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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Fed Reckoning Day Realities for Investor Pain and Gains

Stock-Markets / Financial Markets 2011 Apr 15, 2011 - 02:38 PM GMT

By: DeepCaster_LLC

Stock-Markets

Best Financial Markets Analysis Article“In this light, the Fed’s action is especially meretricious. If it weren’t in such a hurry to juice the stock market and thereby keep the illusion of recovery going, it might have considered extending the regulatory sequester on bank capital for a few more quarters or even years thereby preserving a shield for the taxpayers until it has been demonstrated by the passage of time, not by the passing of phony stress tests, that the American banking system is truly out of the woods.
 


In short, a banking system that by the lights of the Fed was on the verge of extinction just 28 months ago could not possibly have gotten well in the interim. In shades of 2006, the nine survivors did report net income of $54 billion in the year just ended, and it is these retained earnings that have purportedly brought bank capital ratios to the pink of health. Then again, the cynic might wonder whether the trading book and yield curve profits of 2010 might not disappear as fast as did the mortgage origination, securitization and trading profits of 2006-2007…

If you believe that these massive financial conglomerates are a clear and present danger to the American economy, you might opine that they are too big to exist, as well. But even from a more quotidian angle unless you are in the banking index for a trade it’s pretty easy to see that so-called banking profits should have remained under regulatory sequester for a few more economic seasons, at least.”

“Federal Reserve’s path of destruction”
David Stockman, Market Watch, 4/13/11

“America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated…

Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds… it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials…

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record… The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses…

…look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity… just nine loans totaling some $220 million, made through a Fed bailout program… But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business… Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income…

If you want to learn how the shadow budget works, follow along. This is what welfare for the rich looks like.”

“The Real Housewives of Wall Street: Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?”
Matt Taibbi, rollingstone.com, 4/12/11

“…the U.S. dollar is losing its purchasing power at an accelerating pace…

Last night, I heard comments on a national broadcast news program that blamed higher gasoline prices on the economic recovery.  That is nonsense and is a form of economic propaganda suggestive of the increasing level of desperation in political Washington.  Again, the primary problem behind higher oil and gasoline prices is the Fed’s efforts at dollar debasement, but few in the media are willing to blame the Fed…

Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem.  Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

“COMMENTARY NUMBER 362: Trade, Liquidity, Hyperinflation Watch”
John Williams, shadowstats.com, 4/12/11

“If you print money everything will go up...and now the money printing doesn’t go into housing because we have an oversupply of housing, but it goes into equities and for Mr. Bernanke unfortunately into commodities.  And this is lifting the cost of living of the median household, of the typical household in the US...Mr. Bernanke is a murderer, he’s a murderer of the middle class and the working class.”

“Mr. Bernanke is a Murderer of the Middle Class”
Marc Faber interview on King World News, 4/6/11

It is now widely recognized by all but the Purblind that The Fed’s Q.E. has been The Primary Force responsible for Equities and Commodities Markets Price Rises in the last two years (see Deepcaster’s article: “Surmounting the Wealth Destruction Juggernaut” -09/30/10 in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com).

Thus the price of Crude Oil is well over $100/bbl. Couple that with a Revival of the Eurozone Sovereign Debt Crisis, increasing Stagflation (core PPI up in March over Feb.), increasing jobless Claims, Unresolved Massive Deficits (all of which we forecast) and you have Worsening Financial and Economic Realities.

To cap it off, QE 2 is scheduled to end June 30 – “The Day” of Reckoning, we name it; and the Action in several Markets has begun to anticipate this.

And there are many organizations and forces aligned against a further QE 3.

One Major anti-QE 3 Force is the increasingly widely held Realization that while QE 2 has brought the Mega-Banks and Wall Street back to an artificially enabled Strong Profitability, the Middle Class and Poor around the world have suffered greatly from rising Food and Energy prices.

To make matters Worse, we now learn The Perfidious private for-profit Fed is implementing Massive and Private Budgetary Outrages at Taxpayer and Saver and Investor expense – Matt Taibbi’s on “The Housewives of Wall Street” being a case in point.

