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. by Jim Willie
CB The year 2002 began with nationalist pride and united spirit rushing through our broad and diverse landscape. The wounds from the World Trade Center attack were fresh on our minds. A prompt and sweeping response of action ensued on the security front, with financial accommodation to our shocked economy and financial markets. But security enhancements have fallen short of ringing effective, while the resultant economic recovery materialized as fleeting. The benefits of tax refunds, security spending, airline bailouts, and home refinances (hazard not benefit?) have now been exhausted. The effects of official policy resemble spinning gears and band-aid approaches more than true remedy. Most optimism has since largely faded, with financial markets languishing as they show even more dire chart patterns. Few question the system itself. Renewed threats to asset values now appear, as a larger and potentially more dangerous bubble in the entire credit market now menaces over every facet of our economy. Debts and balance sheets have hardly been rectified since 2000 and its bust. Rather, consumers have been led to extend their debts recklessly by the Grand Pied Piper himself, directing his witless alchemist formulas as head of the bewildered, disoriented, and unelected Federal Reserve. His public counsel to raid home equity in order to sustain consumption ranks as the most irresponsible advice ever uttered by a central banker. But then again, such counsel follows his active enthusiasm in nourishing the irrational exuberance he warned against, whose bubble & bust sequence he publicly denied responsibility for. Greenspan's legacy will not be favorable or forgiving when put to paper in history annals. It will feature one destructive speculative mania after another, underscoring the failures of Keynesian Monetarism in broad strokes. His legacy will be identified by tragedy. Meanwhile, a growing wartime economy presents new challenges and further distorts existing dislocations. Heightened risks still remain, but they have moved to different places. Regarding our nation's economy and its ongoing (mis)management, the official policy is in place, the transmission has slipped, the vehicle is not moving. When overcapacity lingers, debt liquidation bleeds, balance sheet strains, and demand falters, stimulus of the typical garden variety is futile. During expansion periods such stimulus succeeds, but not during this unique corrective and rehabilitative grand cyclical phase. A quick look at Japan bears this lesson, if only we were capable of objectively noting our wide-ranging similarities in the Liquidity Trap pathogenesis. We are being drawn into the trap with each passing month. Worse still, careful comparisons would caution that our differences work very much against us -- lower savings rate, mountains more debt, overvalued currency, and an economy that abhors currency devaluation. Argentina crumbled as its debts and shrunken currency wrecked its banking system. Is America due for an outcome resembling a cross between Japan's unresponsive endless recession and Argentina's completely shattered monetary system? My expectation is that our path will follow Japan, drawn to the black hole of the Liquidity Trap, despite desperate efforts to prevent it. The natural economic forces are too powerful. The Kondratieff Winter specializes in laying waste to irresponsible debt and their hapless owners, rendering the entire United States economy, its states, its corporations, and its households more vulnerable than at any time since 1930. Almost every single asset in this country is now indebted, while 75% of every dollar spent on its GDP is now devoted to debt service! Over four dollar as much newly printed fiat money is necessary to generate a single dollar in new GDP activity! We seem to be sleepwalking into this trap, toward a gallows whose neck noose is debt itself. Our systemic priorities are built upon sand. We have been taught that consumption can pull us from the economic doldrums, not investment and savings. We have been actively encouraged to incur deeper debt, described as a sign of health. We have greeted cheap imports with glee, even as the manufacturing base that helps produce our wealth has largely disappeared. We have coerced exporting nations (Asia, OPEC) to recycle their surpluses into our Treasury debt, ignoring the backlash of such exposed vulnerability. Fully 45% of our federal debt is currently owned by foreigners. The United States is no longer in control of its fate, even as our list of enemies multiplies. We face a pivotal year, with countless areas within our financial markets, credit markets, and foreign exchange markets in urgent need of address for corrective resolution. Numerous new and old bubbles have maintained their temporary outstretched state, from unrestrained consumption to mortgage finance (thus real estate), even to US Treasury debt. How can the real estate boom continue to pose as a hard asset, appreciate during debt