THE INTERNATIONAL FORECASTER 28, September, 2002 (#3)
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman Vol. 6- No. 9-3
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International Forecaster September, 2002 (#3)
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US MARKETS
A war in Iraq would throw the US and the world into depression.
Higher oil prices would cut consumption and the war pictorial on TV would keep the consuming masses out of the malls. That would finally trigger the correction in real estate and it would prick the credit bubble. These events would cause a withdrawal of funds from US investments. The resilience would have left the economy. Normally eventual lower oil prices after a peace would build the stage for a recovery, but not in this case. The entire world financial structure is rotten to the core and a purging has to take place for recovery. In spite of US government intervention the dollar would fall lower. The dislodging of Iraq will be more protracted this time in money, time and casualties and an occupation would be long and arduous. We can promise you Iraq will use chemical and biological weapons causing tremendous risk aversion by consumers and investors. We can also expect a major uprising among Muslims throughout the world and major terrorist events on US soil. The Arabs alone would pull $2 trillion out of our economy. The war will cost at least $300 billion, and global capital flows would be severely disrupted. This is reality. This is what your elitist President has in store for you.
Clearly Iraq is trying to buy time. In the meantime Germany, France and Saudi Arabia won’t lend support to war unless the UN decrees it. Congress is being pressured to approve a resolution of war without actually declaring war. If Russia vetoes a UN approval the Bush cabal will attack anyway. Mr. Bush is frantic for war before the November elections so it will assist Republicans in the election, although the elitists could care less, they own 90% of Congress. A quick war is important. It is needed to continue the fallacy of terrorism. We haven’t had an incident in over a year, the public is worn out emotionally, and they are beginning to doubt the existence of a viable terrorist threat on American soil. If the war doesn’t happen there will be amendments to the Patriot Act and the Department of Fatherland Security may never pass Congress. The conspiracy desperately needs a battlefront to keep the patriotic public on edge, implement Fatherland Security to subject the American public and to fulfill its program of controls of the Middle East, Western Asia and the eventual war with China. These moves will also justify the reimposition of selective service.
This is a perpetuation of perpetual war for perpetual peace. The elitists finance and arm both sides of the conflict, collecting the profits and winning no matter who is the victor. This is the way it has been since the twelfth century. Why do you think pervert Clinton was transferring military technology to China and why does free trade end up allowing China to supply such a large supply of our manufactured goods needs? Think about it. The hard line on the Middle East is almost politically universal in the US in spite of a recent disclosure that Mr. Bush has a secret nuclear hit list that includes China, Russia, Iran, Syria, Libya and North Korea. Of course you didn’t see this list in the American media. This is psywar for the rest of the world. Making them accept limited war in the Middle East in hopes nuclear war won’t prevail. This is very simple and very effective. Mr. Bush as a caricature of a nuclear-war mongering cowboy is deliberate. The elitists want to terrify the rest of the world. As you can see the world is being mentally drawn into war.
2,000 US troops have been dispatched to Djibouti, which faces Yemen across the Gulf of Aden in an extension of its pursuit of al-Qaida militants. Djibouti was once the African headquarters for the French Foreign Legion. It is thought that they are being accompanied by CIA paramilitary units. Yemen was the home of Osama bin Laden’s father and is believed to be an operations base for Muslim militants. Delta Force is also present.
Fannie Mae is on a Treasury rampage in its effort to close the duration gap. In fact Treasuries now trade as if they were S&P put options, rallying as stocks tank and selling off when stocks post one of the occasional rebounds. Corporates that were previously held in high esteem, that is investment grade paper, have become suspect as so many become fallen angels that have unfortunately become junk. The street thinks Fannie might buy $100 billion in Treasuries. We believe the figure will be closer to $200 billion and that creates a risk that a bubble could be created in Treasuries. The same sort of scenario played out after 1993, when rates fell to previously unheard of lows, setting off a spree of mortgage prepayments and the buying of Treasury notes. When that was unwound in 1994, after the 30-year bond hit 8-3/16, 1994 became the worst year for bonds since the 1920’s. As you can see it is possible to have rising interest rates and a plunging stock market simultaneously.
