Cash Is Scant Refuge... So What Is?

A Strategy for Protection and Profit

by DeepCaster LLC, deepcaster.com | October 3, 2008

“Crazy” with potentially “awful” consequences
Former U.S. Treasury Secretary Paul O’Neill on the Bailout Bill, October 1, 2008

An Approach to Protection and Profit

To achieve Protection and Profit from the Ongoing Crises requires a bit of Courage for the Truth, as well as an examination of what might be a legitimate Refuge with Profit Potential, and what is not.

Since the price prospects for Commodities and Commercial Securities of many kinds are worsening, one must consider the ostensible “Refuge” of Cash.

The Reality: Cash is merely colored pieces of paper we put in our wallets (or, even more intangibly, electronic data entries stored on a distant server) and nothing more.

The Intrinsic Value of this “cash” is virtually zero.

Insofar as cash has value it is, in part, because of our Confidence that when we tender it, it has sufficient actual Purchasing Power to allow us to acquire goods and services.

Ah, Confidence and Purchasing Power, where have you gone?

The considerable erosion of Confidence and Purchasing Power is reflected in the erosion of Purchasing Power of the World’s Reserve Currency (notably, a fiat currency) plummeting over 30% since 2002, as measured by the USDX, that Market Basket of Currencies against which the U.S. Dollar is measured.

Purchasing Power and Inflation – Key Factors

Omitting inflation for a moment, that means that unless one’s U.S. Dollar income has increased more than 30% over the last five years, one has lost Purchasing Power vis-à-vis the other currencies against which the value of the U.S. Dollar is measured. Being in an international economy, such lost Purchasing Power has quite substantial negative consequences.

Moreover, when also considering lost Purchasing Power due to inflation since the post-2002 period, the total loss of Purchasing Power is considerably greater than 30%. Even if one were to trust Official Figures (which one cannot) the Purchasing Power of the U.S. Dollar has been eroded by inflation averaging in excess of 4% per year since 2002. [The Fed’s Rampant Monetary Creation - - over 14% annualized (M3) for many months now (shadowstats.com) is a major cause of the U.S. Dollar’s decline since 2002. Thus The Fed has de facto imposed a Stealth Tax on Investors.]

In fact, inflation-generated Purchasing Power losses are considerably greater. Real U.S. Consumer Price Inflation is now about 14% annualized, (and Real U.S. Unemployment has recently increased to 15% annualized) according to the very credible calculations of shadowstats.com which calculates these figures as they were calculated pre-1990 before a whole raft of gimmicks were introduced to mask Market and Economic Realities (see Deepcaster’s July, 2008 Letter).

Indeed, the U.S. Dollar and certain other Fiat Currencies have suffered recent losses of Purchasing Power and Confidence for good reason. They are backed by nothing but Confidence - - in the U.S. Dollar’s case, in the Full Faith and Credit of the U.S. Government. The last time the U.S. Dollar was backed by any Tangible Asset was when it was a Silver Certificate which could be redeemed for Silver in 1968. Since then, it has been a creature of the private-for-profit “U.S.” Federal Reserve.

Confidence and the Credit Market Freeze-Up

The fact that the U.S. Dollar is backed by nothing but Confidence, or lack thereof, is a major cause of the ongoing Credit Market Freeze-Up and ensuing Bailout Crisis. The decreased Confidence in, and Purchasing Power of, the U.S. Dollar is reflected in virtually all paper assets, including especially the (often overlapping) categories of OTC Derivatives, including CDOs, CMOs, SIVs, and a raft of other paper with Great Toxic Potential.

Investors and Financial Institutions are increasingly reluctant to buy others’ depreciating paper, or to lend, given their expectation that all they would get incrementally in return is more depreciating paper, since Confidence and Purchasing Power of that paper and in the counterparties holding it is increasingly impaired. Recent record LIBOR and TED Spread Rates buttress this conclusion.

Indeed, as the failure of Major Financial Institutions proves, many of these paper “assets” have indeed proven to be nearly worthless, or worthless in fact. Since Institutions hold increasingly worthless assets, increasing numbers of them will fail.

The Bailout - - A Damaging Disaster

The Bailout proponents claim they will fail unless U.S. Taxpayers buy their worthless assets. That is the reason given for the Bailout. The claim is that worthless assets must be made valuable again using U.S. Taxpayer Dollars or the financial system will fail, much to everyone’s harm.

These claims are false since there are several other ways to save the system without requiring substantial Taxpayer Dollars, as former Treasury Secretary O’Neill and Prof. Roubini have shown.

