Investors Surmounting the Wealth Destruction Dollar Debasement Juggernaut
Stock-Markets / Financial Markets 2010 Oct 02, 2010 - 02:50 AM GMTBy: DeepCaster_LLC
“The Dollar's decline is a result of the "quantitative easing" the Fed has been stepping up recently. Quantitative Easing is a fancy term for printing fiat money and exchanging it for long term good and garbage securities held by Wall Street firms, as part of the president's Working Group's activities. The money has debased the value of the Dollar, and found its way into commodities, stock and bond markets. At some point here, stocks will no longer remain in an uptrend, as the Dollar's debasement takes its toll.
This policy will destroy purchasing power of households as households are not getting access to this additional trillions of dollars being printed by the Fed. Instead the money is going into markets and will be destroyed out of thin air as stock markets tank, resulting in the worst case scenario, too many dollars accompanied by a declining stock market. (i.e. Hyperinflation – Ed) According to the Fed's own balance sheet, it has pumped $1.5 trillion of printed money into the system in this fashion over the past two years. This policy has accomplished nothing positive. Obama's Chief Economic Advisor, Lawrence Summers, announced his resignation Tuesday. Central Planner policies during his tenure have been an abject disaster.” (emphasis added) “Market Briefing”, Robert McHugh, 9/21/10
“I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off deflation, not to create inflation. If the Federal Open Market Committee cannot see the difference, God help America.
We now learn from last week’s minutes that the Fed is willing "to provide additional accommodation if needed to ... return inflation, over time, to levels consistent with its mandate."
No, no, no -- this cannot possibly be true…
Ben Bernanke has not only refused to abandon his idee fixe of an "inflation target," a key cause of the global central banking catastrophe of the last 20 years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).
Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the "tyranny of the general price level" in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.
So all those hillsmen in Idaho, with their Colt .45s and boxes of krugerrands who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control…
Yes, U6 unemployment is 16.7 percent. But as dissenters at the Minneapolis Fed remind us, you cannot solve a structural unemployment crisis with loose money.
Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles.
Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?”
“Ambrose Evans-Pritchard: Fed is out of control, arranging debt default by stealth”
“Shut Down the Fed, Part II”
Ambrose Evans-Pritchard, The Telegraph, London, 9/27/10
“The secular vanishing of the gold basis is a most ominous danger signal. It indicates that monetary gold is increasingly unavailable, and in case of a crisis it can no longer be relied upon to come to the rescue. Basis started out at 100 percent of the prevailing interest rate, but has been steadily eroding all the way to zero percent today. Permanent gold backwardation (negative gold basis) is staring us in the face. The gold basis is trying to tell us something. It heralds the greatest monetary crisis of all times…collapse of the international monetary and payments system…
Gold is the only ultimate extinguisher of debt. Other extinguishers do, of course, exist but they are not ultimate in that they have a counterpart in the liability column of the balance sheet of someone else. Gold has no such liability attached…
The debt crisis of 2008 was a dress rehearsal. It gave the world a foretaste. This crisis is a gold crisis. It is a crisis indicating the threat of a shortage of the ultimate extinguisher of debt, without which our runaway debt tower is doomed. When it topples, it will bury the world economy under the rubble…
All kinds of ad hoc explanations have been offered for the debt crisis. But the real explanation is that under the threat of gold backwardation creditors are scrambling for liquidity. There will be no recovery unless provision is made for the orderly retirement of debt through a mechanism using gold as the ultimate extinguisher. The alternative is a Great Depression worse than that of the 1930's. To understand this we have only to contemplate the shock to the world if it was all of a sudden revealed that the debt of the U.S. government was in fact irredeemable. The Emperor is naked. As long as bonds carry a gold clause, or the bond market is supported by the trading of paper gold, bonds are deemed redeemable. But once permanent backwardation makes monetary gold unavailable, debt becomes irredeemable in the eyes of the bondholders. Paying U.S. bonds at maturity in F.R. notes does not establish redeemability. The latter is just evidence of debt secured by the former as collateral. This reveals that bonds are not really redeemable at all. At maturity, an interest-bearing bond is replaced by non-interest-bearing debt, that is, by an inferior instrument. All you do is shuffle various forms of irredeemable debt…
The solution is evident. The world's monetary gold should be remobilized…”
“Remobilize Gold to Save the World Economy! An open letter to Paul Volcker”
Antal E. Fekete, lemetropolecafe.com, 9/25/10
“There is no question that more and more buyers of gold and silver contracts are opting to take delivery in spite of being offered 25% to 30% premiums to roll or curtail their contracts. In time, due to the leverage, and the fact that sellers have little or no inventory, a two-tier market will develop. There would be two different prices, one for the paper gold play and the other for delivery. This has already been rejected in the market from time to time, as gold has gone into backwardation. In time we could see continual backwardation as gold for delivery goes to permanent premiums, of $50.00 to $100.00 an ounce. That also means non-delivery contracts could fall to a discount and perhaps not participate in the move to the upside in the way that physical contracts will. The sale of leveraged contracts, or naked sales, are really tantamount to fraud if not identified as such. Once no gold is available for delivery, and that is possible, the Comex and LBMA contracts could collapse.”
