Gefunden bei financialsense.com:
MARKET INTERVENTION ACCELERATING
Stunning Data Releases Show Risks, Consequences, and the Cartel End Game
by DeepCaster LLC
deepcaster.com
December 15, 2007
AddThis Social Bookmarking Widget
“Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: we view them as time bombs, both for the parties that deal in them and the economic system.”
“…The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…”
“…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Warren Buffett, February 21, 2003
“The fact that the December 13 and 14, 2007 jumps in the PPI and CPI inflation numbers were accompanied by substantial drops in the gold price is quite significant. After examining all the evidence, how can a rational observer conclude anything other than that the price of gold is manipulated?”
Deepcaster, December 14, 2007
This is the sixth in a series of Deepcaster's work originally entitled "Juiced Numbers" regarding Market Intervention and Data Manipulation. The primary topics of this installment are: 1) An overview of the Market Intervention and Data Manipulation Regime, including the recent Releases from the BIS, BLS and The Fed reflecting that market intervention and manipulation; 2) The August – October, 2006 Intervention Phase that took down Crude Oil, as well as Gold and Silver prices; 3) Highlights of the August & September and other 2007 interventions; 4) Cartel Intervention as the key feature of the aforementioned Takedowns; 5) Data Massaging and The Cartel End Game.
IMPORTANT NOTE: Deepcaster had not planned to prepare an update of its November, 2007 Letter entitled “Market Intervention and Data Manipulation - - Consequences & Forecast for Gold, Crude, Equities and The Cartel End Game” for some months. However, important new data releases from the BIS (Bank of International Settlements - - The Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the U.S. Federal Reserve are quite astounding. They reflect a considerable acceleration of Market Intervention. They reflect dramatic increases in OTC Derivatives, and in exchange-traded derivatives, and an apparent intensification of data manipulation. As we demonstrate, these developments dramatically increase systemic risk and also reflect the importance of creating more OTC and exchange-traded Derivatives in order to affect market outcomes. Because of this dramatically increasing systemic risk, we feel it most important to issue this sixth edition of our “Juiced Numbers” series now.
In order to put the Interventional Takedowns in context, the discussion is interwoven with significant excerpts from "Juiced Numbers #1, 2, 3, 4, and 5, Deepcaster's initial essays describing "How the Government Gets the Statistics it wants, Markets get manipulated, Citizens get Deluded, and Worse."
By describing the aforementioned Interventional Episodes, we provide evidence to the skeptical of the pervasive influence of Market Intervention.
The Interventional Context - - Overview
Deepcaster is periodically asked to explain, and provide evidence for, our view that a U.S. Federal Reserve-led Cartel (apparently composed of the U.S. Federal Reserve, the Bank for International Settlements ("BIS") - - The Central Bankers’ Bank - - and key primary dealers, acting with the cooperation of major Central Bankers) manipulates a wide variety of markets. [Apparently one “operational vehicle” through which The Cartel works is called “The Working Group on Financial Markets” established after the 1987 crash, and which is often informally and widely referred to as “The Plunge Protection Team” or PPT.]
So it is important to explain what we mean by our claim of Cartel Intervention, and to indicate how Deepcaster takes account of that in our portfolio recommendations. [It is important to note that virtually all of the evidence we cite is from publicly available sources as indicated below. For example, the Gold AntiTrust Action Committee has amassed substantial evidence regarding the manipulation of the Gold and Silver Markets at www.gata.org.]
First, we do not (usually) mean that the Cartel totally controls prices in any particular market. Various markets are affected in varying degrees, at varying times, by Cartel manipulation attempts. Cartel actions can substantially affect, but usually do not totally control, prices in many markets - - though they certainly have that capacity much of the time. The price of Crude Oil is relatively difficult to manipulate, for example, but is not immune from substantial manipulation (as we shall show).
It is important to note that the degree of manipulation, and, therefore, control, varies from time to time and market to market. In markets such as the (relatively) small cap markets for Gold and Silver securities, Cartel manipulation attempts can have much more impact and are, at times, and for certain time periods, tantamount to control.
To answer the exceedingly important question regarding how the markets are manipulated one must recognize that there are two main methods of manipulation.
I. DIRECT MANIPULATION
Direct intervention appears to be accomplished primarily via two vehicles: Repo Injections from The Fed and via the Over The Counter (OTC) derivatives reported by The Bank for International Settlements (see www.bis.org, and details below). The Fed makes injections of Repos (Repurchase Agreements - - usually TOMOs - - Temporary Open Market Operations typically expiring in 1 to 30 days) into the market nearly every business day. Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to primary dealers, the proceeds of which can be used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow. The total amount of un-expired Repos on any given day constitutes the “Repo Pool.” Monitoring changes in Repo Poll levels (which is publicly available information) is crucial to determining how the Interventions will likely affect the markets.
Thus, the several primary dealers (e.g. Goldman Sachs, J.P. Morgan), who apparently work under the Fed's direction, are able to use these loaned funds to buy or sell various securities and futures to affect the markets. [Note: One species of Repos, POMOS, never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.] The fact that the loaned funds can be used to purchase derivatives (as well as plain equities) gives the manipulators the tremendous leverage which derivatives afford.
But along with that tremendous leverage comes tremendous and tremendously increasing (as the recent data releases described below indicate) systemic risk.
