-- Posted Friday, 14 March 2008 | Digg This Article
| Source: GoldSeek.com
DEEPCASTER LLC
www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
A variety of Fundamental, Technical and Interventional Indicators tell us that we are in the onset of an ominous Financial Climacteric - - The “Main Event” as it were. But this is an “Event” that is unfolding over the course of months.
There has not been a time since The Great Depression when the Fundamentals and the U.S. Economy and the International Financial System have been at greater risk. Yet with Risk comes Profit Opportunities. In order to determine what they are one must first evaluate the risks.
Consider first Deepcaster’s claim that the risk to the U.S. Economy is the greatest since The Great Depression. The Credit Default Swap Market agrees. March 11, 2008 was the first time ever that the risk of losses on U.S. Treasury Notes exceeded that of German Bonds according to the “judgment” of that market. U.S. Treasury Contracts traded at 16 basis points compared with German Bonds which traded at 15.
The Crises
We need not elaborate further than just to reiterate the litany of Crises: Municipal Bond Market Crisis, Subprime Crisis, Housing Slump Crisis, Bursting Credit and Mortgage Market Bubbles, ongoing Credit Market Freeze-Up, record levels of Monetary Inflation with M3 increasing at over 16% annualized (shadowstats.com), increasing Financial Institution Insolvency and Illliquidity, record high Budget Deficits and Multi-Trillion Dollar Downstream Unfunded Liabilities for the U.S. Government, increasing levels of Unemployment, and CPI increasing at nearly 12% annualized according to shadowstats.com…. the list goes on and on.
Short-Term “Fixes”
The U.S. Fed is lowering rates and providing great dollops of liquidity with apparently no enduring positive effect. And that is not surprising because little enduring positive benefit is to be expected from the recent Fed actions because their actions amount to “pushing on a string.”
Indeed, adding more borrowed liquidity only worsens the fundamental structural problems, as we show in our January, 2008 Letter posted at www.deepcaster.com.
Significantly, the Fed’s actions do help the constituency that, de facto, means the most to them - - the Big Money Center Banks and international financial and related institutions.
The average U.S. Taxpayer, Middle Class and Working Poor are left to “Go Hang” with a measly $150 billion tax rebate plan.
The Collateralization of Trash
Indeed, the Fed’s March 11, 2008 announcement establishing a new Term Securities Lending Facility (TSLP) is merely a short-term Band-Aid for what is a structural systemic crisis. The TLSP allows Federal Agency and non-Agency (i.e. private entity) AAA/Aaa Residential Mortgage backed (and otherwise illiquid) securities (some of which is irretrievably illiquid “bad debt”) to be used for collateral. Allowing these securities (containing bad debt) to be used as collateral makes it possible for banks to liquidate or transfer previously illiquid securities in their portfolios.
Let’s be candid here - - “previously illiquid” is a euphemism for “without any market value” (i.e. zero market value - ZMV).
That which is illiquid is illiquid because it has no market. That which has no market has no market value. Quod erat demonstrandum.
Looking a bit more deeply, the reason for the zero-value character of these illiquid securities is that these bundles of mortgage-backed and other securities contain (in the case of mortgages) mortgages that either were in default or about to go into default. Thus to save the big institutions from having to fully recognize losses (Heaven Forefend!) The Fed will allow this junk to be used as collateral for cash (!) and, we predict, will allow the debt to be “rolled” indefinitely, if it can not be repaid.
Bill Murphy, in his inimitable style, rightly characterizes this latest Fed Action as “Cash for Trash” and Jim Sinclair also, quite rightly, characterizes it as “The Monetization of Bankruptcy.”
Fed Toxics
Among realists like Deepcaster, it is generally agreed that the effect of this most recent Fed action will be yet another increase in inflation and an even lower U.S. Dollar. Of course, these actions hurt the Middle Class and Working Poor most. Meanwhile, they provide some (albeit temporary) “Salvation” for financial institutions which should not have been engaged in the risky lending that resulted in these high default rates to begin with.
