-- Posted Friday, 15 February 2008 | Digg This Article
| Source: GoldSeek.com
DEEPCASTER LLC
www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
“But for systemic intervention and manipulation by the Federal Reserve, it appears we might be contemplating a collapsed U.S. banking system and a looming deflationary great depression that could have dwarfed the bad times of the 1930s. Such is the good news. The bad news is that with those same systemic interventions, the Fed is locking in a hyperinflationary great depression in the decade ahead, with the turmoil possibly breaking by 2010 or earlier.” (emphasis added)
shadowstats.com, Issue Number 39, January 2008
“The mounting evidence is that The Fed-led Cartel* is knowingly creating conditions designed to force the U.S, to eventually have to choose between a hyperinflationary great depression and The Cartel’s ominous “End Game,” which Deepcaster has described.”
Deepcaster, February 14, 2008
Proper positioning and accurate forecasting can not only help insulate one from coming collapses, but also generate significant profits.
The Bond Sector
Regarding forecasting, consider one Sector - - The Bond Sector. This Sector reveals that the damage to institutions built on “collapsing paper” has only just begun. If not contained, this damage could spread throughout the entire Financial System.
There are about $10.4 trillion of dollar-denominated bonds of which $7 trillion are prime AAA and $1.4 trillion are subprime BBB. Of these, the prime bonds have lost 30% of their market value or about $2.1 trillion, the subprime have lost 80% of their value or about $1.1 trillion and the ALT-As have lost another $1 trillion, according to Jim Willie. Since the beginning of the subprime crisis, the total value of bond losses is about $4.2 trillion!
One of the many negative consequences of these losses is that financial institutions (holding these bonds in their portfolios) are forced to make asset write-downs, which reduce reserves. In addition, when reserves are already being destroyed by loan defaults, and when the reserve defaults are magnified by the fractional reserve system, the problems are compounded.
Two methods for maintaining reserves are going to the Fed’s discount window and/or calling in loans. But employing these methods creates some negative consequences for consumers and for the entire financial system. Depleted reserves are one reason we already hear that some bankers intend not to allow additional draws from Home Equity Lines of Credit, and why some credit card companies are talking about increasing rates or calling in their loans. And further bank borrowing exacerbates the “borrowed liquidity” problem which Deepcaster has demonstrated is “A Cure Worse Than the Disease” (see Deepcaster’s January 2008 Letter at www.deepcaster.com).
Thus, for financial institutions holding large chunks of what is now considered “junk paper” institutional failure is a real possibility. And many of these institutions can forget about a Warren Buffett riding to the rescue. (Buffet’s offer to provide reinsurance to certain monoline bond insurers, thereby guaranteeing the ratings of some of their insureds, extended only to their municipal bond portfolios, not to corporate bonds.)
Worse yet, the list of municipal bond auction failures is growing. Increasing numbers of municipalities cannot get funding for schools, hospitals, and roads, etc. The Fed’s favored Primary Dealers claim they cannot lend any more due to heightened risks which were generated by, and reflected in, the famous August, 2007 credit freeze-up. But these are the same Dealers who have gotten rich gouging the municipalities in better days. Clearly, it is likely there will be more problems coming in this financial sector.
Following the aforementioned causal thread reveals only one road to a seriously impaired market sector. Unfortunately, there are several others.
The Retail Sector
Let us now consider the authentic (non-governmental) data for just one other Sector: the Retail Sector - - a primary gauge of consumer health.
According to a shadowstats.com February 13, 2008 Alert, “Real Retail Sales Continue Year-to-Year Collapse…real (inflation-adjusted) annual retail sales will have held in negative territory for two consecutive months, an event rarely seen outside of recession.”
So much for retail sales…and consumer financial health, the primary driver of growth in the U.S. economy.
