-- Posted Wednesday, 28 April 2004 | Digg This Article

"No Tree ever touches the Sky"

Nigel H Maund

BSc(Hons)Lond., MSc, DIC, MBA, MIMMM, SEG

Economic Geologist

Introduction

Numerous writers on various internet sites, where complete freedom of speech still exists, including notably: Richard Russell, Jim Puplava, Doug Noland, Marshall Auerbach, James Turk, Robert Gordon, Antal Fekete, Bill Bonner and Clive Maund, to name but a few, have attempted to alert people to the dangers and consequences inherent in today's financial markets. However, the Fed has skillfully succeeded in wrong footing all these experienced writers, and a great air of complacency now exists amongst the general public that the fantasy land of ever rising equities, bond and real estate markets will continue, ad infinitum, In this wonderland, the foregoing will rise forever into the glittering and rosy horizon of endless, and rapid, economic growth.  What is more, one's house is actually one's own private bank, to be dipped into as and when the need arises.  No need for those nasty credit checks and grim faced bankers after all!! He He! Better still, as houses rocket towards the outer planets, where the effects of gravity diminish, maybe one's house will be worth an unimaginable, galactic scale, sum in years to come. What a thought!

This fantastic "cuckoo land" has been created by the world's key merchant bankers, such as Goldman Sachs, S G Warburg, Kuhn Loeb, Salomon Brothers, N.M Rothschild, Lazard Freres, etcetera, who not only control the world's central (fractional) banks, such as the Fed and the Bank of England, but own them in their entirety. They remain as faceless entities behind the puppet figure, called "the Chairman", or, "the Governor", for whom the syndicated press creates a God-like persona that the Pope would be ashamed of. These bankers fully understand the idiocy and greed of the masses, as evidenced by "Tulip mania" in Holland, the "South Sea Bubble" in England, and various other manias that have driven the financial markets to ludicrous valuations in the near and distant past. However, people generally have a poor knowledge of history, and a very short memory. They become the victims of these manias, when they ultimately, and inevitably, collapse. In the past, losses were purely financial. However, this time the stakes may be a lot higher.

Never in human history has mankind had the technical wherewithal and lack of political controls to create money out of thin air on such a stupendous scale, and milk the planet dry with bank / management charges and interest rates on money that quite simply does not exist, other than as digits in a computer.  There has never been an open discussion of the consequences of such action in the World's "Democracies", and more fantastic still, this high stakes global political and economic game has scarcely been questioned by the media! No one seems to care, so long as the gravy train keeps on rolling. So, what happened to previous generations of "Prudent Bankers", who believed in encouraging savers who provided the vital underpin for constructive lending for productive purposes. Remember that now extinct species of human being?, ..... and, even more scary, where will all this easy credit world we live in end up?....... and, furthermore, what is the purpose of this incredible munificence by the new easy credit (hyper – elastic) bankers where huge loans are extended with the minimum of stipulations or requirements? What happens if gravity is allowed to assume its normal role, or just does so anyway?.... That the laws of finance and economics cannot be defied forever by such wondrous geniuses as "the Great Economic Helmsman", Sir, Dr, Professor, whatever, Greenspan (now virtually deified), without untold consequences? What are the eventual economic and political repercussions when, and not if, this humungous bubble or collection of orbiting bubbles (Equities, Bonds and Real Estate) suddenly meets reality coming the other way?  Hmmmmm! ..... And, if this were not enough, dare one mention the words Government Debts, State Debts, Corporate Debts, Personal Debts, and, God forbid ..... Derivatives? ... There's only 200 trillion of those in US markets, a mere bagatelle....... in "Greenspan's Big Top".

