-- Posted Monday, 31 December 2007 | Digg This Article
| Source: GoldSeek.com
‘The U.S. Government is on…”a burning platform”…of unsustainable policies and practices”
“Chilling long-term simulations…”include “dramatic”…tax rises, slashed government services and the long-scale dumping by foreign governments of holdings of U.S. debt”
“Striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government:”
“On a path toward an explosion of debt…with looming retirement ob baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risk…”
Ø “Current U.S. policy on education
Energy, the environment, immigration and
Iraq is on an “unsustainable path”
David Walker, Controller General of the United States from “Learn From the Fall of Rome, U.S. Warned” by Jeremy Grant, Financial Times.com, August 14, 2007.
The words of David Walker, straight speaking Controller General of the United States, as quoted by eloquent journalist Jeremy Grant, are chilling, indeed, and prescient.
Some of the “unprecedented fiscal risks” of which Walker speaks have certainly surfaced since August 14: the credit market freeze-up, the continuing credit and sub-prime crises, and their ripple effect through the entire financial system.
And the response of The Cartel of Central Banks* has been ever more Intervention with seemingly ever-increasing derivatives and provision of ever-greater unhealthy ‘borrowed liquidity’ rather than healthy ‘earned liquidity’ (see Deepcaster’s January, 2008 Letter “Market Intervention and Data Manipulation - - Consequences & Forecast for Gold, Crude & Equities and The Cartel End Game at www.deepcaster.com at Latest Letter).
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*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Central Bankers to read Deepcaster’s January, 2008 Letter containing a summary overview of Intervention entitled “Market Intervention and Data Manipulation - - Consequences & Forecast for Gold, Crude & Equities and The Cartel End Game” at www.deepcaster.com/Latest Letter. 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. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”
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The foregoing raises three critical questions:
1) Will The Cartel be able to keep the financial system from collapsing AND
2) How can investors and traders best deploy their assets for protection and profit AND
3) What is The Cartel’s ‘End Game’?
Addressing the first question first, we must consider a topic first addressed by Deepcaster in April, 2007: Dark Liquidity. We noted at that time the headlines in the financial news media which proudly advertised.
At www.finextra.com:
“ITG to launch “dark liquidity” crossing platform in Europe.”
“Goldman launches off-exchange trading platform in Europe.”
“JP Morgan launches “dark book” algorithms.”
“JP Morgan’s Neovest provides access to 15 “dark liquidity” pools.”
…and at www.financetech.com:
“Lehman Brothers and Fidelity Brokerage link their “dark pools.”
The significance of “dark pool” transactions cannot be underestimated when considering the risk of systemic meltdown - - a recent estimate is that 10% of all equity transactions occur in “dark pools,” and that this number is growing.
For those who were not inclined to visit finextra.com or financetech.com’s websites to read the very revealing articles at that time, the following excerpts will provide a sampling of the import of ‘dark liquidity’:
Regarding JP Morgan’s subsidiary: “Neovest has established connectivity to 15 ‘dark pools’ of liquidity - - trading networks that do not publish quotes in the open market…”
“Neovest currently provides access to over 100 broker destinations and a range of dark pool algorithms….”
Regarding Goldman Sachs’ new platform “…the new platform will provide customers with access to deals that are not offered publicly on any exchange…(to) provide clients with access to dark liquidity pools.”
Regarding the ITG ‘dark liquidity crossing platform,’ “the system’s total anonymity ensures that there is no leakage of information into the market and therefore price impact is minimized, says ITG.” (emphasis added)
Regarding dark liquidity pools managed via ‘dark book’ algorithms: “Earlier this year electronic broker Instinet launched a ‘stealth liquidity aggregation algorithm’ called “Nighthawk” and “JP Morgan Chase has launched Aqua and Arid, two institutional trading algorithms that have been designed to stealthy trade stocks on dark books - - trading networks that do not publish quotes in the open market…”
In considering ‘dark liquidity,’ ‘dark pools,’ ‘dark algorithms,’ ‘dark books’ and the like, Deepcaster’s initial reaction was “What about the ‘Theology’ of the free and open and fair marketplace” with which we are inculcated?” And what about the manifold opportunities the ‘dark pools’ provide for The Cartel to implement Market Interventions without scrutiny?
- It is pretty clear that the ‘dark pool algorithms’, which are designed to trade large orders in liquid markets, are automated trading operations otherwise known as “program trading.” But haven’t automated trading platforms played a big part in major company and market meltdowns?
- Isn’t an essential part of any investors’ sensible risk evaluation a function of evaluating counterparty risk? That is, a counterparty is the party who takes the other side of any particular investment transaction in which any of us is involved? But the capacity to make good on any such transaction is a function of counterparty strength or weakness. Suppose the counterparty fails? And suppose the counterparty on any particular investor transaction is at great risk because of its ‘dark book’ transaction with other ‘dark’ parties. Who would know, and how could the risk be evaluated?
Indeed, we certainly have enough recent examples of Counterparty Failure to cause concern. Consider that the Amaranth Hedge Fund in recent months and Long-Term Capital Management in recent years are only two examples of this.
- Moreover, consider the foregoing in conjunction with a couple of other observations by noted financial observers who saw “the writing on the wall” months ago:
“The inflationary recession continues to deepen with economic reporting generally surprising markets on the downside of expectations and inflation surprising markets on the upside.” April 3, 2007 Flash Alert, John Williams, Shadow Government Statistics. That is, Williams’ is describing our current state of stagflation.
