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Use the above link to subscribe to the paid research reports, which
include coverage of several smallcap companies
positioned to rise during the ongoing panicky attempt to sustain an
unsustainable system burdened by numerous imbalances aggravated by global
village forces. An historically unprecedented mess has been created by
compromised central bankers and inept economic advisors, whose interference
has irreversibly altered and damaged the world financial system, urgently
pushed after the removed anchor of money to gold. Analysis features Gold,
Crude Oil, USDollar, Treasury bonds, and
inter-market dynamics with the US Economy and US
Federal Reserve monetary policy.
WHAT
UP WITH THE MEXICAN PESO ??
At the same time the US
Federal Reserve relaxed its rules, expanded it Lending Facilities, and
rescued big US
bank balance sheets with massive swaps of USTreasury
Bonds for impaired private mortgage bonds, the Mexican Peso rose. See the
March timeframe. It rose above the 93.5 critical resistance.
The target on the rectangular range swing is roughly 4 points, a rise to
reach 97.5, which has occurred. With deep trouble south of the border in
economic fundamentals, one would expect the MexPeso
to falter. Three theories will be offered, each very likely, somewhat laced
together.
First theory, the Mexican
central bank just announced an official interest rate hike to 7.75% on their
official lending rate. This makes for a 5.75% higher rate than offered by the
USTreasury short-term yield. Forex
traders have seized on the differential, to lift the MexPeso.
They have been anticipating the hike for a few months. Technical traders make
up a bigger portion of FX traders these days, focused intently on the charts
and breakouts, now fixated on interest rate differentials, ignoring the
fundamentals of a nation. Mexican politicians and analysts warn that high
borrowing costs put their economy at risk of further slowdown. Already, their
consumer prices are up 4.95% in June versus a year ago. Food prices are up on
par with those of the US.
The corn price is key in Mexico,
which supplies tortillas as a staple for the broad population. The tortilla
price has tripled in the last year or more, in part a consequence of the US
ethanol initiatives.
Second theory, money is moving
back to Mexico
from troubled banks the United States.
As it does, the impact is direct on the bilateral exchange rate for the MexPeso in US$ terms. Not only do the wealthy individuals
and corporate officials intend to pursue a higher offered rate in banks, but
they wish to avoid severe distress among US banks. If the banks in the Untied
States fail and enter into bankruptcy, depositors would be forced to wait to
retrieve their money. Large deposits are unprotected at all. So money might
be fleeing the US
banks. Furthermore, Mexican drug cartel money might be coming back home,
fearful of being stuck in the US, fearful of being scrutinized during
discovery in a bank failure, fearful of exposing the players and
relationships with higher level USGovt officials. Now
we hear that JPMorgan is pursuing Wachovia for another acquisition. They have
gobbled up a dozen major banks in the last 10 to 15 years. Wachovia is in
trouble of insolvency and possible bankruptcy. Consolidation ensues, perhaps
to obstruct credit derivative accidents and eruptions.
Third theory, an implosion
is occurring in Mexico.
A failed Mexican state requires protective measures that are very difficult
to fully assess. Chaos reigns. Debts fail. Contracts face renege. Federal
deficits rise. Labor strife spreads. Corrupt grabs
by the powerful are enacted. Poverty widens. A bunker mentality prevails.
Money returns home. This is the opposite of the orderly Japanese Repatriation
every March. This is disorder gaining momentum.
MEXICO ON VERGE OF FAILED STATE
The situation in Mexico
continues to deteriorate. As their nation falls further into outright chaos,
three key questions arise. 1) What happens to the reliable supply of crude
oil to the United States,
even as Cantarell sees further decline in oil
output? 2) What happens to the plans for implementation of the North American
Alliance, the economic merger of the US, Canada, and Mexico?
3) What happens to foreign mining rights to Mexican properties, under
possible threat of confiscation or hiked royalty demands? These are central
questions. The underlying problems are too many to cite. The wealth of the
nation is too concentrated with the oligarchs, where a small group controls
up to 40% of the national wealth. See Carlos Slim, the multi-billionaire, now
ranked #1 by Forbes Magazine among global wealthiest, the first time a Latino
has registered that distinction.
