“Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them:  we view them as time bombs, both for the parties that deal in them and the economic system.”

“…The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…”

“…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Warren Buffet, February 21, 2003

Positions in OTC derivatives grew at an even more rapid pace than turnover.  Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007 (Table C.5).  This corresponds to an annualized compound rate of growth of 33%, which is higher than the approximately 25% average annual rate of increase since the current format of the triennial survey was established in 1998.

Growth accelerated in all risk categories.  The highest rate of increase was reported in the credit segment of the OTC derivatives market, where positions expanded to $51 trillion, from under $5 trillion in the 2004 survey.  Notional amounts outstanding of commodity derivatives rose more than sixfold to $8 trillion…Open positions in interest rate contracts increased by 119% to $389 trillion, and those in equity contracts by 111% to $11 trillion.  Growth in notional amounts outstanding of OTC foreign exchange derivatives was less brisk at 83%, taking the volume of open positions in such contracts to $58 trillion. (emphasis added)

                                                                        Bank for International Settlements

Triennial Central Bank Survey, December 2007

                                                                        “Foreign exchange and derivatives market activity in 2007”

“The fact that the mid-March, 2008 financial markets crisis, capped by the demise of Bear Stearns, was accompanied by substantial drops in Gold and Silver prices is quite significant.  After examining the evidence, how can a rational observer conclude anything other than that the price of Gold, Silver, other key commodities and equities markets are manipulated?”

Deepcaster, June 25, 2008

This July, 2008 Report is the seventh in a series of Deepcaster's work originally entitled "Juiced Numbers" regarding Market Intervention and Data Manipulation.  The primary topics of this Report are:  1) An updated Overview of the Market Intervention and Data Manipulation Regime based on, inter alia, including the recent Releases from the BIS, BLS and The U.S. Federal Reserve reflecting that Market Intervention and Manipulation; 2) Highlights of recent Interventions culminating in the mid-March 2008 financial crisis and accompanying Takedown of Gold and Silver and the Cartel’s “Validity Fog” surrounding the early June, 2008 Intervention; 3) Cartel Intervention as the key feature of the aforementioned and other Takedowns; 4) Data Massaging; and 5) The Cartel “End Game.”

 __________

IMPORTANT NOTE:  Deepcaster has spent considerable time reviewing important recent data releases from the BIS (Bank of International Settlements - - The Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the U.S. Federal Reserve.  They are quite astounding.  They reflect a considerable acceleration of Market Intervention and ongoing Data Manipulation.  They also reflect dramatic increases in OTC (Over-the-Counter) Derivatives (Dark Liquidity), and in Exchange-Traded Derivatives, and an apparent intensification of Data Manipulation.  The total notional value of all Derivatives Outstanding now exceeds One Quadrillion U.S. Dollars!  As we demonstrate, these facts reflect dramatically increased Systemic Risk and also reflect the significance of The Cartel’s creating (and/or having available) more OTC Derivatives in order to affect market outcomes.  This Report is based on publicly available sources believed to be reliable, but their reliability is not guaranteed.  In sum, this Report provides even more evidence of Increased Risk of Systemic Collapse, and of the beginning of the attempted implementation of The Cartel’s Nefarious “End Game outlined below.”

________

In order to put the Interventional Takedowns in context, the discussion is interwoven with significant excerpts from the "Juiced Numbers” Series 1, 2, 3, 4, 5 and 6, Deepcaster's initial essays describing "How the Government Gets the Statistics it wants, Markets get manipulated, Citizens get Deluded, and Worse."

By describing the aforementioned Interventional Episodes, we provide evidence to the skeptical of the pervasive influence of Market Intervention and Data Manipulation.

The Interventional Context - - Overview

Deepcaster is periodically asked to explain, and provide evidence for, our view that a U.S. Federal Reserve-led Cartel (apparently composed of the U.S. Federal Reserve, the Bank for International Settlements ("BIS") - - The Central Bankers’ Bank - - and key Primary Dealers, acting with the cooperation of major Central Bankers) manipulates a wide variety of markets.  [Apparently one “Operational Vehicle” through which The Cartel works is called “The Working Group on Financial Markets” established after the 1987 crash, and which is often informally and widely referred to as “The Plunge Protection Team” or PPT.]

