“Reality” to Protect Profits,
“Delusion” to Court Disaster
by DeepCaster LLC, deepcaster.com | June 4, 2010Print
“…Can you imagine if during the cold war the Soviet Union had undermined all the countries, it would have been the start of World War III. And yet we are letting investment banks do the same thing. We are letting investment banks undermine the finances, cast doubt on the credibility, create civil unrest, riots, death. It's the kind of thing that in a military frontal assault would be repelled, but somehow we let Wall Street attack the countries and do nothing about it. I am glad that someone is finally standing up, and I expect that Merkel will be joined by others. I am not against speculation. Let speculators put up some money, let them do (it) on an exchange, let the pricing be transparent, let them do variation margin... This no money down shadow credit default swap market is completely destructive. A little hyperbolic but you get it.”
James G. Rickards, King World News, 5/22/10
Last week’s 284 Up Day on the Dow led some Mainstream Financial Media Commentators to launch again into Happy Talk about the ostensible ‘Ongoing Recovery’. Ditto for the Equities Indices Rally on June 2.
To be clear, we are not anti-Happy Talk, provided there is a basis for the Optimism.
But Unfounded Optimism about the Markets and Economy Courts Disaster. The Necessary, but not Sufficient, Condition for Protecting Profits and avoiding Financial Disaster is to “Get Real”.
Examining Realities provides the basis for Guidelines (see below) to help in achieving our Goals of Protecting Profits and dispelling Delusions which Court Disaster.
One Salient Reality - still – is that not only were Retail Investors, the Middle Class and Main Street Small Businesses in the U.S. (and in several other key national Economies) not Bailed Out, they face worse Economic prospects than ever. And unemployment levels remain at record highs (21.7% in the U.S. – see below). Thus there can be no sustainable Economic or Markets Recovery without the increased Financial Health of this Sector – 70% of U.S. GDP.
Another most Daunting Challenge is coping with ever-tightening Credit Markets.
Increasing LIBOR rates, Swaps spreads, and Credit Default Swaps Costs show Credit Markets – the Mothers Milk of Businesses and Consumers alike – are tightening toward the dangerous levels last seen in The Crash Year, 2008.
Indeed liquidity in general is drying up – M3 is now declining at a 9.6% (annualized) rate (per Ambrose Evans-Pritchard, May 26, 2010) approaching Great Depression levels.
Technically, the Mid and Long term Equities Markets are looking Bearish, with Massive Bearish Head and Shoulders forming for the Dow and S&P.
And, in their two recent one-day rallies the Equities Markets (per the Dow and S&P) have been unable to break above their 200 day moving average.
And those elements of the Economy Crucial to Corporate Earnings, and thus to Equities Markets levels are not looking up either.
- State and Regional Banks are key to credit availability, but over 70 have failed in 2010 already, and nearly 800 are on the FDIC’s problem list. (By contrast the Mega-Bankers, including the Private for-profit Fed are fat, sassy, getting fatter with the private for-profit Fed poised to be further empowered by the Financial “Reform” bill nearly finished in Congress.)
- Housing Loan Demand is at 13 year lows, and foreclosures at record highs, and looking to worsen.
- Greece’s problem, manifest in its 120% Debt to GDP ratio, reflects many Major Nations’ Problems. How so? Not just the PIIGS or even France or the U.K. with their unsustainable debt levels, are vulnerable.
- When the U.S. Government Obligations to private business (incurred in the Bailouts - think AIG etc) are added to the U.S. Public Debt, the U.S. also has 120% Debt to GDP Ratio, just like Greece!
So far as Gross Debt to GDP Ratio is concerned, the U.S. is Greece.
- And then there is the huge Municipal Debt Bubble which Warren Buffett characterized as a “terrible problem”.
So much for U.S. Economic Recovery Prospects.
- But does not China remain as the Major Growth Engine for the World Economy? Putting aside, arguendo, China’s own “bubble” problems which we have discussed in earlier Articles, the answer is “No”.
China’s Economy is Export Driven. China’s two largest customers are the Eurozone and the U.S.A. And China’s Banks are over-extended and Real Estate overpriced. China’s manufacturing Sector is slowing down, according to the most recent reports.
So much for the Chinese Growth Engine.
And what will be the Fate of those Nations overburdened with Debt?
Sufficient Austerity is politically impracticable, so they will try to inflate away their problems by Monetizing Debt (The euphemism du jour is “Quantitative Easing”). But there are limits to this because the “required” monetization will bring with it currency debasement and, eventually, hyperinflation. Think Weimar Republic.
Under the foregoing conditions, corporate earnings will generally be savaged; thus so too will Equities Values.
And Main Street’s Purchasing Power will also be savaged.
It is already happening.
Consider the Real Numbers below as provided by Shadowstats.com. Shadowstats.com calculates the Real Numbers for the U.S. the way they were calculated in the 1980’s and 1990’s, before Data Distortion and Interventions began in earnest.
Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual Consumer Price Inflation reported May 19, 2010
2.24% 9.46% (annualized May 2010 Rate)
U.S. Unemployment reported June 4, 2010
U.S. GDP Annual Growth/Decline reported May 27, 2010
U.S. M3 reported May 16, 2010 (Month of April, Y.O.Y.)
