-- Posted Wednesday, 14 June 2006
DEEPCASTER LLC
www.deepcaster.com
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JUICED NUMBERS III: THE INTERVENTIONAL TAKEDOWN - -
HOW THE GOVERNMENT GETS THE STATISTICS IT "WANTS,"
MARKETS GET MANIPULATED, AND CITIZENS GET DELUDED,
AND WORSE
Preface: This Essay is the third in a series of Deepcaster's work "Juiced Numbers" regarding market and data manipulation. A primary topic of this third installment is specifically "The May and Early June Interventions" that took down gold and silver. However in order to put that takedown in context, the discussion of it is interwoven with significant excerpts from "Juiced Numbers #1and #2, Deepcaster's initial essay describing "how the government gets the statistics it wants, markets get manipulated, citizens get deluded, and worse."
The key point to bear in mind about the May and early June takedown of gold and silver from $728 in the case of gold and about $15 in the case of silver to about $560 and $10, respectively, is that it bore all the earmarks of an interventional takedown and not a normal "market correction." To provide the context for that interventional takedown it is important to review how the market and data manipulation likely occurred and why.
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Deepcaster is often asked what we mean when we opine that a Federal Reserve-led Cartel manipulates the markets. So it is important to explain what we mean by that, and to indicate how Deepcaster takes account of that in our portfolio recommendations.
We want to provide insight about how we were able to alert our readers about the impending takedown in mid-April, and why, since this was an "interventional takedown" and not "normal correction," readers should not "buy the dips."
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 not totally control, many markets. The price of crude oil is particularly difficult to manipulate, for example, but is not immune from some manipulation.
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.
Direct Manipulation
One is direct through daily injections of repos (repurchase agreements) into the market by the Federal Reserve. Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to primary dealers, the proceeds of which are used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow.
So, 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.
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 $32 trillion interest rate derivatives colossus at J.P. Morgan Chase, or the $1.5 trillion derivatives position at the Bank for International Settlements (the Central Banker's Bank). And that $32 trillion derivative position at J.P. Morgan is the position at just one of the Fed’s several “primary dealer” firms.
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 doubters, Deepcaster asks: What could be clearer than that?
The Interventional Takedown
The late April, 2006 takedown of silver and the May through mid-June takedown of gold and silver bear 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 May and early June 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. 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 still exist. 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.
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 admits manipulating the gold and currency markets.
In addition, in one of his typically creative and thorough analyses, Mike Bolser called our attention to statements in the Federal Reserve Chairman's (B.S. Bernake) September 9, 2004, academic paper "Zero Rate Bound Economies" in which he admitted the Federal Reserve is engaged in "targeted long bond purchases."
In effect, the Fed is 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.
This, of course, is a key Fed goal, both to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending. In addition, it is very much in the Fed's interest to focus investors' funds on purchase of this paper (and, especially, their 10-year Note) and to buoy their fiat currency. In this way, the Fed maintains and enhances its power as the Cartel of private banks which it is.
[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.]
Finally, we issue a word of caution to our readers. So long as the Cartel is in a very active interventional mode, 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, they are a lure designed to suck in more "longs" prior to another deeper takedown.
Deepcaster's goal is to identify the approximate bottom of gold, silver and oil, and thus to help readers profit from their inevitable resurgence, and reascendance to new heights.
Indirect Manipulation
The other major form of government market manipulation can most accurately be called indirect. It consists of "massaging" various statistical measures and data to come up with 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 United States government's generation of "creative statistics" on which we focus here.
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 "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 that 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 recently gave 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.
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%."
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," 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.
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) 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 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."
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 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 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, this process will eventually lead to a very high rate of inflation, high interest rates and a very sharp decline in the dollar, likely 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 is the Bedrock Asset so far as Deepcaster is concerned. And this is why the Fed-led Cartel makes such forceful efforts to cap its price.
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."
And Williams' excellent analysis raises a further question which Williams does not address, but which Deepcaster does address. When the resulting (and nearly inevitable) crash appears near, what "cover" or "incident" will the government leaders then in power, create to deflect the public’s justifiable rage away from the numbers manufacturers and manipulators themselves who caused the crisis in the first place?
So it should not be surprising that Deepcaster gives considerable weight to the realities of market and data manipulation factors in selecting its portfolio, to maximize the chance of preserving and enhancing wealth.
Deepcaster
June 14, 2006
www.deepcaster.com
-- Posted Wednesday, 14 June 2006