As corporations by the dozens warn of lower profits and our President seems determined to get us into war, investors are also headed into Treasuries. Bonds have rallied five months in a row and we haven’t seen that since the 1960’s when we began this exciting adventure into the investment world.
As far as we know the only time in the last 100 years that there has been a unified global economic downturn was during the depression of the 1930’s. Then America was a major creditor and today it is a major debtor. In the late 20’s we had 90% margin, but corporate and personal credit as it is known today just didn’t exist. Today personal, corporate and govermental debt is in the trillions. It is colossal. Not only are the excesses monumental, but also society believes it should be this way and has to be this way. Very few Americans have really ever had a bad day in their life. In the 1920’s we had a balance of payments surplus. Today we have the biggest deficit in history. Expansion of money and credit by the FED, Fannie and Freddie, corporate and personal has been close to $2 trillion a year for the past few years. There can be no comparison made between these figures and the 1920’s. The damage done to the US economy this time is without precedent. Worse yet there are virtually no savings. Foreigners have been lending us money to keep afloat.
Looking back, the system should have gone down in the early 1980’s, but by legerdemain the FED and other elitists were able to keep the system afloat. Again we should have broken down in the early 1990’s, but again money and credit was poured into the system. But not this time. The numbers are simply too overwhelming and the resultant depression will make the 1930’s look like a brief difficult disruption.
This is why the elitists have to have war. It’s the only way they can extricate themselves without being hung or shot. In order to maintain yourself as a leading nation you must manufacture. Only 16% of goods consumed in America are made here, the result of globalization and free trade. This structural distortion cannot be overcome. That’s what classical economics is all about. Business investment shrinks every day and that investment is what brings recovery. There will be no recovery until the system is purged. That purging will be terrible. Not only will it be accompanied by contrived war but also domestic civil dislocation. The America of the 1930’s was socially different. Today we have over 11 million semi or illiterate aliens in our midst. Almost all these people and many other arrivals of the last 40 years have no concept of how our system works or what our laws are. They live in insular surroundings having little to do with the general flow of society. These people, most of whom inhabit large cities are an explosive commodity when they can’t feed their families and watch TV. This depression is going to be horrible on all of us and our government knows it. That is why they passed the Patriot Act and want Fatherland Security. It’s so they can subject and control us when these events take place. They know what’s coming, they just won’t tell us.
That market genius from Goldman Sachs, Abby Joseph Cohen, who tells us the Dow is going to 12,500 this year, says next year’s S&P 500 earnings will be $47. Nine months ago we predicted $40.00 at 14.5 times earnings, which is the median S&P value that puts the Dow at 5800 and the S&P at 500-600.
REITS could be heading down from here. We see office-occupancy rates slipping and apartment rents falling amid a home ownership boom and REIT economics look more precarious than ever. Their share prices have started to descend and will continue to so do. Buyers are paying higher prices for properties that stand to produce lower income levels. At the present rate of falling occupancy dividends could be threatened. Once interest rates turn back upward REITS will have further problems.
Amalgamated Bank, a financial advisor and custodian for defined-benefit retirement plans, filed a motion in federal court seeking lead-plaintiff status in class actions against AOL Time Warner, one of our short positions. Two years ago we wrote that they were using Mickey Mouse bookkeeping and so they have been. They are charged with illegal accounting practices.
The NASD fined Salomon Smith Barney a paltry $5 million, which is chump change for this firm, for misleading investors in their reports on Winstar Communication, which went bankrupt. What callous disregard for the investing public. This result just encourages analysts to continue to lie and mislead investors.
57% of executives say that California has the worst business environment. Texas was rated best.
Five Adelphia executives have been indicted on fraud charges. The firm is in bankruptcy.
Fannie Mae interest rates pushed spreads up 15 basis points in just two days. The shares have also fallen to $62, a low for a year. Our short was at $79.
It should interest you that Locate Plus has data on 98% of the adult population in the US. The market for such information is about $4 billion a year. Subscribers are law enforcement agencies and other government agencies and offices, law firms, investigation companies, private investigators and insurance companies. A private spy agency.
