Canadian Silver Bug- Predictions for 2008 Pt 3

I had some final 2008 predictions that I failed to write up for the New Year so I thought I’d just jot those down quickly.

U.S. recession- most definitely, the media is starting to use the R word and I doubt the Government can keep the lid on doctored growth numbers forever.

U.S. unemployment is going up, proof came out this week with private sector job growth slowing and those receiving jobless benefits rose. The first wave of job loss was mostly missed by manipulated stats and the numbers of undocumented illegals working in the housing industry. However with the second wave, legal labour, lumber, cement, hardware companies, furniture stores etc will hit take a hit as people don’t need shit if they don’t have a new house to put it in. I expect the statistical lying to continue but expect they will fail to keep inflation climbing from today’s two year high of 5% to no less than 6% by year end.

Added to my prediction of big banks going insolvent I expect to see at least one large house builder (probably Lennar) file for protection before the end of the Q2.

The subprime mess will continue but this year’s price downturn will also put many more prime mortgages into trouble as loan values exceed property values. Previous estimates of defaults will be sorely insufficient as even trustworthy borrowers end up owing more than their house is worth, those that can pay will ride it out, others who get asked for new down payments will bail.

I think the credit crisis, (the one thing I did not foresee last year) will get much worse unless the Fed just starts buying all debt or mandating loans to the public via the banks(legally the Fed can order loans be made then cover the risk themselves). Baring that, I can see a point this year where banks will start cancelling credit lines, many of these are backed by house equity that no longer exists, others just because of credit ratings or inability of banks to access sufficient credit. The result will be lower consumer spending and a switch from reasonably priced credit lines to expensive credit cards to float excessive consumption. This will be just one of the factors that will hit consumer spending hard this year. While the freeze seems to be thawing in Canada U.S. banks are rightly afraid of each others balance sheet.
Citibank for one is toast.

The recent trend of nearly 5% of car loans going bad will increase, credit card defaults will also head higher.

The inflation vs. deflation argument will continue all while the biggest personal investments of most people, (their homes) will continue to devalue in the U.S and soon Canada, England and Spain. At the same time, food costs, energy costs and the tax burdens in most countries will increase validating neither argument and making it that much harder when deciding how to protect yourself.

Stocks

This year will be a year of chaos, energy and precious metal stocks, some industrial metals, Ur, Moly, Cobalt, rare earths will still do very well. Financials, retail, commercial real-estate will range from weak to nuked

Oil

low of $90 high $140 on shortages. yes I said $140, it will take only 1 fire, hurricane, war etc to put the U.S. into it's emergency supplies, Canada has no emergency supply. What if that pipeline from Alberta into the U.S. that blew up last month had taken all 6 or 7 pipes and not just one? What if someone helped it blow up at one or more points along it's length? Mind you I take this a proof there are no real terrorists in N.A., that or they are too damn stupid to bring us to our knees.

For those who still think my pessimistic views are loopy I leave you this article Crisis may make 1929 look a 'walk in the park' as proof I'm not alone and the fear is spreading, Hell my wife is starting to think it will get worse than even I do. Soon she will actually listen when I tell her I really want that gold sovereign or bag of libertads for Christmas.

Flying money is everywhere

The money is flying fast and furious as more and more schemes and emergency bailouts are brought forward to the market.
Citibank’s 4.9% sale to Abu Dhabi sovereign fund, Merrill Lynch scores $4.4 billion from Temasek of Singapore and a further $1.2 Billion to another firm today.


Morgan Stanley sets the stock price for a 5 billion bailout from the Chinese Government


Banks are in trouble and I’m telling you once again to diversity between banks, avoid the weakest banks, take out 2-3 months of cash if you have any savings and of course buy the anti dollars, Silver and Gold.

Who are the weakest banks? It is not entirely clear as many companies have yet to fully disclose their exposures to bad paper, I would certainly put Washington Mutual and CountryWide on my avoid list, In Canada CIBC looks to have the worst exposure and the National Bank has already taken considerable write downs considering it’s size. At this point the safest most conservative of the Canadian Banks looks to be TD.

