CHAPMAN: Gold, Silver, Economy + More
by Bob Chapman
International Forecaster
Sunday, 6 August 2008
US MARKETS
The central banks are going bonkers to support the dollar, as we see wild spikes bringing the dollar back up every time it starts to go down after another dead cat bounce. This is collusion, plain and simple. And now oil is being hit, all to suppress the precious metals and to give the markets and the economy a boost before elections so scum-dog incumbents can have a shot at reelection. Lindsey Williams' scenario is good so far, but a drop to $50 a barrel for oil so quickly does not seem likely and may be disinformation, so don't let that scare you. Even if oil drops to $50, M3 is still running at 16% to 18%, so inflation is not going to moderate as much as some would think based on lower oil prices, no matter how low they go. Remember, high oil prices are not the root cause of inflation, they are the result of a weakening dollar, a profligate money supply by the Fed to save insolvent fraudsters and oil speculation by Wall Street pirates utilizing the Enron loophole to save balance sheets and income statements. Also, seasonal factors will soon be at play as the wedding and religious ceremonies in India and the Middle East add jewelry demand to what is already substantial investment demand. The credit-crunch is getting worse instead of better, as is the real estate-subprime debacle which will soon morph into the Option ARM debacle. Also, consumer spending is tanking, which will take down corporate earnings to new lows as 70 to 80 percent of our GDP goes down the tubes. Third quarter earnings are going to be the worst yet due to rapidly declining consumer spending and sky-high oil prices for a goodly portion of the quarter. Worldwide inflation is going to continue to put pressure on dollar pegs, and a continuing dollar decline will make the financing of US trade and current account deficits more and more difficult. Which nation will start the panic to unload treasuries, we wonder. Russia is a good candidate if the current Administration keeps up its Eastern European hi jinks.
Bank failures are about to become common place on the new, Friday night, after-market, Bank Failure News Hour, which is the latest rage for investors, television viewers and Internet surfers everywhere. Instead of getting Fireside Chats like the people during the Great Depression, we get the Bank Failure News Hour now every Friday night. Look out Tonight Show, this could mean trouble for your ratings every Friday night for years to come!
All these factors will keep precious metals and their shares well bid during the fall rally. And the mountain of COMEX gold shorts has been moved to December, so a big suppressive element has been moved out of the way to pave the way for what should be some real fireworks. The cartel has given you some ridiculously low prices on gold, silver and their related shares in the past week, so be sure to take advantage and LOAD UP. Just keep buying on the dips. We have years to go with this rally. Just ignore all the market minutia and cartel machinations and keep focused on the big picture. Your mega-profits are a lock if you do. Do not let them scare you out of your positions. Go long and stay long, and thumb your nose at them as they throw their BS and tripe at you. Stay out of the futures casinos, and avoid paper precious metal assets like mint certificates and ETF's. Physical possession is the way to go. Empty their cupboards and take some physical off the table. This is sure to start a shortage stampede at some point. Physical trumps paper. That is their Achilles heel. Any central bank that unloads its gold during the next year of the Washington Agreement will look like dolts and morons later, and will have a lot of explaining to do with their customers.
After elections are over, the real fun will begin, as the Goldilocks facades are eventually dropped to reveal the truth about our economic woes after the fraudsters have bailed out of paper, dollar-denominated assets, an event which will happen soon after elections. They have a real problem, however. If they bail, all that toxic waste will have to go into a fire-sale, and that means mark to market at real value. That could accelerate many gargantuan bank failures. Next, Paulson will take out his bazooka and blow us all into what can only be described as hyper-stagflationary oblivion as moral hazard is ramped up to new heights and as all pre-election pretenses about not needing a taxpayer bailout are thrown to the wind and treasuries are created and monetized out of thin air by the trillions to help out Fannie, Freddie and the Failing Fraudsters. Hey, Fed, you might consider a discount window loan to the people at Crane and the makers of your printing presses, because you are going to need a lot more paper and presses to keep up with the demands of the upcoming hyperinflation.
At the risk of sounding like Jim Nabors' character, Gomer Pyle, we say: Surprise, surprise, surprise, the Fed kept their funds rate at 2%. Of course they did. They are boxed in and cannot get out. Oil will be pounded through the end of the year now to give them the excuse they need to keep rates steady. After all, raising rates to fight inflation could hurt the fraudsters, and we simply could not have that now, could we? Sorry, but the markets will impose higher rates anyway. Ah, the tangled webs we weave when we practice to deceive!