The clouds are getting darker as the Plunge Protection Team tries desperately to support world stock markets and destroy the gold and silver markets. All European indexes and the FTSE have hit long-time lows. Investors, traders and other professionals are throwing in the towel because no one has any idea which way markets will go with your own government trying to destroy you. They are all in shock and it will get worse. That 98.2% of professionals who have been wrong are still wrong. Buy and hold has become the kiss of death. We are about to follow the Japanese into oblivion. All the wishful thinking in the world isn’t going to change anything especially in a world where a man will trade his freedom for safety that is just short of servitude.
GOLD, SILVER, PLATINUM, PLADIUM AND DIAMONDS
We have had a number of inquiries regarding the invasion of Iraq and its affect on gold. When Iraq invaded Kuwait in August 1990, gold was trading at $345 an ounce. Prices rose rapidly to $410 by the end of September. Prices swung between $370 and $410 an ounce until mid-January 1991. Then, Operation Desert Storm began. It ended at the end of February and during February the price declined from $390 to $358 an ounce. That was about a $60.00 swing. We would guess under normal circumstances we could expect about the same result, but these are not normal circumstances. We are 12 years later and the gold manipulation cartel has been rigging gold prices since 1994. Gold prices have been deliberately suppressed, a situation that did not exist in 1990. One mistake by JP Morgan Chase, Goldman Sachs, Citicorp, AIG or any other cartel member could easily send gold to $512 an ounce. There could be a number of other events that could also send gold flying. Thus, we believe a war would send gold prices over $350 an ounce causing a collapse in the suppression of gold prices, which would bring a price near $500 an ounce.
Toronto, Sept. 26 (Bloomberg) – “Barrick Gold Corp., the world's No. 2 gold producer, cut its profit forecast for the year because lower-than-expected ore grades at some mines raised costs.
Shares of Barrick fell $1.77, or 10 percent, to $16 as of 7:35 a.m. New York time in Instinet trading. They closed at $17.77 yesterday in New York Stock Exchange composite trading. The stock had risen 11 percent this year.
Profit will be 33 cents to 35 cents a share, excluding non- hedge-related adjustments, Barrick said in a press release distributed by Business Wire. The Toronto-based company said in July that earnings would be at the ``lower end'' of 42 cents to 47 cents.
Barrick's cost of producing gold will be higher than expected because of a decline in the ore's grade. Costs this year will average $178 an ounce, more than the company's previous forecast of $172, Barrick said. The company trimmed its production forecast to 5.67 million ounces from 5.69 million.
Profit for the third quarter, which ends Monday, will be 5 cents to 6 cents, the company said. The average estimate of analysts surveyed by Thomson First Call is 12 cents.
Barrick expects to earn 10 cents to 11 cents in the fourth quarter, which would be less than analysts' 13-cent average estimate.
Processing problems at several mines haven't been fixed as quickly as the company had expected, Chief Operating Officer John Carrington said in the statement.”
It couldn’t happen to a more deserving group. We are very happy we recommended the sale of Barrick shares over the past eight years. Now it’s payback time. These results also point up the declining value of gold reserves, which will deteriorate much further over the next seven years. It also means the gold manipulation cartel is skating on thinner and thinner ice each and every day and it is only a matter of time before their stranglehold on gold prices is broken. Not only has the cartel ringleader, JP Morgan Chase, had its credit rating reduced, but also it is well on its way to $12 a share. We went short at $56, but Lehman Bros. has lowered JPM’s earnings estimate and cut its target price. Of course the Plunge Protection Team and their minions had advanced knowledge of the JPM downgrade and bashed gold shares and gold again so they couldn’t perform as they normally would on such an announcement. JPM will not be able to deal with central banks now that their credit rating has been lowered. One more downgrade and they are toast. JPM is a disaster waiting to happen and they can’t be merged with another bank, because the others are in trouble.
