2011 Profit and Protection Essentials; Bubbles to Pop and Bullish Sectors
Stock-Markets / Financial Markets 2011 Dec 30, 2010 - 02:17 PM GMTBy: DeepCaster_LLC
"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft…
"It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told Kroft.
Asked why people aren't paying attention, Whitney said, "'Cause they don't pay attention until they have to."… And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.”
“State Budgets: The Day of Reckoning”
Meredith Whitney, CBS’s “60 Minutes”, 12/19/10
“Some of the world’s strongest banks have profited from an emergency credit facility set up by the US Federal Reserve to shore up confidence in the global financial system, according to a Financial Times analysis of data released by the Fed.
More than half of lending under the Fed’s term auction facility – the largest of its crisis programmes – went to foreign banks.” (Emphasis added)
“Non-US banks gain from Fed crisis fund”
Robin Harding, Bernard Simon, and Christian Oliver, Financial Times, London, 12/27/10
“This note is intended to document what can be learned about BIS and related central bank operations in the gold market from published sources. It is based mainly on information published by the BIS itself… (BIS = Bank for International Settlements – The Central Bankers Bank – Ed.)
…the use of gold as collateral for the swap is clearly on a far greater scale than anything done in the last four years.
It is also intriguing that the swap creates a risk of double-counting of gold. The counter parties for the BIS gold swap can presumably account for the gold as an owned asset since the explanation of the gold swap in the 2009/10 BIS Annual Report is very specific and says “The Bank has an obligation to return the gold at the end of the contract” (so it would appear to meet the definition of allocated gold). (Emphasis Added)
However, the central bank (or banks) that hold the BIS sight account(s) containing the swapped gold can also include the gold in their stock of physical gold under the normal central bank accounting conventions.
There has been considerable comment on these gold swaps, but their impact on the increase in the BIS’s holdings of unallocated gold is striking. Experienced gold market analysts such as Reg Howe and James Turk have both remarked that the reason for the swap is much more likely to be driven by the gold market than the currency markets…
“Some analysts speculated that the swap deals were a surreptitious bail-out of the European banking system ahead of last week’s publication of stress tests. But bankers and officials have described the transactions as “mutually beneficial”.”
“Information On The Gold Market Activities Of The Bank For International Settlements (“BIS”) Presented At The Gold Symposium In Sydney On 9th November 2010”
Bob Lambourne, Le Metropole Café, 11/24/10
“Mr. Bernanke, Chairman of the Federal Reserve, a private corporation, would have us believe that, quantitative easing is the only way to save the US economy and to reverse the unemployment problem. He conveniently forgets to tell you that he authored a paper in 1988 with Mr. Michael Boskin that concluded that what Mr. Bernanke is doing with QE does not work. He told watchers of “60 Minutes” that the jobless rate would have been far higher; something like it was in the “Great Depression” at 25%. If Mr. Bernanke had taken time to have his minions do the research, he would have found that U3 at the peak of the “Great Depression” was 25.2% and U6 was 37.6%. As we write U3 is 9.8% and U6 is 17%. If you strip out the bogus birth/death ratio, real unemployment on a U6 basis is probably close to 22-3/8%, as yet, considerably less than in the 1930s, but impressively unacceptable. As those interested now know over the past three years the Fed has bailed out financial firms and many other corporations with funds provided indirectly by the US taxpayer. Little of this largess has fallen into employment and as a result unemployment has risen. It flies in the face of reality for Mr. Bernanke to tell was that QE2 will create employment when QE1 certainly did not.
What Mr. Bernanke has done is add fuel to the fire, which has given us one of the greatest financial scams of all time.
Part of the Fed’s cover is the fiscal irresponsibility of government, which in 2010 created $2 trillion in net liabilities, as federal benefits rose. That was the result of the Financial Report of the US, which rightly applies corporate-style accrual accounting. That includes interest on debt and federal benefits payable when they are incurred. This method illustrates the mounting liabilities of government entitlement programs, such as Medicare, Medicaid and Social Security. 2010’s cash budget may have narrowed to $1.294 trillion from $1,417 trillion in 2009, but the real number was $2,080 trillion.