Of course, the ultimate primary cause of this crisis is the Federal Reserve itself which has been creating far too much monetary liquidity and allowing far too lax lending standards, and creating far too much credit, since at least 2001.
Missing The Solution
We must not forget another fundamental factor which demonstrates that The Fed Actions are neither a long-term, nor an adequate, remedy.
“This Fed injection does nothing for households. And it is households that will determine if we avert depression or not. Consumer spending is 70 percent of GDP. Households need the money, and they can’t get it. Credit card companies are cutting lines. Banks are raising lending standards. House values are dropping below outstanding mortgage and home equity debts. Incomes can’t keep up. Jobs are shrinking. Trickle down won’t work. We need trickle up this time. The Fed’s announced plan today is to monetize bad debt from Wall Street banks, to accept their securities baked by bad loans in exchange for cash. This in lieu of a drastic further drop in interest rates. Once again, save Wall Street and to blazes with households. Because they are not doing a thing here for households, this plan will fail. Households get more inflation and that is it. Wall Street gets a free ride. Somebody ought to be arrested. What a heist. Of course Spitzer can’t do anything. He’s preoccupied.” (emphasis added)
Robert McHugh, Tuesday, March 11, 2008 Briefing
A Serious Structural Flaw
And there is yet another structural problem which is a fundamental cause of The Crisis and which will cause The Crisis to continue for months at least. At the urging of those pushing a misunderstood “free market” ideology, the Glass-Stegall Act (which separated the commercial banking from the securities business) was repealed in 1999. [Note: truly “free” markets mean markets that have better regulations, not no regulation - - Freedom of choice requires a structure which provides meaningful alternatives. To enhance freedom one needs to improve a structure, not abolish it. A basic philosophical point, thanks for which we owe to the philosopher Immanuel Kant.]
That Act was passed in 1933 in the midst of The Great Depression to prevent securities speculation from further destroying bank capital and shrinking deposits.
Since 1999, the Banking and Securities businesses have become increasingly merged, with today’s disastrous results being quite apparent.
Let’s be even more candid: allowing questionable “illiquid” i.e. bad debt to be used as collateral (!) amounts to a quasi-nationalization of that debt in that it further weakens the security and legitimacy of U.S. Treasury Securities and, ultimately, the U.S. Dollar. And while this helps the big banks, it further diminishes the purchasing power of the middle class and working poor.
A key point is that the recent Fed Action is not a long-term fix. The reason this is not a long-term fix is that it “fixes” a liquidity problem in a way that allows insolvent or nearly insolvent financial institutions to have liquidity that would allow certain normal but often deleterious operations (i.e. the continuation of even more lending based on borrowed liquidity). Deepcaster has previously demonstrated the perils inherent in an economy relying on “borrowed liquidity” (i.e. debt) rather than “earned liquidity” (i.e. savings) – see Deepcaster’s January, 2008 Letter at www.deepcaster.com.
Once again, the “borrowed liquidity “cure” is worse than the disease. Thus, what The Fed has given us is a Financial Band-Aid, and only a short-term Band-Aid for the Big Boys at that.
In sum, today the Big Financial Institutions are reaping the whirlwind for their Reckless Securities and Derivatives Speculation and the Fed’s policies which encourage it. Result: we are in the midst of a crisis.
The Great Fix That Isn’t
But The Fed clearly wants to make the markets think that they can achieve a Great Fix. To achieve this effect, in the week Ending Friday, March 7, 2008, they injected $10 billion in POMOs which dramatically (in addition to the TOMOs) increased the Interventional Power of The Fed (regarding POMOs and TOMOs, see Deepcaster’s January 2008 Letter at www.deepcaster.com).
The Fed’s POMO injection is understandable considering that the Equities Market Technicals were looking quite ominous before the March 11, 2008 Fed Action which propelled the Dow up over 400 points. The Dow Jones Industrials, just the preceding Friday March 7, 2008, had broken below the bottom boundary of a 26-year rising Trend Channel from 1982.