Repo additions are made nearly every business day in amounts typically ranging from $1 to $15 billion. Thus, every business day we know the size of The Repo Pool, and whether The Pool is increasing or decreasing.
The Challenge: Determining the Impact of The Interventionals
The challenge for investors and forecasters is to determine where (i.e. in what Sector/s) and how (immediately, in increments, etc.) the funds will be employed. Deepcaster and those very few others, who monitor the daily Repo injections, make educated forecasts of where and how such funds are likely to be used based on patterns, tendencies, and judgments. But no outsider can know for sure (So where is the transparency, Ben?).
Those who doubt whether the Cartel has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the multi-trillion dollar derivatives colossus at J.P. Morgan Chase, or the $346 trillion in June 2007 (up from $291 trillion in Dec. 2006) derivatives position at the Bank for International Settlements (the Central Banker's Bank) devoted to “Interest Rate Contracts” (see www.bis.org. Then follow the path: Statistics>Derivatives>Table 19). Note that that Derivatives figure increased by some $55 trillion in just six months!
Attitudes of The Fed/Treasury/BIS Toward Intervention
Regarding the awareness and intentions of the leaders of the U.S. Treasury and the U.S. Federal Reserve concerning market manipulation and public perceptions, it is instructive to review what their leadership has said.
Former Secretary of the Treasury, Larry Summers, for example, in his own treatise "Gibsons Paradox and the Gold Standard," indicates "determination of the general price level then amounts to the micro economic problem of determining the relative price of gold," Journal of Political Economy, page 529, 1989.
This much publicized conclusion indicates that our monetary and financial leadership know that in order to manage the general price level and interest rates it is necessary to determine the relative price of gold. Therefore, of course, it follows that capping the price of gold (and, by necessity, the price of that other “monetary metal” silver) would be extremely important.
Regarding allegations of "news management" (which some have indelicately called "news manufacturing") we refer you to the words of the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise on "Zero Bound Rate Systems." Note Deepcaster's underlines which call attention to the use of "communications policies" to "shape public expectations," and to the use of the Central Bank's balance sheet and the “targeted purchase” of Treasury Securities (yes, The Fed purchases the Treasury’s own paper) to achieve Fed goals:
"Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment (non-technical summary page i)
In this paper, we apply the tools of modern empirical finance to the recent Experiences of the United States and Japan to provide evidence on the potential Effectiveness of various nonstandard policies. Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes: (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank's balance sheet, or "quantitative easing"; and (3) changing the composition of the central bank's balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate."
(emphasis added) http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf
To Deepcaster all this indicates that the Fed-led Cartel will go to significant lengths necessary to control long-term interest rates (in addition to short term rates, which, it is widely acknowledged, they also control), cap the price of gold and otherwise achieve Central Bank ends.
An excellent analysis of the defects of the “U.S.” Federal Reserve - - so far as the United States’ National Interest is concerned - - is well documented in G. Edward Griffin’s superb book, The Creature From Jekyll Island: A Second Look at the Federal Reserve).
The one conclusion that one can make from this is that the failure to take account of the power, force and pervasiveness of Cartel Manipulations (i.e. The Interventionals) is an invitation to financial and investment suicide.
The profound impact of these manipulation efforts has been most well documented regarding the price capping of the gold market. For those who have any doubts whatsoever about the fact and extent of government (Central Banks) manipulation, we have (thanks to Bill Murphy, founder of the Gold Antitrust Action Committee) the following June, 2005 blatant admission of manipulation by the Head of the BIS (Bank for International Settlements - - i.e. the Central Bankers' Bank) Monetary and Economic Department, W.R. White:
"…it is perhaps worth spending a minute on what is meant by Central Bank cooperation…{it includes]…last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful…"
For skeptics, Deepcaster asks: What could be clearer than that?
Interventional Indicators and Helpful Tips
Indeed, if one looks at the Interventional Indicators, the fact that the manipulation takes place is amply documented. First we have the aforementioned quote from W.R. White, Head of the Bank for International Settlements (BIS), in which he explicitly acknowledges manipulation of the gold and currency markets.
In addition, the aforementioned Bernanke statement in his academic paper "Zero Rate Bound Economies" can reasonably be taken as a justification for the Fed purchasing its own paper, otherwise known as monetizing the debt. Specifically, regarding long bond purchases, the purpose of this would be to boost the 10 and 30-year bonds, and, therefore, reduce long-term interest rates.
From the Fed's point of view, these takedowns would presumably reflect a national policy to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending mainly through the vehicle of the Home-ATM. In addition, it is very much in the Fed's interest to focus investors' funds on purchase of their paper (and, especially, their 10-year Note) and to buoy their fiat currency. In this way, the Fed maintains and enhances its power. But the “U.S.” Federal Reserve is owned by private international banks and is not a U.S. government entity.
[As an historical note, recall that President Kennedy was unhappy with Fed policy and therefore caused U.S. Notes to be printed as a substitute for Federal Reserve Notes. The issuance of these Notes ceased shortly after President Kennedy's assassination.]
Caution for Investors and Traders
Finally, we issue a word of caution to our readers. So long as The Cartel is in a very active interventional mode (e.g. as in taking down the price of Gold, Silver and Oil) do not be lured into thinking that the periodic up spikes in the prices of Gold, Silver and Oil present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper takedown.