The Propaganda Machine

Propaganda is the supposed territory of dictatorships such as those under Hitler, Mussolini, Stalinist Russia or Mao Tse Tung's, People's Republic of China. However, today, far from being the preserve of the long dead Dr Goebbles, we live with a propaganda machine that would have been the envy of any of the above-mentioned dictatorships in terms of its depth, breadth and sophistication. Thanks to CNBC, Fox News, CNN, BBC, Sky News, Channel 4, ITV, Deutsche Welle and France's TV5, not to mention a host of lesser stations, and the mainstream press of all western "Democracies" (the so called "Fourth Estate"), we now have a "Global View", in which the vast majority of people regurgitate, without question, the accepted dogmas as if these were akin to the 10 Commandments handed down by God at Mt. Sinai. The few who dare to ask awkward questions, or, worse still, demand the truth, are derided, smeared or marginalized by sophisticated campaigns written by hacks hired to do the desired hatchet job. This is the unacceptable face of modern journalism, corrupted by power and money from the very top. A very few, such as Australia's great journalist John Pilger have survived to keep on telling the truth. However, sadly, few Americans, Britons or Australians would know of him or his writings. Of course, all of the foregoing implies that we are deep in conspiracy territory, the preserve of "the lunatic fringe". History is "accidental", and as much a catalogue of human folly more than any collective planning.  However, it is worth recalling the comment of a past US President, Franklin Delano Roosevelt, who stated " If anything happens in history, you can bet it was planned that way!" This, while not altogether true, is closer to the truth.

21^st Century USA, under its current administration, is seeing freedom of speech, set down as a fundamental right in the articles of the 1776 US constitution, destroyed with little more than a murmur. Nowhere is this assertion provided with more proof than the manner in which the US administration's Military – Industrial complex has dealt with the news and casualties emerging from the current situation in Iraq, and, moreover, the very one-sided reporting, and handling of the Israel – Palestine situation since 1948. The steady stream of US coffins, not to mention the larger number of wounded, maimed and mentally scarred servicemen, returning from Iraq, is scarcely covered by the US media, who also fail to cover the huge tragedy and loss of life suffered by the ordinary Iraqi's and Palestinians. Balanced coverage of events in Iraq and Palestine is just "not on" in the "Homeland Security" conscious 21^st Century USA. Is this paying real service to humanity?

Perhaps more significantly, for these pages, is the manner in which the "Propaganda Machine" has handled the origin, and economic implications, of the vast credit expansion witnessed since 1982, which is set to eventually destroy the wealth of US citizens and transfer their heavily leveraged assets back to already unbelievably wealthy Merchant Banking families. People will see their pensions and savings quite literally wiped out. What then for them? The media dare not, in its "in depth analyses", discuss the truth. Rather, day in and day out a stream of bright cheery "talking heads" and "space cadets", with over large mouths, ask a heap of pre-arranged questions and try to out do each other in talking the market up. An orchestrated patter keeps these cynical and pathetic shows rolling along to lull the masses into the land of "make believe" and "feel good". So much for objective analysis. “Consumers, for Christ's sake keep holding stocks”, refinancing and spending is the watchword!!..... The war on savers continues. 

Monster Mother Bubble and her Steroid Fed Son

One has to congratulate 18 auspicious years of Alan Greenspan's tenure as Chairman of the Fed. He has created the largest stock market, bond and real estate bubbles of all time, on this planet. Not satisfied with this, his easy credit policies have resulted in the USA accumulating the largest debt mountain: Federal, State, Corporate and Personal in its entire history - a debt burden that it can never repay. What a legacy, "arise Sir Alan!"

Big Mother Bubble started her life back in 1982. She caught a little flu in 1987, but after this was fed steadily increasing amounts of vitamins and steroids, and by God did she grow! The populace loved it! There's nothing like a good old dose of FIAT, so "Easy Al" gave them what they wanted in spades, laying it on with an ever bigger spade until now spades are too small, he now drives a "Big Cat" front-end loader of the type seen in huge open pit mines. Fortunately, human greed knows no bounds, and Al knows this. Always obliging, Al then pumped up the level of FIAT to astronomic numbers that even those scientists stationed at Mt Palomar would find impressive. The printing presses would have blown up long ago, but never mind, Al just created digital money out of thin air. How wonderful is the inventiveness of mankind. No real money is needed at all. In fact, it’s mighty inconvenient. For all those monster leveraged takeovers and acquisitions, and burgeoning mortgages, Al just conjured up figures out of space. Of course, management fees, brokerage fees, insurance fees, and interest has to be paid on all this fictitious money with real money generated from corporate profits or individual earnings. This small fact seems to have escaped the notice of the world at large. Who loses out of this wondrous scheme. Answer? easy really! the shareholders and Pension Funds, who else?; i.e., the man in the street. Who gets all that lovely money? Answer?.... Guess! Yes, its Al's employers, our good old friendly Merchant Bankers. And, if this were not enough, who handles all US and UK tax receipts, corporate and personal? the Fed and Bank of England; QED, the same Merchant Bankers. What a Grand Scheme this all is!..... provided you’re sitting on the receiving end! Of course, the more one pumps up wages, real estate values and asset values, in nominal terms, the larger the tax take as these assets move through different taxation thresholds. Who wins? why once again.......the Merchant Bankers. To cap it all, these same merchant bankers get huge brokerage and management fees for arranging all these mergers and acquisitions, and business and personal mortgages. Oh, what a lovely world!

