-- Posted Friday, 24 August 2007 | Digg This Article
DEEPCASTER LLC
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The August 17, 2007 Fed Discount Rate Cut of half a percent created a positive reaction on Wall Street, resulting, inter alia, in the Dow closing up over 200 points.
But it behooves investors and traders to look beyond any emotional reaction to the rate cut and other Fed decisions in order to determine the effects they are likely to have and not have. And it also behooves them to consider the impact of Fed actions on four Major Markets - - Gold, Silver, Crude Oil and the Equities - - in order to maximize profit and minimize risk.
1) Let us first be clear what that Rate Cut was. It was a bank/mortgage lender bailout, albeit a partial and temporary one. Some Mortgage Lenders are too heavily leveraged to survive in any event.
Deepcaster believes it was not mere coincidence that the cut came on options expiration day. It surely helped options writers (typically, Wall Street) diminish deep losses. The headline could and should have read: “Fed Bails Out Wall Street.”
2) Deepcaster has made much of the capacity of The Fed-led Cartel* to intervene successfully in many markets.
But one market phenomenon The Cartel cannot completely control is the increasing default rate of marginal borrowers who borrowed to buy homes in the easy money days now just ending. The increasing defaults are creating serious liquidity and even survival problems for mortgage lenders who made too many risky loans and who are now suffering. The most prominent is Countrywide.
Moreover, increasing default rates pressure highly leveraged hedge funds and others who have speculated in collateralized debt obligation (“CDOs”), such as, especially, Mortgage Backed Securities (“MBSs”) which are now going sour. We shall thus see more hedge fund failures.
Encouraged by years of The Fed’s promiscuous easy money policies, such speculating hedge funds and lenders were over-leveraged, took on too much risk, and now they are paying the price.
And, to the extent that such hedge fund and lender collapses have systemic effects, we shall pay the price too.
So the effect of The Fed’s lowering the Discount Rate is to give them a respite, however brief, from what we expect to be a concatenating series of mortgage and other defaults.
* [We encourage those who doubt the existence of Intervention by a Fed-led Cartel of Central Bankers to read Deepcaster’s October, 2006 summary overview of Intervention entitled “Juiced Numbers IV: How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, Citizens Get Deluded, and Worse” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for intervention has been gleaned from publicly available records.]
3) The Discount Rate cut will temporarily dampen but not eliminate The Ripple Effect of the sub-prime meltdown throughout the rest of the economy. The negative ripple effects will, indeed, increase. For example, while “only” $500 billion of Adjustable Rate Mortgages are scheduled to reset upward by an average of 200 basis points in 2007, nearly $700 billion are scheduled to reset in 2008, according to a Bank of America report.
The foregoing are part cause and part consequence (per George Soros’ “dynamic disequilibrium” theory) of the fact we are moving into a slowing economy.
Indeed, we are heading into a deepening inflationary recession (cf. with annual inflation running at 10% and U.S. GDP a negative number, per shadowstats.com), and perhaps worse. Moreover, it appears as if nothing will stop the stagflation. It is entirely possible that The Cartel is planning it that way, or at the very least, is allowing it to happen. But, via their “communications policy,” coupled with their “Juiced Numbers,” we expect them to present the coming recession as a deflationary recession as we have explained in our recent Letters and Alerts. Thus, consider the consequences for four key markets.
Equities Markets: While the discount rate cut may have, as a result of the positive psychological impact, temporarily slowed the downtrend in the equities markets, it will not stop it. Deepcaster’s view has been to recommend short positions at the top of rallies, expecting rallies to ultimately fail. This appears to be working well since Deepcaster has, in August alone, recommended taking profit on two of the several short positions it earlier recommended.
Indeed the Equities markets are quite likely to decline further. From a technical perspective not only have we had ten confirmed Hindenburg Omens this Summer, but Dow Theory shows the Transportation Index (the “Trannies”) is confirming the Dow’s downtrend.
And the long-term Chart of Equities Markets shows an expanding “Jaws of Death” (i.e. megaphone) pattern. Ominous!
Moreover, the evidence indicates that The Cartel wishes to use, or help create, such technical patterns as a “cover” or “pretext” to help plausibly implement their interventions.
Finally, and perhaps most important, The Fed has in recent days caused the Repurchase Agreement Pool (the “Repo Pool”) to decline somewhat. Since the Repo Pool is the apparent vehicle by which The Fed-led Cartel maintains their desired overall levels in the Equities Markets (see Deepcaster’s “Juiced Numbers IV: How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, Citizens Get Deluded, and Worse”). Deepcaster forecasts that the Equities Markets, will perforce, decline, as indicated in our recent Alerts.
But there is one sector which Deepcaster forecasts will strengthen (see Deepcaster’s latest Letter and Alerts at www.deepcaster.com). Indeed, the strengthening has already begun.
Crude Oil: Considering the fundamentals, U.S. crude inventories are relatively high. There are over 340,000,000 barrels in storage today. A decline in Crude Oil prices is essential to the ostensible “deflationary” conditions which we expect soon to be presented to us by The Fed-led Central Bankers Cartel.
On the other hand, peak oil concerns, weather events and geopolitical risks all combine to drive prices higher.
Thus, to determine Crude Oil prices in the coming months one must consider the probable use of The Cartel’s $6 trillion derivatives position which is devoted to Hydrocarbon Price Management. Deepcaster has just issued a Forecast for Crude Oil prices based on a careful evaluation of the foregoing and other factors, posted in the “Alerts Cache” at www.deepcaster.com.
Gold and Silver: Some see the Fed Discount Rate decision as a sign of weakness of The Cartel. Au contraire, we see it as a sign of continuing strength of the Fed-led Cartel, like it or not. Given the general deflationary conditions The Cartel seeks to portray, and given the fact that the Monetary Metals, Gold and Silver, are the Mortal Enemy of The Cartel’s Treasury Securities and Fiat Currency Regimes, we expect The Cartel to continue to try to take down Gold & Silver prices.
Are they succeeding? - - Gold and Silver share prices recently reflect several failed technical breakouts.
On the other hand, the fundamentals for Gold and Silver could not be more screamingly bullish than they are now. The credit markets have already seized up once, and The Fed has responded by increasing liquidity even more, and printing even more paper - - M3 is near record levels.
Deepcaster has evaluated these competing considerations and has just issued a Forecast for Major Moves in Gold and Silver soon. The Forecast is posted in the Alerts Cache at www.deepcaster.com.
The current state of the aforementioned Major Markets is in critical respects, unprecedented. The Fed-led Cartel’s Interventional Capacity and Sophistication have never been greater, but the systemic risks and fundamental market pressures are unprecedented as well.
The Titanic Battle has begun.
Deepcaster
August 24, 2007
DEEPCASTER LLC
www.deepcaster.com
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
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-- Posted Friday, 24 August 2007 | Digg This Article