As a group the Mexican oligarchs
exert great control over the politicians, using the system to sustain power
and wealth. Also, the PEMEX oil revenue is on the decline, a factor which
forces change from huge strain to national finances. A shrinking pie always
causes chaos. Their national oil industry is grossly mismanaged, suffers from
inadequate investment, is seen predominantly as a government revenue source
(cash cow), and is subject to intense control by labor
unions. Lastly, PEMEX is forbidden to enter contracts with any foreign
business entity as partner, consultant, or exploration agent. Mismanagement
accusations by me are kind and soft lobs.
Violence has spread widely
across Mexico.
Murders and attempts of police officials are increasing, especially in the
northern state of Nuevo Leon.
Cease fires between warring drug lord groups are being violated, such as
between the Gulf and Sinaloa cartels. Kidnap rings are in operation, with
successful tactics. High value targets to date in the Baja and Tijuana
have only involved Mexican citizens. A splinter group from the Peoples
Revolutionary Army has attacked oil pipeline explosions in the past. That
represented a change in tactics, shifting from online anti-government
manifestos to actual bomb attacks. They have successfully hit multiple energy
targets. Numerous incidents were reported in past months of dead bodies found
along roads and in fields, arms tied behind the back, shot in the head. Police
have in several cases found stolen police and army uniforms. Even US
journalists have been threatened.
A failed nation state is
the likely outcome south of the US
border. Energy network attacks, growing poverty and inequality, inadequate
government services, growing power of organized crime, corruption &
desertion of police forces, assassination of judges and officials without
consequences, and growing farmer bankruptcy are contributing to a failed
system in Mexico.
The current farm product price changes have resulted in tremendous additional
disruption, losses, and disruption to Mexican agriculture businesses. Needs
of people, upheld laws, tax structures, allegiance to authority, and sense of
urgency all seem to be in breakdown mode, and have been for several months. Remarkably,
the US
press networks refuse to cover the stories that form long links in an ugly
chain. The division between rich and poor is stark,
and growing worse. Furthermore, the system is geared to aggravate that
division. The failed state of Mexico
will be evident from the top down, from the financial deterioration of its
federal government, from the decline in their squandered energy business. Gigantic federal deficits will be the
next major story coming from Mexico,
along with energy strangulation by labor unions and
drug lords who will continue to hold oil pipelines hostage. One must wonder if, amidst growing chaos,
whether an external attack might occur of suspicious origin. Many believe
autumn in 2001 saw such an event in New York City.
When half the US
population harbors suspicion, the doubt no longer
qualifies as quackery. Mexico
could ‘benefit’ from conjured disinformation to keep the
nation together. The leaders and oligarchs manage to exploit the situation
further for personal gain, in both nations.
UGLY
DETAILS ON MEXICAN OIL INDUSTRY
The supply of crude oil to
the United States
is huge from Mexico,
behind only Saudi Arabia (#2) and Canada
(#1). As the oil supply production
falters further in Mexico,
a struggle will ensue as to whether the US
receives less oil, or the Mexican customers receive less oil. This has
been my concern for months, expressed regularly in the Hat Trick Letter. Now Mexico has finally
announced a notable cutback in oil supply to the Untied States of almost 150
thousand barrels per day, another news story totally ignored by the US
press networks. One would think that the obvious answer is for domestic
customers to receive their own Mexican supply. If they decide to cut back on US
oil exports, then the Mexican trade gap will be subjected to enormous
deficits. Their Peso will drop in value badly, leading to widespread systemic
price inflation EVEN WORSE THAN NOW. If however, they decide to deny domestic
customers and satisfy US
oil demand, then the Mexican economy will suffer shortages of gasoline and
petrochemical products (like lubricants, synthetic fibers,
fertilizer). Gasoline prices will skyrocket in highly visible fashion,
leading to possible riots. This is a ‘lose-lose’ decision. So
far, it seems cutbacks to US shipments and retention of domestic supply is
the direction that Mexican authorities have chosen.
The Mexican energy picture
has been deteriorating for some time, with an impact on their national
finances soon to be felt. The elephant oil field Cantarell
had been on an established 15% annual decline in year 2006 and year 2007,
offset by expansion elsewhere in smaller volume from other Mexican projects. Now
the Cantarell decline rate is 30% annually.