One of Deepcaster's goal is to identify interim bottoms of Gold, Silver, Crude Oil, and other key markets, and thus to help readers profit from their inevitable resurgence, and ascendance to new heights.
It is essential to study the Fundamentals and Technicals even though the Interventions can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.
Similarly, one should study the Technicals for all the usual reasons and, in addition, because it is in The Cartel’s interest to make its actions seem technically plausible in order to continue to “run mainly under the radar.” It is not in The Cartel’s interest to make its Interventions any more visible than they already are. Indeed, there is powerful evidence that The Cartel often uses and/or helps create technical patterns which lure certain investors (such as hard asset investors) into getting “off sides” before Cartel actions such as taking down the price of Gold or Silver.
Consideration of Fundamentals, Technicals and Interventionals has facilitated Deepcaster’s profitable recommendations displayed at www.deepcaster.com.
Significant and Increasing Systemic Threats
Dramatic increases in two major species of derivatives emphasize the increasing magnitude of systemic risks.
Exchange-Traded Derivatives
Exchange-Traded Derivatives soared 27% to an all-time-high $681 trillion in the third quarter 2007, according to BIS figures.
The largest single category - - Interest Rate Derivatives - - increased 31% to $594 trillion, during the third quarter.
These increases reflect a remarkable increase in risk, for many reasons, including the increased aggregate magnitude of the leverage they reflect, and the concomitant increased opportunities for counterparty default.
However, being exchange-traded, they are, to a degree visible. Yet that other main category of derivatives-over the counter (OTC) are not visible, except for the BIS and other reporting agencies disclosures. Yet the inherent risks are, if anything, greater.
Over The Counter (OTC) Derivatives
Consider the import of the data from the BIS' own website - - Review Table 19 at www.bis.org. Follow the path: Statistics>Derivatives>Table19. Note that as of December, 2006 there were:
* $6.475 trillion commodities contracts (excluding gold) outstanding
* $40.239 trillion foreign exchange contracts outstanding
* $291.115 trillion interest rate market contracts outstanding
But consider the stunning increases in OTC Derivatives in just the six months between December, 2006 and June, 2007. As of June, 2007 there were:
* $7.141 trillion in commodities contracts (excluding gold), an approx. $666 billion (10%) increase in only six months
* $48.620 trillion in foreign exchange contracts, a $8.31 trillion (approx. 20%) increase in only 6 months.
* $346.937 trillion in interest rate market contracts, a $55.822 trillion (approx. 19%) increase in only 6 months
(source: www.bis.org. Path: statistics>derivatives>Table19)
What is also obvious from a comparison invited by Table 19 - - comparing June, 2005 figures with June, 2007 figures - - is the increasing systemic threat this interventional regime imposes. Note also the dramatic jump in most categories of derivatives from June, 2005 to June, 2007.
Gold
Increases in the amounts of OTC derivatives outstanding for the Gold Market are perhaps the most stunning.
From the $359 billion outstanding at end-June 2004 they nearly tripled to $1,051 trillion at end-June 2007, an increase of approx. 290% (source: BIS “Table A - - OTC Derivatives Market, Triennial Central Bank Survey of Foreign Exchange and Derivatives market Activity”).
Note: While BIS Table 19 shows a drop in OTC derivatives contracts for gold in the 6 months from the end-December 2006 figure of $640 billion to the end-June 2007 figure of $426 billion, it should be noted that the end-June 2007 number ($1.051 trillion) from the BIS Triennial Survey is a more comprehensive number, generically akin to the “upward revisions” which the U.S. BLS regularly makes. Doubtless some substantial portion of the foregoing OTC derivatives contracts are for entirely commercial purposes, but with publicly visible exchange-traded derivatives also available for commercial purposes (and considering publicly traded companies incur considerable risk by engaging in “dark liquidity” OTC transactions) it strains credulity to claim that most or all OTC contracts are for purely commercial, i.e. non-interventional, purposes.
Liquidity Injections
For an analysis of why the kind of liquidity injections The Fed has been making (e.g. the $40 billion “fund” made available to banks on December 12, 2007) increase the systemic (and other) risks, see “The Fed Cure Worsens the Disease” later in this document.
The December 12, 2007 $40 billion commitment was presumably occasioned by the credit markets continuing “seize-ups” which began in August, 2007 and which are manifested by:
The asset-backed U.S. commercial paper market shrinking 17 weeks in a row (as of December 12, 2007), and widening U.S. Dollar, Sterling Libor, and Euribor spreads. For example, “the spread between the rate of interest on 3-month U.S. Treasury Bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier this year…” Financial Times, London, M. Wolf, December 12, 2007
In our view, it is doubtful whether liquidity injections of this sort will solve the banks liquidity challenges (precipitated, we might add, by Fed policies and the banks own careless lending practices), but one outcome is clear.
The banks will get their money, anonymously, (see Deepcaster’s article on “Dark Liquidity”) and at below market interest rates, which should be highly profitable to them. But, of course, this action gives no help to struggling homeowners facing ARM resets, or to retirees on fixed incomes, or to those losing jobs to (often international-banker financed) outsourcing, or to all of the “little guys and gals” suffering from rises in the cost of living and a substantial loss of purchasing power of their U.S. Dollars.
