Steve Quayle News Alerts

January 25, 2003
Robert Chapman, Editor

US MARKETS

We are sure you didn’t notice, because the media never carried it, Defense Secretary Rumsfeld in January announced a reorganization of the US Special Forces Command, which will “plan and execute missions in support of the global war on terror.” In addition says Mr. Rumsfeld, “the global nature of the war, the nature of the enemy and the need for fast, efficient operations in hunting down and rooting out terrorist networks around the world have all contributed to the need for an expanded role for special operations forces.” This is an effort to recreate the Vietnam-era Phoenix assassination program run by the CIA, which indiscriminately killed more than 8,000 suspected communist sympathizers in 1970 alone. Now we’ll have a sanctioned international Murder, Incorporated. That, of course, makes it okay. The plan and approach has been opposed by the Joint Chiefs of Staff, which says it turns military personnel into hunter-killer teams. Those behind the program with Rumsfeld are Mrs. Wolfowitz, Feith and Luti. William J. Luti, who runs the Office of Special Plans, is the center of some of the most aggressive strategizing taking place in the Pentagon today. This cabal sees everybody not 100% with them as 100% against them. This is supposed to be a democratic republic not a government of secret agencies and assassins.

UPI says Israel is embarking upon a more aggressive approach to the war on terror that will include staging targeted killings in the US and other friendly countries. Our government is mad to allow this. Ariel Sharon has to be crazy. For every so-called terrorist the Israeli’s kill, the terrorists have millions of unarmed, unprotected Jews they can slaughter. This is absolute madness. American Jews should contact Mr. Sharon immediately and stop him. When the FBI was questioned they said, “This is a policy matter. We only enforce federal laws.” Israel has been killing people in foreign countries for years. If they start doing so in the US the death toll could be unacceptable.

Do as I say, not as I do. The Fed says things will be fine as Sir Alan and other Fed representatives make speeches throughout our land. However, if you read what is stated in the beige book and minutes of Fed meetings you get an entirely different perspective.

For some time the Fed has barely increased the money supply, which is unexpected. If they continue this policy of non-expansion then they will accomplish what they were responsible for in the early 1930s and that is strangling the economy. Perhaps it’s their intention to do that. Perhaps it’s time to take the pain of depression. This could be temporary, who knows. If they are going to add to aggregates they had better do it soon or they’ll lose control. Aggregates in January were virtually unchanged. Let’s see what February brings?

The fiscal deficits in the states will rise from a projected $85 billion this year to about $125 billion. The plight of these states is far worse then stated. That means more unemployment and higher taxes soon.

The markets are telling us a very disconcerting story. Aggregate manufacturing hours have fallen 14.8% from the July 2000 level, yet hourly earnings have risen 7.1%. Wages in the service sector are up 9.6%. Higher unemployment and simultaneously higher wages do not lead to business expansion and higher consumption. In spite of higher wages, if consumption begins to fall, as it is currently, business overproduces, which results in higher inventories and loss of pricing power, which results in lower earnings or perhaps bankruptcy. Repayment of debt and bankruptcy diverts resources away from any possible reproductive case. Smart money has been avoiding financial loss by selling the market as we did in April 2002, going short, using the Prudent Bear and Safe Harbor Fund via Rich Radez at 800-285-1700 and most important of all, being long gold and gold shares. Gold is up 30%; the stocks are up hundreds to thousands percent. You can’t be an entrepreneur in a deflationary or depression environment. Get out of debt and plan for a very difficult time ahead.

The DEA is going crazy trying to stop drug smugglers. They are shipping clothing impregnated with liquid heroin that can be extracted once the clothing arrives. Fifty percent of the drugs seized in Newark last year were shipped this way.

The total size of the TIPS market, Treasury Deflation Protective Securities, is about $170 billion and large institutional investors are now getting involved, which should further increase demand for these bonds. TIPS are cheap compared to conventional Treasuries. Presently TIPS are under priced versus the 10-year Treasury note by 1.6%. We still like 90-day paper, but for those with a longer investment horizon TIPS should be added to your portfolio. Both can be purchased from your banker or broker at no cost.