So it is important to explain what we mean by our claim of Cartel Intervention, and to indicate how studying “The Interventionals” has facilitated  Deepcaster’s profitable recommendations displayed at www.deepcaster.com.  [It is important to note that virtually all of the evidence we cite is from publicly available sources as indicated below.  For example, the Gold AntiTrust Action Committee has amassed substantial evidence regarding the Cartel’s manipulation of the Gold and Silver Markets at www.gata.org.]

First, we do not (usually) mean that the Cartel totally controls prices in any particular market, at all times. Various markets are affected in varying degrees, at varying times, by Cartel manipulation efforts.  Cartel actions can substantially affect, but often do not totally control, prices in many markets - - though they certainly have that capacity much of the time.  The price of Crude Oil is relatively difficult to manipulate, for example, but there has been substantial manipulation (as we shall show) for several years.

It is important to note that evidence that the degree of manipulation, and, therefore, control, varies from time to time and market to market.

In markets such as the (relatively) Small Cap markets for Gold and Silver securities, Cartel manipulation attempts can have much more impact and are, at times, and for certain time periods, tantamount to control.

To answer the exceedingly important question regarding how the wide variety of markets are manipulated one must recognize that there are two main methods of manipulation, Direct and Indirect.

I.  DIRECT INTERVENTION

Direct Intervention to manipulate a variety of markets appears to be accomplished primarily via two vehicles:  “Repo” Injections from The Fed, and via the Over The Counter (OTC) Derivatives reported by The Bank for International Settlements (see www.bis.org, and details below).  The Fed makes injections of Repos (Repurchase Agreements - - usually TOMOs - - Temporary Open Market Operations typically expiring in 1 to 30 days) into the market nearly every business day.

Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to Primary Dealers, the proceeds of which can be used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow.  The total amount of un-expired Repos on any given day constitutes the “Repo Pool.”  Monitoring daily changes in Repo Poll levels (which is publicly available information) is crucial to determining how the Interventions will likely affect the markets.

Thus, the several Primary Dealers (e.g. Goldman Sachs, J.P. Morgan Chase. Citibank), who apparently work under the Fed's direction, are able to use these loaned funds to buy or sell various securities and futures to affect the markets.  [Note:  One species of Repos, POMOS (Permanent Open Market Operations), never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.]  The fact that the loaned funds can be used to purchase Derivatives (as well as plain equities) gives the manipulators the tremendous leverage which derivatives afford.

But along with that tremendous leverage comes tremendous and tremendously increasing (as the recent data releases described below indicate) systemic risk.

Daily Repo additions are made in amounts typically ranging from U.S. $1 to U.S. $20 billion.

The Challenge:  Determining the Impact of The Interventionals

The challenge for investors and forecasters is to determine where (i.e. in what Sector/s) and how (immediately, in increments, etc.) the Repo-backed funds (or other Derivatives) will be employed.  Deepcaster and those very few others, who monitor the daily Repo injections (and related Cartel and their Allies’ Actions), make educated Forecasts of where and how such funds are likely to be used based on patterns, tendencies, and judgments.  But no outsider can know for sure (So where is the transparency, Ben?).

Those who doubt whether the Cartel has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the $91 trillion Derivatives Colossus at Fed Primary Dealer J.P. Morgan Chase, or the $34 trillion derivatives colossus at Fed Primary Dealer Citibank (see Appendix A), or the U.S. $393 trillion in December 2007 (up from U.S. $291 trillion in Dec. 2006) Derivatives position at the Bank for International Settlements (the Central Banker's Bank) devoted to “Interest Rate Contracts” (see www.bis.org.  Then follow the path: Statistics>Derivatives>Table 19).  Note that that OTC Derivatives total has increased by over U.S. $100 trillion in just one year!

Attitudes of The Fed/Treasury/BIS Toward Intervention

Regarding the awareness and intentions of the leaders of the U.S. Treasury and the U.S. Federal Reserve concerning market manipulation and public perceptions, it is instructive to review what their leadership has said.

Former Secretary of the Treasury, Larry Summers, for example, in his own treatise "Gibsons Paradox and the Gold Standard," indicates "determination of the general price level then amounts to the micro economic problem of determining the relative price of gold," Journal of Political Economy, page 529, 1989.