Moreover, a very bearish Equities Head and Shoulders Pattern had completed its right shoulder and fallen decisively below its neckline. Before the March 11th Fed Action, the downside targets for the Equity Indices were 20-25% below where we stand now. Gold, that legitimate Safe Haven from all manner of catastrophes had been hitting record highs. Moreover, the HUI AMEX Gold Bugs Index is on a bullish breakout from its 15-month consolidation pattern, though the Monday, March 10, 2008 shares action put the HUI on a short-term sell signal.
And, in the Energy Markets, Crude Oil has hit $110-$111 range as the first technical target for a seemingly continuing upward ascent.
And one more factor to consider: increasing numbers of those $500+ TRILLION in derivatives reported by the BIS are now unraveling.
Interventional Juice
So the result of the TOMO and POMO “juice” injections was to create the interventionally generated 400-point rally (of Tuesday, March 11, 2008). That Fed Action has turned many of the Equities Markets Technicals from down to up. But on the next two days, Wednesday & Thursday, there was no significant follow-through “bounce” - - an ominous sign indeed! Couple that fact with the consideration that The Fed Action “provides a long-term solution for none of the aforementioned ongoing problems, one must reasonably ask how long such a rally can last.
In sum, if one had only the Fundamentals and Technicals to consider, one would be assured of ever-higher Gold and Silver prices, increasing Crude Oil prices, and continuing weakness in the Equities Markets.
However, one must also consider the Interventionals. We reiterate that The Fed, as leader of The Cartel*, pumped in successively on March 10 & 11, 2008, $15 billion and $9 billion in Temporary Open Market Operations (TOMOs) Repo Injections into the markets.
And, more significant (because many times more potent), in the week ending March 7, 2008, it added another $10 billion in POMOs (Permanent Open Market Operations) which have several times the effect of TOMOs (we now see this was priming the “pump” to generate the March 11, 2008 “market rally”).
All this occurred against the backdrop of Gold’s hitting $1000. If Gold were to break out conclusively over $1000 that would generate even more interest in it. Moreover, with Crude Oil and Silver also at record highs, the Fed-led* Cartel would truly be at a crisis point in terms of their legitimacy as financial market and monetary managers.
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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>LatestLetter. 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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Tangible Assets vs. The Cartel
Thus we can expect The Fed-led Cartel to combat soaring Precious Metals and Strategic Commodities prices vigorously and the increasing magnitude of the ongoing crisis suggests they will try to do just that, and very soon. Deepcaster’s Forecast for the “winner/s” of this battle is contained in its Alert for the week ending March 16, 2008, posted at www.deepcaster.com.
It is not hard to see to see what their specific targets will be. As we have said on several occasions, the power of the Fed-led Cartel of Central Banks and allied Major Financial Institutions depends on continuing legitimacy of their “paper” including first and foremost their Treasury Securities and Fiat Currencies.
Increasing Gold, Silver, Crude Oil and other Tangible Commodities prices threaten this Power because they are Alternative Stores and Measures of Value to The Cartel’s paper. Therefore, we can expect The Cartel to attack Gold, Silver, Crude Oil and the Other Strategic Commodities with a vengeance, and, given the recent POMO Repo adds, and other signs, very soon. The main question is, will they succeed?
The Key to Profiting
Well, that depends on whether one believes that the Fundamentals will overwhelm Cartel attempts at market manipulation, for a change.
In this connection consider The Rule that ‘The Biggest Player in the Market makes the Market Price.’
The Cartel’s multi-trillion dollar derivatives positions make it The Biggest Player in the aforementioned Markets. But are these derivatives positions sufficient to allow The Cartel to bend those Markets to its will? Can they overwhelm the record-high negatives?
Specifically, will The Fed-led Cartel be successful in taking down the price of Gold, Silver, Crude Oil and other Strategic Commodities, with a vengeance soon?
For sure we can expect the upcoming Market Moves to be major ones. And those who profit from them will be those who properly weigh the triumvirate of Fundamentals, Technicals and Interventionals, and not just two of them. That is the key to profiting.
Deepcaster
March 14, 2008
DEEPCASTER LLC
www.deepcaster.com
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
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-- Posted Friday, 14 March 2008 | Digg This Article | Source: GoldSeek.com