America is struggling desperately to follow Japan down the deflationary path to depression. We have already seen the stock market bubble collapse with losses of $8 trillion and we anxiously wait to see what bubble bursts next. A likely suspect is the housing market, which has appreciated for 40 years and is now at astronomical heights. Then there is the debt bomb, which consists of borrowings of business, households and governments, which has grown from $4 trillion in 1980 to $31 plus trillion today. Credit market debt now equals 295% of GDP versus 160% in 1980. Debt as a percentage of GDP exceeds the previous record reading of 264% during the Great Depression. Pressure started to build last fall as borrowing moderated somewhat. That’s understandable as credit-card charge-offs of bad loans exceeded 7% of total debt outstanding versus the previous peak of 5% in mid-1990. Personal bankruptcy filings in last year’s third quarter jumped 12% from 2001. When the final tally is in for 2002 it will exceed 2001’s 1.43 million. Mortgage delinquencies are soaring and sub-prime delinquencies are up to 8.07% from 4.50% in 1999. That market is 10% of the $5.8 trillion mortgage market. FHA loans, which make up 15% of the dollar amount of US mortgage debt are at a 30-year high of 11.8%. These are sub-prime loans. Making financial matters worse, net worth at the end of the third quarter had fallen to 4.9 times disposable income, about 22% below the 6.3% at the end of 1999. Defaults in the junk bond market, which makes up 15% of the $5 trillion non-financial corporate-debt market, have abated somewhat since last fall, but that’s only a breather. The worst is yet to come. Eighty-eight percent of recent credit actions were downgrades, worse than the 86% of 1990. Individuals, businesses and governments are virtually stuck with the debt they have and as deflation sets in that debt will be more difficult and costly to pay back. Thus far, an over $4 trillion infusion since April 2000 hasn’t worked. All it has done is fend off the inevitable; more of the same isn’t going to work either. The Fed has been a disaster for the American people since its creation in 1913 by a cabal of elitists to serve their own private ends. Gross over-indebtedness always leads to economic crashes. The Fed knows that, but they do it over and over again in order to enrich their private owners. Now not even a 1.25% Fed rate can stimulate the economy. The dollar is falling, but so what. It isn’t going to really help the economy. We don’t export enough anymore for it to make a difference. NAFTA, WTO and free trade have seen to that. All a cheaper dollar will bring is short-term inflation. They have learned absolutely nothing from Japan’s recent experience, which is starring them right in the face. We are going to follow Japan into debt implosion. Japan has experienced four years of falling prices, Germany is about to join them and we are next. This is what corrupt monetary and fiscal financial policy brings. This is what free trade brings. This is what is bringing the country and the world into chaos. If the elitists had their way China would produce everything and the only one who would make money would be them. The debt level and the systemic corruption of the monetary and financial systems make recovery out of the question until the depression is over. Government debt gets larger and larger, as do tax cuts, as revenue to governments grows smaller. Defaults flourish as a staggering 18.4% of all speculative-grade debt went into default for the 12 months ended 8/31/02. Corporate revenues, which service debt, have fallen to 113% of corporate debt levels, the second worst reading in debt-repayment capacity since the Great Depression. The figure should be 130-145%. You and I both know what’s going to finally take this edifice down and that’s the real estate market. The debt bomb will explode or perhaps implode. It is absolutely inevitable. Home loans account for $5.8 trillion, or nearly 70% of the $8.2 trillion in household debt. Consumers have sucked wave after wave of equity out of the rising values of their homes. In just the past two years, homeowners have taken out $2.5 trillion. In addition, home equity loans are at $800 billion. Americans’ equity in their homes has dropped to 57%, down from 85% just 50 years ago. About 39% of homes are owned free and clear and the remaining homeowners have debt burdens exceeding 80% of the value of their homes. There is little margin for safety and a fall of 20% in value would have owners walking away from their homes. Our Wall Street elitists, government and CNBC along with Sir Alan tell us all is well. That is what they have been telling us about the stock market for 34 months and all of them have been dead wrong. When is the public’s denial going to crack? We don’t know but we do know it will crack. You may find our prognosis austere, but may we remind you, we have been correct on 98% of our recommendations. We are part of only 1.8% of all letter writers, strategists, analysts and economists who have been right. You decide who you’ll put your money on.