This much publicized conclusion indicates that our monetary and financial leadership know that in order to manage the general price level and interest rates it is necessary to determine the relative price of Gold.  Therefore, of course, it follows that capping the price of gold (and, by necessity, the price of that other “Monetary Metal” Silver) would be extremely important.

Regarding allegations of "news management" (which some have indelicately called "news manufacturing") we refer you to the words of the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise on "Zero Bound Rate Systems."  Note Deepcaster's underlines which call attention to the use of "communications policies" to "shape public expectations," and to the use of the Central Bank's balance sheet and the “targeted purchase” of Treasury Securities (yes, The Fed purchases the U.S. Treasury’s own paper and) to achieve Fed goals:

"Monetary Policy Alternatives at the Zero Bound:

An Empirical Assessment (non-technical summary page i)

In this paper, we apply the tools of modern empirical finance to the recent

Experiences of the United States and Japan to provide evidence on the potential Effectiveness of various nonstandard policies.  Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes:  (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank's balance sheet, or "quantitative easing"; and (3) changing the composition of the central bank's balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate." (emphasis added)

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

To Deepcaster all this indicates that the Fed-led Cartel will go to significant lengths necessary to control long-term interest rates (in addition to short term rates, which, it is widely acknowledged, they also control), cap the price of Gold and otherwise achieve Central Bank ends (see evidence for Fed control of long-term rates below).

Brief Anatomy of the “U.S.” Federal Reserve

An excellent analysis of the defects of the “U.S.” Federal Reserve - - so far as the United States’ National Interest is concerned - - is well documented in G. Edward Griffin’s superb book, The Creature From Jekyll Island:  A Second Look at the Federal Reserve).

Indeed, the Profit Motive lies behind Fed Actions.  Even the most causal student of Economic History knows that the United States’ Federal Reserve system, or “The Fed” as it is called, is not a U.S. government owned or controlled entity, but a privately owned, for profit, entity.

Various international private banks, several of which are headquartered in Europe, own “shares” in the “United States” Fed. Moreover, this “United States” Fed leads a Cartel of Central and Private Banks* who collectively intervene in a wide variety of markets, as Deepcaster demonstrates here. All this is obviously quite financially incestuous.

These International Bankers, acting through their “U.S.” Fed, profit both by creating money out of “thin air” and by collecting “interest” from U.S. Taxpayers on the Treasury Securities it has bought with U.S. Dollars (Federal Reserve Notes) it has created out of thin air. This is all eloquently described by the Dean of the Newsletter Writers, Richard Russell:

            “I still can’t get over the whole Federal Reserve racket.

Consider the following - - let’s take a situation where the U.S. government needs money.     The U.S. doesn’t just issue United States Notes, which, of course it could. These notes would be dollars backed by the full faith and credit of the United States. No, the U.S. doesn’t issue dollars straight out of the U.S. Treasury.

This is what the U.S. does - - it issues Treasury Bonds. The U.S. then sells these bonds to the Fed. The Fed buys the bonds. Wait, how does the Fed pay for the bonds? The Fed simply creates money “out of thin air” (book-keeping entry) with which it buys the bonds. The money that the Fed creates from nowhere then goes to the U.S. The Fed holds the U.S. bonds, and the unbelievable irony is that the U.S. then pays interest on the very bonds that the U.S. itself issued. (With great profit to the private owners of The Fed - - Ed. Note) The mind boggles.

The damnable result is that the Fed effectively controls the U.S. money supply. The Fed is …not even a branch of the U.S. government. The Fed is not mentioned in the Constitution of the United States. No Constitutional amendment was ever created or voted on to accept the Fed. The Constitutionality of the Federal Reserve has never come before the Supreme Court. The Fed is a private bank that keeps the U.S. forever in debt        - - or I should say in increasing debt along with ever rising interest payments.

How did the Fed get away with this outrage? A tiny secretive group of bankers sneaked through a bill in 1913 at a time when many in Congress were absent. Those who were there and voted for the bill didn’t realize (as so often happens) what they were voting for (shades of the shameful 2002 vote to hand over to President Bush the power to decide on war with Iraq).”

                                    Richard Russell, “Richards Remarks,” dowtheoryletters.com, March 27 2007

After President Wilson signed the Federal Reserve Act into law in 1913, he reportedly said, “I am a most unhappy man, I have unwittingly ruined my country…a great industrial nation is now controlled by its system of credit…the growth of the nation, therefore, and all of our activities are in the hands of a few men…”

Insightful economic forecaster Ian Gordon notes several negative consequences of the nearly 100-year reign of The Fed, consequences with which we cope today.

