-- Posted Friday, 4 August 2006 | Digg This Article
DEEPCASTER LLC
www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
AUGUST LETTER
Two leading indicators of economic health, retail sales and housing starts, generated signals in June (as reported in late July) warning of a coming recession.
Specifically, the June, 2006 numbers reflected a 1.2% annualized real (inflation adjusted) second quarter retail sales contraction and the annual retail sales growth rate moved below the 1.8% "fail safe level" as reported by John Williams, Shadow Government Statistics, July 24, 2006.
Williams also notes that highly volatile housing starts showed a "5.3% monthly contraction" in June which translated into a 11.0% annual decline."
Contrary to Federal Reserve Chairman Bernake's recent claim of inflation being contained, Deepcaster agrees with Williams's conclusion that the economy "more properly can be described as coming in for an immediate crash landing. Contained inflation however remains a wishful fantasy of Fed and Wall Street spinmeisters."
Indeed, inflation calculated the old fashioned way (i.e. prior to the data manipulation regime developed in the United States in the last three decades - - see Deepcaster's June Letter: "Juiced Numbers II - - The Interventional Takedown - - How The Government Gets The Statistics It Wants," Markets Get Manipulated, And Citizens Get Deluded, And Worse") is actually running at about 12% per year.
Furthermore, the claim that the Fed has engaged in monetary tightening (i.e. by the Feds moving incrementally to 5% on short-term rates) is, according to noted Austrian economist Kurt Richebacher, "a farce."
This is because, while the successive quarter percent increases appear to reflect a tightening, in fact, "in aggregate, overall financial and non-financial credit growth accelerated over this period of (Fed rate) hikes from $2,643.2 billion in the 2nd quarter 2004 to $3,670.1 billion in the fourth quarter 2005." Thus, from the 2nd quarter of 2004 to the 4th quarter of 2005 "borrowing and lending increased by 38.9% resulting in a total credit market debt increase during that period of 3.34 trillion dollars."
The growth of debt thus created in this period was 4.4 times GDP growth, notes another exponent of the Austrian school, Marc Faber. Clearly, this trend is not sustainable. "…to create nominal GDP growth of $751 billion in 2005, total credit market debt had to increase by 3.34 trillion dollars - - 4.4 times faster than GDP." Faber concludes he expects the Fed will "try to postpone the hour of truth by renewed massive liquidity injection when the next recession arrives…. So my concern remains the same. Before the final debt crisis hits we might see very high rates of inflation, most likely hyperinflation, with all the assets and consumer prices soaring (amid falling real income)."
However, the foregoing is a long-term forecast. Near-term, Deepcaster and Williams and Faber expect credit growth to slow down. And Deepcaster and Faber expect the economy to slow further into a recessionary phase in the near-term (i.e. the next few months).
Why? Since U.S. debt growth has driven asset prices higher in the last few years and allowed U.S. households to "extract funds from their assets (and, especially their "home/ATMs") to sustain increasing consumption, it is likely that home and stock prices will no longer rise, and may go down, which will have pronounced impact on economic growth rates" according to Faber.
So, short-term (i.e. in the next few months) Deepcaster expects the rate of inflation will decrease along with the slow down in the economy into a somewhat deflationary recession. This will likely be followed by a hyperinflationary stagflation, for reasons we have earlier set forth.
A Profit Opportunity
One expected near-term consequence of this impending near term economic slow down is that the Cartel and the spinmeisters will use it as an occasion both through manipulation and "Fed communications policy" to accelerate the drop in the prices of "real and tangible" assets, as Deepcaster has pointed out before. This should eventually provide the opportunity to pick up deflated (in price) real fortress assets at bargain prices. Deepcaster then expects to recommend that its readers take long positions in the price-depressed real tangible assets at their approximate bottoms.
Before we comment further on the profit opportunity occasioned by these takedowns, it is important to summarize the rationale for these takedowns. The bottom line is that the Fed and other Central Bankers do not want gold, silver and the strategic commodities to be seen as "safe havens" or inherent stores of value, because that would tend to devalue their fiat currencies and Treasuries' paper, and thus dilute their power.
But in fact gold and silver are "safe havens" and strategic commodities are inherent stores of value, but just not during the impending deflationary phase, and so long as The Cartel can effectively manipulate the markets.
Thus, in the short term the Fed-led Central Banker Cartel and their cooperating primary dealers control the show. We again encourage readers to review our June, 2006 Letter "Juiced Numbers II - - The Interventional Takedown - - How the Government Gets the Statistics It Wants, Markets Get Manipulated, and Citizens get Deluded, Or Worse" for more details.
