The Jaws of Death pattern is otherwise known to market technicians as the Expanding Megaphone.  This pattern is characterized by a plunge (of e.g. equities) from the top of an expanding “megaphone” of prices.  This summer, ominously, that Equities price plunge has already begun.

Equities Market Crash Likely

The U.S. Equities Markets Price Performance over the last five years has developed a clear “Jaws of Death” pattern.

But the Profit Opportunity reflected in the Jaws Pattern arises from the fact that these Massive Ominous Jaws show us with high probability, but not certainty, that there is much more price downside likely to come, i.e. a likely Market Crash.  But the question is “when” will these “Jaws” which took five years to develop, close?

Deepcaster is waiting for the modest interim Equities Bounce (which we forecast) now occurring within the Jaws of Death to play itself out, at which point we expect to recommend taking short equities positions with a vengeance.  But that time is not yet upon us.

Before we make specific suggestions for positioning oneself for profit, it is important first to demonstrate why the Fundamentals support the Technicals in making such a Market Plunge highly probable.  We will not recapitulate all the economic and financial factors reflecting negative Fundamentals.  Rather, we will just touch on recently revealed items which raise the probability of a Market Crash to “high.”

Much of what makes the Jaws of Death Market Plunge Forecast highly probable is the condition of the Credit Markets that dramatically affect business conditions.

Perhaps most important is a Chart released this year by the Federal Reserve Bank of St. Louis (research.stlouisfed.org) entitled “Non-Borrowed Reserves of Depository Institutions.”  Beginning in 1960 it shows average bank non-borrowed reserves (i.e. capital in excess of the monies loaned out) to be slowly rising from about $10 billion each year just under $50 billion in 2007.  But then in 2007 the chart reflects a precipitous drop and shows that by mid-2008 non-borrowed reserves plunged to a negative $125 billion.  That means banks have loaned out much more money than they have on reserve!

Since it should be quite clear to all sentient Bank Boards of Directors that serious bank solvency issues and bankruptcies are dramatically increasing, this situation is bound to result in tightened credit standards and decreased lending.

Finance Sector Situation Worsening

Couple that consideration with the loan loss situation in commercial and investment banks.  Consider that each dollar of loan loss can force commercial and investment banks to reduce lending by $15 or more.  Consider also that loan losses from mortgage related losses alone will likely still cause $1 trillion in credit to vaporize (Business Week, July 28, 2008).

Couple the gruesome banking situation and the resulting credit tightening with the increasing numbers of revelations of Assets-That-Aren’t.  For example, an auction of the assets from the $7 billion SIV portfolio (structured investment vehicles) previously known as CHEYNE Finance drew bids which reflected dramatic writedowns of the SIV portfolio assets, as reported by the Financial Times on July 17, 2008.  Of course, such a result is no surprise to Deepcaster who has for years been warning about the perils of Darkly Liquid OTC Derivatives.  Many of these are Level 3 Assets and are “valued” by “Marking to Model,” which in our view is equivalent to Marking to Myth.

Many of such ostensible “Assets” for sale have not had any offers from buyers in the market (some since last August 2007) and thus many of these Ostensible Assets have No Market Value.  We reiterate:  that which has No Market has Zero Market Value.

No Help From Emerging or Developed Markets

Couple these considerations with macro economic and financial conditions and prospects.  To be sure, the U.S. economy and markets will not get much help from the “emerging markets.”  China’s oil colossus CNOOC, and Australian miner BHP Billiton dropped dramatically Friday, July 18, 2008, as Crude was taken down by The Cartel* (as Deepcaster Forecast) and by worries about the slowing international economy.

*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Central Bankers and Allies to read Deepcaster’s July, 2008 Letter containing a summary overview of Intervention entitled “Market Intervention, Data Manipulation Still Accelerating -- 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.”

These worsening financial and economic systems stresses are already causing dissension as, for example, within the European Union.  European Central Bank President Jean Claude Trichet announced there would not be help coming for struggling members of the EU including for example Ireland, Spain and Portugal because “our monetary policy must be optimal at the level of the whole Euro area – exactly like The Fed would not look at what is in the interest of Missouri, California and Texas.”

Of course, this statement reflecting the interest of the international bankers is typical and is one of the many reasons which Deepcaster has noted earlier as an excellent justification for abolishing the private-for-profit “U.S.” Federal Reserve.  We noted earlier The Fed wants increased regulatory powers, even though it was The Fed’s policies that catalyzed or caused the economic and financial crises that sparked the issue of increased regulation to begin with.

Fed/Gov. “Solution” Will Worsen Crises

Yet “The Solution” offered by the Central Bankers is to encourage more of what created the problem in the first place, more lending.  That is, more Borrowed Liquidity as opposed to Earned Liquidity.  See Deepcaster’s July, 2008 Letter “Market Intervention, Data Manipulation Still Accelerating - - Increasing Risks, The Cartel ‘End Game,’ and Latest Forecast for Gold, Silver, Equities, Crude, U.S. Dollar and Treasuries” in the Latest Letter cache at www.deepcaster.com regarding the importance of this distinction.