            “Since its inception in 1913, the Federal Reserve Board has been responsible for almost  95% devaluation of the U.S. Dollar. All this has been achieved through its ability to continually inflate the money supply.

            And, between 1985 and 2005, the Federal Reserve Board has increased the money supply by five times. This extraordinary money creation is merely the catalyst for debt creation. In a fiat money system, money is debt…there is absolutely no way this money can ever be repaid except by continued inflation. But, now that the credit bubble is blown  up, inflation is no longer an option; bankruptcy looms.” “The Federal Reserve…What Has It Done For You Lately?”

 Ian Gordon, December 29, 2007 (www.axisoflogic.com)

The one conclusion that one can make from the foregoing is that the failure to take account of the power, force and pervasiveness of Fed-led Cartel Manipulations (i.e. The Interventionals) is an invitation to financial and investment suicide.

Gold and Silver Market Manipulation

The profound impact of these manipulation efforts has been most well documented regarding the price capping of the Gold market.  For those who have any doubts whatsoever about the fact and extent of government (Central Banks) manipulation, we have (thanks to Bill Murphy, Chris Powell, and other leaders of the Gold Antitrust Action Committee) the following June, 2005 blatant admission of manipulation by the Head of the BIS (Bank for International Settlements - - i.e. the Central Bankers' Bank) Monetary and Economic Department, W.R. White:

"…It is perhaps worth spending a minute on what is meant by Central Bank cooperation…{it includes]…last, the provision of international credits and joint

efforts to influence asset prices (especially gold and foreign exchange) in

circumstances where this might be thought useful…"

Among the many items of evidence cited by GATA Secretary Chris Powell in his superb article “There Are No Markets Anymore, Just Interventions,” all of which are matters of public record, are:

It was a matter of public record in January 1995, when the Federal Reserve’s general counsel, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee’s minutes, that the U.S. Treasury Department’s Exchange Stabilization Fund has undertaken “gold swaps.”  Those minutes are still posted at the Fed’s Internet site: http://www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf

It was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress:  “Central banks stand ready to lease gold in increasing quantities should the price rise.”  That is, Greenspan himself contradicted the usual central bank explanation for leasing gold – supposedly to earn a little interest on a dead asset – and admitted that gold leasing was all about suppressing the price.  Greenspan’s admission is still posted at the Fed’s Internet site: http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

Incidentally, while we gold bugs love to cite Greenspan’s testimony from July 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important today.  For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission – no, a proclamation that central banks were working together to control the gold price.  The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard.  But even if you believed that explanation, it was still collusive intervention in the gold market.  You can find the Washington Agreement at the World Gold Council’s Internet site: http://www.reserveasset.gold.org/central_bank_agreements/cbga1/

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003.  On that date Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JP Morgan Chase, for rigging the gold market.

Barrick’s motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit.  Barrick’s confession to the gold price suppression scheme is posted here:  http://www.rba.gov.au/PublicationsAndResearch/RBAAnnualReports/2003/Pdf/…

For skeptics, Deepcaster asks:  What could be clearer than all this?

Interest Rate Manipulation

Clearly the fact that the intervention occurs is amply documented.

In addition, the aforementioned Bernanke statement in his academic paper "Zero Rate Bound Economies" can reasonably be taken as a justification for the Fed purchasing its own paper, otherwise known as monetizing the debt.  Specifically, regarding long bond purchases, the purpose of this would be to boost the 10 and 30-year bonds, and, therefore, reduce long-term interest rates.

But in light of increasing Real Inflation (see “Indirect Manipulation” below) one can reasonably ask:  So why haven’t the storied “Bond Vigilantes” pushed interest rates (and especially long-term interest rates) up to account for the massively expansionary monetary inflation of recent years?

That is because the Fed-led Cartel of Central Bankers and Allies has been using “interest rate swaps” and other Derivatives (via their Chosen Primary Dealers) to suppress what would otherwise be dramatically rising interest rates, both short and long term, according to Rob Kirby.  Consider that there were $393 trillion in Outstanding OTC Interest Rate Contracts as of December, 2007 according to the BIS.