Bob Chapman, The International Forecaster, 9/25/10
Before the Solutions, the Challenges…
The U.S. and Major Eurozone Nations’ Debts are so substantial that no reasonable level of taxation can possibly pay them.
Therefore, they will be “paid” through “Stealth” Currency (i.e. Purchasing Power) Debasement via Overt (and/or Covert – likely already occurring – see below) Quantitative Easing (Q.E).
The Main Question is whether the resultant loss of Purchasing Power will be suffered mainly by the Mega-Bank Lenders (“Q.E. Narrow”, we call it), or mainly by Citizen-Investors (“Q.E. Broad” we call it because the suffering is broadly felt).
In the U.S., for example (and Analogs exist in Other Indebted Fiat Currency Nation’s as well), possible Q.E.–Narrow Solutions could be achieved through The Feds purchasing of Treasury Securities the proceeds of which would be “crammed through” the Mega-Banks via the requirement that they must loan 90% to Small Businesses (now being starved of credit), AND/OR the Proceeds could be used, were Congress to Mandate it, to provide a Massive Tax Cut and/or refund to Taxpayers/Consumers.
Such would greatly strengthen their BALANCE sheets, which, given that they are 70% of GDP, would make a Genuine Recovery Possible.
Unfortunately, (cf. McHugh comment above) Q.E. - Broad, in which the loss of Purchasing Power is felt mainly by Investor-Citizens, is the only course the private for-profit Fed-led Cartel will likely pursue because it is the only one which protects the Profits and Power of the Cartel’s Mega-Bank Shareholders.
Indeed, Q.E. Broad is already being implemented by The Fed as Graham Summers Points out.
“…All told, the Fed has bought $20 billion worth of Treasuries in this fashion, $11.15 of which it purchased last week alone. With this kind of weekly money pumping in place, Bernanke and pals don’t need to continue their “behind the scenes” games (like the options expiration week money pumps).
Or do they?
Unbeknownst to most investors, last week Ben Bernanke pumped an additional $11.05 BILLION into the system ON TOP of the $11.15 pumped via the POMOs. In plain terms, the Fed juiced the system by $20+ billion in a single week, bringing its liquidity pumps RIGHT BACK to QE 1 LEVELS.
If you want to know why stocks have rallied in the last month, this is THE reason. The economy isn’t improving and the European Crisis isn’t over. Nothing has improved. All that has happened is the Fed funneled money into the Primary Dealers who ramped the market.
This is also the reason why the latest rally has almost entirely consisted of gap ups: the Primary Dealers ramp the market and then the computer trading programs take care of the rest.
In plain terms, the market is being juiced higher, plain and simple. There is no fundamental reason for stocks to be rallying. Moreover, we have numerous signs of a top forming (mutual fund cash levels, insider selling to buying ratios, negative divergence, etc). Those who choose to buy into the farce of a rally are going to get what’s coming to them. And when they do, it won’t be pretty.”
“The Only Reason Stocks Have Rallied This Month”
Graham Summers, Seeking Alpha, 9/28/10
Note that this is Q.E.–Broad with a vengeance and reported, finally, in Mainstream Media publication. (Of course Deepcaster and a few others have been writing about this Market Manipulation for years.) The Treasury Securities being bought are the debt-obligations of U.S. Taxpayers (the “Broadly Suffering” group), but the Benefit accrue mainly to the Primary Dealer Mega-Bankers, and, secondarily, but temporarily, to Equities Owners.
The Fed and other Central Banks shall implement further Q.E.-Broad not only because it protects their owners’ Profit, but also because it transfer risks and debt to the U.S. and Eurozone Nations’ Taxpayers, as demonstrated above.