liquidation, mimicking the commodity bull market, when the majority of its properties have their value so tightly coupled to easy flowing mortgage debt? No, I brand real estate as "the great impostor" among hard assets, whose role will be served more as a bloated giant carcass on which true hard assets unencumbered by debt will feed greedily. I refer to the energy complex, the precious metals, and the vast array of raw materials suffering from multiple years of neglect. The true harbinger is gold, which heralds the great upcoming decade for the commodity market ! Gold will rise for many quarters to come, as the greatest bubble of all, our nation's currency, declines and overshoots its true value, whatever that is. The USDollar now faces serious challenge, against a backdrop whereby Kurt Richebacher of the Austrian School of Economics has proclaimed that no middle ground exists between a strong dollar and a collapsing dollar. He contends that retreat from the commitment of an official strong dollar will set into motion forces that ultimately collapse the dollar from sheer massive momentum and insolvent fundamentals. Newly appointed Fed Governor Bernanke's clear speech on planned monetization of debt, thus subjecting the dollar to sacrifice, identifies a watershed in formal posture toward the dollar. Replacement of Dept Treasury Secretary O'Neill with Snow only confirms that watershed event. While the majority of experts seem to believe that a lower dollar will make strides toward solving our economic problems, the threat of a USDollar Decline Vicious Circle now stares us in the face. A lower dollar cannot be achieved without risking the treacherous effects of a declining dollar, unleashing powerful forces inherent to such dynamics of change acting upon extreme imbalances. The majority of leaders, experts, and pundits seem loudly clueless as to the risk of this vicious circle. It is the natural flipside to the virtuous cycle enjoyed in the past decade with a rising dollar. I firmly believe all the pieces for the perfect storm scenario are in position now. Jim Puplava of Financial Sense Online has been a guiding beacon in tracking it. This storm will produce economic recession with job losses, a monetary crisis with the dollar at the epicenter, and a continuation in stock market losses, amidst mounting international chaos as war widens in scope. What we in the USA call "The War on Terrorism," others are increasingly labeling "The War on Islam." Over time, it will transition into "The War for Islamic Oil." The storm's central beneficiaries should be gold & silver in the financial sector, and crude oil and natural gas in the energy sector. Debt resolution, unfavorable investment tides, international monetary stresses, and Islamic financial terrorism will all propel the precious metals during the dollar crisis currently underway. Depleting reserves, interrupted delivery channels, exposure of remote pipelines to terrorism, and military oilfield grabs will all propel the energy complex on a harmonious note. I expect turmoil to prevail across the globe in 2003, with the foundations of our financial system threatened and shaken to their core. Its climax might occur in 2004, but its root system will extend like tentacles all through the current year. The dominant pattern in this new year will be failure of standard policy, exposed vulnerabilities, leaders adrift, disappointed expectations, and surprises that occur in rapid sequence. The specter of war and terrorist events will loom far and wide. Beyond such conflict and the growing distrust of governmental leaders, the biggest stories this year will be the dollar in the financial markets, pension funding in the labor markets, and resolution of debt loads among households. The major themes of my predictions certainly ring pessimistic and bearish to markets. I cannot pinpoint much of anything positive in 2002 events except perhaps the prompt arrival of summer. The foundation has been laid in this new year for dollar damage, bond effects, gold reactions, and clashes among continents and cultures. Nothing, absolutely nothing, has been resolved in numerous situations last year in the world and our nation, either economically or politically. If anything, imbalances in financial markets, as well as posturing between opposing forces has become all the more supercharged. A dangerous multi-faceted delusion has caught our entire nation in its grip, characterized by naïve perceptions and acceptance of economic disinformation, fair stock values, safe haven in real estate, ultimate sanctuary in Treasury bonds, imminent economic recovery, quick resolution to Iraqi conflict, moderation of crude oil prices, and trust in failed re-tread federal government (Keynesian) and Federal Reserve (monetary) stimulus programs. Pervasive delusion breeds a climate for further accidents, errors, and additional financial losses. The new year will provide ample opportunity to toss much more cold water of reality on our faces. This bear has only begun to claw its way toward Main Street and