Furthermore investors were shocked because just nine days earlier Barrick had issued a glowing report. We knew at the time something was amiss because our sources had warned us that their grade was falling and that they continued to high-grade in order to meet shareholder expectations and fulfill their hedge commitments. Barrick knew over a year ago grades would fall and costs were rising. Barrick simply has been lying about their operations, but that doesn’t surprise us at all considering Peter Monk’s sleazy background. Barrick is a disgrace to the mining industry and corporate honesty. These are the same people who almost single handedly destroyed the gold mining industry by hedging. They caused hundreds of mining companies to go under, made financing near impossible for juniors and exploration companies and put thousands of geologists and miners out of work. Since 1987 Barrick has been the cross the mining industry has had to bear. We know for certain that four months ago at Meikle bonuses were cut back and the cost of production was rising in conjunction with a falling ore grade and that is going to continue. Our suspicion is that the ore reserve calculation may be off, so consequently how much of the mine reserve is in fact now economical due to increased production costs and the lowering of grade? Which brings up the question: are these reserves economically viable? The indications that we observe lead us to believe that perhaps Barrick may cut and run from the Meikle project.
Although the media generally reports at depth about JPM, it carefully avoids mentioning the breathtaking exposure it has taken on. The notional value of the derivatives portfolio at JPM is currently $25 trillion. Yes, that is right. $25 trillion. I need not remind you that our GDP is only $10 trillion.
Experts say that the risk of loss of anything like the full $25 trillion is minimal. But as a rule of thumb, 2% of the full notional value is realistically at risk. In JPM's case, that is about $500 billion. The stated net worth of JPM is about $40 billion, but after adjustments for intangibles, asset write-downs and bad loans, probably comes closer to $20 billion. In other words, the derivative risk is about 25 times JPM's net net worth.
JPM, being the second largest bank in our country, would massively affect our financial system should it fail.
Is it too big to fail? Perhaps the better question is where would the funds come from to keep it alive? We are about to undertake open-ended funding for an escalated war of unknown proportions. We are tapped out in this rapidly developing "bust" insofar as increased tax revenues go. And, given our current massive debt, at some point soon, our bonds will likely experience what Japan's did -- an auction that was not fully attended.
So how about a shotgun marriage? With whom? And who wants to take on the derivative exposure? Citigroup, the largest American bank, has big problems of its own, including a derivatives portfolio of about $9 trillion. Not exactly an ideal partner for JPM.
I would suggest this question for the Whitehouse:
"There have been some spectacular failures recently caused by derivatives. Barings and Long Term Capital Management come to mind. J P Morgan Chase is our second largest bank. Somehow it has taken on such risk in its derivatives portfolio that it takes one's breath away. The latest report to the Comptroller of the Currency states that JPM has a portfolio of derivatives with notional value of over $25 trillion. How could this happen?
Where were the bank regulators?"
To get a handle on what these strange creatures called derivatives are, I recommend Frank Partnoy's book, "F. I. A. S. C. O." which is available at Amazon. Mr. Partnoy was a derivatives banker at Morgan Stanley.
US banks, all members of the gold manipulation cartel, carry 69.4% of the $72 trillion derivatives that exist worldwide. JP Morgan Chase holds 35% or half of the $72 trillion.
Since July, gold shares have been moving back up relentlessly, yet they are trading at an average multiple of 1.92 times net asset value, which is still below the June peak of 2.5 times net asset value.
A breakout over $325 will bring the shares up to their June levels. Once $330 an ounce is breached they should run another 30-50% as gold approaches $350 an ounce. Both traders and speculators have been setting very large long positions. All that is needed now is a catalyst. The most obvious one is an invasion of Iraq. By way of example, Iraq invaded Kuwait on 8/2/90 and gold was trading in the vicinity of $345-$365 an ounce. By the end of September it was $410 an ounce. It traded between $370 and $410 until the middle of January 1991. Operation Desert Storm started 1/17/91 and was completed 2/28/91. During this final period gold declined from $390 to $358 an ounce. Now 12 years later we believe the outcome will be much different. Since 1995 the gold cartel, which includes producers such as Barrick, Placer Dome and AngloGold, major bullion banks and players such as JP Morgan Chase, Citicorp, Goldman Sachs, BofA, AIG and Deutsche Bank are heavily short gold. This was not the case in 1990-91. In addition JP Morgan Chase, Citibank and BofA have serious financial problems plus the producers are scrambling to cover their shorts. That means an Iraq war should finally bust gold out and send it to $512 an ounce. This should double the price or more of most gold and silver shares.