Most importantly for typical Investor-Citizens, Q.E. Broad degrades the purchasing Power of the Fiat Currencies, thus effecting a Stealth Confiscation of the Wealth of Savers and Investors. This burden is in addition to the Interest Taxpayers must pay on those Securities, purchased by The private for-profit Fed with Money they print/digitize for free, out of thin air.
To reiterate, incredibly, under Q.E.-Broad The Mega-Bank owners of The private for-profit Fed do not lend much of the money The Fed gives them to small businesses. They use much of it to engage in high-risk leveraged trades, and thereby inflate more Asset Bubbles, secure in the knowledge that The Fed and, ultimately the U.S. Taxpayer will bail them out, again, if they get into trouble. Too-big-to-fail Mega-Banks are alive and well.
But this “Game” is not sustainable in the Long Run. Consider…
Ominously, China has not only stopped buying U.S. Debt, but it has actually reduced the U.S. Treasury and Agency debt it holds by over 7% since the beginning of the year.
That leaves The Fed, Bank of England, and ECB for example, as Major Debt purchasers via Creation of Trillions more in their Fiat Currencies.
And that ensures continued Currency Purchasing Power Degradation and thus Hyperinflation at some point.
So, what to do?
Broad Q.E. is a Major Threat, but one from which properly positioned Investors can protect themselves, and, indeed, profit.
In recent meeting, The Fed announced its willingness to undertake further Q.E.
But as we laid out in our recent article: “White Swans into Black: Golden Antidotes”, there is considerable evidence The Fed is already Covertly conducting Q.E. to the tune of several hundred billion already in 2010. We cite the evidence for such, inter alia, in the comments (quoted in that article) from Jim Willie, Eric Sprott and Jim Grant.
As well, the Fed is also doing de facto Q.E. via their regular POMO injections, per the Summers article above.
Thus, it behooves us investors to consider the Threats and Profit Opportunities from future Q.E. which is almost certain to continue to come. To do so we must consider Q.E. in a bit more detail.
Q. E. (Quantitative Easing) is in its simplest terms, the euphemism for The Fed (or other Central Bank) creating additional fiat currency out of thin air, e.g. to buy Debt (e.g. U.S. Treasury Securities) to fund even more U.S. deficit spending.
Theoretically, this boosts the economy by putting more money into Circulation.
But Q.E. is a Threat too, because putting ever more fiat currency into circulation chasing a slower-growing (or Static) quantity of Goods and Services can lead to significant Consumer Price Inflation, or even to Hyperinflation, and, in the case of the U.S., to a substantially reduced value (Purchasing Power) of the U.S. Dollar.
Thus, while significant Q.E. would likely lead to higher Equities (and Bond) prices temporarily (because of more fiat money available to bid up their prices), the gains achieved thereby would be largely illusory, because the higher apparent dollar-value of those Equities would in fact be diminished by the reduced Purchasing Power of those Dollars.
Indeed, all the Q.E. (Fiat Money Creation) so far is already a major factor in the Consumer Price Inflation from which we already suffer! – Real CPI in the U.S. is already at 8.5% Annualized per Shadowstats.com. This already-high Real CPI is the Miners Canary warning us that Hyperinflation is already coming. But it is in the interests of the private for-profit Fed, and its Cartel* (see below) to hide such Realities from us.
Shadowstats.com calculates the Statistics the way there were calculated in the 1980’s and early 1990’s, before data manipulation began in earnest.
Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported September 17, 2010
1.15% 8.5% (annualized August 2010 Rate)
U.S. Unemployment reported September 3, 2010
9.6% 22%
U.S. GDP Annual Growth/Decline reported September 30, 2010
3% -1.25%
U.S. M3 reported September 16, 2010 (Month of August, Y.O.Y.)
No Official Report - 4.29 %
“Armed” with the Real Numbers, we can thus see that not only did the Dow (etc.) not appreciate in the past decade (Nominally, it is about where it was ten years ago), BUT a Dow holder over that decade would also de facto-have suffered a Great Loss because during that period the Purchasing Power of the Dollars in which the Dow is valued, declined 30%+.
Therefore, considering the Situation Today and the Real Numbers above, The combined Appreciation and Yield of any Truly Profitable Investments must exceed today’s 8.5% CPI figure (or, more precisely, exceed present and projected CPI).
So, Given these Realities, what should Investors do to Profit and Protect? Consider the following Analysis and Conclusions.