 Kirby’s excellent paper, “The Elephant in the Room,” demonstrating how interest rates (which would, if there were no suppression, be dramatically rising) have been suppressed by The Cartel, was presented at the Spring 2008 Washington, D.C., GATA (Gold Anti-Trust Action Committee, www.gata.org) Conference.  Kirby concluded:

“Monetary authorities have long been pursuing expansionary monetary policies while attempting to cloak their actions by suppressing rising interest rates and other natural market reactions.

This has completely perverted our whole banking and monetary system.

This is why false values have been assigned to a host of financial instruments.

This explains why the gold price has been suppressed.  It’s another canary in the coal mine that was vigorously and nefariously silenced.

If you’re wondering why J.P. Morgan never seems to get caught up in any sort of hideous market-to-market losses concerning their derivatives or hedge book – consider that back in the spring of 2006, Business Week’s Dawn Kopecki reported, “President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual  accounting and securities-disclosure obligations.  Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained  eye.”

Thus, what would otherwise be the markets’ “normal” reaction to the ongoing and worsening credit, subprime, and other financial crises - - dramatically rising interest rates, especially on the long end - - has been suppressed by The Cartel’s Interventional Regime

The Interventional Regime – Motives, Causes, and Consequences

But The Interventional Regime is showing increasing signs of stress which are reflected in accelerating Derivatives Creation, and thus in Increasing Systemic Risk.  The nearly $600 trillion OTC Derivatives Colossus (see www.bis.org, path:  statistics-derivatives-Table19 and following) on which the Interventional Regime is built is increasingly subject to counterparty defaults and to Darkly Liquid OTC Derivatives turning illiquid (resulting, inter alia, in the ongoing credit freeze-up) among many symptoms.

Clearly, The Cartel has created a Financial System subject to ever-greater Systemic Risk.  Why?

Harry Schultz, one of the Eminence Grises of the Financial Newsletter writing fraternity, puts the question in this way - - what is the reason for this “seemingly random monetary mess that multiplies its momentum every day?  The answer, in one word, control.  The elite/insiders already have control of the financial system, but they wanted more, much more…and it was is not random, it is planned.”

And what is the effect of all of this on the average investor?  In the inimitable words of Harry Schultz, “How will all the above manifest itself in your life?  The answer:  “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.”

Harry concludes by advocating that we all try to shrink less “relative to the herd” so that we hold our position.  Part of the strategy for shrinking less, according to Harry, is “it will, over 10 years, involve moving in and out of investments as price action will be very dramatic.  Buy and hold will not work in any area, including gold.”  HS Letter, April 27, 2008.

Indeed, Deepcaster has been sounding the theme that the “Buy and Hold Strategy Increasingly Fails” since the inception of Deepcaster’s newsletter.

But Deepcaster is not satisfied with a strategy which merely accepts “shrinking less” as a goal.

Thus, Deepcaster has developed a strategy for coping with and profiting from the “Shrinking Assets” problem.  That strategy can best be employed in the Precious Metals Sector, with Gold and Silver bullion and shares.  It is entitled “Defeating The Cartel…With Profit” and was published on 3/28/08 and can be found in the Alerts Cache at www.deepcaster.com.

From the Fed's point of view, the aforementioned Interest Rate Takedowns would presumably reflect a national policy to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending mainly through the vehicle of the Home-ATM.  In addition, it is very much in the Fed's interest to focus investors' funds on purchase of their paper (and, especially, their 10-year Note) and to buoy their fiat currency.  In this way, the Fed maintains and enhances its power.  But, we reiterate, the “U.S.” Federal Reserve is owned by private international banks and is not a U.S. government entity.

[As an historical note, recall that President Kennedy was unhappy with Fed policy and therefore caused U.S. Notes to be printed as a substitute for Federal Reserve Notes.  The issuance of these Notes ceased shortly after President Kennedy's assassination.]

Deepcaster must issue a Word of Caution here: The paper-based edifice of increasing Fiat Currencies, OTC Derivatives and the Repo Intervention is not indefinitely sustainable. It will collapse, and that is why The Cartel has begun to plan and implement its ominous ‘End Game’ referenced below, and fully described in Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” available in the Letter Archives at www.deepcaster.com.

