Conventional Wisdom has it that the Central Banks in general, and the Fed-led Cartel in particular, have little or no control over long-term interest rates because the long bond markets are simply "too big to control," given that a few trillions in bonds are traded every month.  Conventional Wisdom has it, therefore, that "the market" controls long-term interest rates.

          Conventional Wisdom has it that long-term U.S. Treasury Securities, and specifically the 10-year and 30-year U.S. Treasury Notes and Bonds, respectively, will continue to weaken and that, therefore, Conventional Wisdom has it that interest rates on the 10-year and 30-year will continue to increase in the short term.

Therefore, Conventional Wisdom has it that long mortgage rates such as the 30-year residential real estate mortgage rate (which is pegged to the 10-year U.S. Treasury Note rate) will continue to rise in the short-term.

          The evidence indicates that Conventional Wisdom is wrong.  In fact, there is substantial evidence that the Cartel of Central Bankers has substantial control over long-term rates as well as over the short-term rates which they explicitly and very publicly control.

          Understanding how the Cartel controls long-term rates, and other markets such as gold, is key to enhancing the profit potential of the Deepcaster Portfolio.  For a comprehensive overview of markets and data manipulations see Deepcaster's "Juiced Numbers How The Government Gets The Statistics It Wants, Markets Get Manipulated, and Citizens Get Deluded, and Worse" at www.Deepcaster.com.

But the key question arises:  How can The Cartel possibly wield this control given the size of the long bond market?

Anyone with access to the Internet can review the evidence for himself.  We invite the skeptical to consider a chart developed by the BIS (the Bank for International Settlements) - - the Central Banker's Bank - - at the following Internet address:  http://www.bis.org/statistics/otcder/dt1920a.pdf, called to our attention by Mike Bolser.

Table 19 to be found at the aforementioned BIS website address is entitled "Amounts Outstanding of Over-the- Counter (OTC) Derivatives by Risk Category and Instrument (in billions of U.S. dollars)".

Reproduced below are the five columns from that Table listing notional amounts and (underneath those) their market values. 

AMOUNTS OUTSTANDING OF OVER-THE-COUNTER (OTC) DERIVATIVES

(In Billions of US Dollars)

                                                  (Table 19 Excerpt)

                                                 2003             2004           2004              2005             2005              

                                                December        June        December         June          December      

Notional Amounts

Interest Rate Contracts                       141,991       164,626       190,502            204,795         215,237           

Gross Market Values

 Interest Rate Contracts                          4,328           3,951            5,417                6,699             5,463

Note the Notional Amount of Interest Rate Contracts is 215.237 TRILLION dollars (as of December, 2005).  Obviously, the $215+ TRILLION leverage of these OTC derivatives provides more than enough "firepower" to control the long bond market and thus to control long-term interest rates.  [By contrast, only some $330 billion in derivatives are needed by The Cartel to control the gold market.]

One must ask what else would such a massive OTC (Over-The-Counter, and thus "private" and not exchange traded) interest rate derivative position be used for, if not to control long-term interest rates?

          [A critic may carp that the gross market value of the $215+ TRILLION derivative position is very considerably less than the notional amount.  While this is true, the gross market value of the $215+ TRILLION notional amount is $5.463 TRILLION.  Thus, interest rate contracts with a market value of $5.463 TRILLION were available in December, 2005 to control the long-term interest rate market.  Quite sufficient, no!  Quod erat demonstrandum.]

          Operationally, how is this massive derivatives position used to control the interest rate market?  The answers are not public (and are therefore somewhat speculative) but some aspects are evident.  For one thing, experience indicates that the Cartel likes to "run the black boxes," i.e., the computerized trading programs of the hedge funds.   That is to say that it operates in a manner which increases the probability that computer software programs programmed (by the hedge funds) to "act" at technical analytical markers (such as Fibonacci retracement levels) will "run" in the way that the Cartel wants them to when those markers are hit, as Bolser has also noted. 

For example, among the more important tools of technical analysts are Fibonacci retracement studies [for those not conversant with Fibonacci retracements see the excellent book,

Technical Analysis From A to Z, by Steven B. Achelis (McGraw-Hill, 2001}.  The Cartel strategy is to "lead" the black boxes to key technical points, and then "enlist" their derivative "firepower" on top of the Cartel's derivative "firepower" to get a particular market moving in the direction the Cartel wants.

One such marker - - the 61.8% Fibonacci retracement level - - was hit in the week just ended in a major securities market.  That means that Deepcaster and those few others who are aware of and use the techniques of interventional analysis along with technical and fundamental analysis know that it is likely that the worm is about to turn.  That is, the well-established trend in this market is about to be reversed to the upside with major implications for the U.S. economy and markets.  It is a move that Deepcaster expects will likely last at least until the November elections (Surprise, Surprise!).

The bottom line is that to profit from the Cartel's market moves one must be aware of the broad range of fundamental, technical, and interventional considerations, and then move with, or ahead of, The Cartel-induced market moves, rather than attempt to fight them.

The fact which many otherwise astute observers of the investment scene do not know, or do not want to acknowledge, is that massive derivative positions (such as the aforementioned $215+ TRILLION interest rate contract position) are far too great to be overcome by mere free-market forces.  Those members of, and collaborators with, the Central Bank-led Cartel, control those interest rate derivatives.  This gives them a great deal of control over long-term interest rates. 

And, similarly sufficiently large derivative positions allow them to control many other markets.  And thus those who fail to "ride" with The Cartel do so at their financial peril.

For example, by "riding with" The Cartel and, with the aid of analyzing their interventional tendencies, Deepcaster Fortress Assets Letter was able to (correctly) warn it's Subscribers in mid-April,2006 just before the impending deep fall in gold and silver.

Thus, by analyzing The Cartel's interventional history and inferring their intentions, one can considerably enhance the probability of avoiding losses, and making very healthy profits.

Deepcaster

July 1, 2006

DEEPCASTER LLC

www.deepcaster.com

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-- Posted Thursday, 6 July 2006 | Digg This Article