US MARKETS

We find that Federal Reserve monetary policy works by inciting changes in financial asset prices. Speculative trading is at the heart of their system and its liquidity, and balance and stability are maintained only as long as the Fed keeps leveraging. That is via the stock market and real estate. Those wealth factors keep America happy. Any sane person knows that your house cannot be an ATM machine forever. You cannot forget that leverage works both ways. Once leverage comes to an end, we have deflation. It should not and never has been heretofore the place of the government or the private Federal Reserve to accommodate massive debt. This is risk the average household does not understand and should not undertake.  This is not creating financial and economic stability. In fact, it is just the opposite. The leveraging of today’s US housing market is going to be one of the colossal financial blunders of all time. The system has to be purged and that very serious structural adjustment is the only thing that can return our financial system back to stability. You cannot keep a system afloat by enticing foreign investors solely to keep their currencies from appreciating against our dollar. Who knows when the foreigners will cease accommodating our debt. This is being played out by the value of the dollar. It sinks as debt rises and accommodation wanes. That is why the Fed has to raise interest rates at least 1-3/4% this year. They are giving these lenders better odds on the pass line to keep them in the game. The system of debt and inflow funding has made it difficult to determine what are prudent and sound investments. We have spun forward into financial unreality. The bubbles continue with no necessary adjustments in sight. Credit expansion recklessly stampedes forward, as the BLS, Bureau of Labor Statistics, accommodates the Fed by producing bogus figures. Sir Alan Greenspan is treating the symptoms not the disease. He does that not only via M3, but also via the repo pool and credit expansion. This leaves the investor in US Treasury paper with net losses of over 5% each time they purchase a ten-year note. For foreigners this is a cost of doing business. If you add in the currency depreciation of the dollar over the past 2-1/2 years, you add on an additional 30%. Those are not acceptable losses.  That is why 80 on the dollar index is vitally important; once 80 is broken its free fall to 70 and another 35% correction. We do not believe dollar asset holders will want to accept 65% losses and thus will abandon ship.

            This is all gambling plain and simple. The financial affairs of our government and households are not supposed to function that way. Markets are going to fall and destabilization is on its way. Excesses are about to be accounted for. The stampede begins slowly with a little distress, which gives into fear and dissatisfaction. Bonds, stocks and real estate begin to fall in value and commodities; gold and silver, become the only safe haven in the storm. If nothing else, they will win by default. The world is about to rediscover that the only real money is gold.

            From 2000 to mid-2004, credit grew $2.4 trillion a year. That is three times as fast as ten years earlier. It is like being on an accelerator that picks up speed every minute. Eventually it is going so fast you cannot get off. Something snaps and the escalator crashes and disintegrates. Credit expansion has to inherently go forward at a faster rate because if it does not it spirals into recession and depression.

            As the world’s reserve currency when the dollar falls all other nations are injured in varying degrees. About 70% of foreign central banks’ reserves are in dollars. Thus, if over a five-year period the dollar falls 65%, the value of the reserves of foreign central banks fall commensurately. That also applies to global businesses, which hold large amounts of dollars. It means as well that when America enters recession so will everyone else. The increase in interest rates we envision this year to protect the dollar value and a reduction in credit expansion will begin a long delayed recession. That will bring about a major contraction in world trade and the world will share our misfortune. We will see currency blocking and controls and finally a breakdown in free trade and globalization. That would leave barter as the system for trading goods.

            This is part of the reason we are now at war and foreign occupation. We predicted five years ago that war would create a cover for economic failure. The product of this adventuristic solution is more staggering debt, which compounds the financial problems. These wars will come to an end once the dollar index breaks 80, because that $2.4 billion in foreign inflow will cease. Our elitist leadership is simply going for broke, because there is no other way out. That is why we have the Patriot Act because they will need it to control Americans.

            When you pencil in all the debt commitments, you will find the US is on the hook for $82 trillion. That is over 800% of GDP. There is absolutely no question of the eventuality of bankruptcy. Our President told us Afghanistan and Iraq would cost us $50 billion and we are already at $162 billion. That number would double if we began to extricate ourselves tomorrow. Many nations want us out of these Middle East wars. If they were serious about that, all they would have to do is stop our $2.4 billion a day in funding. We have been led into a quagmire by George and the neocons. They do not have the finances and manpower to continue the war. They have lost control of Iraq to the insurgents. There are few additional troops to be sent and a draft would take six months lead-time to send additional trained forces. If the US-UK withdraws, it will be a strategic debacle not only on the field in Iraq but also back home in America.  Eighty-five percent of Americans do not have a clue as to the terrible position our country has been put into. When they discover the blunders, the political reaction will be explosive. Then wait until they discover the country is financially out of control.

