Train Wreck of the Week
By Bob Chapman
March 3 2007
The nation’s manufacturing sector, or what is left of it, slipped into recession over the past year, but our media, Wall Street, our government and corporate America somehow didn’t notice it. Now we are told, after multiple revisions, that GDP growth in the third quarter of 2006 was 3% and in the fourth quarter 2.2%. The later only two weeks ago was revised from 2.6%, up to 3.5%. Obviously the government is either hopelessly incompetent or was lying. We defer to the latter. Our Commerce Department tells us orders for durable goods, like computers, vehicles, aircraft and factory machines, plunged almost 8%.
These factors add fuel to the fire as markets in Europe and Japan fell as the Chinese stock market plummeted some 10%. US markets fell 3 to 4 percent, the worst fall since 2003. This is significant because with all their funds the “Working Group on Financial Markets” could not arrest the downward tidal wave even with the help of the Fed, although they found time and money to again viciously attack gold and silver. Of course, the market problems were the result of a computer glitch and if you believe that we have a bridge for sale you should take a look at.
We are in a recession, a real recession and not only manufacturing is telling us that, but so are the credit and housing markets. We have been in recession for a year and few professionals and investors know it yet. Can they be that dumb? We do not think so. They are in denial. They do not want their money feast to end.
The housing problems are approaching a crisis that will play itself out over the next 2-1/2 years as we predicted so long ago. The economy is facing major risks and most people are oblivious to them or in denial. This is human nature and it is natural, but it does nothing to make the problem go away.
The Iraqi government draft of a new Iraqi oil law puts decisions on oil under the “Federal Oil and Gas Council” whose panel of experts will come from inside and outside Iraq. They will be predominately from UK and US big oil executives. The law is nothing less than institutionalized rape and pillaging of Iraq’s oil wealth, which was one of the main reasons for invasion and occupation. Nationalization will end and production-sharing agreements will be forged. PSAs, which is the latest form of privatization, will produce 75% profits for the US and UK oil industries. Incidentally, this is what is now being cooked up in Mexico to steal their oil as well. In Iraq, 65 of 80 oil fields go up for bid and we can assure you most of them will end up in elitist hands. The law was really drafted by a US consulting firm hired by the neocons. Involved was the IMF, Paul Wolfowitz and US AID. It’s an American law written in English, not Arabic. This oil costs $1.00 a barrel to extract. What the elitists have done is sanctify the theft of the oil.
Tuesday’s stock collapse is a strong indication that the four-year bear market rally arranged and managed by the Treasury and the Fed is over. The US economy has faltered for a year and few wanted to recognize it. The self-reinforcing asset inflation spiral is changing. Lower equity/asset prices will produce stress on earnings, consumption and debt, which will force liquidation of assets and institutes a negative spiral. Significant busts occur in March and April. In 1929, the first three days of March produced a 5% decline. A rally followed and by month’s end stocks had fallen 12%.
In 1987, stocks fell 8% in April and after an early May rally stocks declined to a 10% springtime loss.
In 2000, stocks collapsed in March, led by OTC stocks. They bottomed in April then rallied to September 1st. Then the real decline began just like it did in 1929 and 1987. 1973 also saw the same action, which was worse than 1987.
The present decline will last into April. Then there will be a brief summer rally and in September-October the bottom will fall out.
Just reflect back to the Chicago PMI as it started to fall in the second quarter of 2005, and collapsed in the fourth quarter of 2006. Now housing as we predicted has collapsed. Debt and income disparity are at records and a massive subprime lending problem is shaking the market causing a contraction in credit as the yen carry trade starts to dry up liquidity.
You will continue to hear more via the media that the economy remains healthy in coming weeks, especially from the propaganda circus known as CNBC. Denial, lies and mitigation always occurs after the first significant stock decline; but this bear market rally is very long in the tooth-historically very old. Even though there is overwhelming evidence of excessive speculation and an ebbing or falling economy, most investors and traders, due to operant conditioning, will remain bullish and complacent as they lose lots of money. Volatility has exploded on Tuesday and the VIX jumped 36% at its high. The yen rallied sharply as the bankers and hedge funds unwound the carry trade. Quality spreads increased. Credit derivative swaps jumped to their highest levels in 18 months. You can be sure everyone is on notice. The percentage fall in the indexes is not profound. But, they are missing the colossal point. In this highly levered world, this unremarkable decline produced record NYSE volume, a supposed, computer/trading malfunction, a record jump in the VIX and disturbances in derivatives and other financial instruments. We ask, what would result if a significant decline materializes? Tuesday was the first warning shot. Thursday should see a further decline after a dead cat rally bounce of 52 Dow points, due to margin calls and deliveries. What is tragic is the Ben Bernanke met the Senate again and told us everything was just fine. So much for truth, either that or he is delusional. Now we will see how the Fed handles the fall. NY Fed President, Tim Gaithner, is to speak on the financial system on Wednesday. We will update you.
Wal-Mart isn’t saving much from using wireless technology, RFID chips; to manage its supply chain as has been expected. It has kept the shelves filled. RFID integration into the existing distribution system isn’t easy or cheap and that is why some suppliers are reluctant to invest a lot of money into the system unless it saves money.
Chrysler will offer all 49,000 hourly workers in the US, up to $100,000 to leave the company as part of a recovery plan. The company lost $1.475 billion in 2006. Chrysler will try to reduce production by 400,000 vehicles a year. Of the production cuts, 2,000 are in Canada and 9,000 in the US, and will be spread over three years. This is an early retirement program, workers must have 30 years with the company or be at least 60 years old and have at least ten years service, or be at least 55 and their age and service must total 85 or more. Eleven US plants will be downsized and the Delaware plant shuttered.
The share of loans on which payments were at least 30-days overdue rose to 2.11%, the highest since the fourth quarter of 2002, from 1.72% the previous three months. This deterioration in credit quality comes in a period of sustained gains in employment and income so the Fed tells us. The employment figures are a lie and rising wages have helped to a limited degree. They are being offset by higher energy costs, so a great deal of the wage gain is being lost at the pump so to speak. Gasoline as we predicted rose in two weeks from $2.22 to $2.35. It should come close to $2.45 to $2.50 shortly. There is economic stress otherwise we wouldn’t have such high personal debt and yes, the last four years of bad loans are coming home to roast no matter what mortgage rates are. Many loans won’t be even offered for reset and many won’t be able to make the payment anyway. We see 1/3rd being unable to meet their payments and maybe as many as 50%. That is $800 billion to $1.35 trillion in bad loans over the next two years.
Subprime delinquencies rose to 12.6% in the third quarter from 11.7% in the second quarter. That has put 24 large lenders out of business plus the smaller ones we don’t hear about and there are plenty of them.
An index of credit-default swaps on 20 securities rated BBB that was created in the second half of 2006 fell 6.3% on Tuesday to 63. The ABX-HE-BBB-07-1 Index has fallen by more than 1/3rd since trading started on January 18, 2007. We warned of all this four years ago.
Investors are concerned rising delinquencies on the riskiest mortgages in the US will spread to other parts of the home loan market. We predicted the subprime disaster and it will spread throughout the entire system over the next two years. We are seeing re-pricing of risky assets and that will move all of the way up the food chain. This will cause a natural contraction of credit exacerbating the downswing in the US and world economy. This comes as funds flow from the yen carry trade diminishes. That means major central banks will have to ratchet up M3 from 14% to 20% if they hope to keep the system from collapsing. In the meantime, gold and silver related assets will continue to rise.
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