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International Forecaster April, 2005 (#4) - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster

-- Posted 27 April, 2005 | | Source:

APRIL 2005 (#4) Vol. 9 No. 4-4

P. O. Box 510518, Punta Gorda, FL 33951

An international financial, economic, political and social commentary.





            When it will happen we don’t know, but we know it will happen - that is the crash of the dollar. It won’t happen all at once, but in stages. We have seen the first stage as the dollar dropped some 32% over the past two and one-half years. You cannot expect the US government, Congress or corporate America to act to stop this inescapable crisis because they created the condition. They want America on its financial knees so it will accept world government.

This year some of the brighter people not involved with the elitists began to realize something very big and devastating was underway. Thus, a handful of economists began to question the direction in which the US was headed economically and financially. These kept-economists are telling the intelligent a little bit of what is going on – enough to keep them on line and sidetracked. This is opposition that is created and controlled. You will only hear as much as they want you to hear. This has little to do with political parties and much to do with the control of all political parties. The manifestations are myriad and complex and loaded with dialectics. In this process few are able to understand what these evil people are up too. That is why we try to make the cryptic understandable.


            A good example of an extension of our corrupted government is the attempted theft of Social Security funds to bail out Wall Street and anoint them with a cool trillion dollars plus in profits. Then there is the almost $3 billion a day that foreigners must spend to buy American assets to keep us financially afloat. The funds inflow is now not sufficient and our Treasury and Fed are buying US Treasuries and agencies in secret offshore accounts with money they created out of thin air, a simple Ponzi scheme. Some of the players are getting cold feet.


            You may not want to believe it but our economy has been in disintegration since 1989 and only one trick after another has salvaged it. Just look at the dollar. It is only reflecting the collapse of a once great economy. Soon the US dollar will cease to be the world’s reserve currency. We have major corporations on the verge of bankruptcy, GM is a good example. As GM goes, so goes America and what is good for GM is good for America. Its debt will shortly be junk. Its supplier, Delphi, along with GM, is under investigation and will precede GM into bankruptcy. Potential retirees and pensioners are going to be in for a big surprise - like the loss of 65% to 75% of their pensions. GM has $50 billion in debt to refinance over the next 20 months. We do not believe the market can or will want to handle it. The market cannot even handle the Treasury refinancings. That means interest rates have to move, jeopardizing the future of the housing market and complicating and increasing the cost of debt service. There are many more complicating factors that are going to be moving into the forefront in the weeks and months ahead. Prepare yourself – it will be a difficult journey.


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            Over the last twenty years the US has been changed from an industrial nation to a consumer society based on services. This has caused massive amounts of dollars to flood the world. As a result foreigners are holding massive amounts of US debt, which has fallen in value over the past five years. Asians are the major debt holders and as we saw recently any kind of utterance regarding financial diversification brings inordinate pressure on the dollar.


            Most every commodity in the world is denominated in dollars and commodities have been in a bull market for five years. During that period oil went from $10.00 a barrel to $58.00 a barrel. That is not only the result of supply and demand and speculation, but also a reflection of the dollar’s value. The axiom is simple. The dollar goes down and commodities go up, particularly gold and silver. Due to systemic financial problems, such as massive debt and free trade and globalization, the rot has progressed too far for a quick fix to work. There will have to be a purging of the system. Tremendous efforts will be made at 80 on the Dollar Index to keep it from collapse, but to no avail. The dollar’s collapse is inevitable. Thus, that is part of the reason for oil’s rise and the move in copper from $0.60 to $1.45 a pound, and the 71.5% increase in the cost of iron ore. The result will be anything made of steel will increase in cost by 50% to 70%. The worst hit in this category will be autos, trucks and other durable goods. That will be very inflationary and it will also affect the sale of these items. Now you more clearly see why GM and Ford are in such trouble. One of the disturbing elements of the commodities world is that the cartels control most of the world’s production. They are: Anglo American Corp., BH Billiton and Rio Tinto. They virtually control the production of many commodities. They all know each other very well and constitute a monopoly. They are also at the top of the elitist picking order. Industrial raw material prices are what they want them to be. As you can see, the depreciation of the dollar has greatly affected the price of commodities, but so has the raw material’s cartel.


            We predicted some time ago that if free trade and globalization were allowed to continue that Ohio, Indiana, Michigan, Quebec and Ontario would have serious problems. In two years, China will be sending millions of autos and trucks to the US. That said we want to talk about GM and its problems, because GM is the model for what is to come for many, many other US corporations. The failure of many US corporations means massive permanent unemployment for our nation.


            GMAC, General Motors Acceptance Corp., contributes about two-thirds of GM’s profits. After three years of $5,000 rebates per car, which was double the sector average, car and truck sale growth is falling. GMAC’s $260 billion debt is larger than all of that of the auto division combined. As you saw in the last issue, GM’s euro bond issues are trading at a yield of over 11%, which is certainly junk quality. The money maker GMAC is faced with declining vehicle sales and has been a major investor in Fannie Mae and Freddie Mac mortgages, thus, as interest rates rise and home prices fall, paper quality will come into question and mortgage volume will dry up, especially in cash outs and home equity loans. GMAC is facing a double-edged sword. At GM the most profitable sales unit is the SUV and with today’s gasoline prices, they will suffer. Sales overall for January and February were off 11% despite having lowered prices in February. As you can see, the market is simply saturated with vehicles. GM lost $2.6 billion in Europe last year via Vauxhall, Saab and Opel and is laying off 12,000 workers. Since 1980 the auto workforce has shrunk by 70% due to deliberate de-industrialization and, of course, thousands of smaller firms supplying the industry have been phased out with massive job losses.