So now let us take a brief look back to see how all this "Interventional Firepower" is manifested in the Markets.
The August to October, 2006 Interventions - - Stunning
The late Summer, 2006 takedown of crude oil in particular was stunning. From its high at about $78 a barrel crude oil blew past $70 a barrel and then moved relentlessly on to $60, and never looked back. One trader noted recently that oil just kept getting "more and more oversold" from a technical perspective.
For Deepcaster this signaled that intervention was trumping the technicals and fundamentals yet again.
Retrospectively, if one charts the progressive (currency adjusted) increases in the oil price to $78 and then charts its decrease to $60, it reflects a shocking and improbable "linearity." That is to say, that chart appears to have none of the characteristics of random market fluctuations.
The aforementioned "linearity" of the Crude Oil takedown noted by Deepcaster is another surefire sign of intervention, but not the only one.
Most Big Media claim the big drop was due to a "surplus" of above ground supplies and a reduction in Mid-East tensions.
But neither is entirely true. In fact, there were massive above ground surpluses of crude oil in early and mid-summer when crude oil prices peaked.
And even as of October, 2006, Mid-East tensions had only just diminished a bit, but by no means had they evaporated. And demand for crude oil is still increasing year-by-year as the appetites of China and India continue to increase. So fundamentals are still strong and technically crude oil was dramatically oversold. Yet the price kept dropping.
Perhaps the most telling earmark of the second half of 2006 was interventionally-induced decline signaled by the nearly $2 per barrel drop in the crude price on just Monday, October 2nd.
Consider that the preceding Friday Venezuela said it would reduce oil output by 50,000 barrels a day, and that the very next day Nigeria announced it was cutting oil exports by 5%.
The markets' response on that Monday - - nearly a $2 a barrel decline. Do we have any doubters that The Cartel was, in that situation, still "the boss”??
Clearly the ($6.475 TRILLION as of December 2006) petroleum and other derivatives positions, which the Fed-led Cartel utilized beginning in 2005 when natural gas prices hit $15, is the number one candidate for causing this Crude Swoon.
Similarly, for Gold and Silver, a key feature of the late-Summer 2006 Takedown of Gold and Silver from $650 in the case of gold and about $15 per ounce in the case of silver to about $560 and $10.50, respectively, is that, like the late-Spring, 2006 takedowns, it bore all the earmarks of an interventional takedown and not a normal "market correction."
The Spring 2006 Interventional Takedown
Like the late Summer, 2006 takedowns of Crude Oil, Gold and Silver, the late April, 2006 takedown of silver and the mid-May takedowns of gold and silver bore all the earmarks of intervention. The late April takedown of silver was breathtaking indeed. In one trading day, silver was taken down by about $2, about an 18% drop. No explanation has been offered for this takedown other than the dealers' "pulled their bids" (i.e. refused to bid on silver that day). Since there apparently were no bids, the price of silver was dramatically reduced. Silver subsequently rose in early May to near its $15 highs before it and gold were taken down in mid-May again.
One might reasonably ask what the justification is for saying there was a "takedown" (i.e. by an outside force) rather than that this takedown was a natural correction or a pullback.
First, and most important, there was no fundamental reason for gold or silver to suffer such a serious retrenchment. All the reasons for investors to buy gold and silver as an inflation hedge were then still in existence. The United States trade deficit, the current account deficit and budget deficits were looming larger than ever. The downstream-unfunded liabilities of the United States Government were well in excess of $40 trillion dollars. The tension in the Mid-East was not any closer to a resolution; the war in Iraq was no closer to being resolved.
And although one could make a technical case that silver and gold were "over bought" there is still no justification for the abrupt drop through and out of the upward trend channel, especially with fundamentals being as strong as they were. In sum, the explanation appeared clear: Cartel Intervention.
The August, September and October 2007 Market Interventions
A late 2007 example of such a Fed-led Central Bankers Cartel takedown was the stunning October 2, 2007 $18-in-a-day takedown of Gold Bullion. Consider seriously the fact that this takedown was accomplished in the face of extremely bullish Fundamentals and Technicals.
Considering the motivation for such a takedown, Deepcaster reiterates that Gold & Silver, the monetary metals (as well as the Strategic Tangible Assets such as Crude Oil) are the “Mortal Enemies” of the Central Bankers’ Fiat Currencies and Treasury Securities. The Cartel simply cannot afford for investors to long regard Gold & Silver as the ultimate (or even alternate) stores and measures of value as that would decrease the legitimacy of their Treasury Securities and Fiat Currencies.
Indeed, a measure of the historical effectiveness of the Central Banker Cartel in suppressing Gold & Silver prices is that, in inflation-adjusted terms, Gold would have to exceed U.S. $2,200 an ounce to top its all-time high of $850 in 1980.
An example of the apparent use of the Repo Pool to boost the Markets occurred in September, 2007. The Fed allowed the Repo Pool to drop slightly on Friday, September 14, 2007, continuing its modest downtrend bearish for the Equities, at that time. But they increased the Repo Pool on Monday, September 17, 2007 as they typically do when they expect/intend to create major moves (or respond to events) and they want to have sufficient Repo “ammo” to control the markets.