However, according to the Mexico City
business journal El Financiero, the
broader national energy product output has been in major decline for a full
year. Last June 2007, gasoline production fell in output by 56.4% at PEMEX
refineries, versus the previous June output. Clearly, it follows the
trend down in oil production, with less oil from which to derive products. The
Mexican economy consumes 800 to 840 thousand barrels of gasoline per day,
with any shortfall made up by imports. The shocking data point here is that
their gasoline imports rose by 92.1%
in June of 2007, versus the previous year, and continue to rise. The
trend has continued, as Mexico
is witnessing a gradual reduction of its trade surplus dominated by oil
shipments.
No new gasoline
refinery has been built in Mexico in over 20 years,
not as bad as in the US,
where no new refinery has been built in 35 years. The net financial impact is that Mexico
earned $34.7 billion in FOREX reserves in 2006 from oil export, but of that,
$10 billion was spent on gasoline import, or 29% of the gain. The trend
continues to kill off their trade surplus, as they continue to import more
gasoline and produce less crude oil. The great boon from oil discovery in the
1970 decade is coming to an end. Their oil exports in the first half of 2007
stood at 1.718 million bbl/day, 10% less than the
first half of year 2006. The
Mexican trade surplus from energy is vanishing. Analysts expect it to
be gone by 2011. They do not enter disruption and a breakdown of order into
the equation. It could be sooner. They do not seem to enter in growing
gasoline import, which forces the timetable forward. The effect on their
national politics will be severe, causing a failure of state, with a broad
internal breakdown of order. Gold usually responds to such crises, even if in
Mexico.
Then there is the North
American Alliance, all surreptitiously planned by those in power. The greater
plan seems intended (without debate, analysis, or vote) to share US financial
might, broad technology expertise, pharmaceutical depth, augmented by
military prowess WITH Canadian energy supply and mineral wealth and certain
other expertise WITH Mexican cheap labor, energy
supply and mineral wealth, and a bonus of new port facilities.
Faltering crude oil supply
interrupts the Mexican contribution. A chaotic state down south in Mexican
might conceivably disrupt the entire Alliance
plan, perhaps only if it leaks over into a US
problem. This could happen if millions of Mexicans jump the border into the US, or if their drug
lords expand operations into California,
Arizona, New Mexico, and Texas.
IF MEXICO
IS FORCED TO INFLATE WITH MASSIVE FEDERAL EMERGENCY FUNDS, OR FACES
WIDESPREAD DEFAULTS AND BOND FAILURES, CONDITIONS MIGHT ARISE FOR BROAD
MOVEMENT INTO GOLD AS REFUGE. The process is deteriorating, again without any
reporting from the sleepy lapdog US press networks.
CALIFORNIA DISTRESS
EPICENTER
A snapshot of home
foreclosures exposes the continuing nightmare, nowhere near end, with California
at the epicenter. On an annual basis, foreclosures
ran at 112% above 1Q2008 versus Q1 of last year. The pace continues, as May
national foreclosures rose by 48% versus a year ago. One might expect the
pace to level off, but the increases continue. According to RealtyTrac, almost 650k properties were in some stage of
foreclosure during the first quarter of 2008, an astounding ratio of 1 of
every 194 households nationally. Nevada
suffers a ratio of 1 in
every 54 households in foreclosure. For California, the rate is 1 in every 78 households,
and for Arizona 1 in every 95 households. This
is a national tragedy. The rise in home foreclosures is truly frightening. A
national catastrophe is unfolding. In California
alone, lenders sent out 113,676 default notices in 1Q2008, up 39% from
4Q2008, and up 143% from 3Q2007. The number of California
homes lost to foreclosure in 1Q2008 was 327% above that of Q1 a year ago!!!
In the month of April,
foreclosure filings were reported on more than 243,000 properties, a 65%
increase compared with April 2007, according to RealtyTrac.
In San Bernardino California, a
friend told me that 800 foreclosures per day are being filed in the area. By
the way, towns dominated by military bases suffer foreclosure rates four
times worse than the national rate. California
has more than its share of military base towns. This does not sound like
support of troops. California
generally saw home prices fall by 32% in April, versus the same month in
2007. Sales in the Golden State
actually increased by 2.5%, but with heavy price cuts. Again shockingly,
one in every 204 US
households is in some stage of the foreclosure process, by latest figures
available. Bank owned properties are soaring in number. In January 2007
they totaled 231k homes, in January 2008 it was
493k homes, and in April 2008 it was 660k homes.