We have discussed bogus government statistics for more than 20 years, especially over the past ten years. Growth projections for the year are hard to make when the numbers are what government wants them to be. The result is no nonsense – it is premeditated fraud. It is called cooking the books and if it weren’t for John Williams our nation would be in the dark, as to what government is up too.
The term now being used within government is information management.”
Bob Chapman, The International Forecaster, 12/29/10
“Something is Rotten in the State of Denmark.”
Shakespeare, Hamlet
“More than half the lending under the Fed’s term Auction Facility…went to Foreign Banks…” But isn’t the Mission of The Fed supposed to be focused on the health of the U.S. Economy and Financial System, and not on creating foreign employment and foreign investors’ security?
In light of the quotations above, the Challenges and Opportunities facing Investors and Traders in 2011 are quite clear. They can best be addressed on a Sector by Sector basis. From these Sector Analyses, we infer certain Essential Guidelines.
U.S. Dollar
In the week before Christmas, the U.S. Treasury reported that the U.S. had added $2 Trillion to its liabilities.
And we also learned that The Private for-profit Fed’s Holdings of U.S. Government Debt were over $1 Trillion. On these Holdings the U.S. Taxpayers must pay interest to the Fed, which creates Dollars to buy them for free out of thin air.
In addition, The Fed holds over $1 Trillion of Mortgage backed (ostensibly) Debt.
All this Debt was also purchased with Dollars printed for free by The Fed.
We and others have detailed how all this Money Printing reduces the Purchasing Power of all the U.S. Dollars already in circulation, thus de facto confiscating the Wealth of Savers, Investors, and Retirees.
A similar Sad Story can be told regarding the Euro and other Major Fiat Currencies.
And virtually none of this Q.E. (money printing) has gone to reduce debt; rather, to the extent it has been used e.g. to buy Treasury Securities it has facilitated an increase in debt.
And earlier Q.E. in the U.S. (and ongoing Q.E. in the Eurozone) facilitated the transfer of Private Mega-Bank Debt to the Public Sector.
Thus in the long Run, the Purchasing Power of the U.S. Dollar and Euro is destined to continue to be much diminished.
Note that the Continuing Reduction in Purchasing Power of Major Fiat Currencies is “Baked into the Cake”. This is reflected in a Real U.S. Inflation Rate of 8.54% per Shadowstats.com. That means that Total Return (gain plus yield) on Investments must exceed that Real Inflation Rate to show a Real Profit.
Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before Official Data Manipulation began in earnest.
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported December 15, 2010
1.14% 8.54% (annualized November, 2010 Rate)
U.S. Unemployment reported December 3, 2010
9.8% 22.6%
U.S. GDP Annual Growth/Decline reported December 22, 2010
3.25% -1.44%
U.S. M3 reported December 18, 2010 (Month of November, Y.O.Y.)
No Official Report - 2.90%
In the short run, Fears of Eurozone Chaos and general Economic Uncertainty and sentiment have bolstered the U.S. Dollar back over 80 on the USDX.
The U.S. Dollar is the least Bad Fiat Currency “House” of a number of Bad Major Fiat Currency “Houses”, the main other one of which is the Euro.
Guideline: Overall, Q.E. (Money Printing), because it facilitates increasing debt, hurts rather than helps the economy, which is suffering precisely because of too much debt. The Sovereign Debt “Problem” and Many Private Debt “Problems” are Issues of Solvency, not liquidity. Therefore, increased liquidity via Q.E. exacerbates economic problems rather than ameliorates them.
Indeed, past, present and future Q.E. also serves to create Asset Bubbles, such as the Housing Market Bubble.
Essential Guideline: Thus it is essential to distinguished those Assets which are reasonably priced based on Supply and Demand, from those which are Overpriced is a result of Money Printing and are therefore in a Bubble, as Deepcaster does in latest Alert posted in the ‘Alerts Cache’ at www.deepcaster.com.
Consider the following bubble.
U.S. T-Notes & T-Bonds
A prospectively weakening U.S. Dollar coupled with past, present and probable future Q.E. spells Major Degradation of Purchasing Power in the long run for the long-dated U.S. Treasury Securities.
Similarly, continuing Eurozone Q.E. spells Major Degradation for the Euro long-term as well.
