From Volume 5, Issue Number 20 of EIR Online, Published May 16, 2006

U.S. Economic/Financial News

Primary Materials Price Hikes Killing Jobs

The Weimar-style hyperinflation is taking prices to new highs every day, while industry and jobs are showing the effects of high costs. The price of gold for immediate delivery shot up to $726.70 an ounce at one point Thursday (May 11) morning, the highest since January 1980, and up 69% over last year. By the end of the week, the gold price had surged to over $730 an ounce.

Copper, a key metal for industry and building, soared above $4 a pound ($8,800 per metric ton) for the first time on May 11. Nickel, zinc, and platinum all rose to historic highs, and aluminum hit a 21-year high. Investment funds are pouring money into commodities, hoping to make a better return than on stocks and bonds, the financial press reports.

Meanwhile, the price hikes are hurting industry and jobs. Some copper wire and rod makers have suspended production because of shrinking stockpiles. Ohio electrical workers report that a box of insulated copper wire, that recently cost $20, now costs $100. With home construction contracts also on the downswing, jobs are being killed.

Asbestos workers union officials met in Washington, D.C. on May 10 to discuss the effect of hyperinflation on the building trades. One example: fiberglass insulation has increased twofold. Whereas it was $50 to $75 a box recently, it is now $100 to $150.

Silver, which like gold, is purchased as a hedge against inflation, rose on May 11 to the highest level since the Volcker depression in January 1981, reaching $15.20 an ounce at one point that day.

Mergers Feed Commodity Bubble Inflation

A report issued by Citigroup estimates that "speculators and investors" in April held a record total of more than $120 billion of bets on 36 commodities' futures in U.S. commodities markets. Some $30.3 billion were natural gas bets, and $30.1 billion oil bets; $20 billion in gold; $4 billion in copper. Citigroup announced that it had doubled the number of traders it has working commodities!

On May 9, aluminum futures reached a 20-year high of over $3,000/metric ton; zinc, platinum, and copper prices all reached new records. Speculation pushed oil back above $70/barrel.

In Toronto, Teck Cominco, the world's number-one zinc mining company by volume, offered $16 billion to take over the world's largest nickel producer, Inco. According to the Toronto Star May 9, "Teck Cominco said its C$78.5-a-share offer represents a 20% premium to the closing price of Inco shares on May 5." (This is how mergers drive commodities speculation—by giving speculators upward price triggers to speculate on). While Teck Cominco is taking it over, Inco itself is trying to take over Falconbridge, the world's third-largest copper producer, itself just having merged with two other Canadian firms.

Short Positions May Have Driven Copper Price Rise

China's State Reserve Bureau, the nation's stockpiling agency, had losing trades totalling as much as 130,000 metric tons of copper. The agency had bet that the price of copper would fall. The agency covered some bets in cash and in physical metal late last year, and rescheduled others for settlement in 2006. "Most of the bureau's short positions were closed in March and recent weeks," said Yang Yinghui, head of metals trading at Cofco Futures Co. (the company that traded for China's State Reserve Bureau).

Of perhaps greater consequence is the U.S. hedge fund Ospraie, which is believed to have taken short positions in copper, representing 300,000 metric tons of the metal. One market trader told the May 8 Financial Times, "They have been covering that position in the last few weeks as the pain just became too much." The FT reports that Ospraie had bet that copper's price would fall to $3,000 per ton, and had to obtain the copper metal in the market to cover that position at a cost of $6,750 per ton. If that report is true, then on a position of 300,000 metric tons, Ospraie had a loss of $1.13 billion. Not only might Ospraie become the first major casualty of the current Weimar hyperinflation, but there would have had to have been a sizeable banker rescue mission to prevent Ospraie and any hedge fund or financial institution that was associated with Ospraie, from blowing a hole in the market.

Housing Mortgage Bubble Is 'Dead Man Walking'

According to a very depressed local realtor in Loudoun County, Va., the area Lyndon LaRouche calls "ground zero" for the coming collapse of the housing bubble, the residential real estate market is a "dead man walking." People may still be buying homes, but there are not enough of such buyers to absorb the growing inventory of unsold homes, which according to the latest (April) figures, is now up by more than 500% over last year already, with developers expected to add several thousand more units/homes to that inventory in the next 60 days.

Realtors and bankers here and in other extremely troubled sectors of the bubble, such as in the New York-New Jersey area and Southern California, are alarmed by rapidly rising inventory trends and declining home sales contracts. In Loudoun, for example, contracts for the normally busy month of April were down nearly 50% from a year ago, while settlements were down over 40%. Even more alarming are the signs that a significant portion of the rise in inventory is coming from the panicked dumping onto the market of recently purchased homes, which had been bought more with consideration of making speculative profits than for a dwelling; in Loudoun, these same sources report more than one in every three home purchases was made to gain profits on rapidly appreciating markets.

Another alarming trend, now amply documented by developments in Loudoun and in the Washington-Metropolitan area, is the rise in people who "jump contracts"—i.e., withdraw before settlement—even with loss of sizeable deposits. The Washington Post reported May 6 that cancellation rates are up significantly, especially on new homes, with some builders reporting that they are as high as 25%. In Fairfax County, just east of Loudoun, rates are now more than 30%; half of all condo buyers cancel contracts. Driving this, the Post reports, is the fear that people will be caught in a down market, with rising interest rates, in homes that they cannot afford; such buyers are often willing to lose tens of thousands of dollars in deposits rather than to be stuck with mortgage payments they can't afford.

According to sources in Loudoun, Federal regulators have already become alarmed at the danger signs. Word has gone out to lenders to "tighten up" and the local commercial market has reportedly been already put on a "watch list." But, as less deluded realtors and others realize, any credit tightening only more rapidly turns to market gloom into doom.

"It's done," said the formerly buoyant local realtor. "It is truly a 'dead man walking.' "

U.S. Corporate Bond Issuance Reaches All-Time High

Bond issuance is replacing stock issuance as a financing method used mostly for takeovers, the Financial Times reported May 11. Hedge funds, private equity, and recycled foreign trade surpluses provide "what feels like limitless sources," said a Bear Stearns executive. ("This is where the unreported M3 money supply is flowing," LaRouche commented.) There was surprise at the appetite for a $4 billion bond offer from Abbot Laboratories. So far this year, corporate bond issuance totals $312 billion, beating the 2001 record for the same time of year of $271 billion.

Often, the bonds held by hedge funds are converted into stock equity after the takeover, giving the speculators control over the corporation to be looted.

Foreign Companies Buying Up U.S. Toll Roads

"Strapped for cash, U.S. states and cities are selling toll roads to foreign companies willing to pay rich prices," reports Barron's in a cover story May 8, on the privatization of toll roads. The article cites the $1.8 billion purchase last year of the Chicago Skyway, the $3.8 billion deal last month for the Indiana Toll Road, and the $611 million sale last week of the Pocahontas Parkway near Richmond, Va. The announced merger of Spain-based Abertis and Italy-based Autostrade will create a company big enough "to bid on what they believe will be 25 U.S. road privatizations in the next three years. Sensing a lucrative opportunity, Wall Street investment banks, led by Goldman Sachs, have descended on state capitals, trying to convince toll authorities and legislators of the benefits of privatization," said Barron's Andrew Bary. He complained that government-run toll roads "are often inefficient because profit maximization generally isn't a top priority," adding: "Investors won't buy roads without being assured that they can raise tolls over the years."

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