Sure enough, the September 17th, Monday, Repo Pool boost was a harbinger of the Big Fed Discount and Fed Funds rates cuts on Tuesday, September 18, 2007, and partial cause of the Equities Market launch that day.
II. INDIRECT MANIPULATION
The other major form of government (including agency) market manipulation can most accurately be called indirect. It consists of "massaging" or hiding various statistical measures and data to create results that suit the manipulator's (usually, whatever Presidential Administration has power at a given time) preferences, insofar as its political, economic, or financial or market goals are concerned. It is the U.S. Federal Reserve Bank’s (a privately owned “national” bank) and the United States government agencies generation of "creative statistics" on which we focus here.
Specifically we consider today’s massaged government and agency data in comparison with today’s data calculated the “old fashioned way” (i.e. sans contemporary statistical gimmickry).
Overview
Mr. Walter J. (John) Williams (see bio below *) operates an excellent and revealing website business named shadowstats.com, in which he analyzes the U.S. government's and The Fed’s "manufactured statistics" and develops statistics which have a better correlation to reality (i.e. his shadowstats).
*Walter J. “John” Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.
In order to get a flavor of the statistics which are manipulated, and the effects of that manipulation, we present a partial summary of an excellent interview (conducted by Kate Welling, Editor and Publisher of Welling @ Weeden), which Williams gave in 2006 regarding the subject of government manipulation.
Williams says that regarding “what used to be called the GNP but is now widely followed as the GDP, (and) the CPI, and the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation - - both of which are admirable political goals."
Williams has analyzed and compared the way in which the unemployment figure was historically calculated versus the way it is calculated today. He concluded that if it “were calculated (today) the way it was during the Great Depression, it is now running at about 12%." As well, he says, "Real CPI is now running at about 8%. And the real GDP is probably in contraction." Clearly, the government’s methodologies that generated these bogus numbers are all designed to paint a more favorable picture of the economy and the markets than is the reality.
Unemployment Figures
He explains why contemporary unemployment numbers are bogus. Today, the unemployment number does not include those unemployed who have been discouraged and out of work for more than a year. So they are taken out of the work force completely automatically. This results in knocking about 5 million unemployed out of the broader measures of unemployment.
Thus, unemployment is about 50% higher than is commonly alleged. And thus, "Today unemployment is really up around 12%."
Consumer Price Inflation Figures
These distortions have very real, and usually adverse, consequences for citizens. Consider, Williams says, the methodology developed several years ago by Mike Boskin and Alan Greenspan for generating the Consumer Price Index. In their (erroneous in Williams' and Deepcaster's) view the CPI was supposedly overstating inflation so they "fixed" it from its prior condition of (allegedly) overstating inflation.
And here is how they did it:
Originally, the whole purpose of the CPI was to "measure the change in the cost of a fixed basket of goods over time." But Boskin and Greenspan said that we should allow for substitution because people can buy hamburger when the price of steak goes up.
But, of course, "if you allow substitutions you aren't measuring a constant standard of living, you're measuring the cost of survival." Williams correctly concludes.
But the effect of this statistical chicanery is very real and very adverse to, for example, retirees because the CPI was, and is, being used to adjust Social Security payments to compensate for increases in the cost of living.
Today, as a result of the Boskin-Greenspan "fix" (implemented in the Clinton Administration) it understates those increases and therefore under-compensates retirees for those costs
In a similar manipulatory vein, the Bureau of Labor Statistics (BLS) during the Clinton Administration constructed and began to employ a weighting regimen whereby if the price of something went up it automatically got a lower weight in calculating the CPI, but if it went down in price it automatically got a higher weight. The result, of course, was, and still is, to further shaft those people (like Social Security recipients) whose income was dependent upon the CPI measure.
"If the same CPI were used today as it was used when Jimmy Carter was President, Social Security checks would be 70% higher," Williams dramatically emphasizes.
Hedonic Pricing
But perhaps the most outrageous aspect of the government's numbers-manufacturing business has to do with its using "hedonic pricing." ("Hedonics" is the study of how to create pleasurable sensations.) Hedonic pricing is the practice of creating pleasant (to the government manipulators and to a credulous public) pricing.
Using its hedonic method, the BLS says the price really doesn't go up for a product that has "improved" in quality because the consumer is getting greater benefit or pleasure from it. Therefore, if computer power increases by a factor of 10, but the sticker price of computers has only increased by a factor of 2, then the hedonically adjusted price would be much lower for CPI calculation purposes even though the computer is actually twice as expensive (in dollars actually paid) as it was years earlier.
Williams also notes that sometimes data manipulation attempts are overt, such as the time during the administration of George Bush I, in which a computer industry official was approached and asked to boost his sales reports to the Bureau of Economic Analysis. Williams is careful to point out that manipulation is a bipartisan phenomenon.
In the Clinton Administration, the manipulation resulted from the CPI numbers being re-set using weighting. "They basically reduced the number of people being surveyed in the inner cities (which had more unemployment (Ed.)) and then claimed they replaced them statistically. But the effect was immediate. You saw a drop in all the unemployment measures that would normally be influenced by inner-city surveying. Thus, of course, the statistical replacement reflected a lot less unemployment than actually existed."
