of just $10 trillion puts lots of pressure on the Treasury market. Overall any sizable sale would destroy the dollar and drive interest rates higher, thus, dollar denominated assets are virtually un-saleable. Two to three years from now dollars will be very difficult to get rid of.
Eventually dollars will be unacceptable and that is when the financial chaos begins. That is why you must own gold and silver related assets. Once inflation ends you can only own gold bullion coins. Whether you know it or not, the dollar has been fiat since 8/15/71. Finally the world is about to realize they have been victims of the biggest scam in history.
The financial flow of funds shows that borrowing in the economy slowed to the weakest growth in four years, as borrowing by business increased by 9%, corporate borrowing was up 9.1%. Homeowners have increased mortgage debt by 5.4% in the first quarter or more than $500 billion a year. That number was 9.3% in 2006. Household debt diminished by 6%, the slowest in nine years. Total mortgage debt rose 6.2% at the slowest pace in eight years. Personal income was a negative -1.3%. Borrowers are no longer the masters of their own fate - nor is our government master of its own fate. Central banks are selling Treasury paper and as yet the US hasn’t uncovered who the sellers are. In time the Fed and the US Treasury will be powerless to shape their own financial and economic destiny.
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GOLD, SILVER, PATINUM, PALADIUM AND URANIUM
We see little chance of a correction in gold and silver this summer. As we said earlier we believe the central banks will save the bulk of bullion sales until September, although they could be forced to act sooner if gold were to break up over $700 an ounce. That would bring a very unwanted disruption to their plans.
One of the fallacies of the gold market is that gold goes down when interest rates go up. We heard the same gobbliegook in the late 1970s. As interest rates rose so did gold and do not forget that. The recent strong gold selling and leasing by central banks had nothing to do with interest rates. The rate climb was aided and abetted by the Chinese who were demonstrating what China could do with hundreds of billions of dollars in Treasury paper they’d be willing to sell if the US congress changes the rules of access to the American economy. We often wonder how analysts get economic and financial history so wrong? We studied that history, but in this case we lived it as the largest gold and silver stockbroker of that time. In fact, most analysts’ reports are so confused we often cannot understand them. There is no mystery to why the gold rally was stopped in its tracks. The commercials again added 80,000 shorts; we saw naked shorts and the central banks coordinated the sale of 181 tons of gold over an eight-week period, which was followed by aggressive leasing, which is still going on. We also cannot leave out the sale of 31 tons of gold from the ETF GLD, which was sold by hedge funds in coordination with central banks with whom they work in concert with. Did you ever wonder why there is no hedge fund regulations? Now you know. Hidden from the public eye while the foregoing was going on was that jewelry sales rose 17% and gold production fell 4%. The buyers in India, the Middle East and China loved the physical gold sales and another correction as a new time to buy.
We believe the dollar’s latest rally is about over, thus a softer dollar brings strong gold prices about 85% of the time. In addition there is no hope for lower US interest rates. If they were lowered the dollar would collapse and gold would rise strongly. If the Fed raised rates the economy would collapse. The Fed will keep rates unchanged officially. The element of interest rates has been taken away from the Fed by the real market. What they do from here on out will be an after thought. It’s just like in credit and money creation, they currently are creating monetary aggregates at a 13.3% rate, while the market is increasing them by a 3% to 5% rate. M3 or our estimate thereof is important, but the Fed and other central banks do not rule the roost anymore. Among major currencies the fiat dollar has become just another piece of toilet paper. We must also remember in a manipulated environment charts, waves and cycles do not work. Those that use them are fooling themselves. They do not yet understand all markets are being rigged and until we have free markets again they are useless. The venue of gold and silver reporting is full of incompetent charlatans today, some of which are very anti-gold. One of which is shorting the market. Several other sources are actually working in conjunction with the government, so weigh what you read very carefully. The trend is your friend. Gold is in a bull market. Go long and stay long, making appropriate changes along the way. Do not let anyone twist you out of your gold and silver positions because in the final analysis they are your only financial salvation. Paper money is just that – paper, no matter what currency it is in.
On Monday, gold had a decent day. It was better than being down. Spot closed up $1.30 to $655.80 and silver fell $0.02 to $13.17. The September gold contract was up $1.20 to $659.90, silver fell $0.03 to $13.24 and copper fell $0.02 to $3.42. Gold open interest fell 2,134 contracts to 411,430 and silver OI fell 175 to 122,724. On Friday, the gold open interest on Tocom saw a reduction in their net short position by 2,413 contracts to 134,466 as Goldman Sachs covered 300 contracts to bring net short positions to 23,687. The XAU fell .61 to 140.116 and the HUI slipped .25 to 336.02.
One of the largest platinum mines based in South Africa has gone offline for a week due to some safety concerns and mining union NUM (National Union of Mineworkers), and Implats continue to head towards a stalemate in negotiations, as Implats has not offered a new wage increase. NUM filed for a grievance with the government the next is beginning an official strike. The chance of a settlement is small. There will be a strike, but we do not know for how long. This is a communist union and a communist government so anything can happen. That is why we haven’t recommended investments in South Africa for almost 15 years.
Early Tuesday we saw a hesitant market. The Dow was -13, S&P +2, Nasdaq -11 and FTSE -10 Dow points. The CAC was -1 and the DAX was +3. The yen was +.19, the euro -.0016 and the pound +.0031. The 2-year Treasury yield was 5.00% and the 10’s 5.14%. Oil was -$0.05, gas -$0.01 and natural gas unchanged. Gold was -$0.50, silver -$0.01 and copper -$0.03.
Last week gold holdings in the gold ETF GLD rose 3.08 tons to 472.99 tons. Other gold ETF’s were flat.
Silver ETF holdings were relatively unchanged.
Gold and silver are both showing no downside momentum and a bias to the upside. Gold wants to go higher.
The long bull market in gold and silver still persists. Physical demand in both metals continues to strengthen. ETF’s add to the demand some 80% of the time. Every time central banks sell, buying comes in strongly from Asia and the Middle East. Dollar foreign exchange reserves in part are being used to buy gold. This is definitely a 2-way market. Gold production continues to decline and no major finds have been produced in sometime. Mining costs continue to rise and in some areas there are labor shortages. Former hedgers continue to de-hedge bringing buying into the market and huge losses for companies as we predicted it would, as long ago as 1992. Political events remain negative, particularly in the Middle East and North Africa. It is only a matter of time before gold and silver move higher.
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