According to an internal Selective Service memo made public under the Freedom of Information Act, the agency’s director met with two of Defense Secretary Rumsfeld’s undersecretaries in February 2003, precisely to debate, discuss and ponder a return to the draft. It did not point to a general draft at that time, but of a possible draft of men and women with certain special skills such as, medical personnel, linguists, computer network engineers, etc. We may have a magnificent force but the Army and Marines are perilously over extended. Unfortunately, the volunteer foundation is beginning to crack. Half of our frontline fighting force is composed of “weekend warriors” from the Reserve and National Guard of which 100,000 enlistments have been involuntarily extended. Young reserve officers and enlisted men are retiring in droves. In order to get reenlistments they are offering anyone $30,000 to reenlist. Our military is maxed out in a war and occupation that has dragged on for two years. We are called conspiracy mongers because we report the truth. The elitists will supply us with another event and we will have a draft to meet the needs of our Middle East quagmire or to staff our internal Gestapo Fatherland Security. Men and women 18 to 34 are being lined up as future cannon fodder. The military does not only need specialists, they also need pure man and womanpower. The draft will have no exemptions and will include men and women. They will decide what skills they need and draft those with those skills. More than 60% of Americans are against the war in Iraq. Only 20% of Americans favor forced military service. A draft would create an anti-war movement whereas a volunteer military does not engender such a response. The National Guard is giving a $10,000 enlistment bonus. Our President has even signed an executive order allowing legal and illegal aliens to apply for citizenship immediately, rather than wait five years if they volunteer for active duty. The Guard missed recruitment goals by 5,000 in 2004 and they are short 2,000 thus far in 2005. They have exercised stop loss and say they can demand service until 2031. What they are saying is reenlist or we will screw you anyway. This attitude makes recruitment next to impossible and expedites a draft. At the rate the Pentagon is going, we could end up with a mutiny. No matter how you cut it, if we do not withdraw from Iraq we have to have a draft.
As we told you last week, little had changed except overall things were worse. That is why at $410 to $414 gold and at $127.5 on the euro that the correction has run its course. We were correct. The Dow was up 1% last week on generally lousy news. The AP/ISOS poll consumer confidence was a disaster. Our President wants to destroy Social Security. He lies about reducing the budget deficit and the state of the war. Spending is increasing not falling. The thing that will fall in 2005 is corporate earnings as inflation rises. A $66 billion increase in M3 in just three weeks is very large as bank and real estate lending goes bananas. Foreigners and foreign central banks continue to cut back on purchasing US assets. When will they start selling? We even have to ask the Europeans not to raise interest rates to buy Treasury paper and support the dollar. The Chinese are being extorted to revalue the yen or we will hit them with 27.5% tariffs. These are not good omens as we approach the “ides of March.” It is not good and could get lots worse. Our government has no solutions. All they and the Fed do is spend and create liquidity in a world awash in debt and liquidity. The UK and Australia have inverted yield curves, which portend inflation and recession. We are only 0.78% away. Short rates are rising and long rates have been falling. Over the past 18 months, the spread between two and ten year yields have relentlessly been closing. The platitudes of the administration and the Fed are starting to fall on deaf ears and before the year is out things will be a lot more difficult. We expect soon that gold and silver will return to test their recent highs and move higher. The game is only getting underway.
Wal-Mart will pay a $135,540 fine to settle federal charges that it used 24 children in Connecticut, Arkansas and New Hampshire, who operated 18 dangerous machines. Our interpretation is slave labor. In 3/2000, Wal-Mart was fined $205,650 for using child labor in Maine.
Goldman Sachs, an elitist firm tells us Asian central banks will probably reduce the amount of dollars they hold as foreign exchange reserves. This will be a negative factor for the dollar. They will probably shift 1/3 of dollar holdings into euros and yen. Goldman expects the euro to end the year at $1.40 and the yen at 95. This would put the dollar index below 80. Goldman does about 4.5% of the $1.9 trillion-a-day foreign exchange trades. Fewer US Treasury purchases by Asian banks would put upward pressure on US interest rates. These moves by central banks should cause a loss of confidence and perception that will drive US rates higher as well. Officially, the dollar bonds returned 3.5% last year. We saw it as a minus 6%. Unless there is war, we would expect the yen and yuan to be protected by their governments.
Another bonanza is being cooked up by the health industry. Some medical experts are recommending that virtually all Americans be tested routinely for the AIDS virus. They say this would reduce new infections and give the patients drug cocktails early, when they work best. A test each year would cut rates more than 20% and every infected patient identified would gain an average of 18 months of life. Nationally, about 40,000 people are infected each year. About 950,000 people are infected, but 30% do not know they are infected.
Handing Mr. Bush another legislative victory, the Senate overwhelmingly approved a measure that would sharply limit the ability of people to file class-action lawsuits against companies. Adopted 72 to 26 it now goes to the House. The measure would prohibit state courts from hearing many kinds of cases they now consider, transferring them to federal courts. The measure would affect pending cases. The measure has been attacked by civil rights organizations, labor groups, consumer organizations, many state prosecutors and environmental groups, who say it, will sharply curtail cases and provide new protections for unscrupulous companies. Many federal and state judges have criticized the bill, saying it would strip states of an important role in judging such contest and it will add a considerable number of cases to already overburdened federal dockets.