Indeed, Paul O’Neill, former U.S. Treasury Secretary has an eminently sensible plan which would risk few Taxpayer Dollars: make 20-year government loans and charge 2% above the government’s borrowing rate. The institutions could count the loans as part of their capital base which would help un-freeze the credit markets. But pro-Bailout propaganda and intimidation are moving a Bailout Bill toward passage - - a Bill which would use Taxpayer Dollars to purchase devalued assets.

Since the U.S. has no cash, those Dollars, prospectively provided by Taxpayers of course, would have to be borrowed from the Federal Reserve (which prints them out of thin air) which would result in Taxpayers owing “interest” to the Federal Reserve on the Treasury Securities which are collateral for the borrowings. Outrageous!!

This Bailout Cannot Save the System

Moreover, why have a Taxpayer-funded Bailout if that Bailout cannot save “the system” in the long run? Consider the reasons the proposed Bailout schemes cannot work in the long run to save the system.

U.S. Taxpayers (70% of the U.S. GDP) are already quite overburdened with debt.
The plan the Bailout would employ is the very inflationary creation of more Fiat U.S. Dollars, and not merely U.S. Dollars but borrowed Fiat U.S. Dollars, to “give” to Wall Street, et al. We use the term “give” intentionally, since if the paper assets had any value they could be sold in the Market. Since they cannot be sold they have no value, thus any “purchase” of them would be a de facto gift. .
This borrowing of U.S. Dollars would dramatically increase the size of the debt obligation of U.S. Taxpayers who are already over-indebted.
Increased debt burden on the American Taxpayer will cause even more of them to be unable to pay their mortgages, credit cards and other obligations, resulting in even more foreclosures and defaults and, therefore, business insolvencies.
The Bailout Scheme would not adequately and sustainably re-capitalize the banks - - another necessary condition for a sustainable unfreezing of the credit markets. Notwithstanding any Congressional Action on a Bailout Bill, the Systemic Financial Crisis will worsen, more business and personal financial failures will result, and more Bailouts will be demanded.

The Key To The Solution - - Systemically, and for Investors

Fortunately there is a strategy for protection and profit which can be employed by investors who have been rudely presented with a Reality; namely that Paper Assets and other Derivatives can quickly become utterly valueless. But in order to understand how to profit and protect, one must first better understand the Systemic Flaws and their manifestations in the Markets.

First it is crucial to note that there is virtually no Safe Haven among traditional Commercial Securities and Commodities Sectors. One can expect nearly all Assets to fall in a general Price Deflation of Securities and Commodities such as we are now beginning to experience. However, consider that since the failing paper - - mainly OTC Dark Derivatives - - is concentrated in the Financial Services arena, it is predictable that more Financial Sector entities like the aforementioned collapsed businesses will also go down (see Deepcaster’s 4/8/07 Alert entitled “Profiting From Dark Liquidity & Other Systemic Risks” in the Alerts Cache at www.deepcaster.com).

More troubling, however, since these Derivatives and other failing paper are laced through many Sectors, it is likely that other entities outside the financial arena will also go down.

Thus the Darkly Liquid OTC Derivatives Contagion has, and will, spread beyond just the Financial Services stocks with more consequent failures. We earlier referred to the case of Bristol Myers Squibb (a supposedly Safe Haven Big Pharma Company) which had to take a quarter of a billion dollars write down due to Derivatives problems. So much for Big Pharma as a “Safe Haven.”

In sum, the Fed/Treasury Bailout of Favored Financial Institutions cannot (in the long run) cure the OTC Derivatives Threat, or the Credit Freeze-Up, or restore Market Stability; rather it just puts a temporary Bandaid on these crises. Problems which brought down these businesses are still widespread and seriously systemically threatening and are accelerating as reflected by the dramatic increase in the OTC Derivatives Pool to nearly $600 trillion as of December, 2007 (bis.org, path: statistics>derivatives>Table 19 and ff).

Given this brief background, we can now outline a Solution.

A Systemic Solution and an Investor Strategy

The key to The Solution is to note that the first major public casualty of 2008 - - Bear Stearns - - main surviving genuinely liquid asset - - the rights to its building in New York City - - is a Tangible Asset.

That fact provides the clue to a Major Remedy for the larger Systemic Problem.

That larger Systemic Problem reflects The Fatal Flaw “in spades.” The large Systemic Problem is that the world’s Reserve Currency, the U.S. Dollar, is susceptible to the same Flaw that afflicted Bear Stearns: it is a “paper” Fiat Currency. It is not based on, or backed by, Tangible Assets. That is, it is backed only by the Full Faith and Credit of the United States Government (that is to say, by confidence alone). It is not linked to Gold, Silver, or any other tangible asset.