Thus, while we do believe there will be a QE 3, we expect it will not be named as such, and will not necessarily begin just after QE 2 expires, unless The Honorable Ron and Rand Paul’s Forces of Light Prevail, to take another course.

Indeed, Peter Turnville-Ince of Compass Global Markets recently wisely observed that it is difficult to know what Real Market-determined Market levels are, because QE Stimulus has artificially generated them. Kudos for the Candor Turnville-Ince!

And Official Statistics are no help either, as many are Bogus.

For the U.S.A., consider the latest Official Bogus Numbers versus the Real Numbers as reported by Shadowstats.com. (We continue to provide Updated numbers in response to Readers’ Requests).

Shadowstats.com calculates Key U.S. Statistics the way they were calculated in the 1980s and 1990s before Official Data Manipulation began in earnest. Consider

Bogus Official Numbers      vs.      Real Numbers (per Shadowstats.com)

Annual U.S. Consumer Price Inflation reported March 17, 2011
2.11%                            9.62% (annualized February, 2011 Rate)

U.S. Unemployment reported April 1, 2011
8.8%                              22%

U.S. GDP Annual Growth/Decline reported March 25, 2011
2.78%                            - 2.21%

U.S. M3 reported April 10, 2011 (Month of March, Y.O.Y.)
No Official Report             - 0.99%

Williams also Provides an excellent Summary of What to expect Near and Middle Term as quoted above. In particular, we note his forecasts, with which we continue to concur, of dramatically increasing Inflation and decreasing economic Activity.

Indeed, if one considers the aforementioned Real Numbers, and not the Bogus Official Statistics or Main Stream Financial Media Talking Heads’ Spin, one realizes that we are at The Very Threshold of Hyperinflation.

In the U.S. for example, Real Consumer Price Inflation is over 9% (see above).

Furthermore, given ongoing Monetary Inflation (e.g. QE 2, and, notwithstanding official Denials, a prospective QE 3 and possibly 4 and 5) Hyper-Price Inflation is probably baked into the Financial and Markets’ Cake. This is the Unfortunate Reality.

The recent nearly Vertical Rise of the Continuous Commodity Index (CCI) provides Objective Confirmation of our recent Subjective Experience – Prices of Essential Commodities, Food and Energy, have skyrocketed recently.

Indeed, the Weimar Experience provides further confirmation of our being on the Hyperinflationary Threshold.

The Monetary Explosion in Weimar preceded the Actual Price Explosion by a couple of years. And, we must recall, that Weimar Hyperinflation was then followed by The Great Depression.

Another Hyperinflationary Harbinger is the continuing swoon in the Purchasing Power of the Worlds Reserve Currency – the U.S. Dollar, a Fiat Currency nonetheless. 

And when we compare the past decades’ Stellar performance of Gold and Silver in all Major Fiat Currencies, we begin to realize that Voltaire’s Observation that “Paper Money returns to its Intrinsic Value – Zero”  may well reflect Ultimate Fiat Currency Reality. And perhaps even provide… Intimations of Zimbabwe in our Future?

And just one more consideration is relevant before providing Guidelines for portfolio Preparation for the Coming Great Hyperinflation.

Historically, and logically, the Run-ups to Hyperinflation are preceded by a period of Price Run-ups for Risk Assets such as Commodities and Stock Markets.

This provides The Illusion of (a Return to) Financial and Economic Health, just as we are seeing now. (The Quotation at the end of this article indicates much of this Illusion is created by way of Deception created by The Fed.)

But, inevitably, when, as a result of the preceding Monetary Inflation, Price Inflation begins to skyrocket, that Dramatic Price Inflation Chokes Economic Activity, leading to Economic Stagnation and then Contraction. Voila, a Hyperinflationary Depression – “Mega-Stagflation” to Coin a Term.

At this point, it is essential to add one further consideration for Hyperinflation-Resistant Portfolio Construction – Timing.

Consider Energy for example. Early on in a Hyperinflationary Run-up Energy Prices Soar because the Fed-Created (or Eurozone created, etc.) Monetary Hyperinflation (which started the whole process) causes the Purchasing Power of Fiat Currencies to decline (as we are now seeing). Early on, this results in soaring Energy (and other Commodities) prices.