In the U.S. the first of the new wave of low rate credit auctions intended to ease the credit constraints received bids from 93 different banks. These banks put bids in for over $60 billion when only $20 billion was up for auction ensuring the additional auctions planned for January should be fully subscribed. Some commentators have speculated the terms on this credit is destined to become long term.


The ECB has offered $500 billion in 2 week loans to European banks in order to ease them through any holiday liquidity issues. (Egad, that’s like the entire Canadian Federal debt.) Why is it no one will loan me enough for a ton of Silver or my dream farm below prime?

Very shortly I fear this will become an insolvency crisis not a liquidity crisis, borrow as the might from this emergency short term money pool, banks who have taken large loses from subprime products will eventually have to come clean with a full accounting.

The scariest news is the from the bond insurers. MBIA admitted to having a total of $30.6 billion in complex mortgage securities with $8.1 billion of those being the highest risk varieties, including CDOs backed by other CDOs. Should MBIA be downgraded every single one of its insured bonds will also be downgraded. When this paper starts going under the companies net worth of $6.5 billion will evaporate leaving bond holders and stock holders with nothing, already shares have plunged to near the $20 range from a 52 week high of $72.02.

Other insurers are in trouble and downgrades in this industry would be like pulling the lynch pin from some piece of machinery, expect gears, cogs and wheels to start falling off any time after.


Canadian markets can however breath a small sigh of relief from the claim today that a deal to unfreeze $33Billion in ABCP has been worked out. This is not a bail out however, people who guessed badly will take loses but it does give hope that normal trading of this paper in the spring will allow many organizations to recoup some or all of their investments.
http://www.reportonbusiness.com/servlet/story/RTGAM.20071223.wabcp1223/BNStory/Business/home

It’s a quiet day in the markets so far, Gold and silver are holding their gains from Friday and the office is not likely busy so please get your asses over to your coin dealer and buy your own Christmas gift. If you care, I’d like a couple of Sovereigns or perhaps a bag of Libertads, or DOS Pesos.

The Great Race to Zero

A little break from my 2008 predictions to take note of yesterday’s surprise interest rate decrease by the BoC.

While a 25pt decrease is not a big issue in of itself, it is a huge sign that the BoC is going to join the U.S. Fed in a series of competitive rate cuts to devalue the dollar in what I’m calling the “Great race to Zero”.

Why are they doing all this?

They claim that its simply an attempt to stave off an impending recession but in reality this is about saving a financial system that is all but dead. My bet is that the Fed will lower rates down near 2% by the next U.S. election but you will see the spread between the Fed rate and the street rate will grow giving the Banks a larger profit margin. The Banks will basically be fleecing those who can still pay their bills in order to cover off bad debts; the slight improvements in the street rates will hopefully decrease total value of defaults, making the potential 500 billion in bad mortgages somewhat smaller.

At the same time low interest rates will weaken the U.S. dollar and pump in liquidity in an attempt to inflate their way out of both Government debt and onerous public entitlements. Imagine that each time inflation rises by 10% you tell the public inflation is only 3%. This means inflation (even with a cola clause) is good for the Government and the management of its liabilities because they get to pay with freshly created/devalued dollars. What good is a promise of a $1000/month pension when after inflation it won't buy you more than 1 buggy of groceries.

In reality the U.S. is creating money at the blistering rate of 14%, making the real cost of living is far higher than stated by Gov. Shadow Government statistics claims CPI is really over 10%. Have no doubt Canada's stats are just as biased/corrupted/massaged/just plain wrong!

A low dollar will create export jobs, price imports higher and hopefully lower trade deficits.

“Surely you overreact?” you say.

No I don’t think I do. The U.S. Federal Gov has about 56-60 trillion in real debt (if they used the same accounting standards they demand from businesses) or about 3.5 x GDP
Add in municipal, state, business and personal debt and the U.S. tops out near 100 trillion dollars or about 7.5 time the U.S. GDP

That’s problem #1

Problem # 2

Housing: 2 more years of mortgage resets are still ahead which means 2 more years of foreclosures which could total 400-500 Billion in the subprime class alone, some higher quality paper may also take a hit including business loans, prime mortgages, and credit cards. If banks are in trouble now how will they fair when more of this paper goes bad. A perfect example is the desperation of Citi which sold 4.9% of itself (the max allowed without Federal approval) offering a staggering 11% interest.