Thus the existing system of Reserve Currency by Fiat is unsustainable. No Fiat Currency Regime in the history of the world has ever survived indefinitely.

So The Systemic Solution is apparent. We outline it as follows:

Re-link the world’s Reserve Currency (the U.S. Dollar) to Gold and Silver, the Monetary Metals which are both Stores and Measures of Value, Tangible Value.

Failure to re-link currencies to Gold and Silver will allow a continuing massive and unsustainable inflation of the money supply by the Fed-led Cartel* of Central Bankers. The private-for-profit U.S. Federal Reserve is currently inflating the money supply (M3) by over 14% per year (shadowstats.com) - - less than a 5-year doubling time. Unless such re-linking to Gold and Silver is accomplished, the U.S. Dollar, and likely the entire International Financial System as we know it, is likely doomed, with severely negative consequences.

Money supply inflation ultimately leads to price inflation and this extraordinary rate of increase in the money supply in recent years, as several commentators, including Deepcaster, have pointed out, is leading us down the path toward a deep Hyperinflationary Recession or even Depression. (c.f. shadowstats.com). In addition, it is leading more ominously, to an attempt to implement The Cartel’s “End Game” (see July, 2008 Letter at www.deepcaster.com.), an attempt which has already begun.

But the private for-profit U.S. Federal Reserve is not likely to give up its “un-backed” Fiat Currency and “un-backed” Treasury Securities Regime that easily - - they are the source of its Power and Profit. The Fed and associated International Financial Allies will strenuously resist.

Regarding The Fed-led Cartel’s* overall Strategy, the increasing evidence is that the present Strategy is the same as the one the private-for-profit Fed employed in the “roaring” 1920s and consequent 1930s Great Depression.

First, create a period of several years (as in the 1920s) of easy credit and plentiful money. This encourages the public including investors to become heavily indebted using Performing Assets as collateral. Then, when the planned deflation via tightened credit is launched, and defaults predictably follow, the Fed and its Favored Financial Institutions, (facilitated by The Fed) can acquire the performing assets (like farmland in the 1930s) at fire sale prices while the non-performing assets are laid off (on the Taxpayer, as in the Paulson proposal) and the non-favored financial institutions.

We assert that this Strategy is but one component of The Cartel’s Nefarious End Game which we describe in greater detail in our August 13, 2006 Alert entitled “Massive Financial-Geopolitical Scheme Not Reported by Big Media” and our June, 2007 Letter entitled “Profiting From the Push to Denationalize Currencies and Deconstruct Nations.”

*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.”

Therefore the following recommendation should be implemented.

Legendary investor Jim Rogers recently neatly expressed The Solution to the problem of The Fed: “The Fed should be abolished and Chairman Bernanke should resign.” (March, 2008, CNBC)

An excellent idea. Deepcaster and Rep. Ron Paul agree. Indeed, The Fed is a private for-profit group of International Banks, whose main motivation is in providing profits for, and protecting the interests of, The International Bankers Cartel and related favored institutions, not in serving the needs of U.S. citizens (or most citizens of other countries for that matter). Thus it is not a surprise that those favored financial institutions are the very “folks” that the Bailouts of 2008 have been designed to protect.

It is important to reiterate why the bailout will not work to stabilize the financial system long-term - - the Economic Stimulus Package that The Fed recommended for all the households in the United States was only $150 billion - - peanuts compared to what the Fed is doing, repeatedly, for the Big Money Center Financial Institutions. The health of the Financial System and the U.S. Economy absolutely depends on the health of the middle-class Taxpayer. But those Taxpayers are over-indebted and, increasingly, unemployed or underemployed. Thus, given that U.S. Taxpayers are 70% of U.S. GDP, no Bailout can work which does not protect and restore their financial health.

In any event, the Private Ownership of the U.S. Federal Reserve is unsustainable (unless The Cartel can successfully implement its Ominous “End Game” Plan) as we explain in our January 14, 2008 Article “Private Ownership of U.S. Fed Unsustainable” available in the Articles Cache at www.deepcaster.com.

Consider further that the Favored Major Financial Institutions are the allies, progeny and, in many cases, the Beneficiaries of the U.S. Federal Reserve largesse. In sum, throughout the Bailout Era of 2008, the private-for-profit U.S. Federal Reserve has acted (and continues to act) in the interests of its Beneficiaries, Allies, and progeny, a conflict of interest if there ever was one.

