Fed looses control on US interest rates and crisis reaches China and EU

GEAB N°16 is available! Global systemic crisis / Summer 2007 : Fed looses control on US interest rates and crisis reaches China and EU


This second quarter's fundamental event about to shove most players' anticipations over the coming months, is certainly the final and simultaneous failure of the two key-strategies defined by US leaders, i.e.:

. in the economic, financial and monetary fields, the Fed' policy initiated a year ago when M3 publishing was abandoned and aimed at substituting a financial and stock bubble to the bursting housing bubble in order to maintain US growth (and capital attractiveness) has now patently failed, thus entailing a historical loss of the Fed's control on US interest rates (for the first time since 1918, except in times of war or social/economic depression)

. in the military, strategic and diplomatic fields, the stability plan for Iraq is a complete failure taking place in the framework of Washington's growing political paralysis (which LEAP/E2020 plans to describe in GEAB N°17 - on subscription).

Spring 2007 indeed appears as the tipping point of the global systemic crisis: the US economy went into recession, US interest rates were restored, the bond market is in crisis, the subprime crisis begins to hit large US financial institutions such as Bear Stearns (1), Goldman Sachs (2) and Freddie Mac (3), the US housing crisis is speeding up (4), the paralysis of Washington's political power grows (5), the isolation of the US on the international arena increases, the security plan for Iraq proves to be a complete failure, the US is powerless against Iran, the relaunch of the Israelo-Arab peace process aborts, trade tensions between China and the US rise, a growing number of countries (Kuwait, Syria,…) flee from the US dollar, etc…

However, according to LEAP/E2020 researchers, it is undeniably this Fed's and White House's (Pentagon's) double simultaneous failure which affects most the unfolding of the global systemic crisis for the months to come, as it precipitates China and the EU into the « vacuum » thus created and thrusts the US into « recessflation ».

Rest of the world holdings of US financial assets / Source US Federal Reserve - PrudentBear

In this public announcement, LEAP/E2020 wishes to share publicly some of GEAB N°16 excerpts (on subscription) about the consequences of this failed attempt of economic relaunch conducted by Ben Bernanke and the Fed's loss of control over US interest rates, of historical dimension (6).

Today, the Fed's official stance pretends that the US economy will grow again in the coming months and reduces to a mere anecdote the collapse of US growth in the first quarter (down to 0.6 percent only), anticipating a 2.5 see 3 percent growth altogether in 2007 (7), knowing that recent economic previsions published by the UN place US growth around 0.5 percent in 2008 (8). As early as March 2007, LEAP/E2020 anticipated a growth below 1 percent in the third quarter of 2007 (in consideration of the first terms 0.6 percent, annual growth is very likely indeed to be at best below 2 percent, more likely negative in the end).

Nevertheless this official stance is contradicted by most available objective indicators (corporate performance, employment,...), even if it seems supported by a whole range of other indicators, either indicators carefully ‘cooked' by the Federal government or subjective indicators reflecting for instance the impact of official statements on public opinion. LEAP/E2020 already described in 2006 how opinion manipulations work; and in GEAB N°16 (on subscription), our team of researchers details a number of objective indicators that can help to anticipate precisely US economic trends in the next quarters (in particular: hidden unemployment rise, « phantom-GDP » mechanism of US growth overrating, or increasingly devastating impact of the housing and subprime crises).

A great lack of transparency reigned over the Fed's actions in terms of monetary mass and global assets in USD (such as the end of M3 publication at the end of March 2006) (9). Well this strategy proved to be a complete failure. The attempt to substitute a financial/stock bubble instead of the housing bubble, like Greenspan did when he turned the internet bubble into a housing bubble, in order to maintain US growth did not succeed. Federal Reserve Chairman Ben Bernanke can always flood the US economy with liquidities. The only result will be in increasing US inflation and the fleeing from US dollar and US dollar-denominated assets. Just like the US troops are stuck in an endless conflict in Iraq, the US consumer is exhausted and insolvent, as illustrated by the close correlation between retail sales and the fast growing consumer delinquency rates.




Compared retail sales & consumer delinquency rates in the US on one year - Source Moody's


As a result, the Fed will experience a central bank's absolute nightmare: stagflation, or more precisely « recessflation » (10). The crisis currently agitating financial markets, with interest rates' « natural » curve being restored and long-term rates back above short-term rates, clearly proves that the US debt and US Treasury bonds no longer find buyers (11).

If T-Bond yields rise today, it is not by fear of inflation but because nobody wants to buy them anymore (12) (a situation anticipated by LEAP/E2020 a year ago already). As a matter of fact, foreign investors (only 11 percent of the last T-Bond sell-off (13)) are now those who fix the rate, and the Fed can only follow the trend in long-term international interest rates. Simultaneously, the Fed will have to increase its repurchasing of the US debt, operating for instance via figureheads such as those large associated investment banks, as LEAP/E2020 described many times.