As more and more investors realize that Massive Q.E. (Money Printing) will dramatically reduce the Purchasing Power of those Dollars (Euros), they are scheduled to get back in 10 or 30 years, the more those 10 and 30 year Securities will weaken, thereby requiring ever-higher yields to attract purchasers.
At some point, this realization, slow in coming thus far, will become a Mass Awakening, resulting in a Rush to Exit from U.S. long-dated paper. At that time this Bubble will have Burst, thus giving the lie to those who claim U.S. Treasuries are among the Safest Repositories of Wealth.
Essential Guidelines: In this Rush to Exit, Rates will skyrocket thus ushering in a painful Age of Hyperinflation.
Short term, however, we may see a strengthening of long-dated U.S. Treasury Securities if the Economy and/or Equities Markets run into ever more trouble.
Indeed, we opine on the chances for one more Major Strengthening of long Bonds (i.e. Takedown below 3% on the 10 yr. Yield) in our latest Alert and Letter.
In sum, Longer term, U.S. Treasury Securities will likely be in very serious trouble as it becomes increasingly difficult to fund increasingly unpayable U.S. and other Sovereign Debts, but it is too early to short U.S. Treasuries Yet.
Higher U.S. Paper Yields, and Hyperinflation Courtesy of the Private For-Profit Fed are thus our long-term Forecast.
Guideline: Do not invest in long-dated U.S. (or Most Eurozone) Debt, with the goal of Buying and Holding it. We expect you will be most disappointed.
Guideline: Short-term, Even More Dangerous than U.S. Treasuries is one particular species of Widely Held Debt which we also discuss in our recent Alert.
Essential Guideline: So what is the Alternative to Paper? Answer: Hard Assets which are not in a Q.E. induced Bubble!
Gold and Silver
First and Foremost among these are: Gold and Silver. But, though these are arguably not in a bubble, they are nonetheless still vulnerable to Cartel* Price Takedown Attempts. (Also in the Hard Asset Category are Agricultural Products in relatively inelastic demand, which we treat elsewhere.)
*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 Deepcaster’s website. 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 Deepcaster’s website 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.
But as we explain in recent Articles and in our January letter, recently The Cartel’s capacity to significantly take down and sustainably hold down Precious Metal prices has been substantially weakened, but not eliminated.
Regarding Gold, even though the Cartel successfully took Gold down modestly recently, and even though that generated some Negative Technicals, Gold’s Fundamentals, and Key Technicals (e.g. Upward Trend Channel) are nonetheless quite Bullish.
Perhaps even more important, because demand for Physical Possession of Gold and Silver is increasing, and The Cartel’s ability to successfully implement and sustain Mega-Takedowns is Decreasing, The Probability of a Major Mega-Move Upward Breakout has slowly but inexorably increased from “minuscule” to “significant”.
Indeed widely respected investment advisor John Embry of Sprott Asset Management recently opined that Gold and Silver could “go ballistic” before the end of the year, and indeed they may just have launched as we write.
In particular, credible information indicates that Major Repositories are out of, or almost out of, Silver with which to Make Deliveries to which they have committed. Thus the Silver Bullion Price could explode upward at anytime.
However, and not inconsistent with Embry’s view, it is also our view that The Cartel will likely attempt to implement a Significant Takedown early in 2011.
Our Takeaway from these Not-Inconsistent Views is that, regarding Gold, One should
- not be out of Gold or Select Gold Shares, or Silver Bullion
- should be prepared for great Volatility and
- Should buy on the Dips
As to Silver, because Silver is an Industrial as well as a Monetary Metal, our view on it is somewhat different than ours on Gold.
Regarding The Precious Metal Shares and Especially Silver Shares, if an Equities Takedown launches early next year, the Precious Metal Shares, and especially Silver Shares should be sucked down in the downdraft. Silver and Silver Shares are especially vulnerable since Silver is an Industrial, as well as Monetary Metal, and because Silver (and Gold!) compete with The Cartel’s Fiat Currencies and Treasury Securities as legitimate Stores of Wealth and Measurers of Value.
Recall that in the 2008 Financial Crisis, Silver dropped from $21ish to $9ish, more than 50%.