Cautions for Investors and Traders

Finally, we issue a word of caution to our readers.  So long as The Cartel is in a very active Interventional Mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity.  As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.

Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals.  One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.

Similarly, one should study the Technicals for all the usual reasons and, in addition, because it is in The Cartel’s interest to make its actions seem technically plausible in order to continue to “run mainly under the radar.”  It is not in The Cartel’s interest to make its Interventions any more visible than they already are.  Indeed, there is powerful evidence that The Cartel often uses and/or helps create technical patterns (i.e. “painting the charts”)which lure certain investors (such as hard asset investors) into getting “off sides” before Cartel actions such as taking down the price of Gold or Silver.

 Thus a primary Deepcaster goal is to identify interim bottoms of Gold, Silver, Oil and other sectors, through the use of Fundamentals, Technicals, and Interventionals, and thus to help readers profit from their inevitable resurgence and ascendance to new heights. For example, Deepcaster’s profitable recommendations displayed at www.deepcaster.com were facilitated by attention to the Interventionals, as well as Fundamentals and Technicals.

Significant and Increasing Systemic Threats via Derivatives

Dramatic increases in two major species of Derivatives emphasize the increasing magnitude of Systemic Risks.

Exchange-Traded Derivatives:  Exchange-Traded Derivatives soared 27% to an all-time-high $681 trillion in the third quarter 2007, according to BIS figures.

The largest single category - - Exchange-Traded Interest Rate Derivatives - - increased 31% to $594 trillion, during the third quarter, 2007.

These increases reflect a remarkable increase in risk, for many reasons, including the increased aggregate magnitude of the leverage they reflect, and the concomitant increased opportunities for counterparty default.

However, being exchange-traded, they are, to a degree visible.  Yet that other main category of derivatives-over the counter (OTC) are not visible, except for the BIS and other reporting agencies disclosures.  Yet the inherent risks are, if anything, greater.

Over The Counter (OTC) Derivatives:  Consider the import of the data from the BIS' own website - - Review Table 19 at www.bis.org.  Follow the path:  Statistics>Derivatives>Table19.  Note that as of December, 2006 there were:

• $6.475 trillion Commodities Contracts (excluding gold) Outstanding
• $40.271 trillion foreign exchange contracts outstanding
• $291.582 trillion interest rate market contracts outstanding

But consider the stunning increases in OTC Derivatives in just the twelve months between December, 2006 and December, 2007.  As of December, 2007 there were:

·        $8.405 trillion in Commodities (excluding gold) Contracts Outstanding,

      a $1.930 billion (approx.30%) increase in only twelve months

·        $56.238 trillion in Foreign Exchange Contracts,

      a $15.967 trillion (approx. 40%) increase in only twelve months

·        $393.138 trillion in Interest Rate Market Contracts,

       a $101.556 trillion (approx. 35%) increase in only twelve months

What is also obvious from a comparison invited by Table 19 - - comparing December, 2005 figures with December, 2007 figures - - is the increasing Systemic Threat this interventional regime imposes.  Note also the dramatic jump in most categories of derivatives from December 2005 to December 2007.

Gold Derivatives

Increases in the amounts of OTC derivatives outstanding for the Gold Market are perhaps the most stunning:

From the $359 billion outstanding at end-June 2004 they nearly tripled to $1,051 trillion at end-June 2007, an increase of approx. 290% (source:  BIS “Table A OTC derivatives market, Triennial Central Bank Survey of Foreign Exchange and Derivatives market Activity”).

Note:  While BIS Table 19 shows a modest drop in OTC Derivatives Contracts for Gold in the 12 months from the end-December, 2006 figure of $640 billion to the end-December, 2007 figure of $595 billion, it should be noted that the end-June 2007 number ($1.051 trillion) from the BIS Triennial Survey is a more comprehensive number, generically akin to the “upward revisions” which the U.S. BLS regularly makes.  Doubtless some substantial portion of the foregoing OTC derivatives contracts are for entirely commercial purposes, but with publicly visible exchange-traded derivatives also available for commercial purposes (and considering publicly traded companies take incur considerable risk by engaging in “dark liquidity” OTC transactions) it strains credulity to claim that most or all OTC contracts are for purely commercial, i.e. non-interventional, purposes.

