“Everything in the Goldilocks Markets is fine until the

 Three Bears come home for their porridge!”

Most market commentators who are not ideologically impaired know that the U.S. economy and the U.S. equities markets are on increasingly shaky ground.

The U.S. markets are, in a word, Goldilocks Markets.  Indeed, were it not for Intervention (see below) the major equities markets would likely be much lower than they are now.

          So Deepcaster will begin with our conclusion.  Some measure of refuge from the Goldilocks Markets Impending moves can likely be found in:

·         Gold and silver shares, but only of a select type

·         Bonds, but only of a select type

·         Energy and resource stocks, but only of a select type

·         Gold and silver coins, but only of a select type

·         A very few highly select special situations

…And for all of the above, the timing of the purchases is crucial.

And Gain from the Goldilocks Markets’ impending moves can potentially be found in select positions such as the one indicated at www.deepcaster.com.

So, before we elaborate further below on these, we briefly summarize why the equities markets are in Goldilocks Territory and should fall substantially, soon.

There now exist about $1.4 trillion in risky sub-prime mortgages that never should have been made.  This of course is likely to lead to…more foreclosures and a drop in housing prices, cash-out refinancing, and housing market activity.  All of which will likely lead to greatly curtailed consumer spending which, by some accounts, is 60% of the U.S. economy, which leads to…increased unemployment and underemployment and reduced U.S. worker earnings and therefore slower economic activity, leading to a greater economic slowdown than the U.S. is already experiencing. 

Couple these with the fact that U.S. consumer savings is a negative number (i.e. most consumers have more debt than savings) ... and U.S. government debt levels are at all time highs and increasing.  U.S. budget deficits and downstream unfunded liabilities continue to increase in the order of magnitude of some hundreds of billions & trillions of dollars, respectively.

Consider that foreign governments, including especially China and Japan, own over $1 trillion of U.S. Treasury Securities and some of these have indicated an inclination to diversify their portfolios.  This (but for intervention), as well as the weakening dollar, increases the risk of higher interest rates.

Couple the aforementioned with low-skilled labor wage rates driving down wages for most American workers, causing further impairment of consumer spending and further market weakness.  This wage depression (as well as the tax burden) of course would be exacerbated if the Bush Administration’s Comprehensive Immigration Reform Bill, more accurately known as an Illegal Alien Amnesty, were to pass.  It would further flood the labor market with these low-skilled laborers and their relatives and saddle all of us taxpayers with paying their medical, educational and various infrastructure costs.

Robert Rector of The Heritage Foundation has recently found that each low-skilled household costs the rest of us (the taxpayers) $22,449 a year in net costs (i.e. after subtracting taxes paid by immigrants) for education, health care, social services, and infrastructure, inter alia.  Most of the 25 million plus illegal aliens in the United States are low skilled (i.e. do not have a high school degree or equivalent).

Couple all the foregoing with fact that real inflation is running at 9-10% annually, but Real U.S. GDP is falling, as indicated by shadowstats.com.  Another name for this economic condition is “stagflation.”

And then consider that the markets really are NOT at records highs when their true measure - - purchasing power - - is considered.  Peter Schiff of themarkettrader.com puts it well: 

“As the Dow burst through the 13,000 milestone this week, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years. Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold.  Today it is only worth about 19 ounces.

To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold.  So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years (emphasis added).  The entire rise from 360 to 13,000 has been an illusion made possible by the magic of inflation (emphasis added).  So much for the concept of stocks being a “can’t lose” long term investment -- unless you feel that eighty years is not quite a long enough time horizon!

Now that is not to imply that the Dow has not generated returns during those years: it has.  However, those returns have been a function of dividends and not appreciation.  But it is not yields that Wall Street celebrates, it is prices.  By dazzling investors with higher prices, they distract their attention from the unpleasant reality that they are actually treading water.  What difference does it make if you have more dollars if the dollars themselves have less purchasing power?

Despite its recent eclipse of 13,000 the Dow now buys 30% fewer euros than it did then back in 2000 when it was priced at approximately 11,500.  It also buys 35% fewer gallons of milk, 40% fewer bushels of corn or wheat, 65% fewer ounces of silver, 70% fewer barrels of oil, 80% fewer pounds of copper, and 90% fewer pounds of uranium.  Try figuring what the Dow will buy in terms of other necessities, such as housing, insurance, college tuition or hospitalization.  Any way you measure it, the Dow is worth far less today then it was in January of 2000.

The point to remember is that when it comes to records, it is real purchasing power, not nominal value, that counts.  Measured by its purchasing power, the Dow has clearly lost value over the past seven years.  Those who have remained invested in Dow stocks during that time period are clearly poorer as a result.”