Returning to Big Mother Bubble, she started to look grossly outsized in 2000 and fell inexplicably sick, thought to be due to increasingly excessive eating habits developed since 1992. In late April 2002, after a tough pregnancy, having lost some 30% of her humungous weight, she gave birth to her son, "Baby Al". "Baby Al" grew at a fantastic rate, that had the crowds cooing with delight! No surprise, "Baby Al" was fed with the financial steroid equivalent of JET A1 fuel, courtesy of his older namesake in the Fed. In an all out effort to stop what would have developed into a full blown market correction, taking the DOW back to 4,000 points and S&P back to 400 points, as shown on the chart above, Al savagely cut interest rates to a 45-year low of just 1%. Credit became ever easier, if that were possible. "Baby Al" responded wonderfully, feasting on the Mortgage Refinanced US consumer spending money as if there were no tomorrow. Debts were serviced by taking on more debt from second and third tier syndicated banks. In the marketplace equivalent of Michael Milken's Junk Bond Financing, the already highly leveraged consumer was propelled along as never before. US GDP surged to 6% in Q1, 2004, wowing the markets. Companies have posted impressive Q1 profits, largely based on 2^nd and 3^rd tier subsidiary banking operations lending money through the Mortgage Refinancing system. Should the consumer finally wake up and start to repay some of their debts, and not take on additional financing, then one may expect profits arising from this sector to start drying up. Indeed, this has started to happen. Furthermore, if the consumer senses, belatedly, the coming interest rate crunch, to which they are now highly exposed, they may curtail their consumer habits with all that that means for the markets. Many ordinary US and British families can barely meet their household outgoings, let alone higher interest bills on their enormous credit exposure. If interest rates were to rise by a mere 3% this would collapse the market, substantially. Any larger rise would precipitate an all out recession, or possibly, a depression of 1929 proportions.

Old Al's scheme is to fine-tune interest rates upwards, probably, initially, in 25 basis point moves. This, he says, will gradually allow the economy to adjust rather than cause any serious perturbations. However, Al's options are dictated by the behavior of the Bond and Currency markets. Bonds have already turned south, as shown on Figure 3, as yields on 10 and 30-year long bonds have risen in the past 6 weeks. The REIT Index chart looks horrific. The death knell of the US Property Bubble has been sounded by a very large "Lutine Bell". The REIT may recover slightly for a couple of weeks, but is now perched ominously on the support of the 200-day moving average. Given the stark nature of the recent plunge, one would expect this market to resume its "death dive" to the bottom of the Mariana's Trench very soon.

The collapse of the Real Estate bubble will cause the simultaneous collapse of the DJIA, S&P and NASDAQ indices. Given "Baby Al's" hormone induced infancy, his life will be seen to have been a short but merry one. Overpumped with steroids, Baby Al is beginning to look a bit peeky. In fact, he's definitely sickening. When the US consumer is no longer able to tap into the diminishing value of their private bank; i.e., their house, for easy money, they will start to wonder what is going to happen next. With their source of funds dried up, and loaded up with debts that they will never pay back, panic will set in. The awful realization that 2 + 2 does not equal 10 will dawn, and spending habits will have to be severely curtailed. The Refinancing driven equities markets will, accordingly collapse. "Baby Al", unable to go "cold turkey" without his steroids, will die a sudden and tragic death. Not for him a long terminal sickness, he has no strength, as he has been brought up on the wrong diet from birth.

Currently, the World's Reserve Currency, the US dollar, which has had a torrid last two years, having lost 30% of its value, has rebounded 10% in the last 6 weeks. No coincidence that this change in the dollars’ fortunes exactly coincides with the sharp downturn in the Bond markets, and Al's coded signals about interest rate rises to come. The stage has been set. The smoke signals have gone up. Those traders now leveraged to the hilt in the Bond and Real Estate Markets have been given the blatant signal "Game Over".  The smart ones are rushing for dollars to exit their dangerously exposed short positions. This has pushed up the US$ Index, which is now testing its 200-day moving average, as shown on Figure 4. It could well break through it leading to a dollar spike lasting a few months while the Bond and Real Estate markets cover their positions.  During this time the commodities markets will take a terrific hammering, with the realization that interest rates will rise significantly enough to kill off the bull market and usher in a recession, or, more likely, a major depression . The writer expects nickel and copper to fall to between 75% and 50% of their current prices, despite recent years demand from the Chinese markets. This is apparent on the copper chart, shown on Figure 5. As with copper and nickel, so with silver and platinum, which are, after all commodity metals.