Liquidity Injections Increase Systemic Risk

For an analysis of why the kind of liquidity injections The Fed has been making (e.g. the $40 billion “fund” made available to banks on December 12, 2007 and the March 11, 2008 establishment of the new Term Securities Lending Facility TSLF) increase the Systemic (and other) Threat(s), see “The Fed Cure Worsens the Disease” later in this document.  The March, 2008 establishment of the TSLF occurred during the crisis which resulted in the (de facto taxpayer guaranteed) takeover of Bear Stearns.

The December 12, 2007 $40 billion commitment was presumably occasioned by the credit markets continuing “seize-ups” which began in August, 2007.

That crisis was manifested by the asset-backed U.S. commercial paper market shrinking 17 weeks in a row and widening U.S. Dollar, Sterling Libor, and Euribor spreads.  For example, “the spread between the rate of interest on 3-month U.S. Treasury Bills and AA-rated asset-backed commercial paper has widened to 270 basis points from a mere 30 basis points earlier this year…”  Financial Times, London, M. Wolf, December 12, 2007

In our view, it is doubtful whether such commitments will solve the banks liquidity challenges over the long term (precipitated, we might add, mainly by Fed policies and the banks own careless lending practices), but one outcome is clear.

The banks will get their money, anonymously, (read “More Dark Liquidity”) and at below market interest rates, which should be highly profitable to them.  But, of course, this action gives no help to struggling homeowners facing ARM resets, or to retirees on fixed incomes, or to those losing jobs to (often international-banker financed) outsourcing, or to all of the “little guys and gals” suffering from rises in the cost of living and a substantial loss of purchasing power of their U.S. Dollars.

So now let us take a brief look back to see how all this "Interventional Firepower" is manifested in the Markets.

The Spring 2006 Interventional Takedown and

The August through October, 2006 Interventions

 For a full discussion of the Spring, 2006 and the August – October, 2006 Interventions see Deepcaster’s July, 2008 Letter posted at www.deepcaster.com.

The August and September, 2007 Market Interventions

A late 2007 example of such a Fed-led Central Bankers Cartel takedown was the stunning October 2, 2007 $18-in-a-day takedown of Gold Bullion.  Consider seriously the fact that this takedown was accomplished in the face of extremely bullish Fundamentals and Technicals for Gold.

Considering the motivation for such a takedown, Deepcaster reiterates that Gold & Silver, the monetary metals (as well as the Strategic Tangible Assets such as Crude Oil) are the “Mortal Enemies” of the Central Bankers’ Fiat Currencies and Treasury Securities.  The Cartel simply cannot afford for investors to long regard Gold & Silver as the ultimate (or even alternate) Stores and Measures of Value as that would decrease the legitimacy of their Treasury Securities and Fiat Currencies.

Indeed, a measure of the historical effectiveness of the Central Banker Cartel in suppressing Gold & Silver prices is that, in inflation-adjusted terms, Gold would have to exceed U.S. $2,200 an ounce today to top its all-time high of $850 in 1980.

An example of the apparent use of the Repo Pool to boost the Markets occurred in September, 2007.  The Fed allowed the Repo Pool to drop slightly on Friday, September 14, 2007, continuing its modest downtrend bearish for the Equities, at that time.  But they increased the Repo Pool on Monday, September 17, 2007 as they typically do when they expect/intend to create major moves (or respond to events) and they want to have sufficient Repo “ammo” to control the markets.

Sure enough, the September 17^th, Monday, Repo Pool boost was a harbinger of the Big Fed Discount and Fed Funds rates cuts on Tuesday, September 18, 2007, and partial cause of the Equities Market launch upward that day.

The March 2008 Crisis-Induced Takedown of Gold & Silver, and Its Context

On March 14, 2008, Deepcaster stated 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.

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.

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 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.

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) 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 cannot 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.”

Among realists, 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.

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

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. 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. [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.]

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 this helps the big banks, while further diminishing 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 January, 2008 Letter.

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 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. Result: we are in the midst of a crisis.

But The Fed clearly wants to make the markets think that they can achieve a Great Fix.        To achieve this effect, on the week ending Friday, March 14, 2008, they injected $10 billion in POMOs which dramatically (in addition to the TOMOs) increased the Interventional Power of The Fed.

The Fed’s POMO injection is understandable considering that the Equities Market Technicals were looking quite ominous before the next day’s (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