Junk bond holders should enjoy while they can. Chasing yields is a loose, loose proposition. Junk made a hefty 13.18% return over the last three months of 2003. The High Yield Index hit a record spread of 10.97 points over Treasuries with a yield of 14.16%. The spread is now 7.82% with a yield of 11.211%.

A sharp increase in tanker rates has seen the cost of transporting crude oil from the Gulf to the US more than doubling to about $3.25-$3.50 a barrel. The reduction in exports from Venezuela has forced the US to source more crude from the Middle East.

Deflation continues to grasp at the economy as the Fed floods the economy with money and credit and the administration gets set to spray $100 billion over the economy, or 1% of GDP in the resuscitation process. Inflation is 0.8% and sinking and, in spite of the river of funds and savings at 1.6%, doesn’t allow much room for recovery. The federal budged deficit marches swiftly toward insolvency with no discernable positive results. The American economy is sick, there are no two ways about it. Just look at the current account deficit, which is 5% of GDP, and in order to finance it, foreigners have to invest $1.9 billion a day. During 2003 that flow of funds into the US must rise to $2.5 billion daily. Lack of savings and earnings and an ever-widening federal budget deficit reduces our ability to finance investment if the desire was there. The federal government and the states with huge financial demands are going to squeeze business and industry out of the credit and money markets and sometime during the year force interest rates higher. That leaves us even more dependent on foreign funds. We know those funds won’t be there. Who wants to own dollar denominated assets when the dollar is crashing through the floor, a victim of the Rubin era of an unnaturally manipulated strong dollar? Foreigners will not fill the financing gap, which means the Fed has to go berserk in creating monetary aggregates, perhaps over $2 trillion a year. That leads to a Weimar scenario. Overseas investors already own 18% of the total market value of long-term US securities and 42% of US Treasury bonds. That’s about $7 trillion. We cannot afford for the Fed to continue its financial profligacy. It will bring an even lower dollar, much higher gold prices and perhaps financial collapse. How can an administration that has falling tax revenues lose another $360 billion over the next 10 years? What the new Bush tax cut proposal really is, is another way to prop up the stock market. Once the Dow hits 4500 most of the pension funds and insurance companies in the country will be broke. What both the Fed and the Bush administration are doing won’t work. By the end of 2003 we’ll be entering depression and the price of gold will be $850.00 an ounce.

As soon as Bill Frist (R-TN) was made Senate majority leader he also became a made man in the Council of Foreign Relations. This also happened to Catherine Harris after she successfully rigged Florida’s votes to give George W. Bush the election.

The National Association of Scholars took questions asked of high school seniors in 1955 by the Gallup poll and asked the same questions of college seniors in 2002. The average of correct answers to a series of questions measuring general cultural knowledge was 53.5% for today’s college seniors, compared to 54.5% of high school graduates and 77% of college graduates in 1955. That comes from dumbing down and teaching to the level of the lowest common denominator. Our educational system is a disgrace.

Our VA care system is overwhelmed. There are 300,000 patients in the system that have waited six months or more for appointments with their primary care physician. These are the men and women who were or could have been in harms way. Now our government refuses to care for them via proper funding. This is a national disgrace.

NYC is in danger of losing 300,000 service jobs over the next 12 years as technology and financial companies move overseas to take advantage of slave labor. Those jobs will go to China, India, Russia and the Philippines. It is also estimated the nation will lose at least 3.3 million service-industry jobs and $136 billion in wages. This is all in the name of free trade.