It should interest you that non-hedging mining companies such as *Agnico-Eagle and *Goldcorp are up 15% over the past three months and hedgers such as Anglo-Gold, Barrick and Placer Dome are off seven to 15%. Over the past year *Goldcorp was up 95% and *Agnico Eagle 75%. Anglo-Gold was up 34%, Barrick 10% and Placer Dome minus 2%.
We again turn your attention to the now 5% current account deficit, which should grow to 5.3 to 5.5% in 2003. Can we continue to attract over $1 billion a day from foreigners to pay for this deficit? We are not sure but probability tells us we cannot continue attracting that much inflow. An Iraq invasion could easily bring that about. Out latest figures are from June.
Foreign financial inflow is $1.66 billion a day. These are pretty imposing and frightening figures. If the flow does not continue interest rates are going up and the FED can do nothing to stop them. M&A inflows continue to drop as the market environment continues its deterioration. We do know that in September foreign investors dumped nearly $10 billion in US equities, the largest sales since 9/98 when we experienced the LTCM debacle and the Russian crisis. Total portfolio inflows were only $5.3 billion in September versus a monthly average of $44 billion over the first eight months of 2001. Recent inflows have been from Asia, which has been consistent and recently from Japan. In the final analysis we believe there will be a capital inflow crisis and when it comes it will be the catalyst that will bring recognized deflation and depression. The FED hasn’t solved any problems since 1981; they have just shifted them around. Disinflation has brought deflation, low interest rates and asset inflation. The FED is in a box. It’s game over. The Fed can’t deal with it because the only way to do so is to finally let the system purge itself. Sir Alan should look at Japan, which did the same things he has done. Japan still hasn’t entered full depression and they have already endured 13 years of agony. We must add to Sir Alan’s credit he did identify the bubble in late 1996, but didn’t do anything about it. Why, because his elitist masters wouldn’t allow him to. He had sold his soul for fame and it was payback time. His masters were not ready to end the party and now that the party is over he gets the blame. That is the price of fame. The situation at the ECB is just as bad. They can’t make a move without consulting the BIS, which answers only to Europe’s black nobility. As you can see this game makes Dungeons and Dragons look like child’s play.
The Russian government’s $4 billion plan to sell rough diamonds to DeBeers is being scrutinized by the European Commission as non-competitive and as a monopoly. The commission is probing whether the arrangement causes higher diamond prices and the answer is of course it does. If the DeBeers monopoly is broken, diamond prices will fall. After Botswana, Russia is the next largest diamond producer. The commission has already found that DeBeers, suppliers of choice agreements, breach EU antitrust laws, so we don’t know what they are waiting for.
HONG KONG, Sep 20, 2002 (ODJ Select via COMTEX) -- (Dow Jones)—The Chinese Gold & Silver Exchange Society plans to expand opening hours until 3:30 in the morning (1930 GMT a day earlier) and introduce electronic trading to boost the competitiveness of Hong Kong's gold market, the South China Morning Post reports.
Turnover on the exchange is up about 30% this year to about 200,000 taels a day as investors increasingly see gold as a safe-haven investment, boosting its price about 6.7% so far this year to about US$320 an ounce, the paper said.
DJ. INTERVIEW: Eagle Coin Sales Point To Soaring Silver Price
By Jim Hawe Of DOW JONES NEWSWIRES TOKYO (Dow Jones)--
With the popularity of U.S. silver Eagle coins soaring to record levels in August, it won't be long before the price of spot silver also takes flight, said one market analyst, as individual investors appear to be making a big move into this often overlooked commodity. According to statistics released by the U.S. Mint, sales of one-ounce silver Eagles exploded to 1,745,000 coins in August, more than double the average monthly sales for this year, which in themselves have been the best in 15 years. By comparison, sales in July came to 740,000 coins, while only 474,500 silver Eagles were minted last August.
Ted Butler, an independent commodities analyst based in Florida, feels that this sudden interest in silver Eagles points to bigger picture - namely renewed interest among individual investors in the silver market in general.