Problem 3.

Derivatives: 400 Trillion dollars worth of unpricable paper, 90% of which trades in back rooms with no regulation certainly sounds like trouble to me. These guys are shady and manipulative when we can see what they are doing and yet they are trading 6 times the value of the world GDP in mystery paper. What’s next financial pixie dust to sprinkle on your portfolio?

Martin Weiss from Weiss Market Analysts has a great article on "Money Panic" that
states 5 of the biggest U.S. banks have exposure to credit risks that range from Wachovia’s mere 89% of their total capital to JP Morgan whose credit exposure is a whopping 388% of their capital. A 26% default rate is all that is needed to wipe out all of JP Morgan’s Capital.

We are on the verge of a fundamental change, nothing is certain and nothing is safe. The U.S. is desperate and is trying to wiggle out of financial troubles by screwing its debtors, citizens who save, citizens and employees who are owed medical coverage, pensions or welfare. The rapid and purposeful devaluation of U.S. debts is in effect a declaration of economic war. The U.S. is saying “Screw you Guys, we are paying our debts with half priced dollars and you’ll like it”

The BoC has taken the challenge and lowered rate ensuring that our citizens will also suffer the ravages of inflation, lowering the price of our wares for export, raising the prices of imports and taxing our savings by devaluing them. Of course this will give the Fed Reserve motivation to lower more and faster in order to stay ahead of the curve.

Inflation management is supposedly the goal of the BoC but its actions and explanation says economic stimulus is more important, screw the real costs of such a policy. It does however support my stance on buying silver and gold. The entire situation strengthens my belief that a major Fiat currency or three will be destroyed in the next 5 years.

Canadian Silver Bug- Predictions for 2008 pt2

Ok this installation is the big stuff, lets look at precious metals.



Gold,



based on U.S. dollar weakness, flight from risk and the instability of paper assets world wide I believe 2008 will see $1200 dollar gold. This of course is based on a continued, somewhat orderly fall in the U.S. dollar. That said there is still the chance of the Chinese nuclear option of dropping all U.S. debt or some other calamity still leaves the possibility of astronomical gains. 1980 saw what panic/mania/ can do to a market in a very short time and while destined to happen the risk of panicked spike is much higher than the chance of peace, goodwill and sound fiscal management fixing the worlds woes and dropping gold back down to $400.


Silver

Based on the same factors as gold, silver will go to $25 in 2008.

There are slight differences in the markets however, while I believe silver is money many still look at it as only a commodity so naturally in a crisis more money will move to gold than silver. This is where it gets complicated, first there is much less silver available in the world so it would take much less new investment to bid the price up, that’s good for us. The Nymex is evil and quite probably allowing manipulation, that’s bad for us.

The Nymex holds about 133M oz of silver and between it and the silver EFTs accounts for most of the available silver. The Nymex also has regulations limiting how much you can have delivered per month making it difficult for any one person or institution to accumulate large quantities or bleed off their stockpiles quickly.

Eventually however enough people will quit trading paper and demand delivery, a quick move towards delivery that takes down stock piles 20-30% would at today’s prices only cost 600 million, a drop in the bucket compared to the values of hedge funds, pension funds, and sovereign wealth funds. This kind of move will panic industrial users to secure a year or twos supply rather than accept the security of just in time delivery, the ensuing rush will push silver much higher. It can’t all be bought by one entity but it will get bought, delivery will be demanded and eventually there will be default as far more paper trades than silver exists.

I’m not saying this will happen next year but this is destined to happen. The default is the magic moment physical silver holder must wait for; the silver/gold ratio will go from today’s 55 to 17, 10, maybe 3.1212232332? I don’t actually know, I do know silver is way below it historical ratio, it’s natural ratio, and it’s above the above ground ratio.

While my status quo prediction for 2008 is $25, a silver default could price silver over $200.



Platinum and Palladium.

I don’t usually mention these because they are not now and have never been money. That said, there is a lot of risk with these metals, short supply, strikes, hostile and potentially manipulated producers, mine accidents all of which could pump the prices. I won't set a price for these but I do expect them to go up. Bang for the buck however, Silver has the most potential so I can't see any reason to bother with Platinum Group metlas.