The adverse effect of this "numbers manufacturing" extends far beyond its adverse affects on any particular group such as retirees. If someone relies on these buggy statistics and invests in the stock market based on happy economic reports, they may well lose the money (and will likely lose purchasing power) because of that reliance. Williams says "I am…disgusted by both parties at this point, especially because we have no one of substance taking on very severe issues, like the trade deficit and federal deficit that are going to create terrible times for people in this country if they are not addressed."
Williams focuses on what he considers, and what Deepcaster considers, "so dangerous that if it isn't addressed - - and I am afraid maybe that even if it is addressed - - that it has gone past hope of repair; and that is the fiscal condition of the Federal Government."
Budgetary Chicanery
Typical statements of the budgetary condition of the government (by whatever administration is in power) do not include accrued pension and retiree benefit liabilities. Certainly this is not a small omission - - and usually results in differences between the official numbers and the real numbers.
Williams notes "where the official federal deficit in 2004 was reported at about $412 billion and the GAAP-based deficit was around $616 billion they said that if you added the net present valuing of the under-funding of Social Security and Medicare, the one-year deficit in 2004 was $11.1 trillion."
In fact, the 2005 statement (of the U.S. government) shows that total yet unfunded downstream federal obligations at the end of September were $51 TRILLION, Williams calculated.
Of course, foreigners are financing most of this deficit spending. Williams notes that last year alone, foreign investors bought enough U.S. Federal Debt to cover all the debt issuance of the U.S. Treasury. But we have no assurance that this will continue. Indeed, once this foreign buying even begins to slow, U.S. interest rates must rise to finance our debt, the interest costs on which are already running at nearly $3 billion per day.
As Deepcaster has repeatedly noted after the current deflationary episode has passed, this process will eventually lead to a very high rate of inflation, high interest rates and a very sharp decline in the dollar, quite possibly followed by a deflationary depression. Williams notes (consistently with Deepcaster's view):
"Once the selling pressure starts it's going to be massive. You're going to see a lot of dumping of U.S. securities, particularly Treasuries."
"To absorb them you're going to see a sharp spike in rates or the Fed will step in, provide liquidity in market………..the end result, when it does all come together, will be something akin to hyperinflation. But at the same time, you'll also have a very depressed economy." …That possibly could evolve into a hyperinflationary depression as much as I hate to use that term."
Williams concludes by saying "so we're talking about a global crisis of unprecedented proportions. Probably one that could lead to the collapse of the current currency system."…As crazy as it sounds, I think the only thing they will be able to do is go back on some kind of gold standard." And, indeed, gold and silver are the Bedrock Assets so far as Deepcaster is concerned. And this is why the Fed-led Cartel makes such forceful efforts to cap their prices.
Finally, Williams talks about where we are today. Indeed, he says we are already in a recession. "What I found is that if you adjust the real GDP numbers that the government releases for the myriad revisions and redefinitions…you'll find that there is a happy overstatement of growth of about 3% on a year-over-year basis." The problem very simply is this - - the consumer is the primary driving force behind economic activity and the only ways that consumers can fuel consumption growth are through rising income, debt extension, or savings liquidation, that's where he gets his cash.
But the consumer is not really seeing any income growth. “Now this is where the playing around with numbers really gets good.” We've already talked about hedonics and all the other manipulations of the CPI. But they all pale next to the impact of imputations in the GDP that are an outgrowth of the theoretical structure of the national income accounts.
“Any benefit a person receives has an imputed component…when the government puts all of it's imputations into income, its growth generally remains positive and has very little relation to reality."
How do we know when the end is near? Deepcaster and Williams agree on the answer. "If I were looking for one factor to signal the onset of some really serious problems, I would watch the dollar. If you start to see a sharp sell-off, or if the selling starts to pick up a little steam and begins to look like a panic, or you start to hear talk of an Asian country dumping a little extra in the way of dollars, it will be a sign of really bad times to come." Ominous!
Key Statistics
The Fed chose to stop reporting M3 in March, 2006, clearly to hide their massive monetary inflation running, as of October, 2006, at 14% per year (according to shadowstats.com) a doubling time of only 5 years!
But, consider major data calculated “the old fashioned way” by shadowstats.com. As of November 6, 2007, shadowstats.com edition, M3 was increasing at about 15.3% annually, an increase from 14.7% in October, 2007.
Gross federal debt totaled $9.07 trillion as of October 31, 2007, up $72 billion from September. Gross domestic product (GDP) while estimated by the Bureau of Economic Analysis at 3.90% (+/-) is estimated by shadowstats.com to reflect an annual contraction of about 2.3% for the 3rd quarter 2007. As of the end of October 2007, whereas the official estimate of the Consumer Price Index inflation for core inflation was estimated to be 2.2%. Shadowstats estimates consumer real price inflation as of the end of October was about 11% annually.
Gimmicked BLS Statistics
Finally, perhaps the most laughable or tragic, depending on one’s mood, was the November Jobs Report which was, according to Williams, was heavily manipulated to bring in the reported $94,000 gain in non-farm payrolls as opposed to an outright contraction. The report again, was “statistically indistinguishable from a monthly contraction” according to Williams.
The Bureau of Labor Statistics appears to be using a variety of gimmicks to come up with the manipulated figures. Perhaps the most notorious (for lack of a better word) is the net “birth-death” adjustment whereby the BLS estimates gains or losses of jobs due to the creation or destruction of businesses. Noteworthy from the November, 2007 report was an estimated 14,000 new “construction” jobs added and 25,000 new “financial activities” jobs added in October, 2007.