One hundred eighty-two billion dollars was removed from Social Security last year, which means the real debt was $609 billion not $427 billion. It should also be noted that China bought $200 billion in US Treasuries last year, which means they funded almost 50% of the US budget deficit. The minute China, and for that matter Japan, stop buying, the Fed will have to buy the government debt - those Treasury notes will cause immediate monetization, higher inflation and higher interest rates. The Fed, the Federal Reserve banks and the commercial banks are the buyers of last resort. The recession that follows will affect the entire world, as will the collapse of the dollar. Japan has effectively stopped buying Treasury paper since 3/04. China is the buyer of last resort.
We could be witnessing 1994 all over again. In 1994, we projected an 8-3/8% 30-year bond. We hit the nail on the head and our prediction of bonds getting killed was right on. That was accompanied by a ten-year note yield of 7.75%. Back then Sir Alan Greenspan was raising rates in the face of inflationary pressures but as he did that, he also drove Fed credit and reserves up by double-digit amounts. We believe he will do the same thing again. If we are correct, long-term rates will move higher ahead of short-term rates. That has been the way it has been since 1950. The best comparison we have is between now and the 1930s. That is if we have a higher curve. We have now, as then, a corporate predisposition to hold cash and eschew capex and hiring. We have three added factors today, colossal debt far beyond anything experienced in the 1930s; outsourcing, which is something that did not exist in the 1930s and which happens to be deflationary and a collapsing dollar. The dollar was under pressure in the 1930s and that is why FDR illegally confiscated gold. He was paying off America’s debts. The markets still believe the Greenspan put is still in operation. He is phasing it out and he has told the professionals just that. Unwind those carry trades. We can expect interest rates at least another 1% higher this year and at the same time see M3 rising over 10-12%. The higher rates are needed to protect the dollar and keep it from breaking 80 on the dollar index and the increase in aggregates will be needed to stop a consumer debt contraction. If they do not do both simultaneously, yes and one offsets the effect of the other, and delays facing the problem then we will have debt contraction and recession/depression. Thus, in spite of higher rates we will have higher inflation via more excess liquidity, only this time we will not get a repeat of 1995-6 because the economy is already over extended beyond what can be controlled. Needless to say, gold and silver will move higher. Sir Alan leaves the Fed in 2/06, after that the deluge.
It is the opinion of the United Nations that even though the US Senate has not ratified the Kyoto Treaty it is binding on the US since it is the will of the world body. The UN, regardless of non-ratification, believes the Treaty is in force. If the US government agrees to this, it is treason as explained under the Constitution.
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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
A subscriber says, “It would only seem fair and humanitarian that the IMF would transfer the gold arbitrage to the poorer countries along with the gold by selling it at the official price of $42.22 an ounce in exchange for their own national fiat currencies. Why should the IMF pocket the free market proceeds, shave a slice for themselves and give the crumbs to the poor? Whether the gold ends up in the bank of a tyrant or not, it’s going to go there whether in cash or gold anyways, so it will just be a transfer of gold from a cartel of tyrants to individual ones.”
Answer: The case as stated by Gordon Brown was sale or partial sale or revaluation of gold held by the IMF. That procedure needs 85% approval by members of which 17% of the vote is held by the US, and it would have to be approved by the US Congress. The gold was denoted by the citizens of the participating countries so it is not the IMFs to sell without approval. Rather than sale, revaluation would be simpler and less damaging to the gold market. That would allow, via bookkeeping entries, the IMF to write off all the debt. If you give the cash to the poorer countries, it will be stolen or spent. If kept by the IMF it would give them great lending power. If sales were spaced properly, many would participate. On the other hand, Britain or the bullion banks in London may want to purchase the gold because they are short and central banks have little or no gold left to lend or sell, or perhaps some central banks are calling for leased gold to be returned. We believe the latter is so. If it is not the case, the move by Britain was an effort to suppress gold prices during the most important G7 meeting since 1986.
Morgan Stanley says revaluation of IMF gold is plausible, but they see a sale or revaluation as unlikely. They do not see the IMF getting agreement from Canada and South Africa, which in the past has opposed such sales. It would also be very difficult to get 85% of the IMF vote for changes and especially when both US houses would have to approve the measure. A revaluation they say would have little effect on the market. In a sale, theoretically, the gold price could decline, but in the past, this has not happened. Between 1976 and 1980, the IMF sold 23.5 million of its gold in a series of pre announced auctions and gold prices moved higher.
We believe, as in 1999, any vote to allow the sale of IMF gold to relieve debt would meet with failure in the US Congress. The Congress knows that the IMF can write off poor company debt because they have large loan loss reserves already in place, some $2.9 billion in the General Department and in the ESAF, the Enhanced Structural Adjustment Facility, they have another $2.8 billion plus 30% of all money owed to this facility was actually grants so you can add another $1.5 billion. That is $7.2 billion and those are 1999 figures, which means the total is probably much higher today. Via the IMF’s NAB facility, New Arrangement to Borrow, they can take out $51 billion anytime they want. US taxpayers own the highest portion of IMF gold so our Congress will have the last say on any sale. They will get to voice their objections to the miserable performance of IMF loans in the past and they will bring into focus the obscurity of IMF financial statements. Our Congress and the American people realize that paper is fiat and gold is real money. They know the gold market, nor any market, should not be manipulated and that is what this is really all about. There will be no gold revaluation or sales. This was just another blatant attempt to manipulate gold prices.
Merrill Lynch Management and Resource Team, which manages $6 billion sees the outlook for gold in 2005 brighter than last year. They say, “We are definitely in a bull market for gold at the moment.” Jewelry demand in the fourth quarter in spite of higher prices was quite strong. In addition, as we predicted, investment demand has remained strong. Merrill believes the dollar will weaken and that gold will rise as a result.
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International Forecaster February, 2005 (#3) - Gold, Silver, Economy + More