Predictions have just been published saying the trade deficit will probably hit $473 billion in 2003 and $503 billion in 2004. Usually trade deficits narrow as consumer spending weakens and a weak economy tends to undermine the value of the dollar, imports become more expensive and exports cheaper for foreign buyers. Alas, the economies of many of America’s major trading partners are growing more slowly or not at all, leading to slack demand overseas for US goods. Just imagine what the deficit would have been if US consumer spending hadn’t started to turn down. Economists, who are wrong 65% of the time, say growth in 2003 will be 3.1%. We predict 1% at best. Cheap money and massive aggregate infusions by the Fed won’t work. The dollar is off 17% and will be off 30% plus by year-end.

Last year the Georgia Fair Lending Act, which governs home loans and so called higher-risk-covered home loans and high-cost home loans, was passed in an effort to counter so-called predatory lending. What these loans really are, are loans to people who shouldn’t have loans. Recognizing the futility of such loans, S&P has refused to assign ratings to structured finance transactions. New York has done the same thing and their program begins in April. Perhaps finally these types of loans will end. They only lead to bankruptcy and grief for everyone.

Asian investors since late last year have been jumping from the frying pan into the fire. Last year they accounted for 40% of the foreign-investment flows into the US, double the amount of just two years ago. Through October, European net purchases of $152 billion in US securities were down 35% from the same period a year earlier. EU countries were net sellers for the first time since 1993. Since January 1, the dollar has fallen 26% versus the euro, 17% versus the Swiss franc and 10% versus the British pound. We see another 15% drop by June and perhaps a total of a 30-50% drop overall. Asians were net purchasers of $156 billion, primarily of Treasury and federal-agency bonds for the first 10 months of 2002, after averaging only $47 billion a year during the 1990s. The region’s central banks have been buyers in order to keep their own currencies from appreciating against the dollar and in the process they are taking hefty losses as the dollar falls. Asia is awash with dollars to invest, some $950 billion in excess liquidity. As an alternative, only $40 billion in Asian dollar-denominated debt is being issued annually. That really only leaves the euro and gold as alternatives, and as of late they are being more aggressively purchased. In November the Japanese bought double the amount of euro securities versus dollar securities. If a war commences in Iraq the dollar will fall further and more money will find its way into the euro and gold. The reuniting of North and South Korea would have a very negative dollar affect, thus the turmoil continues.

Finally, six months too late word is reaching the leading economists that fourth quarter growth was probably only 0.5% not the 2-3% they had predicted. This probably is the result of government pressure to falsify projections so the stock market wouldn’t collapse. You have to be real dunces to be consistently that wrong. In fact, Morgan and a few others say there was negative growth. So what do we have? We have a double dip recession. The facts are the recession, which the government says we never had, is not a double dip. It is just the same recession that had been deemed a non-recession. It reminds us of Napoleon decreeing his horse a general. The problem is in the face of facts these so-called experts continue to predict even higher growth. Are they stupid, mad or purchased? Either way, don’t give their figures any belief. There is no soft spot, as Sir Alan would have you believe. This is the real thing. Forty-one year low 1.25% interest rates haven’t and won’t work. Deluding the economy with money and credit hasn’t and won’t work. The economy must purge itself and until that happens there will be no recovery. Business and consumers don’t get it yet either. In November exports rose 1% and imports 5%. They just continue to pile on debt. In fact, to show you how idiotic this is we heard rumors that China might become our 51st state. The falling economy has nothing to do with war. The problem is systemic, structural, not only in the economy but also in our financial structure. It’s been ripped to pieces by Wall Street, International Banking and government.