American GDP has been negative for the first half of 2008, and it will continue that way indefinitely. The credit crisis is worsening. There are no signs of stabilization or improvement, as credit gets ever tighter. The subprime-ALT-A crisis has spread into prime and conventional mortgages, commercial paper and throughout the entire lending structure. Excess home equity has evaporated and second mortgages or refinancings are close to being a thing of the past. Securitization markets are not only in a shambles they almost do not exist. Just look at the statistics in our Saturday issues. Corporate debt issuance is at a 5-year low. Lenders have sharply curtailed lending to all sectors of the economy. Bank credit is at a standstill and without lending and credit creation the economy will grind to a halt. Unless banking loosens lending they will single handedly destroy themselves and the system. They have $500 billion a month available, but they are using most of those funds to bolster their capital structures and the remainder to speculate for profit. America has a finance driven economy and the big dirty secret is the banks are broke. They are trying to hang on and destroying the economy in the process. This problem wasn’t just a maligned mortgage problem. It was the culmination of years of credit excess and an out of control Federal Reserve. These problems can all be traced back to August 15, 1971 when the Gold Standard was abandoned.
Credit creation was the wave on which the economy and asset markets have floated for years. The economy and finance have played their last trump. The spectacular gains in income and financial wealth are over. The days of overly conspicuous consumption and luxury and discretionary spending are history. All spending, at all levels will be cut. Sensible individuals and businesses are cutting back. Those who do not will go under. As well, the day of reckoning for government is also upon us as many states such as California and New York cut costs to the bone in order to financially survive. Windfall spending that encouraged all of government to overspend could in some cases spell their financial doom. The budgetary madness and the massive creation of money and credit have ended. Unfortunately, these excesses are accompanied by hyperinflation, which certainly exacerbates the problem.
The credit noose continues to tighten as jumbo mortgages rise to 7.56% for 30-year fixed rate mortgages. That is 1% higher than a year ago when this crisis began. These rates, plus higher down payments, will spark a new fall in high priced homes and a further fall in general spending and consumption.
Higher inflation is causing many businesses to fold or go bankrupt. That means more layoffs and less income. Credit conditions will worsen constraining business and consumers. That is why except for your mortgage you have to be out of debt.
The dynamics of lending have profoundly changed and economic and financial conditions are deteriorating rapidly. It is up to the Fed to continue to pour money into the system and just as important the banks have to lend it or the system breaks down.
The only question now is, when will the system break down?
Washington, the banks and Wall Street think (believe) their propaganda and lies are working, but they are not. Washington’s bogus official statistics are coming more into question by professionals, something a good part of the public knew long ago.
It is to be expected that as the dollar falls in value, exports will increase and as the economy slows, less income will inhibit imports. Were it not for this improvement in trade, official numbers would have shown a minus ½% in GDP for the second quarter. In the future both exports and imports will fall as all countries slip into recession. The current drop in US imports is an early reflection of what retailers anticipate for Christmas. They know the tax rebates slowed the downturn, but there was no follow up. Employment has fallen, not grown. Even investment in plant and equipment fell 3.4% and business inventories have fallen by $62 billion. That cost GDP some 2%. U6 unemployment officially is 10.8% and inflation 5.1%. Prices paid for goods surged 4.2% in the second quarter. Inflation and stagflation are where we are and it is going to get worse. If the Treasury, after having injected the equivalent of 4% of GDP into the economy in the second quarter, can’t come out with stronger numbers the third and fourth quarters are surely doomed.
The rebates did not affect the housing problem, nor has the “Fed’s” infusion of $500 billion into the banking system. All we are seeing is a holding action. Even the Fed shows 19.4% of all subprime loans in Florida and 14% in California are in foreclosure. The “distress ratio” of speculative-grade companies has rocketed to 23.5% in July, up from 13% in just one month. This ratio is a precursor to default. This year 38 corporations that S&P rates have gone bankrupt with combined debts of $30 billion. Combined defaults for all of last year were $4 billion. This is as you can see only the beginning of corporate troubles.
Factories from around the world are in slowdown, reflecting uniformly negative economic news from across the globe. This is an early warning sign when you see a simultaneous downturn nearly one year after the start of the credit crisis, which was worsened. This is a reflection that we are still a long way from being out of the woods.
We have a number of countries that are in the early stages of property busts following the US. There is England, Ireland, Spain, Portugal, Italy, China, Australia, New Zealand, etc.
Retail is being hammered as well. German June retail sales fell 2.8%. The Swedish economy didn’t grow in the second quarter. Denmark is already in recession, reporting two straight quarters of contraction, as their retail sales collapsed 6.3% yoy. What we warned of almost four years ago unfortunately is becoming reality.
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