Freelance credit analyst
Jas Jain said of California,
“Since the credit crisis began in August 2007, home prices (on a
price per square foot basis) have been steadily dropping at a 20% to 40%
annual rate, depending upon region. There could be some leveling
off in prices for a few months before the second leg takes [housing]
prices down more than 50% from their peaks in most areas by year-end.
California has
been in a recession since July 2007 based upon employment data, and should
enter a depression in 2009. The housing bubble kept Silicon Valley out of the depression after
the tech bubble burst, causing employment to fall by 20% in 2001 to 2003. That
is a depression by any definition. This time there is nothing to save the California
economy.” Wow! Ouch! Batten the hatches on the Left Coast !!!
The $4.8 state billion
budget cut by Gov. Schwartzeneggar in educational
funding this year has hit hard, cutting 20 thousand jobs among teachers and
other school employees. Many wealthier communities in California have begun initiatives to
solicit private funding to aid the schools, even a separate tax levy proposed
in Alameda
County
outside San Francisco. Home
values in California are
already down by 29%, from March 2008 versus last year March. That translates
from median value $582k last March to $414k this March, a median average drop
of $168k per home. Conditions are worse with bigger losses in Monterey, Riverside, Sacramento, High Desert, and Santa Barbara.
Rick Sharga of RealtyTrac
said, “California still
has not hit bottom. We have a lot of California homes that are in early
stages of default that may not be salvageable, because either there is no
market or financing available, or both.”
The national housing
inventory problem grows worse, not better. Pollyanna analysts continue to
miss the direction toward more bloated, as prices are threatened continually.
The inventory for existing homes was high in March, at 9.9 months supply,
and went to 11.2 months in April, a record covering 23 years. In California,
the existing home inventory is at least two months greater supply than the
national figure. On the existing home side, foreclosures relentlessly flood
the market, aggravating supply, serving as the most significant factor
weighing down housing price. In fact, fully 40% of all sales in California
come from bank & lender foreclosures. And the condominium picture
is worse, as pressure comes from rising condo fees. The median national
housing price has fallen to $202.3k, down 8% from a year ago. Sales activity
has fallen for eight of the last nine months. A key data point is seen in the
West, where sales activity rose by 6.4% but where prices fell
the largest amount. Prices fell in 43 states, with California and Nevada
registering the biggest declines. An opportunity for price stability might
come out West where prices came down hard to encourage buyers, but it is
early to conclude stability. The foreclosure process still drives the process
out West. My belief is that the foreclosure process generally will continue
to pressure inventory for another year at least, and push prices down
further. Lending institutions are dumping their inventory, lowering price,
and achieving some sales. Just because price has fallen, and sales activity
has risen, does not mean that price will stabilize. Lending institutions are
not seeing any reduction in their inventory, the key point! They incur costs
from insurance, property tax, and maintenance, plus legal fees. They bribe
homeowners to leave quietly without damage to the property, as in sabotage. Banks
even call the cost ‘Anger Escrow’ in their financial reporting. So
time to hold properties on the books costs money, an inducement to cut price
for distressed or auction sales.
The Standard & Poor
Case Shiller composite index provides broad
aggregate price data, but two months old. Its index of 20 metropolitan
areas showed prices of existing homes fell 2.2% in March, accelerating to
worse than a scary 20% annualized decline. The venerable serial bubble
engineer Greenspan estimates that house prices will decline by another 10%
from February levels, and perhaps 5% worse than that if the USEconomy remains weak. He expects a peak to trough total
decline of 25%. Economist Paul Krugman uses a
different reasonable measure, a ratio of home prices to rental rates, to
arrive at a 25% overall home price decline in the overall correction. Goldman
Sachs keeps its simple, stating home prices will fall 15% without a
recession, and 30% with a recession. Yale Univeristy
professor Robert Shiller expects a shocking 50%
home price decline in the formerly hot property zones, like California, Las Vegas, south Florida, and parts of Arizona.
My forecast is for a national housing price decline to the levels seen in
1990, plainly put, a double housing recession since no housing recession was
permitted in 2000-2002.