Worse yet, the Powers-That-Be, ensconced at The Fed and U.S. Treasury, want even more power without accountability.  We are grateful to Rep. Ron Paul for disclosing shocking details of the Housing Bailout Bill now being rammed through Congress, and grateful to GATA and others for reporting them:

“-  The two troubled federal mortgage agencies, Freddie Mac and Fannie Mae, will be given      unlimited access to the U.S. Treasury without requiring any further approval from Congress.

-  The U.S. national debt ceiling will be raised by $800 billion, which suggests that the bailout is expected to cost a lot more than the country is being told.

-  All credit card transactions will have to be reported to the Internal Revenue Service, as if the country isn’t under enough government surveillance already.”

“Ron Paul discloses housing bailout bill’s money and power grab”

 The Gata Dispatch, July 24, 2008

Joining Deepcaster in its call for abolition of the “U.S.” Federal Reserve is legendary investor Jim Rogers, who also advocates letting Freddie Mac and Fannie Mae go bankrupt.  But no, the private-for-profit U.S. Fed gave its New York Fed Reserve Bank subsidiary the authority to lend to these Government-Sponsored Enterprises at 2.25% - - the same rate as Wall Street gets.

Financial Crises Will Worsen Unless…

Once again, The Fed and U.S. Treasury provide favors for Wall Street (with the explicit or implicit guarantee of U.S. Taxpayers), but nothing more for the American Consumer who pays the taxes and is 70% of the U.S. economy, which is still about a quarter of the global economy.  Only by acting quickly to help households, and not Wall Street, can worsening crises be averted.

Just in case anyone thinks that the financial system/banking crisis has bottomed out, consider that the FDIC recently stated that its list of problem banks has now increased to 90, nearly twice as many as 2 years ago and the U.S. Treasury has its own list of 100 banks in danger.  Needless to say, the names on the list have not been released.  Could your bank be among them?  Are the FDIC’s loss reserves sufficient to accommodate 90 bank failures, or more?  Or would the FDIC look to the U.S. Taxpayer to backstop it?  Unfortunately, we likely know the answers to those questions.

Consider also that the banking crisis will not be limited to relatively small banks, but could extend right to the very largest Money Center International Banks.  Lehman Bros., for example, has been de-leveraging rapidly.  Its leverage ratio is down from 31 to 24.  Its mortgage business is hurting too; it originated just $2 billion in residential mortgages in the 6-months ending in May, 2008 compared with $32 billion in the same period in 2007 and $4 billion in commercial mortgages down from $32 in the same period.

“They bought risky securities and they levered up but the bet didn’t pay off,” said Brad Golding, Portfolio Manager, Christofferson, Robb & Co.  “There is no difference between Lehman and sub-prime borrower who bought more house than he could afford.”

The problems are not limited to Lehman.  Merrill Lynch is facing about $48 billion in collateralized debt obligations which are either in default or on the verge.  As derivatives consultant Janet Tavakoli said, “they really did create their own problems.”  But does anyone doubt The Fed will bail out its International Banking Buddies by providing even more borrowed liquidity, borrowed liquidity ultimately backstopped by the U.S. Taxpayer?

Thus it is no wonder that Real M3 is increasing by nearly 16% a year and that Real U.S. Consumer Price Inflation is about 12% and Real U.S. Unemployment about is 14% as indicated by the very credible figures of shadowstats.com.

Of course, all this massive borrowing and monetary inflation is already resulting in Price Inflation with more, much more, to come.  It is already “Baked into the Cake” as they say, thanks to the private-for-profit U.S. Federal Reserve.  To help protect yourself from these ongoing disasters catalyzed by the Federal Reserve and its Allies and Factota, it is important to adopt a protective regime with profit potential.

Recommendations for Protection and Profit

Among our specific recommendations:

1)     Short the financial sector whenever it is near the top of an interim bounce.  That is because the financial sector is likely going to be in the doldrums for at least 2-3 years.

2)     Buy pawnshop-type businesses that profit from liquidation of assets.

3)     Buy short or double-short Exchange Traded Funds.  But the correct timing of these purchases is essential. 

4)     Buy Hard Assets which are typically hedges against inflation such as Gold, Silver and positions in Energy with one caveat.  Gold, Silver and Crude Oil (as well as the Equities Markets) are subject to very substantial price manipulation by the Fed-led Cartel* of Central Bankers.  Given this fact, Deepcaster has developed a Strategy for Profiting from Cartel Intervention in “Defeating The Cartel…With Profit” posted in the Articles Cache at www.deepcaster.com which is also reflected in our Forecasts.  Among the recommendations are buying Physical Gold and Silver near the interim bottoms of Cartel Takedowns.

Thus Forecasts and Profit Opportunities for Gold, Equities, U.S. Dollar, Crude Oil and U.S. Treasuries are best evaluated by understanding the context in which they exist - - in an Interventional Universe and in the face of the looming ‘Jaws of Death’ and worsening Credit Crisis.

Deepcaster

July 25, 2008

DEEPCASTER LLC

www.deepcaster.com

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-- Posted Friday, 25 July 2008 | Digg This Article