But how could this be? In October, 2007 Capital Spending was decreasing, the housing market had increasing numbers of unsold homes, the economy was slowing and the Financial Services Industry had been hit hard by the credit freeze-up from August, 2007 from which it has still not recovered. The BLS expects us to believe that nearly 40,000 jobs were added in these two sectors alone in the month of October?
III SYSTEMIC RISKS
On the Brink of a Cartel-Facilitated Systemic Meltdown
The August, 2007 credit freeze-up and the Fed’s bailouts of August 17 and September 18, 2007 illustrate just how close to the brink we are.
“The Fed’s September 18, 2007 rate cuts temporarily bailed out their buddies on Wall Street, while simultaneously inviting hyperinflation, and sacrificing the U.S. Dollar, the long-term health of the U.S. economy, and the best interests of taxpaying middle-class American citizens and future generations of Americans.” Deepcaster, September 18, 2007
“…(the rate cuts are)…a temporary bandage…not going to solve our problem…I think we’ll have more problems in the stock market this year and 2008…: Jim Rogers, September 18, 2007
“Nothing that has been done will correct…the economic problems…because the real problem is a trembling $20 trillion mountain of Over-The-Counter…derivatives…think about the Weimar Republic…” Jim Sinclair, September 18, 2007.
A major cause of the liquidity crisis is the period of excessively low interest rates created by the Greenspan Fed after the tech-wreck of 2000. This encouraged a proliferation of heavily leveraged “commercial” paper as well as excessive borrowing by sub-prime borrowers and others and risky lending by sub-prime lenders, particularly via adjustable rate mortgages (“ARMS”). This proliferation of ARMS was sure to cause problems when any financial bumps in the road were encountered, and/or when the ARMS interest rates reset to higher levels and the sub-prime borrowers were unable to pay.
As of October, 2007, ARMS are resetting now at about $40 billion/month and will continue at this rate into 2008. The resulting growing mountain of risky and imploding debt creates not merely increasing default risk in the real estate sector, but also creates greater systemic risk.
In sum, excessive and risky mortgage lenders encouraged by low rates and borrower standards has predictably led to increased defaults which has led to heightened perception of risk in CMOS (see below) resulting in the markets “seizing up” in August, 2007.
And, of course, the Greenspan/Bernanke crew at The Fed surely should have known this - - known in 2001 that, via their rate cuts, that they were setting up a situation which would have resulted in an excessive and risky lending “bubble”, resulting inevitably in large increases in defaults, and that this would result in title to valuable properties passing, dirt cheap, to the Central Banks client banks, just as they did in the Great Depression of the 1930s.
The Fed’s “Cure” Worsens the Disease
However, as a “temporary cure” on August 17, 2007, The Fed decreased the discount rate (whereby banks can borrow directly from The Fed) by ½%. The result was that borrowings (!) by banks (so they could do more lending) jumped from a daily average of $6 million to $1.3 billion in the two weeks ended August 29, 2007. A staggering 21,600% increase.
The key point is The Fed administered a cure (enabling even more debt) which, in the long run, worsens the “excessive lending disease.”
The Fed’s discount rate cut (i.e. enabling more borrowed liquidity) “cure” is simply creating more of what got us into this terrible situation in the first place, which was excessive borrowed liquidity. Coupled with non-transparency (e.g. hiding M3 – Where is the transparency, Ben?) and excessive monetary printing, the liquidity increases and easy credit have led to, among other things, the moral hazard of lenders lending recklessly to borrowers who should not be borrowing to being with.
Even so, its “Solution” of allowing even larger injections of “borrowed liquidity” as opposed to “earned liquidity” (which is healthy liquidity achieved through savings out of earnings) temporarily calmed the markets. Yet it is increased “borrowed liquidity” which worsens mid and long-term systemic risks.
For this crucial “borrowed vs. earned” liquidity distinction we are indebted to Dr. Kurt Richebächer (R.I.P.) whose sensible prescriptions have been utterly disregarded by the U.S. Federal Reserve and which prescriptions, had they been followed, would have resulted in our not being in today’s liquidity and derivatives crises. [May the straight-speaking, realistic and erudite Dr. Richebächer rest in peace. He passed away in early August, 2007.]
Dr. Richebächer explains why credit (i.e. debt) financing, or “borrowed liquidity” as he calls it, is so pernicious:
“Available liquidity is, of course, most important. Nevertheless, we find it most important to distinguish, first of all, between two different sources of liquidity: borrowed and earned liquidity. Present excess liquidity in the United States and several other countries is of a peculiar kind.
It does not come, as would be normal, from unspent current income – in other words, from saving. In the absence of any new savings, all the liquidity creation occurring in the United States is borrowed liquidity. Generally, borrowing against rising asset prices is in diametric contrast to earned liquidity from savings out of current income. By definition, this is liquidity from credit inflation.
One thing is certain about borrowed liquidity: it depends on rising asset prices. Once asset prices stop rising (see current U.S. housing prices) this liquidity suddenly evaporates. Moreover, ever larger credit injections are needed to keep asset inflation - - like any other inflation - - rising. Nevertheless, there inevitably comes a point in which asset prices, for one reason or another, refuse to rise further and then the big selling without buyers begins. Never before in history has there been an exception from this disastrous end of asset inflation.”