But as the Price Increases in Energy start to Bite, Demand is Reduced, thus slowing Economic Activity, Energy prices are then likely to drop suddenly and dramatically as Demand swoons.

So what Assets are not only resistant to such a Mega-Stagflation, but also provide Profit Potential or Reckoning Day approaches?

Fortunately, there are three Assets which provide Insulation against Hyperinflation and Substantial Profit Potential for Portfolios.

Gold

First and Foremost is Gold. Throughout the Process from Monetary Inflation (QE 1, 2…3? 4?) to Price Inflation (e.g. beginning now) to Price Hyperinflation and Depression, Gold tends to appreciate (Caveat: But beware of “Paper Gold” and Cartel* Price Suppression Attacks).

*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, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" 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.

Initially, in the Fiat Currency Monetary Hyperinflation phase, Gold, as The Ultimate Money, appreciates because all Fiat Currencies (albeit in varying Degrees) decline in Purchasing Power vis a vis Gold.

And then, as price Inflation becomes Price Hyperinflation, Gold Soars as Fiat Currencies’ Purchasing Power Plunges.

Then, as Economic Depression Sets in (and thus when Fiat Currencies have lost much of their value) Gold tends to Retain its value vis a vis the damaged or Destroyed Fiat Currencies.

One other consideration relates to Gold (and other Precious Metal) Mining Shares. Their Value tends to track Bullion more or less, except that they are after all, and above all, Stocks. Thus, overall Stock Market performance is likely to be a greater determinant of their Value at certain times, than their value as actual or potential Precious Metal producers.

Maximizing Value in Precious Metal shares (as opposed to Bullion) is thus in large part a matter of Timing… Generally speaking, they are better purchased near the Bottom of Equities Markets Downlegs.

Silver

Silver, The Poor Man’s Monetary Metal, can, in the Hyperinflationary Process, be expected to perform similarly to Gold, except for the fact that it is also an Industrial Metal, used, and used up, by Industry.

While Gold has recently powered up to trade around its recent all-time Nominal High around $1470ish as we write, Silver is stronger even yet, recently trading around its 21st Century high of over $41/oz.

But it is important to note Silver has recently been acting more like the Monetary Metal that it is, rather than the Industrial Metal that it also is.

The prospect of sustained Higher Oil Prices justifiably exacerbates fears that such high prices will dampen Economic Activity, thus dampening demand for Industrial Metals. But Silver as Safe Haven Money has spiked UP along with Gold and Crude. Indeed, Silver prices are spurred by a Critical and Worsening Supply Shortage of Physical.

And as we have explained elsewhere the Shortage of Physical is so severe that there are increasing reports that those who opt to take delivery of Physical Silver are told they will be paid cash premium of up to 80% if only they agree not to take delivery.

Thus we have, and will continue to have, this Very Volatile situation in the Precious Metals Arena with the Contenders being: The Cartel vs. Economic and Financial Reality.

Any perceived diminishment of The Chaos and/or a Major Equities Takedown will surely bring intensified Cartel Suppression Attacks on the Precious Metals Prices.

As we earlier Forecast, we expect an even more Vigorous Cartel Attack on Precious Metal prices to launch in the next few weeks.

We expect the next few weeks will provide a test of The Cartel’s Price Suppression Power. See Deepcaster’s latest Alerts in the ‘Alerts Cache’ at www.deepcaster.com for our latest Forecasts.

In the Middle and Long Run, Gold and Silver are likely going higher, much higher.

Caveat: but Consider that Precious Metal Miner and Explorer shares are stocks, and thus tend to mimic overall Equities Market Movements to a degree. In other words, an Equities Takedown would tend to take down Precious Metals shares prices also, but Bullion would tend to be less affected.

And, this is The Key Point, since Silver is an Industrial Metal, we expect Silver Shares would be taken down harder in any equities Takedown. But the Severe Silver Bullion Crunch would tend to keep Bullion Prices elevated.

In sum, we consider Silver Bullion a “Buy” and Silver Shares are a Buy too at the right time.

 

Food

The Third Hyperinflationary Insulating Category with Profit Potential is Agricultural Products (and certain Producers) in Inelastic Demand. Whether in a Hyperinflation, or in a Depression, people will buy Food first above all else.