But if this power of manipulation is a fact in the short term, why is it that it cannot be a fact in the long term? Put another way, why will the Cartel likely be unable to stop eventual hyperinflation?
Two primary reasons are that demand has, for some time, exceeded supply for key commodities such as gold and silver and that we are at or near "peak oil," i.e. the peak of production. Indeed, of all the strategic commodities, natural gas is the closest to experiencing a genuine supply "outage" which could be occasioned by a summer heat spell (25% of all electrical power generated in the United States is generated by natural gas) or a cold winter. And the natural gas situation is not easily remedied because it is primarily a "continental resource" - - there are only 4 LNG terminals in the United States.
So when (not if) demand significantly outruns supply of any of the aforementioned commodities, the Cartel's price manipulation regime will crumble, with serious negative consequences for those who do not hold Fortress Assets.
Yet Professor Kotlikoff, writing for the U.S. Federal Reserve Bank of St. Louis, recently advanced another reason the price manipulation regime must ultimately fail:
"…the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payment of various kinds…" He goes on to ask, "to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors…" Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States is going broke."
[And Deepcaster notes that one of the results of the United States' impending bankruptcy is to sell off public assets to Foreign Interests. See "President Bush Continues to Sell America to Foreign Interests" by Chuck Baldwin, www.chuckbaldwinlive.com.]
From the Federal Reserve's perspective, the only "solution" to the problem Kotlikoff and his predecessors identify is to print more money (and issue more Treasury Securities). But printing more money devalues the currency and is inflationary. [As currency is devalued, asset prices stated in terms of that currency, rise.]
Total U.S. government debt is now over three trillion dollars - the equivalent of a $340,000 mortgage for each working American. And the politicians say this is manageable!?
Yet, predictably, (and conveniently for The Fed) last March, the Fed stopped publication of the M3 figures that have constituted the broadest measure of liquidity (i.e. all forms of money in circulation) in the monetary system at any one time. This suggests that liquidity (i.e. fiat currency and Treasury Securities) creation will dramatically, and dangerously, accelerate, but out of the public's view, since M3 is no longer published. But the danger (of what apparently will be increased profligate paper printing) is that it not only debases the currency, and creates real inflation, but also that it likely creates hyperinflation.
Indeed, long-term, Deepcaster and Faber expect these massive and increasing liquidity injections to be hyperinflationary and to result in a crisis.
And what this logically entails is that the only refuge for the middle and long term are gold, silver, the other precious metals, crude oil, and the strategic commodities.
However, we reiterate, for the short term, the Fed-led Cartel is still able to, and likely to, initiate a deflationary takedown of real assets. Thus Deepcaster has recently made recommendations which are already enabling its readers to profit in this impending deflationary period.
Indeed, as we write, the U.S. Treasury 10-Year Note rates have dropped to 4.9% from 5.2% just a few weeks ago. [Caveat: intensifying war in the Mid-East or similar (in effect) geopolitical events could cause us to bypass the deflationary phase entirely and move into hyperinflation immediately.]
Thus those who are heavily invested at this time in gold, silver, oil and the strategic commodities are likely going to take a serious financial bath in their deflationary phase of the next few months. [There is, for example, a rational explanation of the rally failure after the first 2006 Interventional Takedown of gold and silver in May and early June, and which Deepcaster forecast in Mid-April. The explanation is that the Cartel "caused" gold's recent rally to fail near $662 because that is the 61.8% Fibonacci retracement from gold's recent low at $543. In this way the hedge funds' "black box" computerized trading systems are "enlisted" by the Cartel to aid it in the subsequent taking down of gold and silver as we have described in greater detail in earlier Deepcaster Letters and Alerts.]
In sum, in the next few months Deepcaster expects to witness hard asset deflation. We expect this deflation to seriously begin (and to be accelerated by the Cartel) if and when the Middle East situation defuses or begins to defuse. This would likely lead to declining crude oil and strategic commodity prices (but likely not natural gas prices) and precipitously declining gold and silver prices. And this should present readers with magnificent profit opportunities as Deepcaster endeavors to recommend purchase of these real hard assets at their approximate bottoms in a few months.
Yet all of the anticipated near-term deflation will unfortunately likely mask the oncoming reality of a hyperinflationary future (thanks to The Cartel!) with the ultimate debt-crash-crisis as the likely Final Act.
Then the quintessential Kondratieff Winter will be upon us. It is that for which we all should endeavor to prepare our portfolios in particular and our assets in general.
Deepcaster
August 4, 2006
DEEPCASTER LLC
www.deepcaster.com
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
Gravitas, Pietas, Virtus
-- Posted Friday, 4 August 2006 | Digg This Article