The Entire Financial System
Now consider overall health of the financial system. Recent Bank for International Settlements (BIS - the Central Bankers Bank) data releases reveal some $516 trillion (notional value - - see below) in OTC (Over-the-Counter) Derivatives outstanding as of June, 2007. Consider also that OTC Derivatives constitute highly risky “dark liquidity” for the several reasons set out in Deepcaster’s April 8, 2007 Alert entitled “Profiting From Dark Liquidity and Other Systemic Risks.” Exchange-Traded Derivatives by contrast are relatively transparent and are typically less risky because a clearinghouse often guarantees their performance. Not so with OTC derivatives.
Deepcaster has laid out the evidence, on several occasions, that a substantial chunk of the multi-trillion in OTC derivatives outstanding are available for, and used for, market manipulation by The Fed-led Cartel* in various multi-trillion-dollar tranches.
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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, Data Manipulation - - Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com> at 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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But there are at least three major problems flowing from this mountain of toxic OTC derivatives weapons of financial mass destruction (to borrow a phrase from Warren Buffett).
First, they constitute “dark liquidity” transactions in which the “outside world” (and indeed, sometimes one party to the derivatives contract) may not fully know the strength or weakness of their counterparty/ies. And, typically, entities other than the parties and counterparties know little or nothing of those derivatives and their risks, other than, perhaps, that they exist.
Needless to say, their darkly liquid character often makes attributing a “market value” to them an exercise in mythmaking.
It also makes putatively “safe” investments in “Safe Haven” sectors, for example, in a “Big Pharma” company, not so safe after all. Who could have known that Bristol Myers Squibb had derivatives losses until they announced a quarter billion dollar write down recently? And Bristol indicated there might be more such losses to come. So much for Big Pharma as a “safe haven.” Indeed, so much for other traditional “safe havens” which have been infected by the OTC derivatives disease.
Second, OTC Derivatives creation has been accelerating at an increasing rate. To accommodate increasing financial sector imbalances (created largely by their own flawed policies) The Fed-led Cartel* has had to accelerate derivatives creation at increasing rates (see Deepcaster’s January, 2008 Letter “Market Intervention, Data Manipulation, Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com). This manifests an increasing reliance on (and thus increasing risk from) OTC derivatives as a means of market stabilization, as well as Intervention.
The third problem has to do with the slippery term “Notional Value.” “Notional Value” is the total value of a leveraged position’s underlying assets. The apologists as it were, for massive derivatives creation (i.e. typically, those who understate the risks) claim that Notional Value is not Market Value. And since market values are so much less than notional values, they claim the overall risk is correspondingly less. That is true to a point.
But the “market value” of the $346 trillion plus in Notional Value Interest Rate Contracts reported by the BIS (06/07), for example, is nonetheless some $6 trillion. A pretty hefty “real” market value, with potentially great impact if a significant portion default.
But there is an even more significant consideration; typically, upon default of one counterparty to an OTC derivative contract the notional value becomes the full value of the loss!
And when that Notional Value becomes full value due to one counterparty default (and of course we are seeing an increasing number of counterparty defaults - - even the Big Media occasionally covers them) the negative “ripple effect” on the primary party and his other counterparties, increases the likelihood of massive losses and dislocations system wide. And the first recent realization of that phenomenon was in the subprime default-generated-credit-market-freeze-up of August, 2007.
The practical consequence of the foregoing is that The Systemic Meltdown Threat becomes ever greater, as OTC Derivatives Creation accelerates.
No Solace from Tangible Sectors
One important consideration: if the threat were “only” one of such companies (whose businesses are built on paper) collapsing, perhaps the strength of the underlying “Tangible Sectors” of the U.S. economy could serve as a buttress against broad-based damage suffered as a result of “paper” based companies collapsing.
However, the U.S. economy has been dramatically weakened in recent years by outsourcing, globalization, gutting of the manufacturing base and particularly by The Fed’s profligate increases in money supply and credit availability beginning in 2001. Thus, as a consequence, the role of the U.S. as the driver of the World Economy and the U.S. Dollar as the World’s Reserve Currency is likely coming to an end.