Indeed, The Fed and Favored Financial Institutions have and are profiting by the creation and collapse of the Tech and Housing and Credit Bubbles (which The Fed played a central role in creating).

The Bubbles were entirely self-serving because Vast Fiat Money Creation through ever-increasing new debt was needed to feed a system that must continue to expand to stay in existence. Why else would loans be offered for nothing down, rock bottom rates, and no consideration for risk of the borrower? And what Member or Beneficiary of The Cartel cares how all that inflation affects our purchasing power and our savings, after all the crapola cascades down hill? No, we’re stuck with the fallout from either Bursting Bubbles and/or hyperinflation as the Dollar eventually loses the rest of its value, so long as The Fed runs the monetary show. The Fed’s Alan “Bubbles” Greenspan pushed bubble-creating policies for years, along with the deregulation of the derivatives markets. The housing and credit bubbles replaced the tech bubble. Either one alone would be ugly.

Meanwhile, the Beneficiaries will be walking away with Real Assets in their pockets, courtesy of the Mother of all Bailouts, and the U.S. Taxpayer.

The Owners and Beneficiaries of The Fed get the benefit of all the new money before it heads downstream.

We reiterate that Congress can abolish the Federal Reserve, just as Congress created it in 1913. Rep. Ron Paul’s Bill H.R. 2755: “Federal Reserve Board Abolition Act” is bottled up in the House Financial Services Committee.

The Fed should be abolished so these tech, housing, and credit bubbles and hyperinflation can never be inflicted on us again. Bailout or no bailout, we are in a world of hurt thanks to The Fed’s non-sustainable, self-rewarding, corrupt system. People keep blaming the Democrats or the Republicans for bad regulation. And they deserve blame. But, guess who was the primary cheerleader for the lousy legislation/regulation? And guess where a number of lobbying dollars originate for this nonsense?

The Systemic Solution Starts With A U.S. National Bank

To replace The Fed, and in order to protect ordinary citizens interests, the U.S. Congress should create a genuinely National Bank as authorized by the U.S. Constitution. That truly National Bank should be the money issuer for the United States, not the private for-profit Cartel of International Bankers known as The Fed.

This is not such a radical idea. President Kennedy caused U.S. Notes to be issued late in his presidency as a replacement for Federal Reserve Notes. [He was killed soon after the issuance was started and the U.S. Notes disappeared from the market.]

If the U.S. Federal Reserve were acting in the interest of the American people it would act first to bail out households. We reiterate that households are 70% of GDP. If households cannot pay their mortgages and cannot purchase the essentials and pay their bills, then households are not economically viable. If that 70% of the economy is severely stressed, the economy cannot be healthy. In the long run, no amount of support The Fed provides to International Big Boys which it bailed out will suffice to save the economy because the very basis of the economy, the households (which operate, we emphasize, mainly in the world of Tangible Assets, not Darkly Liquid Paper), will be increasingly at great risk.

The problem is that none of these above prescriptions have been followed, nor are they likely to be followed any month soon until the (unfortunately, likely) real collapse begins. Therefore, we will continue to see more darkly liquid paper-based businesses collapse and a steadily increasing Systemic Threat. Some will be rescued like Bear Stearns and others (like Lehman Brothers) will not. The list of casualties will grow.

Commonizing Losses, Privatizing Profits, Manipulating Markets

Let us be clear about the reality of the Paulson-Bernanke Proposed Bailout. Consider that Treasury Secretary, and former Goldman Sachs CEO, Henry Paulson and Fed Chief Ben Bernanke put together a “Bailout” package which would commonize the losses (i.e. to U.S. Taxpayers) which the favored investment banks and others were and are in the process of suffering. That Bailout package, however, included very few crumbs to commonize past or even future profits to the U.S. Taxpayers being asked to fund the Bailout.

Thus, what we saw in the first version (and what we are, alas, likely to see in the version that passes) of the Paulson Bailout Bill is a Privatization of Profits to Fed-favored Financial Institutions and commonizing of losses to disfavored institutions and, of course, to the U.S. Taxpayer at large. At least $700 billion worth! That is Socialism for the Selected Rich.

What we saw in the Cartel* Takedown of the Equities Markets (by removing Repo support), especially on Monday, September 29, 2008 when the U.S. House was voting on the Bailout, was in effect a threat to Congress to get them to pass the outrageous Bailout. The message was “pass the Bailout or we’ll take down the markets and you will get the blame.” Wisely, a majority of the Members of the House refused to bow to this intimidation. But not all of them held out in the second round.