They are dropping like flies. Last year 300 companies were relegated to the pink sheets, now home to 3,300 stocks. An estimated $75 million a day trades on the pinks. Now their listings are getting more attention from Wall Street pros that see lots of unrecognized value there, as more and more closed-end mutual funds and hedge funds want to invest in small growing companies. Many trade at 50% of book value. There are plenty of gold buys there; all you have to do is look for them.

The US and Western Europe want lower oil prices OPEC has been able to keep prices higher than what the west wants to pay and one main cog in OPEC is Venezuela. That is why the US has fermented civil unrest in the country and assisted in the attempted overthrow of the duly elected democratic government of President Chavez. Mr. Chavez has also been a threat to the international oil cartel by increasing taxes on their new endeavors there. He also cut PDVSA’s budget 28% in order to get rid of many workers who had jobs fostered by political connection and corruption. No one wants to remember that Venezuela hasn’t had a decent president or leadership for many years. In addition, Mr. Chavez strictly adhered to OPEC quotes, which kept international oil companies from expanding production in Venezuela. Higher oil prices were more profitable for the state owned PDVSA and at the same time limited the profit of foreign investment, whose investments already cannot exceed 49%. Full privatization of PDVSA would mean the end of OPEC, because private capital would increase production and lower prices more quickly, exhausting a valuable natural resource. This ultimately would make Venezuela another US protectorate like so many other hapless countries. This is really what the strikes and discord are all about. Mr. Chavez has proved to be one tough cookie. He hasn’t given in and hasn’t backed down with the exception of agreeing to a new election in August, which he’ll win hands down. Thus, we see civil war shortly, a war the rich and middle class cannot and will not win. They haven’t got the guts for it, they are too soft. It’s one thing to bang pots in the street, it’s completely another to have your boy or girl die in your arms, bullets havingripped their bodies apart. They are not prepared to take on the military and the street people. They are no match, and carnage will ensue. The strike is all about oil and its affect on the buyer, the US. The oil workers are going along with the program because most of them have good jobs and they are middle class wage-wise. Mr. Bush gave direction to the first failed bloodless coup and their present silence belies their current involvement in a second coup attempt. As you can see Bush has no love for democracy, he simply wants the government changed to suit his oil interests. The coup was financed from George Bush’s oval office. The opposition is out of ideas as they face martial law and violence. They have no respect for government or law as dictated by their actions. In the end all Venezuelans lose. There are no winners here.

Forty-five percent of investment grade corporate bonds are currently graded BBB, one notch above junk. Companies are desperate to avoid being downgraded further and are massively cutting costs and laying employees off. At the same time foreign investors will be less and less willing to hold dollar-denominated debt as the currency declines.

As the stock market and interest rates have declined, house prices have risen, probably in anticipation of higher inflation and simply as an investment alternative. All borrowers are looking for inflation to erode their debt burden. There can be only one answer to the $5 trillion thrown into the economy over the past three years and the lack of effect of very low interest rates of inflation and that is an enormous deflationary pull. We don’t know which way the debt problem will eventually be solved, if at all, but it doesn’t make any difference, inflation or deflation will send gold soaring. It’s simply a flight to quality from fiat money.

Companies complaining about short sellers destroying their firms finally have the ear of Eliot Spitzer, New York Attorney General. The SEC is also finally listening to complaints that hedge funds, private investment pools, that typically cater to wealthy investors, are working together behind the scenes to push down stock prices in a bid to bolster their profits. Many companies have complained various hedge funds were working in concert with Gotham Partners Management to spread negative information about their stocks. Wall Street is pressing regulators because it is losing business to these upstart funds. Collusion in shorting has been going on for decades and is aided and abetted by naked shorting rules in Canada. These shorts and naked shorts have destroyed thousands of companies, and up until now regulators, even though well aware of the problem, have chosen to do nothing about it as shareholders have lost billions of dollars.

President Bush continues to lose support for his war against Iraq. Turkey, whose bases are critical to war plans, suggests that 80% - 90% oppose the war. In England 58% oppose military action.