Consider Paul Craig Roberts’ (former Under Secretary of the Treasury under President Reagan) view of the health of the U.S. Economy:
“It is difficult to know where Bush has accomplished the most destruction, the Iraqi economy or the U.S. economy.
In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while U.S. household debt doubled.
This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and half a million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.
This is the profile of a third world economy.”
“The Dollar’s Reserve Currency Role is Drawing to an End,” vdare.com, January 25, 2008
Of course, we have been brought to this sad pass primarily by the policies of The Federal Reserve coupled with globalists who have pushed the United States into NAFTA, CAFTA, and other U.S.-economy-destroying and middle-class-destroying agreements.
Deepcaster asks: how can so-called “free” trade agreements be fair to the American workers (or to U.S domestic businesses) if it means they have to compete with the wages (and production costs) of workers (and businesses) in countries in which wage rates (and production costs) are a tenth or less than those in the United States? In sum, our view is that “fair trade” is more conducive to economic health than ostensibly “free” trade.
Again, consider Paul Craig Roberts’ view:
“Economists have romanticized globalism, taking delight in the myriad of foreign components in U.S. brand name products. This is fine for a country whose trade is in balance or whose currency has the reserve currency role. It is a terrible dependency for a country such as the U.S. that has been busy at work off shoring its economy while destroying the exchange value of its currency.”
Consequences, Insulation, and Profit Potential
Consequently, Deepcaster’s view is that beginning in late February or early March, the paper equities markets will make another major move - - a move likely signaling the beginning of a climacteric in the making. At that time we can expect to see further meltdown of institutions whose business are built on paper. Deepcaster has previously outlined his prescription for maximizing insulation from the collapse of companies with paper-based assets.
The prescription includes:
1) Locating one’s capital primarily in tangible assets which are in great and relatively inelastic demand, and in
2) The Consumer Staples Sector, and in the
3) Precious monetary metals (e.g. Gold and Silver) near the interim bottoms of Cartel-generated takedowns. But the timing and selection here are key.
For further details see Deepcaster’s 12/23/07 Alert entitled “A Strategy for Profiting From Cartel Intervention in Gold, Silver, Crude & Other Tangible Assets Markets” at www.deepcaster.com.
In the long run, Deepcaster believes one can find no better “Safe Haven” than in the precious monetary metals, Gold and Silver.
BUT we must emphasize one important caveat regarding finding a “safe haven” in precious monetary metals: in the short run they are subject to the considerable price manipulation by The Cartel of Central Bankers*.
Several times in recent years investors who have invested their resources in the “insulated” “safe haven” precious monetary metals sector have been greatly disappointed and have had their net worth reduced by massive Cartel*-induced takedowns of the prices of the precious monetary metals.
Yet now the fundamentals have become ever more bullish in terms of pushing the prices of tangible assets to record levels as they have recently been for Gold, Crude Oil, certain agricultural products, and other tangible assets.
So the question is, in the next round, will The Cartel price suppressors win out when it comes to precious metals and other tangible assets prices, or will blazingly bullish fundamentals propel them further up? Deepcaster provides his most recent Forecasts in his Alert for the week ending February 10, 2008.
Whatever the answer, the mounting evidence is that the Fed-led Cartel is knowingly creating conditions designed to force the U.S, to eventually choose between a hyperinflationary great depression and the Cartel’s ominous “End Game,” which Deepcaster has described in its January, 2008 Letter and its Alert of 8/13/07 entitled “Massive Financial-Geopolitical Scheme Not Reported by Big Media.”
And notwithstanding all the foregoing, the powers that be are playing possum:
“It’s one thing to identify a problem. It’s another thing to know exactly what to do about it.”
Deepcaster
February 15, 2008
DEEPCASTER LLC
www.deepcaster.com
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
Gravitas, Pietas, Virtus
-- Posted Friday, 15 February 2008 | Digg This Article | Source: GoldSeek.com