Conclusion - - Profit and Protection for Investors

So how does an investor protect and profit from these what are sure to be these continuing developments. With only three major Caveats (see below), the more closely one’s investments are linked to Tangible Assets and especially to those Tangible Assets which are in great and inelastic demand, the more secure and potentially profitable one’s investments will be, in the long-term.

This means, for example, that investors should focus on agricultural products, consumer staples, energy and similar Tangible Asset sectors, but considering the Caveats below. It is not an accident that, with rampant monetary inflation and an 80 million person annual increases in world population (and a 4 million annual mass-immigration-generated increase in the U.S. population), that these Sectors have been hitting records highs (until very recently), and will continue to do so long-term, except as follows.

The Three Important Caveats

Beware of Cartel Intervention in the Precious Metals Markets. Tangible Assets, and especially the Precious Monetary Metals Gold and Silver, are the “Mortal Enemy” of the Fed-led Central Bankers as Deepcaster pointed out on several occasions. This is because if Tangible Assets become legitimate Alternative Stores and Measures of Value to the Bankers “Paper Assets” (i.e. Treasury Securities and Fiat Currencies) the Bankers lose power, influence and profit.

Therefore it is understandable that the Cartel of Central Bankers* periodically makes major and often successful attempts to take down the prices of the Monetary Metals, Gold and Silver, and Tangible Assets such as the Strategic Commodity Crude Oil.

Indeed, in the week of the Bear Stearns collapse (when Gold and Silver should have skyrocketed), the week ending March 21, 2008, they did effect a major Precious Metals Takedown with massive Market Intervention, as Deepcaster earlier Forecast.

Therefore, in terms of timing one’s purchases of these assets, especially Precious Monetary Metals, it is essential to consider not only the Fundamentals and Technicals but also the Interventionals. Otherwise one and one’s Tangible Assets Portfolio can be caught in a Cartel-generated Takedown, with severely negative results.

The March 19 and 20, 2008 Takedown of Gold, Silver, Crude Oil, and Commodities in general are an Object Lesson in the still-potent Interventional Power of The Cartel.

And, given the exponentially increasing numbers of Derivatives required to implement each successive Takedown, it is also a clear reflection of the increasing Threat of Systemic Collapse. A Financial Regime built on Darkly Liquid Paper and Fiat Currencies and $600 trillion of OTC Derivatives is not indefinitely sustainable.

Beware of Cartel Intervention in Other Markets. Cartel Takedowns are not limited to Precious Monetary Metals and Strategic Commodities. Though these are the Ultimate Stores and Measures of Value, given repeated Cartel Interventions, the timing of their acquisition is key. Similarly, Cartel Intervention dramatically affects the Equities Markets, so these Caveats apply to them as well. The Cartel is now in the process of effecting a general Commodities Price Deflation. This process should continue for several months until the Commodities Bull Trend is allowed to resume.
“Buy and Hold” increasingly means to “Hold and Lose.” There is a time-honored maxim that “smart money is always long-term money.” Indeed, that saying has until recent years been largely true, provided that the smart money was also proficient in finding and investing in “value” investments.

Alas, that maxim is increasingly not true. One primary reason is traditional measures of the value of a particular investment have mainly been contextual, rather than inherent. But the economic, financial, and market system within which these contextual measures have been determined is increasingly vulnerable. The Chinese Yuan re-peg to a market basket of currencies and the general trend away from the U.S. Dollar are only two signs that the U.S. Dollar-as-World-Reserve Currency system is beginning to crumble before our very eyes - - and the evidence is increasingly before us. When coupled with monetary and price inflation (dollar-denominated, especially), simply buying and holding many assets will increasingly not be profitable, and in many cases will be a losing proposition.

Moreover, for all the reasons set forth in the section “An Approach to Protection and Profit” above, investments bought and held in Assets vulnerable to U.S. Dollar (or other Fiat Currency) devaluation and/or to monetary hyperinflation and, especially, to Cartel Intervention, are Assets at great risk.

Thus, to create a true “Fortress” Assets Portfolio, to protect and profit from the Markets, one must be nimble. Thus, the Refuge from Ongoing Crises is A Strategy - - changing the assets mixes and investment selections to accommodate rapidly changing Market and Economic Realities and accommodating Cartel Intervention.

Investors must thus become Proactive Long-Term Traders with a Long-Term Vision informed by the Interventionals, as well as by the Fundamentals and Technicals.

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