What is new in the current situation is that the Fed is being deprived from its last remaining instrument. The rest of world now determines US rates. Simultaneously systemic uncertainty is back on financial markets. Investors suddenly realise that in the medium- and long-term, they no longer have any guarantee on global system's trends (while only a few months ago, they were convinced that the current system was sustainable). This situation highlights the fact that it is outside the US that the country's future economically and financially speaking is being played, as illustrated on three occasions in the last six months by the impact on US markets of Chinese decisions (dollar and stocks). This is a totally new situation for the US ever since the end of WWI which clearly suggests that the world order created after 1945 has come to an end.

This double simultaneous failure creates a new situation, radically modifying everyone's perception of the future, and deeply affecting the dominant trends of the beginning of the phase of impact of the global systemic crisis (such as for instance the US capacity of action militarily and diplomatically speaking) while significantly reinforcing other trends (such as China and the EU being sucked into the systemic crisis as a result of the accelerating evolution in their respective status of emerging pillars of the new global system, a crisis-bearer phenomenon for both China and the EU).

Thus, in this Summer 2007 issue of the Global Europe Anticipation Bulletin (on subscription), LEAP/E2020 consider it useful to anticipate the four following trends that they consider will shape this year's second semester in terms of economy, finance and international policies:

1. Finance – Investor's shift away from US Treasury bonds, the Sovereign Wealth Funds, the Fed's loss of control over US interest rates and the great return of market volatility

2. US economy – The « phantom-GDP » invented by US statistics, aggravation of the US housing crisis and rise in real unemployment: the « 2007 Very Great Depression » is shaping

3. International trade – Fallout of US economic recession on the United States and China: enhanced trade conflict and Chinese financial system in crisis

4. Euroland – Eurozone in crisis with a bursting housing bubble in Spain and speculative currency bubbles in Eastern Europe

As LEAP/E2020 describes in GEAB N°16 (on subscription), during the summer 2007, these heavy trends will get organised to shape the rest of the year, taking from the rear the last three months' mainstream opinion. In this issue of GEAB, our team provides some advice for investors to avoid this coming summer's main risks.

-------
Notes:

(1) Bear Stearns opens the bal with second-quarter profits dropping by 10 percent, in relation to the subprime crisis. But this second quarter is probably the first of a long series to experience the full effect of a crisis that is only beginning (described in the previous issues of the Global Europe Anticipation Bulletin). Recent declarations by Bear Stearns leaders provide a clear picture of what large US investment banks outght to be expecting : after the subprime loans, Alt-A loans (less risky) are beginning to provoke corporate losses and hedge-funds liquidations for 4 billion worth of mortgage-backed bonds. Source : Bloomberg, 06/14/2007

(2) Source : MarketWatch/DowJones, 06/14/2007

(3) Source : MarketWatch/DowJones, 06/14/2007

(4) In June 2007, Harvard University released the yearly « Joint Center for Housing Studies » on housing trends in the US. The study clearly suggests that the housing crisis is only beginning as « prices only begin to fall, riskiest loans are only about to enter refinancing period, and credit restrictions only started ». The impact on the financial sphere, consumption and employment is still ahead and will materialize more and more roughly from this summer onward.

(5) President G.W. Bush's approval rating fell to 29 percent, with 66 percent of respondents disapproving of him (his lowest result ever). In the same Wall Street Journal/NBC poll, reported by MarketWatch/Dow Jones 06/13/2007, 68 percent of Americans consider that their country is headed in the wrong direction. 23 percent approve the performance of the 1-year long Democrat-controlled Congress. Iraq and the economy being key-factors of US public opinion today, the gap between the « official » figures and the optimistic statements we hear today on the US economy on the one hand, and the American opinion on the state of their country on the other hand, is clearly abyssal.

(6) The military and strategic aspects will be described in GEAB N°17 (on subscription).

(7) Source : GlobalInsight.

(8) Source : Rob Vos, Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), UN, 05/30/2007

(9) In the second issue of GEAB (February 2006), LEAP/E2020 announced the discontinuance of M3 publication.

(10) Recent UN economic revised forecasts anticipate a 0.5 percent US growth in 2008, far from the 2 to 3 percent announced by the US authorities and largest banks and financial media. Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), UN, 05/30/2007

(11) Source : MarketWatch/DowJones, 06/12/2007

(12) Source : Financial Times, 06/12/2007

(13) Source : MsnMoneyCentral / Financial Times, 06/12/2007

SOURCE :http://www.leap2020.eu/GEAB-N-16-is-available!-Global-systemic-crisis-Summer-2007-Fed-looses-control-on-US-interest-rates-and-crisis-reaches_a713.html