            We will view with great interest the next huge quarterly Treasury debt-refunding auction on February 8-10, which follows the FOMC meeting on February 1-2. The Japanese have been sellers and the Chinese recently have stopped buying. The Treasury has to raise $157 billion. What used to be a 45% foreign absorption is down to 9.6%. That is why we believe there is an excellent chance of a 1/2% increase in Fed rates from 2-1/4% to 2-3/4%. What better way to attract foreign funds and show foreigners the US is serious about protecting the dollar.  In addition, it will make them feel good. They hold $9 trillion in US paper assets. That is 43% of US Treasuries, 12% of US stocks and 25% of corporate bonds. Maybe they will forget the $1 trillion in losses they have taken over the past three years by being in dollar denominated assets. What no one wants to talk about is climbing interest rates mean slowing economies all over the world. Japan has GDP growth of 0.2%. It will only take a slight push to see it settle back into depression. This is the flip side. The problems engendered in higher rates and curtailed credit expansions are global. These lenders are well aware of both sides of the equation and they are well aware that the US trade deficit is running at $665 billion a year or 6% of GDP.

            They also know the real budget deficit is $630 billion. If Japan stays away, along with China and other Asian central banks, and others are small buyers, the US could lose in excess of 10% of their foreign buyers. If the other central banks did not increase their off take, the Fed would have to buy the debt monetizing it, which is highly inflationary.

            Finally, George W. Bush has lost his credibility with a large sector of the Republican Party. As we said, we believe the Social Security partial privatization and other changes are dead on arrival. The immigration issue will suffer the same fate eventually. A good portion of both parties do not want to be associated with Bush in any way due to the disaster that Iraq has become. Besides, these elected representatives are already getting ready for the next election and they do not want to be tied to a lame duck. In addition, backing Bush is very dangerous to the Republicans because the lunatic may attack Syria, Iran, or both. An attack on Iran could easily bring a world nuclear war. Another possibility is that the elitist will need a scapegoat as negative world opinion builds and it may be that his own handlers may have him assassinated.  The next four months will tell the tale as to where Mr. Bush, the Republicans and America are headed. We can assure you that the Republicans are well aware Mr. Bush’s approval rating of 48 is 10% to 20% below that of every previous setting President at this stage of his second term and 56% of respondents do not believe the Iraq war is worth fighting. They are also aware the dollar index is about to test 80 something, which it has not done since 1972, just before the Bretton Woods Agreement collapsed. This is when we lifted gold backing for the dollar and started to dump our debt and inflation on the rest of the world.

Our Reserves and National Guard have been told they can now be called up for 24-month tours indefinitely in what we will call a reserve draft. As we have explained before, we need at least 100,000 more troops in Iraq and we may need as many as 500,000.  Mr. Bush intends to stay in Iraq for the duration of his term, so we have to believe there will be a selective service draft.  Irrespective of what Mr. Bush wants, no one else in the world, save England, wants US forces in the Middle East indefinitely as the guardian of its oil. Allied forces are already outnumbered if the Shiites rose up against the Sunni’s or the US; the anti-terrorism forces would really have their hands full.  The US is already facing 200,000 full and part-time insurgents and if the Shiites joined in, they would be looking at an additional 400,000. Bush does not have the manpower to win and he cannot retreat or will not retreat, so we have endless warfare, death, destruction and financial drain. That is because he and the elitists he represents believe they have an unchallengeable moral and political right to rule the world by force.

Seymour Hersh, Pulitzer Prize winning reporter, sees George Bush’s endeavors messianic. George feels victorious in what he is doing, and he is committed and believes he is doing the right thing. He is going to continue to do what he is doing in Iraq and expand it if he can. Hersh thinks that the number of body bags that come back will make no difference to him because he sees it as a price he has to pay to put America where he thinks it should be. He has purged the intelligence section of the CIA and neutralized the agency. We are now going to replace Saddam Hussein, with a Saddam-lite, by the name of Allawi, who was a member of Mukabarat, Saddam’s secret police. Hersh says it is Bush’s intentions to bomb Iraq into the Stone Age irrespective of the loss of life. We are all going to have to pay for the Bush’s neocons and elitists - pay for what they have done. We are going to see our dollar and economy crushed. We will no longer have the world’s reserve currency; we cannot be trusted to have it anymore. Oil will begin trading in euros. What the Bushes and the elitists have done to us is horrible and the damage will go on for years to come.