Douglas Dillon is dead at 93. He founded Dillon Reed, an investment-banking powerhouse. He was a primary school classmate of the Rockefeller brothers and he was educated at Groton and Harvard. He served in both Republican and Democrat administrations in Washington. He was the driving force behind globalization and free trade, having engineered the trade expansion act of 1962, which empowered the President to cut tariffs in reciprocal international negotiations. He led the Alliance for Progress under President Kennedy. He was on the Harvard Board of Overseers, the Rockefeller Foundation, Brookings Institute and the Council on Foreign Relations. He was the ultimate elitist.

Yields in Jumbo six-month and five-year CD’s were unchanged last week at 1.33% and 3.34%. On small ones, six-month yields were 1.23% down from 1.24%. The two-year and five-year were also unchanged at 1.96% and 3.24%.

The Mexican government is handing out millions of “matricula consular cards” for Mexican citizens to obtain social services, establish bank accounts, open utility accounts and obtain building permits. They are to be used as legal identification for those detained by any policing agency. Contrary to our law, these are illegal and our government and policing agencies are breaking the law by accepting these documents and not apprehending and exporting these lawbreakers. The most important thing to understand about these Mexican matriculas is that they are almost absolute proof that the bearer is an illegal alien and a felon. Legal immigrants can get valid US documents, such as state issued driver licenses. The reason for this lawbreaking by our government is to keep the flow of slave labor flowing into the country.

Delphi’s unfunded pension obligation has almost doubled to $4.1 billion in the year to December due to three years of stock market declines. They face a government mandated pension contribution of $1 billion to $1.5 billion in the year to December. They are now talking to credit agencies about borrowing $1 billion to spread obligations over the next 10 years. They contributed $350 million from earnings this month and will produce another $250 million in the second quarter.

Enormous debt, falling profits and lack of pricing power are neutralizing the induction of monetary aggregates into the economic system. Monetization is not working. We are pushing on a string and have been doing so for almost three years. We see little inflation in spite of a $5 trillion monetary injection, which leads us to believe that today’s stagflation will lead to tomorrow’s deflation. The deflationary drag has to be very powerful to overcome such an inflationary onslaught of aggregates. This example leads us to believe that if we are to have inflationary growth, the Fed will have to raise money creation by two to three trillion a year. That is very possible, but it’s not the answer to the problem.

The SEC says registrants will be required to comply with the disclosure arrangements in commission filings that are required to include financial statements for the fiscal years ending on or after June 15, 2003. Registrants will be required to comply with the disclosure requirements for the table of contractual obligations in commission filings that are required to include financial statements for the fiscal years ended on or after December 15, 2003. Registrants could voluntarily comply with the new disclosure requirements. Guess what, its derivative showdown time.

Criminals are now kidnapping illegal aliens after they cross the border. They are also kidnapping illegals already illegally settled in Arizona. Smugglers who bring these people over the border are charging over $1,200 per person per trip up from $400.00 five years ago.

Seventy US Special Forces troops are training Columbian soldiers to protect an often-bombed 500-mile pipeline along the border with Venezuela. This is free protection for Occidental Petroleum and Columbia’s Ecopetrol for a pipeline that carries $5 billion a year worth of oil.

The SEC will now require mutual funds to disclose to investors how they voted on decisions at the companies they hold. It’s about time.

As the dollar tanks, the competitive devaluations we predicted are taking place and US manufacturers are again getting hurt as a result. Business is putting pressure on globalization king George Bush to put pressure on Taiwan, China, Japan and South Korea to stop manipulation of foreign exchange rates that are giving them an unfair trade advantage. Isn’t this what free trade is all about, screwing your competitor? The dollar is off only 10% versus the yen this year whereas it’s off 20% versus the euro. The Ministry of Finance has bought over $75 billion on currency markets over the last two years. The Chinese Yuan is essentially fixed against the dollar. This is an excellent example of rigged markets and why globalization doesn’t work.

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