Schiff’s basic points - - that it is purchasing power which counts, and purchasing power has been steadily eroding for many years - - is the same one made by Deepcaster in its 2006 report entitled  “The Golden Rule; Maximizing Real Gains” available at www.deepcaster.com.

Finally, couple the foregoing observations with the consideration that the Federal Reserve cannot significantly raise interest rates or it will seriously choke off economic activity and destroy the housing market.  But it cannot lower them significantly either because of the increased inflation that would bring and the fact it would put even more pressure on a weakening dollar.

Indeed the only reason the economy and markets do not appear as weak as the underlying realities would indicate, is likely because of the Manipulation of Markets and Economic Data by The Cartel and the government, respectively.  We encourage those who doubt the existence of manipulation to read Deepcaster’s October, 2006 summary overview of the manipulation (“Juiced Numbers IV:  How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, Citizens Get Deluded, and Worse”) to be found at www. deepcaster.com.

Regarding gold and other precious metals price manipulation we encourage readers to review the evidence at the Gold AntiTrust Action Committee’s website at www.gata.org.

Indeed, there is substantial evidence that it is mainly Manipulation that is keeping aforementioned key equities markets stratospherically elevated and the precious metals markets suppressed.

Notwithstanding the apparent manipulation in many key markets, it is also clear the manipulation cannot continue forever, because fundamentals will eventually come to predominate.  For example, natural gas production in North America is diminishing and there is no sign that the trend can be reversed in spite of increased drilling activity in recent years.

That is, in Canada, the United States and Mexico natural gas production is declining but demand in increasing.  At some point within the next few years it is likely that demand will overtake supply and will be so radically greater than supply that not even the nearly $6 trillion in derivatives currently apparently devoted by The Cartel to managing hydrocarbon prices will be sufficient to cover up the shortages of natural gas which will exist.  Crude oil is not (yet) in such a disastrous predicament.  In a very few years however, we expect the same situation with crude to obtain.

          So let us consider key relatively safe harbors.

Gold and Silver

          As Gold AntiTrust Action Committee (www.gata.org) has effectively demonstrated, the prices for gold and silver have been capped for a number of years by the Fed-led Central Banker Cartel.

          Regarding gold bullion, unfortunately, we expect the capping can successfully continue for some time simply because the evidence suggests the Central Banks may still own most of the bullion and that they trade it back and forth, as well as lend it.  In other words, the weight of the evidence indicates that, taken together, The Cartel Banks and their Primary Dealers are the biggest participants in the Precious Metals markets.  And the biggest participants determine market price.

          The Silver Market is a bit of a different situation because silver gets used up in industrial processes and demand is overtaking supply rapidly.  But we do not yet see an imminent demand/supply gap that cannot be accommodated by The Cartel.  But there will be one eventually.

Therefore gold and silver bullion prices will likely be controllable by The Cartel for at least the near future.

However, there is such a sub-sector within the gold and silver market that is not as readily susceptible to manipulation.

Therefore a relatively low risk refuge for those who wish to hold gold and silver shares is to hold those shares of companies in this sub-sector.  Deepcaster had a list of them in its April Letter entitled “Golden Tactics For Profiting In Spite of Cartel Intervention” available at www.deepcaster.com.

Gold and Silver Coins also provide a measure of protection but should (like the shares of companies in the sub-sector (referenced above) be bought near the bottoms of Takedowns.  When such a Takedown bottom arrives, Deepcaster expects to make specific coin recommendations.

Bonds

          As the economy, housing market, and equities markets decline we expect many more companies to weaken and, in general, with the exception of special situations, mortgage-backed and corporate bonds will not be the place to be, because of the increased risk of default, inter alia.

However, one species of bonds should afford considerable protection in the short-to-medium term.  See Deepcaster’s May, 2007 Letter posted at www.deepcaster.com.

Strategic Commodities and Other Real Tangible Assets

          Deepcaster earlier described the rationale for The Cartel’s being (see Alerts Cache:  “The War Against Tangible Assets” at www.deepcaster.com) impelled to drive down and/or cap precious metals and strategic commodities prices in order to maintain legitimacy for its fiat currencies and Treasury Securities.

Yet there are commodities sectors in which the demand is so strong that it will tend, over the mid-term, to overwhelm attempts at manipulation.

Two of these Sectors and specific recommendations for potential profit are identified in Deepcaster’s May, 2007 Letter posted at www.deepcaster.com.

The aforementioned “Fortress Assets” will be sorely needed and appreciated by Investors in the months to come.

So it is entirely possible for investors to gain and find refuge from the Goldilocks Markets’ impending moves.  But one must employ fundamental, technical and interventional analyses to do it.

Best regards,

Deepcaster

May 3, 2007

DEEPCASTER LLC

www.deepcaster.com

Wealth Preservation         Wealth Enhancement

Financial and Geopolitical Intelligence

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-- Posted Thursday, 3 May 2007 | Digg This Article