Wall Street. A ray of hope lies in new the new Bush economic package and the Fed's willingness to forestall deflation. However, the harsh reality calls for political squabbling, watering down its best elements, and watching them fall short of accomplishing much more than procrastinating the time of reckoning. *** PREDICTIONS *** USDollar decline emerges, picking up downhill speed, as the vicious circle becomes more evident in capital markets and import prices, leading to foreign abandonment and rising price inflation the US economy and financial markets experience the increased amplitude of the dollar decline vicious circle, as foreign investments are repatriated, stock equity levels shrink, foreign exports from the US weaken, commodity supply costs rise across a wide spectrum, especially energy, leading to another cause for not just pricing pressures, but further profit erosion and a rise in import prices
Energy prices rise broadly, as supply shortages become critical, delivery routes become threatened, and terrorists target pipelines, with the first events centered on natural gas and heating costs
The new (tinted) USDollar is born, ushering in debate on firewall issues, as the world openly discusses eventual US Treasury default and serious writedowns in USTBond reserves, while gold collateral has dwindled
Longterm interest rates rise, as import prices inch upward, commodity prices see fitful jumps, while Treasury debt oversupply echoes the stress of continued corporate and personal defaults & bankruptcies, resulting in frustration to the Federal Reserve, which is targeting longterm rates in their unsuccessful monetization efforts
By end of year, USTBond concerns focus on world bank reserve holdings and the consequence to the world economy if bond values worsen, which results in greater motivation for foreigners to diversify their dollar-based reserve holdings
The longstanding presidential third-year upcycle fails to materialize, as debt liquidation and dollar decline overwhelm the typically observed benefits from the fiscal stimulus (vote buying) during election campaigns, with the end result being a surprising stock market on a slide
Stock market sees occasional gains, punctuated by sharp declines, as foreigners watch and react to the dollar and domestics watch and react to longterm bond rates, each concluding the wisdom of exiting the equity markets, and executing on that wisdom
The mutual fund industry follows the brokerage industry in issuing vast job layoffs, while investors yank remaining funds from their stock accounts, leaving fund portfolio sizes a fraction of their peak levels, thus marking an end to a manic era for retail investing
Fed Monetization breeds surprising results on trade gap, with new money supply only feeding the consumer bubble, while longterm bonds show opposite of intended response, making more clear over time the indirect result that the Fed is actually building the Chinese economy and resupplying its new Central Bank
Gold price will accelerate as dollar, euro, yen are simultaneously debased, but by the end of year the new story will become silver's rise, as actual defaults on delivery occur on a scattered basis, raising big questions and attracting attention like blood in the water, with silver actually enjoying benefits from the next gold correction and catching up to gold, while gold and the dollar regularly swap roles leading each other as indicators
Risk control programs for gold miners and bullion bankers progressively ratchet to higher "lines in sand," begetting less volatility than expected, while outsized short positions simply will not go away, which result in a steady unrelenting ascent of gold in a much more stable fashion than envisioned
The Blanchard lawsuit reveals some surprising gold contracts and interconnected contracts within the gold cartel, all coming as a result of discovery process, as nothing is resolved but much is revealed, with the battle itself attracting more attention than gold cartel members would like
At least one derivative event will occur, as a long and growing list of risks endanger highly leveraged positions which fiercely hold fort to the massive imbalances, with numerous identifiable actual threats, while systemic consequences are frightening, if not unimaginable
The foundation is laid for a Grand Gold Scandal, upon disclosure of the depleted nation gold reserves, whereby vast quantities of our gold supply were sold at the cycle low prices, and the collusion with JPMorgan and other gold cartel members is clarified during lawsuits and criminal prosecutions
Asia and the Middle East make strides toward becoming more gold-centric in commerce and banking, with petrodollars converting more to gold, and talk becoming action in forming gold-based central banks, gradually coalescing into a concerted pan-Islamic financial position against the USDollar
Calls rise from govts and corporations for China to devalue its yuan and reduce its worldwide deflationary pressure on prices, on wide class of products going beyond technology, leading to geopolitical confrontations