Part 3. will be along in a few days, it will be some general predictions, and a few what if's.

We are having a nice correction likely from Goldman Sachs self serving claim Gold has peaked and the markets are getting over the credit crunch, Bullshit!

My belief is this is a ploy to strenghten the dollar or to cover short possitions by driving the price down. Don't believe them and take this opportuntity to stock up.

Canadian Silver Bug- Predictions for 2008 PT 1.

I’m going to break my predictions for 2008 into a few bite sized posts, to make them easier to digest, discuss and to drag this out for more days of content, ha!


A Bigger war in Persia,

NO

While I do believe that Bush and Darth Cheney are stupid enough to do it, I don’t believe they can because of the weakness in the system. I think a war would cause Generals to quit, protesting bad orders. There has to be strife in the military, they are over stretched, they’ve been stealing tracks from armoured vehicles in Korea to meet their need for spares. They have too many soldiers putting in multiple tours, too many National Guard acting as full time soldiers, too many soldiers failing to re-up, too few new recruits and with the banning of Blackwater and possibly other contractors in Iraq, it is going to leave the U.S. with no wiggle room to enlarge the conflict.

Iran has them by the short hairs and the U.S. dependency on foreign oil from hostile states like Venezuela means any war would lead to an immediate energy crisis world wide.

Between modern air defense (unlike Iraq’s), subs, massive missile stockpiles, super sonic anti ship missiles, and suiciders, any fleet in Arab waters will be sunk, oil terminals for the Saudi’s , Kuwait, UAE, etc will all burn. China who would lose a lot of its energy supply and would likely pull the currency bomb destroying the U.S. dollar. There is no marginally winnable scenario for an Iran conflict up to and including enough neutron bombs to sterilize every town over 100 souls

Dollar Pegged Currencies

I expect to see most or all of the Gulf states turn on the U.S. and drop the dollar peg as Kuwait did in May. The massive devaluation and over creation of U.S. dollars is creating strong inflation and big losses in the currency reserves of Gulf states. As protection from a falling dollar many are already shifting reserve ratios to include more Euros, Pound, Swiss Franc, and Gold. This trend will continue further weakening the Dollar and the problem will snowball.

Other pegged countries include non oil producers like Lebanon, most of the Caribbean, and Jordon. Inflation will also force some of them to re peg to the Euro or mixed currency baskets.

Countries Using Dollars as Domestic Currency

Its one thing to peg your dollar to the U.S. but there are also a handful of countries that actually use the U.S. dollar as their own. These include British Virgin Islands, East Timor, Ecuador, El Salvador, and a few others. Panama's currency is U.S. notes traded in tandem with domestic coinage. I predict Ecuador and likely a couple of others on this list to institute new domestic currency or switch to Euros. These States are relatively small economies and the damage would be more image than substance. Still, as soon as one country make the move the chances that other will follow increases.

I suspect there to be some serious talk about a South American regional currency. I don't believe it will go anywhere however; Chavez and his big mouth will likely sour the process before a deal can be made.


Dollars for Oil

I also predict more States will begin to price oil and demand payment in Euros rather than Dollars. Iran has begun demanding Euros and soon other countries will follow. This is a huge market and the demand for Dollars will drop greatly when this break is made, the dollar with plummet. The last hold out will be the Saudis. Since Kuwait has already moved from the dollar peg I expect they will be the first, if not them, Russia.

U.S. Dollar

There will be ups and downs but buy the end of 2008 the U.S. dollar will have lost almost 15% putting the USD index about 11.3 lower than today's level of 75.75 or 64+-.

It would even be more but by mid 2008 both the ECB and the BoC will have no choice but to start cutting interest rates and weaken their currencies in response. I think China will make some small (under 5%) revaluation of the Yuan(Renminbi)upwards as a anti inflationary move that the west can claim as progress in trade issues.

The main factors of the USD index will be a worsening U.S. Economy and a drop in interest rates to 2% by 3rd Quarter

The Yen

You can't decrease your interest rate when you barely have one. The Yen will be the big gainer as other big players join in a new rate cutting cycle. Try as they might I don't think the Japanese will be able to indefinitely suppress the Yen against the Dollar.

That's enough for now, maybe I'll get the rest of it out by weeks end.