To summarize: The Fed has been sending Signals – more Q.E. is surely coming. Indeed, it is already occurring.
Why “Surely”.
Because the U.S. (and Eurozone and several other major countries) have unsustainably high, and de facto unpayable (!) levels of debt.
For example, the U.S.’ $13 Trillion Debt is nearing 100% of GDP. And the U.S. has over $100 Trillion (and Growing) Downstream Unfunded Liabilities. (The Eurozone will have to engage in more Q.E. as well for similar reasons.) The only “Solution” (other than Outright Default, which the U.S. is unlikely to accept) is to dramatically degrade the value (purchasing power) of the Dollar via Q.E. Eventually, this is bound to create Hyperinflation!
So, in addition to the hundreds of Billions of Overt and Covert Q.E. already occurring, we can forward to several more rounds of Overt and very Public Q.E., as well as much more Covert Q.E.
Eventually this will dramatically increase CPI above its current real 8.5% level, (and even though the economy is stagnating) and dramatically reduce Purchasing Power.
Q.E. is thus a Serious Threat, because by facilitating (hyper) inflation it enables a Confiscation of the Assets from Savers and Retirees and “Main Street” and Small Business, among many others. And the Bogus Official Statistics are “Complicitous” in this Confiscation.
Of course, we expect Officialdom to continue to Attempt to keep the Realities Hidden via the Bogus Statistics and otherwise.
But take note that, with a Stagnant Economy and 8.5% Inflation, Serious Stagflation is already happening and thus is both an ongoing and prospective Threat.
Thus the Challenge becomes: how to preserve wealth and profit.
There are three main “Vehicles” which will do the Trick and only if acquired according to a well-designed Strategy (for reasons we mention below). We lay out such a Strategy in our articles entitled “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.
The three Main Vehicles are Gold, Silver, and Securities for which present and prospective Price Appreciation plus Yield is likely to significantly Exceed the Real Inflation Rate, now 8.5%. (There are a few other Vehicles as well, such as Selected Agricultural and Resource Products, if timely selected, but we leave these aside for now.)
Our Regular Readers are aware that, while we are quite Bullish on Gold and Silver, both are subject to Price Suppression by the Cartel*.
*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.
Though the Cartel has been weakened in recent months (see our Alert for Week Ending April 16, 2010 – "Cartel Failing? Precious Metal Buy Reco! Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & Bonds" in the ‘Alerts Cache’ at www.deepcaster.com), it is still potent. It has been able to keep the Gold price – below $1,250/oz. for many weeks now, for example. See our latest Alert for our short-term Forecast for Gold and Silver prices.
But for the long haul, Gold is still in an uptrend, having quadrupled in price in the last ten years.
And though Silver is an Industrial as well as a Monetary Metal, given tight above-ground supplies it is also in a sustained and sustainable Uptrend. Thus we have recommended acquiring a specific Form of Gold and Silver, which is resistant to Cartel Price Suppression Attempts (see our recent Alerts in the ‘Alerts Cache’ at www.deepcaster.com).
As to the Third “Vehicle”, reasons for acquiring Securities with Appreciation Potential plus Yields in excess of today’s 8.5% CPI, need no further elaboration. Recently Deepcaster has recommended five securities whose recent yields when we recommended them were 15.6%, 26%, 8%, 18.5% and 10.6%. (See Deepcaster’s Alert for Week Ending July 23, 2010: “NEW HIGH YIELD PORTFOLIO: 15.6%, 26%, 18.5% & 10.6% Recent Yields” in the ‘Alerts Cache’ at www.deepcaster.com for a list of these Securities.) Such high-Yielders provide a potentially Profitable Cushion against Q.E. and Consequent Inflation.
In sum, repeated Q.E. virtually guarantees continued appreciation of Gold and Silver, notwithstanding repeated Cartel Attempts to Suppress their prices. Though these Attempts may be intermittently successful in taking down the Precious Metals prices temporarily, these Takedowns are not sustainable.
Thus we recommend acquiring Precious Metals near interim Takedown bottoms per our Strategy.
And because, with rampart and repeated Q.E., Fiat Currencies Purchasing Power diminishes, we recommend holding only limited amounts of U.S. Dollars or Euros or other fiat Currencies.
Gold and Silver provide a much better Security Blanket and Profit Potential.
Best Regards,
By DEEPCASTER LLC
www.deepcaster.com
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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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