Unemployment rises in non-China Asia, as Chinese competition deals blows to their economies, and bank problems worsen across Asia beyond Japan, as exporting companies feel the pain from reduced exports to the USA
A conflict of words escalates between China and its neighbors, most notably with South Korea and Taiwan, as China makes preliminary political gambits toward absorbing Taiwan into the People's Republic of China in the same staged manner as Hong Kong, eventually leading to financial concessions on the yuan currency in exchange for political sacrifice of the Taipei govt
Leading economists openly discuss how the USA economy is inexorably slipping into a liquidity trap, just like Japan, despite preventive efforts, as debt liquidation continues and Chinese deflationary pressures mount
George W. Bush sees performance ratings slip while the economy stagnates, as Middle East tensions remain at pitch, and stimulus fails (just like Japan), with cries for our leaders to pay closer attention to domestic issues as they worsen
Middle East and Iraqi tensions simply will not go away, and a constant state of no resolution persists, as Saddam Hussein continues to sit defiantly in power, American leaders lack the will to initiate broad conclusive attacks on any recognized terrorist states, and European support for US efforts against terrorism and terrorist states dissipates
The House of Saud shows evidence of some preliminary cracks, offering first evidence of potential regime shift and revolutionary change, as symptoms explode onto the scene with local violence within the Saudi Arabia, attacks on certain royal princes, official crackdowns of terrorist funding, revelation of extortion by religious front organizations, demonstrations against "US Occupation," sponsored raids by US Troops against internal Al Qaeda hideouts near the Yemen border... i.e signs will emerge that all hell will break loose
Democratic party remains leaderless, vapid, devoid of ideas, desperate to capture political gains during the current economic duress, as the libertarian third-party grows at grass roots, calling for abolition of the Federal Reserve and an end to the steady beat of warmongering
USGovt economic reporting is deemed no different from corporate deception, as actual Treasury debt levels are scrutinized, numerous data series are doubted since the aggregates reported fail in consistency with the union of the component evidence, and grand reform is demanded
Alan Greenspan retirement sets off an emotional debate over his legacy, his responsibility in the greatest investment mania and collapse in modern history, the role of the Federal Reserve, and of the ineffectiveness of Keynesian Monetarism generally, as comparisons to Japan grow more stark
Foreign criticism reaches peak on US economic policy, corruption, dollar hegemony, and war efforts, as competing currency mayhem is blamed on the dollar "problem," with Asian leaders feeling helpless to the competition and its harmful effects
Car industry and its vertically integrated sectors lead into economic recession, as mounting layoffs undermine the consumer spending extravaganza, breeding calls for nationalization of the industry, since the sheer number of jobs involved is monumental, but not before calls by labor unions and Congressmen alike urge for protection from the world juggernaut in Toyota, which has made giant inroads within the US with numerous non-union car mfg plants
Airline industry bankruptcies continue beyond United and USAir, leading to calls to nationalize it also, and create a vast network under the Department of Transportation to manage both the car and airline industries, as large-scale job and pensions issues are hotly debated
Residential real estate market begins its slow decline from the weight of job insecurity and an uptick in mortgage rates, but with such slow rate of decline that it raises little concern, but REFI movement dies, and consumer spending feels effects, leading to broad economic consequences Numerous mortgage finance companies go belly up, led by the infamous subprimes, followed by smaller home financiers, as mortgage application and appraisal processes are called into deep question, and parallels are more vividly established between the real estate mortgage bubble and the 1999 tech stock bubble
Rumors swirl around Fanny Mae and other GSE's, as default rates rise and questions surface as to the actual govt guarantee levels for its operations, leaving critics to charge that the govt has aided in creating a new credit bubble akin to the tech bubble from recent years
Warnings abound concerning the ominous specter of negative home equity, which leads to popular urgings for the govt to attempt to provide special tax breaks for home losses, and even to guarantee residential real estate prices, to no avail, with public questioning of Greenspan's longstanding position of encouraging real estate investments and even raiding of home equity to sustain the consumption bubble