Note that M3 is dropping to near Great Depression levels.
So what is the Realistic answer for Profit and Protection: the traditional Safe Havens Gold and Silver.
But it is not just their Traditional Safe Haven Status which recommends these Precious Metals. It is also because they are not vulnerable to the fatal flaw of Fiat Currencies: unlimited printing and consequent hyperinflation.
But Gold and Silver prices are vulnerable to another attack – Price Suppression by a Fed-led Cartel* of Central Bankers and their Agents and Allies.
Indeed, given the ongoing, for many years, Cartel* attacks on Gold and Silver prices, it is important to have a Strategy to minimize the damage from these attacks.
Deepcaster has developed such a Strategy laid out in “Defeating the Cartel... With Profit, Part 2” (6/19/2009) and “Defeating the Cartel... With Profit, Part 1” (3/28/2008) in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.
*We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2009 Letter entitled "A Strategy For Profiting From The Cartel’s Dark Interventions & Evolving Techniques - II" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, 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.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.
[One ray of hope is that while The Cartel is still Potent, it is not nearly as Potent as it once was as we explain in our recent (May) articles in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.]
Key Elements of that Strategy are the following.
That Strategy must not only take account of Fundamentals and Technicals, but also Interventionals. In addition, there is a strong preference in that strategy that one’s Paper Assets be linked to Tangible Assets.
Generally speaking, with the five Major Guidelines/Caveats listed below, the more closely one's assets are linked to Tangible Assets, and especially to those Tangible Assets which are in great and relatively inelastic demand, the more secure and potentially profitable one's investments will be, in the long term.
This means, for example, that the Opportunities to Profitably escape Paper Wealth in 2010 and beyond lie in Precious Metals, Agricultural products, Consumer staples, Energy and similar Tangible Assets Sectors, BUT taking into account the Caveats below.
- Successful Investors must be Position Traders with a long-term perspective. Buy and Hold rarely works anymore. Owners of “the Dow” Stocks have lost over 30% in the last decade if Real Inflation is considered.
- 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 and allies, as Deepcaster has pointed out on several occasions. This is because if these become more widely recognized as the legitimate Ultimate Stores and Measures of Value (which, indeed, they are as compared) to the Bankers “Paper Assets” (i.e. Treasury Securities and Fiat Currencies) the Mega-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, recall that in the week (ending 3/21/08) of the Bear Stearns collapse (when Gold and Silver should have skyrocketed), The Cartel did effect a major Precious Metals Takedown with massive Market Intervention, as Deepcaster earlier Forecast.
Therefore, regarding TIMING one’s purchases of these assets, and especially Precious Monetary Metals, it is essential to consider not only the Fundamentals and Technicals but also the Interventionals. Otherwise, one’s Tangible Assets Portfolio can be caught in a Cartel-generated Takedown, with severely negative results. For details regarding The Interventionals see the December, 2009 Special Alert “Profiting From The Cartel’s Dark Interventions - III" in the ‘Alerts Cache’ at www.deepcaster.com.
The March 19 and 20, 2008 Takedown of Gold and Silver (and the early December, 2009, and early February, 2010 $50 Takedown days of Gold), and Commodities in general are an Object Lesson in the still-potent Interventional Power of The Cartel.
Unfortunately, the exponentially increasing numbers of “Paper” Derivatives required to implement each successive Takedown is also a clear reflection of the increasing Threat of Systemic Collapse. A Financial Regime built on Darkly Liquid Paper and Fiat Currencies and nearly $600 trillion of dark OTC Derivatives (see www.bis.org, follow the path: statistics>derivatives>Table 19) is not indefinitely sustainable. See Deepcaster’s Article “Profiting and Protecting From Collapsing Paper” (2/15/08) in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com.
- Beware of Cartel Intervention in Other Markets. Cartel Takedowns (and, regarding the Equities Markets in 2009, boost ups) 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. Indeed, we believe it is likely that The Cartel poised to implement Major Moves for selected Commodities. (See Deepcaster’s 2010 Letters and recent Alerts for specific Forecasts and recommendations, all of which are available at www.deepcaster.com.)
- Going forward, “Buy and Hold” will increasingly mean to “Hold and Lose.” There is a maxim that “smart money is always long-term money.” Indeed, that saying has until recent years often been true, provided that the smart money was also proficient in finding and investing in “value” investments.
Alas, that maxim is increasingly NOT true and will likely not be true in the next few years. 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, as the Market Crash of 2008-2009 and the general Market Malaise Indicates. Tangible Assets have inherent value; Paper Assets have insignificant inherent value.
- Adopt a Long Term Position Trading Strategy like the one described in our recent article “Protecting Profits from The Apparent Recovery” (03/05/2010) available in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com. It specifically details a Strategy for Profit and Protection despite (weakened, albeit still potent) Cartel Intervention. In sum, employing the aforementioned Strategy and Guidelines above can help achieve Profits and avoid Real Losses, notwithstanding the ongoing Market and Economic Perils.
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