"Since I don't see a corresponding rush to all coins, like this rush to silver, I have to think it's silver specific," said Butler. Butler, who was a commodities futures traders for 15 years with both Merrill Lynch and Drexel Burnham, noted that silver Eagles, which usually outsell gold Eagles by a ratio of just under 5 to 1, have been outselling gold Eagles since the start of 2002 at a harried pace of close to 40 to 1.
"I think as more and more people recognize the specific advantages of silver there will be continued investor movement to silver-related items.
US Emerges A Major New Buyer
Butler said that one of the most compelling reasons for a move into silver is the improving supply and demand situation for this metal, especially now that the U.S. government has officially run out of silver. In July President George Bush signed legislation allowing the U.S. Mint to begin purchasing silver directly from the market for the first time in four decades because the nation's strategic stockpile of 730 million ounces recently has been depleted. Butler estimates that Uncle Sam may be in the market for some 15 million ounces of silver each year to cover its various coinage programs. This means that virtually overnight a new buyer has emerged accounting for roughly 1% to 2% of the world supply and 25% of all U.S. mine production.
In addition to the likely tightening of supply, Butler feels that silver's "super cheap price" also makes it an attractive investment option.
Spot silver was quoted at $4.645 an ounce Wednesday afternoon in Asia, down slightly from $4.65/oz overnight in New York and a far cry from its peak of around $50/oz in 1980 when the billionaire Hunt family of Texas attempted to corner the market.
While declining to give a specific price range, Butler said that he sees "shockingly higher" prices for silver in coming years. Butler's advice for investors is simple.
"Buy real silver on a fully-paid-for basis, put it in a safe place and forget about it. Go fishing or play with your kids."
*******
WORLD MARKETS
The credit derivatives market is expected to double this year to nearly $2 trillion and reach $4.8 trillion in 2004. Last year saw $1.189 trillion. London is the biggest center for credit derivatives, with a 50% market share. Most credit derivatives are now written on corporate assets, with this type of protection accounting for 60% of activity last year. Sovereign assets accounted for just 15% of derivatives in 2001, compared with 54% in 1996. Single-name credit default swaps accounted for 45% of the market.
German domestic final sales fell 1.9% year-on-year in the second quarter, worse than the low point in the 1993 recession. In Japan sales were 0.8% down from a year earlier, clearly both countries are suffering from different stages of deflation. Both Japan and Germany have lost control over real short-term interest rates. We believe interest rates in Germany should be 3% less than the rest of the euro zone. As you can see one rate cannot fit all. It’s an absolute absurdity. Japan lost control 10 years ago and their efforts to put off eventual depression have been futile. Japan has no way out. The euro is killing Germany. They have no currency to depreciate. It’s the same with interest rates. They are set by the ECB. Thus Germany can’t help itself and consequently they will soon slide into depression. Japan can’t stimulate its economy with any affect with their deficit at 140% of GDP, it is simply too high. Worse yet both countries suffer from a shrinking aging population for the next 40 years. The elderly don’t consume and they place a strain on pension systems. Both corporate sectors rely on bank lending to finance corporate activity, so big banks are in bed with big corporations. This stifles competition and innovation as well as a kind of discipline. That makes for a miniscule equity market. Germany’s unemployment is up 2.3% and Japan’s 3.3% while unemployment has fallen 1% in the rest of the OECD. Japan’s debt holders, after four years of deflation have no chance for inflation to reduce the real burden of their debt. Strangely enough with higher inflation and lower public debt, Germany’s government can run a bigger sustainable deficit than Japan. Both have had equity prices halve since 2000. Both countries have severe structural problems due to government interference and the existence of monopolies, which are always prevalent in socialist command economies. Japan, Germany and the world are headed into prolonged depression until free trade is ended, the system is purged and free enterprise is again given free reign.
CANADA
The composite leading index of economic activity rose 0.2% in August from July for its 13th consecutive increase.
EUROPE
Alcatel, the French telecommunications equipment maker will cut an additional 10,000 jobs or 12% of its workforce. Ciena Corp will lay off 450 employees or 17% of staff.
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