However, one metal is not a commodity, despite the best efforts of the Merchant Bankers to create the illusion that it is. For 7,000 years gold has been man's principal store of wealth and bulwark against inflation by corrupt Governments and Kings. It can neither be created nor destroyed. There is a sufficient quantity of it to serve the world as a monetary instrument. During the past 70 years every effort has been made by the Bankers to demonetize it, with great success. Almost no one now believes, excepting die-hard gold bugs, that gold can be a basis for money. The propaganda machine combined with 70 years of bad experience with the metal, engineered by the Bankers, have convinced almost everyone that gold is intrinsically just a commodity like everything else.  Had the world been on the gold standard, the following may be stated as truths:

Ø       Wars could not have been so readily financed;

Ø       Inflation would not have taken place to anything like the degree it has;

Ø       The Anglo – American world would not know be faced with appalling debts, and the social consequences of this situation in the years to come;

Ø       People's savings and pensions would have been secure and not placed into the highly manipulated casino called the stock market, where the "smart money" habitually plunders the pension and mutual funds;

Ø       Asset prices would have remained to a large degree stable, and attainable by most people, without incurring massive borrowings, and debt servicing costs;

Ø       The huge, and very evil, social consequences of large corporate and personal debts, involving many criminal undertakings, would have been avoided simply because people would have been under far less psychological pressure to chase money at all costs. The need would not have been there.

Ø       Finally, people would have been encouraged to save their money, where it could be lent out for constructive and profitable enterprises based on adding real value to companies, and to society at large.

Once the shorts have covered their positions, the US dollar will resume its downward path to an unknown destination. Never has the US currency faced such a dubious future. The world has changed so much since the US$ became the accepted global currency in 1945. Consider this:

In 1945, the US produced more manufactured products than the rest of the entire world;

Ø       The USA had the world's most enlightened Constitution ever written by mankind, although it had already been partially debauched by the Bankers;

Ø       The USA was still one of the world's largest Oil Exporters;

Ø       Europe was a total wreck, and without US Marshall Aid, France, Germany and Italy would have taken a century to get back on their feet;

Ø       The US had a gold reserve of 22,000 tonnes compared to less than 8,000 tonnes today;

Ø       The US was virtually debt free and produced a large annual balance of payments surplus from a huge internal economy;

Ø       Terrorism did not exist, the only concern was the Soviet Union, which was in any case held in check by the US atomic weapons arsenal;

Ø       The US had very friendly relations with the entire Arab world; and,

Ø       The average American Citizen was a net saver.

Compare this situation with today's and the contrasts are very stark, if not to say very disturbing.

Add to this America's very changed image in the wider world, and the rise of China, India, SE Asia, the recovery in Japan and the expansion of the EEC and recent launch of the Euro and the world for the US dollar has become a very different place indeed, with all that this means for the longer term survival of the US economy and political hegemony.

The final denouement

If all the above seems pretty awful, consider this; the next stage in this Grand Scheme is the inevitable crash. This is what US chess Grandmaster, and former World Champion, Bobby Fischer, called "The Sucker Puncher".  This crash will by its very scale and nature result in the largest transfer of assets, to an astronomically wealthy elite, ever seen in the history of the planet, except in outright cases of Ancient to Medieval pillage. However, never before has society been so interconnected, and yet, so easy to manipulate and to control. When the crash comes, real estate equity, stocks, savings and all other forms of monetary instruments will become the property of the banks, dependent upon everyone's state of indebtedness. Those who are highly leveraged will be totally financially destroyed. Gold will be the only monetary instrument outside the control of the Bankers. This writer is of the belief that the US and UK administrations will, in this scenario, outlaw private ownership of gold.

NHM 27.04.2004

Charts by Clive Maund

-- Posted Wednesday, 28 April 2004 | Digg This Article

Web-Site: CliveMaund.com

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