In this Sector, there is one Extraordinary Investment Opportunity, still a “Sleeper” Sector to some degree, which, some would argue, is, at this time, even better than Gold and Silver.

Indeed, we are among those who agree that Gold and, with the right timing, Silver, are Two of the Three Best Investment Opportunities for the Next Decade.

But we must also agree that this “Sleeper” Opportunity may at this time be the Best of All, because there are still certain key companies in this Sector which are quite undervalued.

Indeed, Deepcaster recently recommended three -- one trading at just over $5/share and the Others at just under $2/share in his recent Alerts.

In particular, for example, we recommended a ‘Sleeper’ Sector Industry leader, which has a huge and expanding Asian Market and a recent P/E Ratio of under 4, and which trades under 70 cents/share (in $U.S.) and has Tremendous Appreciation Potential.

To Consider these three “Best of the Best” Sleeper Sector Investments, read our recent Letter – “Main Gold, Silver & ‘Sleeper’ Sector Price Movers; ‘Sleeper’ Buy Reco.; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar, and U.S. T-Notes & T-Bonds; March 2011 Letter”, and Alert -- “Golden Green Opportunity Buy Reco.; Forecasts: Commodities, Gold, Silver, Equities, Crude Oil, U.S. Dollar, and U.S. T-Notes & T-Bonds” in the ‘Alerts Cache’ at www.deepcaster.com.

In sum, in the Medium and Long Run, we see the aforementioned Equities Bearish Factors overwhelming the Bullish Ones, which will have Severe Negative Consequences for Equities-in-General and for certain Commodities which are in Elastic Demand.

Given this Negative Scenario Safe Havens with Great Profit Potential are Gold, Silver (with Timing Caveats for Shares) and Agricultural Commodities in relatively inelastic demand, and businesses focusing on them.

Another important Guideline is that Financial and Economic Conditions are such that we do not recommend shorting Gold and Silver, even in advance of a likely Cartel* Takedown attempt.

Deepcaster’s recommended General Guidelines for Preparation for The Coming Day of Reckoning and Cartel Market Manipulation (i.e. especially in the Precious Metals Market) is:

  1. Buying Precious Metals on Dips, coupled with a Willingness to Tolerate Great Price Volatility
  2. The Core Holdings of Ones’ Precious Metals Position are best held in one particular form (see our Precious Metal Recommendations) of the Physical Metals
  3. that Well Managed reasonably priced Miners with Substantial Reserves be bought on Dips, and, if one is a Trader, a portion sold near interim highs
  4. that a portion of One’s Holdings be in a Dividend Paying Precious Metals Fund such as one which we have Recommended, and
  5. Regarding Silver, since it is also an Industrial Metal, it is especially vulnerable to Slowdown in Economic Activity and (especially for the Shares) Takedowns in the Equities Markets.
  6. Be alert for Opportunities to acquire Food Producers at reasonable prices

In sum, we expect another Markets Crisis will launch soon in 2011 and Gold, Silver and Food (and water) are the places to be.

Indeed, Gold and Silver and Essential Food Products and Producers are the most important Means to Profit and Protect regardless of Economic, Financial, or other Market Conditions, when preparing one’s Portfolio for Hyperinflation.

We reiterate, finally, that, given the aforementioned Negatives, a Crisis is likely already “baked into the cake.” The Fed’s (and Eurozone Bankers) Price boosting via Q.E. can not go on forever, and, in any event, Q.E. worsens the Inevitable Crash because it serves only to pile more Debt upon already Unpayable Debt.

Moreover, the Bond Markets have already been Signaling that Q.E. will result in increasing Inflation and Interest Rates which will Seriously Injure the Equities Markets, and Burst Equities and other Key Asset Bubbles.

The fact that The Bond King, Bill Gross (PIMCO) has not only exited the long-dated U.S. Treasury Market, but is also shorting it, should be a warning to all.

The Wise are Well-Advised to prepare for the Coming Hyperinflation.

_________________________________________________________________

“The minutes of each Federal Open Market Committee (FOMC) meeting are released within weeks of the meeting having occurred. The full transcript is available only five years later. I recently started reading in depth the transcripts of the FOMC meetings and discovered some shocking information.

