US MARKETS

Now that George W. Bush and the neocons have cut taxes for the wealthy and for corporate interests, their next mission is to destroy Social Security, this is the only safety net that may save some Americans from utter poverty and at the same time will further enrich Wall Street. Mr. Bush has declared the program unaffordable in 50 years and he says only privatization can save it. As we have said before every administration and Congress has looted Social Security since its inception, and the securities held in trust are worthless. This has always been a pay as you go system. This partial privatization of our old age benefits in exchange for giving up some future benefits, for a tax rebate and put into an investment account in order to save for retirement is a sham. Markets, as we all know, go down as well as go up, but our President fails to mention that. Ask those who were in the markets in the 1930s.

            Britain embarked on the same mission during the 1980s and the results have been terrible. The result is a call for higher taxes and a call for raising the retirement age, even though benefits are currently miniscule in the UK. The experiment with substituting private savings accounts for a portion of state benefits has been a failure. The costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn. Fees and charges can reduce lump sums by 30% upon retirement. In fact, in 2002, British insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system, something millions of Brits had already done. This is the kind of system George and the neocons want us to adopt - a guaranteed failure that will make Wall Street over $1 trillion. We call that robbery and fiscal expediency.

            When Baroness Margaret Thatcher rose to power in 1979, she like George W. Bush began dismantling much of what Conservatives called “the nanny state.” Citizens would no longer be shielded from market forces. They would have to stand on their own feet. Britain was to be an entrepreneurial state. Unfortunately, many did not have the brains or acumen to compete or to manage their funds and that is true of Americans. The Baroness and Nigel Lawson attacked retirement benefits first, just as Bush is doing. The plan implemented slowed the 1.5% to 2% growth in pension increases, which reduced the value of payout by 50% over 30 years and this is what Bush wants to do. The Thatcher government got away with this because the least generous government system was complemented by the most developed system of voluntary private fund pensions. The US does not have such systems and everyday they are being cut or terminated. As an aside, the main reason the Brits do not want to switch to the euro and join the EU pension scheme is because their private pension system is well funded and would be merged with the EU’s poorly funded government and personal pension schemes. From 1988 to 1993, $18 billion in rebates were made by the government pension system and that was invested privately for almost 5 million people. The bottom line was the government was spending much more than it was saving by bribing people to leave the system. Government then investigated personal pension clients of most large providers and discovered that a staggering percentage of pensions had been sold to those who would be worse off in retirement as a result. Over the next eight years, about 1.7 million people sought and received compensation due to fraud that cost the insurance industry $24 billion. You can expect the same to happen with US insurance and brokerage companies. In addition, hundreds of millions were paid out in fines and penalties. It was the biggest financial scandal ever and you can expect that to be repeated here and perhaps much worse.

            Britain’s next crisis is upon them - it is here. The UK occupational pension system shows 65,000 British workers have lost all or part of their pensions as a wave of insolvent employers are discovered to have left their pension schemes severely under funded. Many have been left destitute. This is exactly what is taking place in America. The Pension Benefit Guaranty Trust is in the hole for $23 billion and is headed toward $500 billion. As you can see, we are more socialist than England because we supply inadequately funded insurance, we have to pay 30% on the dollar and still go bust. The employers are the villains in both the UK and here. They stole the money. They should go to jail for a long time.  

            The result today is, in 2004 alone, 500,000 abandoned private pensions moved back into the state system. Just as many are expected to leave this year. The insurance industries have told private pension owners to opt out and rejoin the government system. In addition, of course, the elitist corporations, Chamber of Commerce etc. want taxes to be raised to cover their theft.

            The British blew it. We should learn from their mistakes. The insurance and brokerage only want the fees, they could care less if a retiree is broke or not. There is no question that it is cheaper for the government and the people to carry the risk. All that has to happen is that politicians stop looting the $250 billion paid yearly in Social Security taxes and it be put into tradable government securities. This would help government fund its debt, but they would have to reduce spending $250 billion a year. There is nothing wrong with our Social Security; a law must be passed to stop the looting of our retirement funds. There is no crisis except in the unbalanced mind of our President.

            Later in this issue, we will be giving you the most recent data on foreign fund inflows. The current account deficit of $60.3 billion in November was disastrous. The dollar fell and rightly so, but the Fed came to the rescue. It stopped the dollar’s fall and sent it right back up again. Back to foreign fund inflows. In October, foreigners bought a net $48.1 billion of stocks and bonds, the smallest monthly inflow since 10/03 and well below the $67.9 billion monthly average since then. For the 12-months ended October, the net inflow was $853.5 billion, which fortunately is $253.5 billion above our $600 billion current account deficit. In addition, their figures are estimates. There is not an $853.5 billion inflow, because the Treasury advises that these published numbers should be adjusted for stock swaps in mergers between American and foreign companies and for principal payments made on asset-backed derivative securities. When those adjustments are made, October slips 7.2%, to $44.6 billion, and the net inflow over the 12-months through October drops 6.6%, to $796.9 billion, not $853.5 billion. Thus, when the new foreign inflow figures hit this week, they will be very important.

