Increasing United States’ Budget Deficits and National Debt, massive Trade Imbalances, a seemingly never-ending War, and a whole host of other reasons including real inflation at 9-10% a year, would indicate that the U.S. equities markets and U.S. dollar should not be as buoyant as they are.  Indeed, those and other factors argue for a lower dollar and lower equities markets.  See Deepcaster’s May Letter entitled  “Gain & Refuge From The Goldilocks Markets’ Impending Moves - - Gold, Silver, Bonds & Energy” posted at www.deepcaster.com.

          But to forecast what lies ahead for the precious metals, equities markets, interest rates, the dollar, crude oil and other strategic commodities (and to make the specific recommendations with profit potential which Deepcaster does at www.deepcaster.com) we must have reliable data upon which to make those forecasts.  Thus Deepcaster considers and comments on the following key “Real Data:”

Among John Williams’ conclusions from these data are:

• “The Fed faces both inflation and recession, with little ability to counter either circumstance.
• The downturn reflects a long-term structural change that has shifted much of the U.S. manufacturing base and wealth offshore.  The result has been impaired real (inflation-adjusted) income growth, growth that has not been able to keep up with inflation…without sustainable real income growth, there can be no sustainable real economic growth.
• Never has the Fed faced such severe economic difficulties with the financial markets so heavily dependent on foreign capital for liquidity.  Foreign investors are flush with dollars from the extraordinarily massive U.S. trade deficit.  It is the liquidation and repatriation of those dollars and dollar-denominated assets that has the Fed scared.  Once that process starts, the U.S. central bank will have little choice but to boost interest rates, at least initially, in defense of the dollar and irrespective of domestic economic conditions.
• Only the threat of a systemic domestic financial collapse is likely to push the Fed to an easing stance.  That, however, will be the beginning of the process that eventually will trigger a hyperinflation.  Indeed, the basic elements for a dollar collapse and an eventual hyperinflationary environment in the United States remain locked in place (see Hyperinflation Series in the December 2006 to March 2007 SGSs).
• An inflationary recession, compounded by dollar dumping, is about as bad a nightmare as the stock and credit markets can face.
• Ahead lie a sharp decline in equity prices, a sharp spike in long-term rates, a heavy sell-off in the U.S. dollar and soaring gold prices.  The proximal trigger for all this remains likely to be the dollar and its accelerating demise.”

*All data and quotations from John Williams’ Shadow Government Statistics, Issue Number 30, May 7, 2007 (www.shadowstats.com).

          While each and every one of Williams’ forecasts above should be fulfilled on fundamental considerations, Deepcaster believes that not all of them will be.  And that will likely be because of the Interventional Colossus - - The Cartel.

The Cartel’s “Ideal” Scenario

          That is, arrayed against Williams’ Forecast equity price decline, interest rate spike, dollar collapse and soaring gold - - all correct in Deepcaster’s view if one considers only fundamentals - - appears to be The Cartel of Central Bankers’ Market Intervention Operation.

Thus one must consider Interventional Analyses as well as Fundamental and Technical Analyses in forecasting which of the aforementioned will likely occur, and which will not.  Specifically, the evidence shows the equities markets are “juiced” artificially higher by massive daily Repo (Repurchase Agreements) Injections and that the currency level of the U.S. dollar vis-à-vis other major currencies is generally manipulated by Central Bank Interventions.  For an overview of the apparent ongoing Interventions by The Cartel visit www.deepcaster.com and read “The Mega Manipulations - - Juiced Numbers IV:  How the Government Gets the Statistics It Wants, Markets Get Manipulated, Citizens Get Deluded and Worse”…Also consider the substantial evidence at www.gata.org for information on precious metals price manipulations.  Remarkably, virtually all of the evidence for these Manipulations is publicly available!

          In conducting Interventions, credibility and plausibility are essential to The Cartel.  Thus The Equities Markets and the U.S. dollar cannot continue at today’s unrealistically elevated (in light of the economic and market realities noted above) levels without The Cartel’s losing credibility as a financial system manager.

          Moreover, were The Cartel to allow a continuation of such unjustifiably elevated levels they would risk a hyperinflationary scenario reminiscent of the Weimar Republic or, recently, Zimbabwe.  Thus, the reasoning goes, if The Cartel must cause the Equities Markets to be taken down and the U.S. dollar to be taken down (for Deepcaster forecast for these see www.deepcaster.com) what does that imply for precious metals and other tangible assets values such as crude oil?  And what does that imply for long-term interest rates?

          Consider:  Fundamentals (i.e. genuine market forces) will continue to press precious metals and crude oil and other strategic commodities prices higher.  But The Cartel will likely work to lower these prices because they must - - precious metals and strategic tangible assets like crude oil are competitors to the Central Banks’ Treasury Securities and fiat Currencies.  The result is The Mother of All Market Battles with the short-term outcome not entirely certain.

          But we can say with some assurance that if the equities markets are to drop and the U.S. dollar is to drop then, above all, The Cartel will not want to give investors Tangible Asset Alternatives (see Deepcaster’s 1/5/07 Article entitled “Profit Potential from The War On Tangible Assets” at www.deepcaster.com).

Thus they will likely cap or take down precious metals and crude oil prices simultaneously, if they are able to do so.  As well, following this logical train, they will want the resulting drop to be accompanied by an increased value for 10-year and 30-year U.S. Treasury Securities because that would be accompanied by the corresponding decrease in long-term interest rates, resulting in softening the housing market decline.

          For the same reasons, The Cartel can be expected to try to suppress the prices of the other strategic commodities like crude oil and including certain key base metal prices.

          Finally, for sure, during a time of equities markets breakdown and dollar weakness, The Cartel will not want gold and silver to be seen as “go to” assets.  So, in spite of dollar and equities markets weakness The Cartel Program in this scenario would likely be for gold and silver to be taken down simultaneously.

This would leave the Crown Jewels of The Cartel, Treasury Securities in general, and the U.S. 10-year Note in particular, as the major beneficiaries of all the various market moves.

Will The Cartel Succeed?

          After considering the Fundamentals, Technicals, and Interventionals, Deepcaster believes that The Cartel will achieve some but not all of its objectives posited above.  For specific forecasts (and recommendations) on Gold, Silver, the U.S. Dollar, the Equities Markets, Crude Oil, and Interest Rates read the latest Alert and Letter posted at www.deepcaster.com.

The fact is that The Cartel still remains a potent force, but not a totally dominant force, in the major markets.

Deepcaster

May 11, 2007