            In 2006, GM either will pay off or refinance $44.7 billion in debt and Ford has to do $37.1 billion or $174 billion in debt. Can the market handle that at junk levels or will they want too? That could be bonds with a 13-14% coupon. Will financial firms, such as GMAC continue the hobby of producing cars? We don’t think so. Can you see how deadly offshore production, outsourcing and free trade and globalization has been for America? Our industrial heartland has been destroyed. Fundamentally both GM and GMAC are on a path to destruction as is Ford. Borrowing costs have just jumped from 7.5% to over 11%. Can they generate cash at these levels and still make a profit? Delphi, the GM parts spin off, is now embroiled in an Enron-type fraud scandal, which could indirectly reflect on GM. Delphi has already informed 4,000 of its salaried and retirees that it is ceasing to pay their health care plan. GM and Delphi layoffs are over 10,000. Suppliers are already at junk level and can only borrow from GMAC to stay in business. Ford’s Visteon is in the same boat. The UAW is on a two-tier wage system to save money and avoid layoffs.


            If all of that wasn’t bad enough GM’s pension fund is underfunded by $17 billion or is only funded to 80% of its obligations. This comes as George and the neocons push pension reform, better called, funding your plan. This is a debt bomb and Washington knows it. If reform passes Congress for the benefit of the Pension Benefit Guaranty Corp., many companies will achieve junk status. GM wants to split off GMAC hoping to save GMAC. If that happens this year it is guaranteed GM will go into bankruptcy. PBGC is already $23 billion in debt and can not absorb the obligations to GM’s hundreds of thousands of pensioners. This is a disaster of major proportions. Plus, they’ll lose GM’s pension insurance premium payments. Even if GMAC is spun off we do not believe they will escape attachment by PBGC. It should have been spun off three years ago.


We have had thousands of e-mails and letters asking when will real estate top out. It should be soon or it may already have begun. Last year mortgage debt increased by $995 billion. Since 2001, $3 trillion in mortgages have been refinanced. The average house is up 50% in the last five years, but incomes have gone nowhere. Instead corporate bottom lines have been fattened with income under pressure from outsourcing and illegal immigration. As you know Americans do not save and they are up to their eyeballs in debt, but that is okay, foreigners are saving for us. They lend us $2.9 billion a day to stay afloat.


               As we said earlier, we do not believe China will revalue and there is a good chance of a trade war. Higher interest rates & dollar selling will sap liquidity even if the Fed increases bank loans, ABS, M3 and commercial paper all 15-20%. If bonds, stocks and real estate are going down, a lot of that excess liquidity will be eaten up via losses. You will lose money in bonds. You will lose lots of money in stocks and real estate. The alternatives are money market funds, bonds of short duration and gold and silver shares and coins. This is the beginning of global meltdown caused by a deliberate unbalancing. There is no way back.


There evidently was an argument over the May 29th referendum in France regarding acceptance of the EU Constitution, which looks sure to fail. If just on country votes against it, the Constitution dies. Other vulcans in attendance were Henry Kissinger, Richard Perle, Robert McNamara, Larry Summers and Zbigniew Brzezinski.


The latest from one of our spies is that 6,500 soldiers have gone AWOL and in addition 45 recruiters. You heard it here first.


            Trading in derivative contracts that insure against companies defaulting on their debt surged to a record this past week as investors sought protection from the biggest decline in corporate debt in more than two years. The volumes are astronomical and if the writers, JP Morgan Chase, Morgan Stanley and Deutsche Bank guess wrong the whole financial system comes apart.


            Corporate debt issuance fell to $4.3 billion. Junk bond outflows rose to $679 million.


            Freddie Mac’s fixed 30-year mortgage rates dropped 11 basis points to 5.80%, the lowest in seven weeks. The 15’s dropped 10 BP to 5.36% and the one-year adjustables declined 4 BP to 4.26%. The Applications’ Index dipped 1.6%. Purchase apps rose 7% y-o-y, with dollar volume up 18%. Refi apps fell 1.6%. The average new purchase mortgage rose to $240,700. The average ARM dipped to $328,500. The percentage of ARMS dipped slightly to 35.4% of applications.