            Shortly we will see a market retake of 1977. We believe we will see a market correction by year-end of 20%, which would be about 8,500 on the Dow. That is based on fundamentals. If we have some unusual jarring events we could easily see 7,286 again. If we are right and we see 7,286 to 8,500 in 2005, then in 2006 we will see 6,000 and 2007 see 4,000 to 4,500.

            In two thousand and five, growth should be 2-1/2% to 3%, oil prices averaging $45.00 a barrel, BLS inflation figures at 5%, up from 3.6%. Our figure will be 11%. Unemployment will reach an official 6-1/2%. Our figure is 14-1/2%. Commodity prices will move higher in the first half of the year and flatten out over the second half. The dollar presently is in a bear market rally assisted by central banks. Eighty on the dollar index will be tested and it could be broken to the downside. Once the dollar rally is over, gold will rise over $500 an ounce and perhaps as high as $850 and silver could move to $10 and perhaps $15 to $20 an ounce. That is because a dollar between 80 and 87 is of little help to the balance of payments deficit. Do not expect any improvement in personal savings with inflation, there are lagging wages and mountains of debt to liquidate. By mid-year we will see an inverted yield curve. That is when short-term rates are higher than long term rates. That will not last long in spite of intervention by the Fed and the Plunge Protection Team. Long rates have to rise to attract $2.4 billion a day from foreigners. By June, and at least by year-end, the US ten-year Treasury note will yield 6% and the 30-year mortgage will be over 7%. That means house prices will be headed down 5% to 15% dependent on location and degree of previous appreciation. The Fed increased M3 7.1% last year and bank loans were up 8.9% or over $1 trillion. You can expect bank loans to rise over 10%, and M3 12% to 15%. The floodgates will be opened again. This will nullify the 1-3/4% plus rise in interest rates, push up inflation and eventually force the dollar below 80 on the dollar index. The industrial base now at 13% of non-farm employment and down from 25% just 20 years ago will continue to shrink. Workers will move into lower paying jobs as they have been and those falling wages will drastically cut consumption. The very core and heart of America is being ripped out of our country by free trade, globalization and outsourcing. This loss of manufacturing capability makes it impossible for us to ever have a trade surplus again. The current account balance will be out of deficit and the dollar will depreciate until we erect protective trade barriers and tax transnational corporations who want to export goods and services into our country. The world economy is going to remain unbalanced indefinitely and that counterweight will be the USA. America cannot export its way out of this, so the only alternative to protective tariffs would be 20% interest rates, which we had in the early 1980s.  This again could bring the needed purge of the systems. There are no guarantees that the depression we would enter would solve the problem. It could this time lead to world war or a revolution within the USA. Unfortunately, now there is no way of avoiding these painful consequences. Both tariffs and higher interest rates would bring balance and a level playing field. We also ask when will private foreign investors stop buying dollar assets and how long can we expect foreign central banks to subsidize America’s profligate party? It does not really matter when we meet the moment-of-truth. The fact is that we will meet it. We believe that will happen late this year or early next year. Once the dollar breaks 80, the funding will end and all the bubbles will break. The current rise in interest rates have been measured, but many trade speculators are not listening. There is no chance of liquidity strangulation by the Fed. It will create monetary aggregates until the edifices collapse. Sir Alan Greenspan has told us that and that is the way it will be. Do not be deceived by a flat monetary base for five months. That can change overnight. If you do not believe us, look at the repo pool and bank lending. They all add up to the same thing, monetary expansion. If this recession/depression comes it will be a lollapalooza, the breaking up and out of forces that have been suppressed since 1990. This is an event that has been 15 years in the making and its beginnings began in the early 1960s. It is really 45 years of financial debauchery. That is why we started on the quest we have followed for 45 years. In those early years, we realized where we were headed and like today, nobody wanted to listen. Early 2005 will bring a loss of faith by corporate insiders and the experts. Many are about to have their faith in the American economy and the world economy shaken in a major way. They will start to realize what we knew long ago of what a trap we are in. A soft landing is impossible, totally out of the question. Please get out of debt, the market, real estate and dollar denominated bonds. Hold gold and silver coins, shares and bonds in euros, Swiss francs and German bunds.

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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

            In the first eight days of the year, Street Tracks Gold Trust added 47 tons to its gold holdings, or about half of the gold accumulated by the ETF between its launch and the end of 2004. The ETF added three times last year’s total sales of US Gold Eagle coins, or more than 1,500 tons on an annualized basis. That is, of course, if they are holding the gold. We have no way of telling because it cannot be audited, so we assume they are using derivatives. The ETF’s initial public offering never ends, so restrictions exist.