Let's consider the December 21, 1999, meeting. The minutes can be found here –
http://www.federalreserve.gov/fomc/minutes/19991221.htm

In the minutes the Board unanimously accepted the accounts of the System Open Market Account:

“The Report of Examination of the System Open Market Account, conducted by the Board's Division of Reserve Bank Operations and Payment Systems as of the close of business on September 10, 1999, was accepted.”…

One would think that there was nothing of interest to see here; just mundane approval of accounting. But if we look at the transcript we get an entirely different picture that shows that the Fed contemplated that there could have been fraudulent diversion of funds or errors in accounting in the famous Exchange Stabilization Fund (ESF) that has received so much attention from GATA as one mechanism for manipulation of the gold market…

MR. FISHER…

More fundamentally and more importantly, what troubles us is how we could have gone for so many years without scrubbing this account more vigorously. That is something we are looking into and we are going to be revising our control procedures -- both the audit procedures and those in our own Markets Group. The Board's staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks…

CHAIRMAN GREENSPAN. Were it an embezzlement, prior to what period would it have occurred?

MR. FISHER. We only know that the difference existed prior to December 1994.

CHAIRMAN GREENSPAN. It could have been any time prior to that? Is there a beginning point, other than 1914?

MR. FISHER. The details certainly don't exist for pre-December 1994 records, so I don't know how we could determine the beginning point -- in 1973 or 1963 or where. Prior to 1994, the only interest income we were receiving in that account was coming from the BIS, the Bundesbank, and the Bank of Japan. So the source of the income was official institutions. It was really a very simple accounting process to bring that income in at that point; the complexities have been introduced since that time. So, as I say, Pricewaterhouse-Coopers and our audit function are confident in looking over the control procedures we have had in place that it's implausible that a diversion could have occurred. But we cannot rule it out.

* * *

What is the solution to this accounting problem? Just fudge the accounts! They reduced reported income to make the 31.6 million dollar problem go away. Here is a repeat of the relevant section:

The Board's staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors…

It is shocking that PriceWaterhouse-Coopers should be "comfortable" that this is not a "material event" for the purposes of disclosure. Clearly the system is set up to deliberately deceive the public and avoid any transparency. Full transcripts of the FOMC meetings are available only after five years -- and what is the time limit before they destroy detailed records? You guessed it: five years.

But there is more deception revealed in the transcript on an entirely different topic: Greenspan claimed that the Fed cannot recognize a bubble until after it has burst. That is a lie as shown by another section of the transcript.

* * *

MR. PRELL: All of this may well be stretching the point statistically, but I think it's worth sounding a note of caution that strong productivity gains and intense competition -- even accelerating productivity and intensifying competition -- do not by themselves ensure that there can be no step-up in inflation. Unless supply is completely elastic, which seems unlikely in the short run, demand can become excessive.

That, we fear, is the current situation, with the rising stock market overriding the effects of monetary tightening…

The Fed clearly recognized the tech bubble and even made reference to the infamous and most speculative South Sea Bubble. But they did not want to do anything because it was making the whole economy expand due to the wealth effect:

If this speculation were occurring on a scale that wasn't lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand.

Greenspan lied that the Fed could not recognize a bubble in advance. They did recognize it and even compared it to the South Sea Bubble and they purposefully let it continue…

This transcript shows that the Fed cannot even manage the multi-billion dollar ESF fund, so how can they be trusted to run a multi-trillion-dollar bailout operation as was instigated in 2008?...

The Federal Reserve acts as the supervisor and regulator of the banking system. Clearly such breaches in fiduciary duties and accounting standards explains why the banks they supervise can thumb their noses at any banking regulations and run fast and loose with off-balance-sheet transactions, report falsely inflated and often record profits coming out of the biggest recession and banking crisis in 80 years, and pay their executives obscene bonuses.”

“Adrian Douglas: Deception and cover-up at the Fed”
Adrian Douglas, Gata.org, 4/3/11

Best regards,

By DEEPCASTER LLC

www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
DEEPCASTER HIGH POTENTIAL SPECULATOR
Wealth Preservation         Wealth Enhancement

© 2011 Copyright DeepCaster LLC - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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