ARM resets and consequent defaults and foreclosures are far from over. Indeed, ARM resets will continue at a $4 billion/month pace until well into 2008. By correctly anticipating the foregoing, Deepcaster was able to recommend that its subscribers take profit on two “short” positions in August, 2007.
In sum, the August freeze-up will be the of several credit market freeze-ups due to defaulting borrowers and reckless lenders, magnified by the leverage of $20 trillion plus of OTC Derivatives and grossly excessive “borrowed liquidity.”
Ominously, also, on the very day of the September Fed rates decreases were announced, the Treasury International Capital Flows (“TIC”) data for July, 2007 was released.
The bad news was that foreign capital flows into the United States hit their lowest levels since December, 2006, when one considers only the data for long-term securities. When short-term and long-term securities are considered together, the Treasury Inflows jumped to over $100 billion - - more than enough to cover the $60 plus billion trade gap for July.
The key point is that while foreigners are still willing to support the United States’ overspending and over-indebtedness they are moving to shorter dated securities. Thereby, the data is not so subtly telling us that the days of foreigners carelessly financing the U.S. debt are limited. Acute analyst Dan Norcini concluded from the economic and TIC data that “…the Fed will burn the Dollar down, rather than let the U.S. Equity Market collapse.” Apparently so.
Thus it is important to conduct a reality check on how these Fed policies affect American workers. Surely they are a primary cause of wage levels continuing to deteriorate. Real median income of full-time year-round workers fell from $44,600 in 2002 to $42,250 in 2006 (for males) and from $33,800 in 2002 to $32,500 in 2006 (for females)**.
One final point: as detailed in the section above “Significant and Increasing Systemic Threats”, the Fed’s December 12, 2007 liquidity injection represents the creation of more unhealthy and destabilizing borrowed liquidity!
Williams' excellent analysis raises a further question which Williams does not address, but which Deepcaster shall address. When the resulting (and nearly inevitable) crash appears near, what "cover" or "incident" might the government and/or Fed leaders then in power, create via their “communications policy” to deflect the public’s justifiable rage away from the numbers manufacturers and manipulators themselves, who caused the crisis in the first place? In the meantime we must all cope with The Interventional Regime.
So it should not be surprising that Deepcaster gives considerable weight to the realities of market and data manipulation factors in selecting its portfolio recommendations, to maximize the opportunity for preserving and enhancing wealth.
Deepcaster’s specific Forecasts for Gold, Crude Oil, Equities and the U.S. Dollar, as well as a listing of profitable recommendations, can be found at www.deepcaster.com, click on “Latest Letter” and Alerts Cache.”
The Cartel End Game
Deepcaster agrees with Williams that we are looking at an international crisis of unprecedented proportion. It is also clear to Deepcaster that those who run the Fed-led Cartel cannot be so stupid as to not know where their hyperinflation of the money supply (according to shadowstats.com M3, as of October, 2007, was increasing at an annual rate of 15% which is a five year doubling time!), and other policies are leading us.
Thus if The Cartel leaders know what they are doing what is their End Game?
The only rational conclusion to draw is that they expect (and may even be pushing) the Dollar to go into further and further decline, and to continue their other policies, until there is a Systemic Crisis. (Very short-term, Deepcaster earlier Forecast the U.S. Dollar to “bounce” into the 1st Quarter of 2008 - - a Forecast that is being fulfilled - - but that does not affect the fact that The Primary Trend for the U.S. Dollar is down.)
And we expect that systemic crisis will likely lead The Fed-led Cartel to implement the final and dramatic stage of its apparent “End Game” plan which Deepcaster describes in detail in his June, 2007 Letter posted at www.deepcaster.com (path: Latest Letter>Archives). Consult Deepcaster’s Letter for details, including the backup documentation.
The “Real Numbers” as of November, 2007
That the U.S. economy is headed in the direction of stagflation is pretty clear from the shadowstats.com November, 2007 statistics. According to shadowstats.com, Real Consumer Price Inflation is running in excess of 11% a year and, as we commented above, the money supply figure (M3) is increasing at 15% per year, or a doubling time of about 5 years. Moreover, GDP growth is a negative number. It would appear that The Cartel-charted-course (which we describe in our June Letter) toward a hyperinflationary Recession/Depression as a catalyst for a painful transition into the apparent “End Game”, is on track.
To be sure, this course involving an explosion of the money supply (“money from helicopters” to use the phrase associated with Chairman Bernanke) and the massive and increasing use of derivatives to intervene in a wide variety of markets is fraught with danger. Deepcaster, Warren Buffet and Jim Sinclair have all pointed out the dangers. Indeed, Sinclair has aptly described the financial system as sitting on a “$20 trillion trembling mountain of derivatives…think Weimar Republic.” Unfortunately Jim Sinclair and Warren Buffett are correct.
In sum, with The Cartel’s increasing use of derivatives comes an increasing risk of a financial meltdown. We had such a harbinger of one in August with the credit market freeze up of August, 2007 but The Cartel was able to rescue its major International Bank and Wall Street clients from this one.
So far The Cartel has staved off a systemic meltdown. But, alas, it may well not always be so.
© 2007 DEEPCASTER LLC All rights reserved.