Labor wage deflation becomes a national issue, as indirect methods to reduce monetary benefits constrict on bonuses, club memberships, sports & entertainment tickets, discounts on store purchases, while individual responsibilities extend to covering duties of laid-off workers, in addition to outright reductions in salary as a result of taking lesser positions in different companies
Notable press pundits offer scary previews of an economy beset by both the car and housing sectors in decline, since these are typical beneficiaries of federal stimulus, thus highlighting its failure, as early evidence is unmistakable in the unemployment data
Recessionary ripple effects are seen in advertisement revenues, which begin to hit the press/media, with a strange dual effect of layoffs and a shift in editorial direction toward independent thought
Deflation and default enter the world of sports & entertainment, as franchise closings hit hockey and baseball, but not football or basketball, while financial strain is felt in restaurant chains and amusement parks, but not movie theatres or local eateries
Pension funding reaches national debate levels, as corporations plot to circumvent obligations, and govts conspire to enable their efforts, leading to huge national controversies and a grander debate on Social Security, as Americans feel the deep threat of retirement insecurity
Federal stimulus package will again be watered down by bipartisan squabbling and ineffective leadership, but also be thwarted by offsetting scattered state tax increases, while entire concept of intervention is slowly perceived as obstructing the economic recovery process itself
Next debt defaults are govt (state, city, municipal), with taxes rising on many fronts (sales, property, usage), services reduced, worsening local economies, rising liability insurance premium costs, which culminates in California inexorably inching toward bankruptcy
California fiscal distress becomes the topic of national attention, as its debt falls to junk status, while urgently levied tax hikes exacerbate the economic decline and layoffs grow markedly following the 2004 presidential election where the state votes against Bush, the state appeals for federal aid, is refused, and declares bankruptcy
Insurance industry joins the distressed financial sector, with both severely reduced portfolios and payoffs gone out of control, as asbestos, medical malpractice, and personal injury awards rise to unrestrained levels, resulting in shutdown of scattered doctor clinics and municipal building services, amidst public outcries
Personal bankruptcies not only continue to rise but accelerate to the upside, creating a national stir, with broad new advertising in the media (newspapers, journals, television, radio) about debt counseling and legal alternatives, while warning against drawing equity recklessly from homes
Brazil defaults on their US/German/UK sovereign bank loans, leading to tumultuous debate over the IMF role in damaging fringe economies, as major money center banks finally feel the consequences to their balance sheets
Chaos in Venezuela spreads to neighboring Columbia, as both the drug cartel and terrorist groups carve the nation into a feudal state, with communist popularist leaders gaining more control in the northern rim of the continent
South American economic failure slowly becomes comprehensive, total, and complete among the non-Andean nations, which is accompanied by increasingly radical political movements, producing leaders openly defiant to western influence, the IMF, our leaders, and our big bankers
Terrorist groups consolidate their organization (Al Qaeda, Hez Bollah, Islamic Jihad) and align more closely with Arab govts, carrying out clear plans for attacks on the dollar, as clandestine groups attack critical energy pipelines left vulnerable
A serious mysterious disease outbreak occurs within a major American city, whose origin cannot be traced, but whose effects linger, as blame is placed viscerally upon Islamic sources
A western world leader will be assassinated, probably in Europe, a consequence of support for American anti-terrorist (aka anti-Islamic) efforts, as attacks on G7 nations resume, and Christian religious centers are targeted
Social unrest escalates inside the USA, leading to class strife, rising crime rates, as depressed jobless join those whose life savings have disappeared, and enmity is directed toward the wealthy whose luxury homes, cars, and possessions are threatened
George W. Bush will be re-elected in a landslide, as Democrats offer up weak recycled candidates that include Lieberman, Gore, and even Hillary, with women's groups urging Gore and Hillary to combine forces, but a serious obstacle develops as her past association with the Rose Law firm and widespread fraud in Arkansas resurfaces
The Kondratieff winter grinds colder and darker, as debt liquidation continues, stimulus fails, and the world monetary standard (USDollar) endures one serious blow after another until a crisis unfolds
Jim Willie
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Predictions for the 2003 year