Couple this observation with one attributed to Mark Precter (the Elliott Wave theorist) which we paraphrase as follows: “Currency inflations can go on forever, but credit inflations have a finite end point.” Indeed are we not seeing the beginning of the end of the massive (Fed Caused) Housing Credit Market inflation that we have seen in recent years manifested, for example, in the New Century Financial bankruptcy at the beginning of April, 2007?
Does not the “darkness” of “dark pools” impair our capacity to cope with the foregoing challenges?
- And what about “Fundamental Fairness” and “Level Playing Fields” in The Markets? Equal timely access to price information is essential to fairness to the investing public but “dark pools” and “dark transactions” in principle limit such information to the privileged few.
- And what about “conflicts of interest?!” One blogger wrote: “But if a bank sets up an (dark pool) exchange, some of the biggest traders on the exchange will also be the bank’s biggest customers in other areas. This is a massive conflict of interest situation. Remember what happened in the 1990s when investment banks noticed that their equity research divisions could be used as a marketing tool? Imagine using execution speeds and pricing for the same purpose.”
- And what about lack of oversight?
- And what about the potential for fraud?
- And, above all, for the investor, do these “dark pools” not put at risk all their hard earned wealth and profits, as a result of some “dark pool” event which has not been foreseen or planned for?
In sum, so far as risks are concerned, because so many major transactions are dark we often cannot know close to the “meltdown precipice” the financial system is at any given time.
A Dark Liquidity Incipient Disaster
Consider just one ‘dark liquidity’ incipient disaster risk about which we know something: In recent years lenders packaged bundles of subprime mortgages into CMOs (Collateralized Mortgage Obligations) and sold them to investors including banks.
The rating agencies rated many of these CMO bundles AAA, relying on the fact that past default rates had been low. But of course past default rates were low in times of relative prosperity and Fed-created cheap credit. Yet once default rates started to rise the AAA CMO bundles were beginning to look like BBB-, or worse. And, of course, the value of that CMO garbage paper plummeted. And as a result no buyers could be found for that junk paper. And this problem still exists today. But we do not know the full scope of this problem because many of the private party transactions involved are “dark liquidity.”
It certainly seems that the lack of transparency, in dark pools and dark books, lack of the ability to evaluate counterparty strength, conflicts of interest, and the continuing stagflation and impending credit bubble bursts certainly do not bode well for the future or for portfolios, unless one can develop an approach which satisfactorily addresses these issues.
So how does one protect from and profit in spite of these risks? This poses a considerable challenge. A significant focus of Deepcaster’s Letters and Alerts is aimed at answering these questions. But the following observations may provide some partial answers:
1) Keep a significant portion of your wealth in tangible assets including especially Gold and silver (the Monetary Metals) and Strategic Commodities (subject to Timing Considerations) which the public needs and regularly uses (i.e. for which there is strong inelasticity of demand). Deepcaster has identified certain of these assets and addresses the Timing Considerations in his recent Letters and Alerts at www.deepcaster.com.
Even though The Cartel may manipulate the prices of these Tangible Assets down from time to time, in the long run one will be rewarded for owning them, we reiterate, if they are in great demand and that demand is relatively inelastic.
2) Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearinghouse guaranteed? And how strong is the clearinghouse?
3) “Go Local.” Deepcaster intends to address this injunction in some detail soon.
4) Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel Initiated Takedowns. In this connection, Deepcaster has developed an approach for investing and trading in the Precious Metals markets described in its December Alert “Profiting from Cartel Intervention” posted at www.deepcaster.com in the Alerts Cache.
5) Push for Transparency.
6) Ask The Regulators for oversight.
7) Stay informed. Given the rapidity, magnitude, and increasing significance of “dark liquidity” transactions, failure to stay informed can be lethal. But, since the transactions are “dark” staying informed is difficult, to say the least. And that is a primary challenge.
Clearly the Fundamentals of the U.S. economy and the international financial system are increasingly grim. Is there an “End Game?”
The Cartel End Game
Deepcaster’s view is consonant with that of John Williams (shadowstats.com) and Jim Sinclair (jsmindset.com) - - we are looking at an international crisis of unprecedented proportion. It is also clear to Deepcaster that those who run the Fed-led Cartel cannot be so stupid as to not know where their hyperinflation of the money supply (according to shadowstats.com M3, as of October, 2007, was increasing at an annual rate of 15% which is a five year doubling time!), and other policies are leading us, i.e. toward increasing risk of systemic meltdown.
Thus if The Cartel leaders know that they are creating increasing meltdown risk, what is their End Game?
One rational conclusion which can be drawn is that they expect (and may even be pushing) the U.S. Dollar to go into further and further decline, and to continue their other policies, until there is a Systemic Crisis. (Very short-term, Deepcaster earlier Forecast the U.S. Dollar to “bounce” into the 1st Quarter of 2008 - - a Forecast that is being fulfilled - - but that does not affect the fact that The Primary Trend for the U.S. Dollar is down.)
And we expect that Systemic Crisis will likely lead The Fed-led Cartel to implement the final and dramatic stage of its apparent “End Game” plan, a plan which Deepcaster describes in detail in his June, 2007 Letter posted at www.deepcaster.com (path: Latest Letter>Archives). Consult Deepcaster’s Letter for details, including the backup documentation.
Rational analysis leads to the conclusion that a “Platform Burning” Systemic Meltdown is likely. Only the timing and specifics remain Dark.
Deepcaster
December 28, 2007
DEEPCASTER LLC
www.deepcaster.com
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