            M3 fell $1.3 billion to $9.544 trillion y-o-y. M3 has expanded at a 2.7% rate, with M3 less money funds growing at 5%. Credit expansion is being financed by the expansion of non-monetary financial sector liabilities expansion that we have brought to your attention week after week. A good example is Bank Credit, which dipped $8.5 billion last week, but y-t-d expansion is $283.4 billion, or 14.6% annualized. Securities credit is up $80.8 billion, or 14.6% annualized y-t-d. Loans and leases have expanded at a 14.3% pace so far during 2005. Then there are real estate loans that expanded at a 16.3% rate during the first 15 weeks of 2005 to $2.66 trillion. They are up 13.1% over the past 52 weeks. Bank of America’s first quarter liability expansion was $103 billion, yet deposits only gained $11.4 billion. The Fed funds and repo liability line surged $67.9 billion. Total Commercial paper rose $8.7 billion last week ($48.5 billion in three weeks), $1.478 trillion. Total CP jumped $8.2 billion last week to $1.328 trillion, up 11.1% annualized y-t-d. Non-financial CP increased $0.5 billion to $149.7 billion, up 27% in 52 weeks. Are you getting the message? The fed doesn’t need to increase M3 when their fellow banking elitists are flooding the world with credit.


            Fed foreign holdings of Treasury and agency debt declined $0.3 billion to $1.389 trillion. Custody holdings are up $53.2 billion, or 13.0% annualized y-t-d, or up $46.6 billion, or 6.3% over 52 weeks.


            ABS issuance was a strong $18 billion. Y-T-D issuance of $193 billion is now 8% ahead of 2004.

            The Dollar Index is again under downward pressure, off 1% last week. The South African rand was up 3.5% again leaving less hope for South African mining companies.

More for subscribers.... 



            The G-7 failed to authorize gold to be sold for debt relief. There was complete silence on the subject, which proves it was a red herring to suppress the price of gold. Either that or they want the inhabitants of Africa wiped out, probably by AIDS, which they invented. Incidentally, overall the meeting was a complete failure.


The US Mint announced it will begin producing a new 24-karat gold bullion coin early next year hoping to capitalize on growing international demand for purer gold coins. The potential for the coin is $2.4 billion in annual sales. Sixty percent of global coin sales are of 24-karat coins with Maple Leaf’s from Canada the top seller. One-third of sales in the US are 24karat foreign coins. We wonder where the gold will come from?


            The Dubai Metals and Commodities Centre offered a gold Sukuk, which was oversubscribed. S&P has issued an A long-term rating and A-1 short-term. The Sukuk allows the investor payment in gold bullion as well as dollars. You are going to see more such issues in the future.


            We are told foreign exchange traders in London are now hedging gold against their euro, pound and Australian dollar. The irony of this is that currency ratios that underpin and determine the flow of capital around the world are now becoming increasingly dependent on the trading action in and around the Comex gold pit and confirms what we know and that is despite its size the gold market really is the true price discovery mechanism for global currencies and therefore, interest rates in the world currently. It also shows you in the final analysis value depends on the demand for gold bars and the ability of the market to supply them. Once the cartel is out of gold, and it will be soon, price acceleration will be enormous. Remember, people own gold because they cannot trust governments. Keep in mind as well he who has the gold makes the rules.


            We do not know for sure how much gold central banks have left, but we believe it is less than 5,000 tons. That means it won’t be long and the gold suppression cartel will be out of gold. That brings up an interesting question, where will the US Treasury get the gold to mint its new 24-karat coin? Without an audit since the mid-1950s we can’t tell if they have any gold or not.  World gold demand increases every day, especially in China, India and the Middle East. Physical off take is enormous as production decreases. Over the next five years production should drop 500 tons a year. Only producer mergers allow some to stay in business. Exploration has slowed to a crawl and it takes four to seven years to get into production. Incidentally, we have decided that no IMF gold was sold because they had already leased the gold and wanted t even their books up. The Americans thought it would be too obvious to pull off a phony sale. We are faced with higher interest rates and inflation and lower stock, bond and real estate markets. That leaves gold, silver, and oil and gas and uranium stocks for the long side of the market. Even Goldman Sachs and Anglo Gold thinks gold will go to $500 an ounce. The oil to gold ratio is at a 29-year peak, and if you use the long-term average, gold should presently be selling at $800 an ounce. The fundamentals are overwhelming – just be patient and be long.


More for subscribers.... 



There is a new program for Mexican migrants in the US. The program allows Mexican migrants in the US to obtain mortgages to buy homes in Mexico. The program will kick off with 1,000 mortgages. As the program grows, the first states to participate will be Jalisco, Aquascalientes, Guanajuato, Michoacan, Puebla, Oaxaca and Zacetecas.


The program is operated by three private mortgage companies with offices in the US: Su Casita, Hipolecana Nacional and Creditor Inmobiliario Terras/Confiscas with the support of Federal Mortgage Society, a Mexican public organization that promotes the construction and purchasing of housing in Mexico.


Migrants can buy a home in Mexico while working in the US. The program is designed to increase the standard of living of the families of migrants in Mexico, working in conjunction with the already existing so-called “3X1” Program. Another route for migrants to increase their financial well being while reinforcing their roots in Mexico.


First of all, why aren’t Mexicans doing this for Mexicans in Mexico already? If they have such a program, migrants will not want to permanently stay in the US and become citizens. It is just more dollar outflow for temporary visitors. We believe institutions and the wealthy in Mexico should be pushing and funding such programs.


More for subscribers.... 




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-- Posted 27 April, 2005 | |

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