In year 2005, a very intriguing
sequence of events occurred. California
state contractors were not properly paid in cash and instantly redeemable
checks issued by the state. The state was actually in severe arrears on
payments and at risk of losing contractor work. So California
issued state coupons, like IOU on pieces of paper. It is unclear to what
extent state employees received such coupons. Of itself, this is not so
important. What struck legal and political scholars was how the state coupons
were used. THEY WERE REDEEMABLE AS CASH, AS IN LEGAL TENDER, AT SUPERMARKETS
AND UTILITY FIRMS. The coupons were essentially cash in restricted usage.
They were a bizarre form of money created by the State of California,
inflation to be sure, but money printed illegally outside the realm of the
federal USGovt. Only the USGovt
has the privilege of inflating the money supply and destroying the currency! The
problem resolved itself in the ensuing months. Fast forward to today. Gov Schwartzeneggar announced a 10% budget cut a few months
ago, with additional budget cuts in progress. California
is under great distress. Its economy is probably in a mild depression, much
like Michigan
and Ohio. The Governor
recently announced the inability to float a state bond to cover ongoing
expenses to run the state. So they resorted to floating some emergency
measure bonds, using state lottery income as collateral. Gambling income
is the only reliable income stream to the state, WOW! Watch for future
attempts to print money via the back door, if desperation runs thick. Look
for challenges to the federal privilege to print money. The implications
could actually work toward strain in the union, as in USA.
That is not my forecast, but one should expect strains to individual states
to become acute. Some will want to print money. Imagine a California Dollar
with a golden bear on it. Oh yes, the Governator
declared a state of drought, which forced an emergency order of resource
sharing for water, and some conservation measures. The state has enough
problems, let alone drought. What is next, locusts? How
about rising salinity levels in irrigated water?
If California
is forced to inflate with state coupon devices, or receive massive federal
emergency funds, or faces widespread defaults and bond failures, conditions
might arise for broad movement into gold as refuge. Vallejo
already declared bankruptcy at the town level. The process is degenerating.
THEY CANT KEEP
GOLD DOWN
Despite the technical
rebound of the USDollar since March, the gold
correction refuses to go below 860. Another successful retest occurred in the
last couple weeks. The stochastix cyclical index
has begun to turn upward from oversold levels. The magic new level is 940 for
gold to surpass. Fundamentals support the gold price. Mine output continues
to struggle. My ongoing point of gold supply inelasticity bears repeating.
Higher gold price has not resulted in higher gold mine output. Thus, the
gold price should continue higher. The silver chart is nearly identical. The
prevailing story driving the gold price correction in the last few weeks has
been that the USFed will actually raise its
official FedFunds rate before the end of the year. The
Euro Central Bank has wrested leadership and bank power prestige from the
hack Americans, who seem hellbent on the
destructive cycle of inflation, bust, liquidity
provision, corrupt with bond fraud, paper over, consolidate with raids. The
bluffs by the EuroCB to hike rates are being taken
seriously. But not here! The Europeans cannot hike rates when the southern
bloc is awash with housing liquidation and price declines, and assured
recession. The Europeans cannot hike rates when the German economy has
suffered five consecutive down months in industrial production, and when ZEW
economic expectation measures are heading down. The big German banks are due
for more bond and credit market losses, just like the American banks, but on
a smaller scale.
Neither the USFed nor the EuroCB will hike
rates this year. Yet another massive marketing scheme (aka propaganda) has
taken place. The gullibility of the US
investment community has become laughable. They are always ready to swallow
the next myth, chapter and verse. When the bond market and currency market
realize no official rate hikes will come, the USDollar
will head lower. Price inflation must be permitted, even in wages, an all
important distinction. Gold will rise in US$ terms. Gold will rise in euro terms. Then lest one forget, the Summer Olympics in China
are sure to produce some surprises. Such a grand political stage is not to be unexploited. Gold
might like the hubbub. My preference is to watch the magnificent athletes
more than to pay attention to sideline developments. However, with trade
conflict on the rise between the US and China,
and bank power being fought for, my ears will be trained for stress fractures.
Gold will respond.
Congratulations to the
Boston Celtics, NBA basketball champions! Boston rules
in sports!
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By : Jim Willie CB
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Jim Willie CB is the editor of the
“HAT TRICK LETTER”
Jim Willie CB is a
statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His
career has stretched over 24 years. He aspires to thrive in the financial
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