But, the Upside for Silver is Spectacularly High given the Supply and Demand Realities. Thus, Major Dips should be bought and for those who have the Capacity, Silver Bullion should be held through any Price Takedowns.
Indeed, Silver and Silver Shares have very considerable upside potential in the next very few weeks coupled with vulnerability to Takedowns. For Silver’s short term prospects see our recent Alert.
Even though we believe it likely The Cartel will attempt to take Silver and Silver Shares down soon, we believe the prospects for Silver are nonetheless bullish (it is rumored one Major House is out of Physical Silver which can be delivered, even though it committed to make delivery of Physical!).
Though we recommend holding, as part of one’s Core Position the (remaining, after recommending selling half for a profit recently) Bullion Coins we recommended buying last April, in our Alert earlier this week, we just recommended buying shares in a Bullion Fund which are Almost Instantaneously liquid, for all the reasons we recommended buying Silver in April (e.g. Demand exceeds Above-Ground Supply; Poor Man’s Monetary Metal, Inflation-adjusted it should be over $400oz (– our long-term Target BTW), and historically imbalanced regarding the Gold to Silver Ratio).
We have been and still are concerned that certain Major Silver funds do not have all the Silver they say they do. But we have identified one which likely owns the Physical Silver it says it does.
Similarly Gold and Gold Shares Prices could also be taken down also in a Silver and Silver Shares Takedown, though not proportionally as much. (See our Forecast Timing and Targets in our Recent Letter and Alert.)
But what a wonderful Buying Opportunity we expect that will be, because, longer term, both Metals and their Shares Prices should recover and rise much much higher.
In sum, Gold and Silver have great upside potential. Consider for example that the Real All time 1980 Inflation-Adjusted Gold Price High is about $7,400/oz (Shadowstats.com).
Clearly, recent Q.E. has helped accelerate the Gold Price on the upside. But that is not the Primary Cause of the Golden Bull. Rather it is primarily the result of Q.E.’s degrading the Purchasing Power of the U.S. Dollar, Euro and other Fiat Currencies, and of the fact that Gold is Real Money, unlike Fiat Paper.
Guideline: In sum, while the Precious Metals are not in a Bubble, they are subject to temporary Cartel Price Takedowns.
Rather, the Second Largest Bubble is…
Equities
Ongoing Q.E. and Massive Fed POMO operations have kept the Equities Markets Artificially Elevated for months now (See “Opportunities to Profitably Escape Paper “Wealth” into 2011 (10/07/10)” in the ‘Articles by Deepcaster’ Cache.
But Mid-and long term the Fundamentals and Technicals are Quite Bearish. We think the Equities Bubble will have a climacteric, beginning sometime early in 2011.
Thus, the question for serious consideration which we address in our latest Alert is whether Equities are setting up, and being set up, for another Mega-Move Down.
Thus, the Bearish Considerations are:
Without Fed Q.E., there are not many Fundamental Reasons for Equities-in-general to move much higher than they are now, and plenty of reasons for them to move lower. (But The Fed is committed to ongoing Q.E.)
Interest Rates are Rising. Sovereign and Business Solvency Issues are not being solved and Unemployment (read: reduced Consumer Demand) and Investor Sentiment (a Contrary Indicator) are at record highs, and increasing.
Thus, we reiterate:
The Worsening Unemployment Situation in the U.S. and other Major Nations virtually guarantees More Fed Q.E., thus more Asset and Especially Equities Market Bubbles in the short run.
Indeed U.S. unemployment is still increasing with the Official Number at 9.8% and the Real Number at 22.6% (Shadowstats.com). Eurozone Unemployment numbers are, alas, comparable. A sustainable Recovery is not possible without a recovery in employment – 70% of U.S. GDP is Consumer Spending, and if Consumers are increasingly unemployed…well then…
Guideline and Conclusion: In sum, we are in a situation in which there is Increasingly Great Risk to the Downside, but in which the Near Term Trend is Bullish on the Upside, especially for Equities and Inflation Assets such as Food and Energy (emphasis on increasingly), primarily because of Fed Q.E. Consult our recent Alerts for Forecast Timing and Targets.
Crude Oil
Another Bubble, but less Artificially Inflated, is the Crude Oil Bubble.
Consider our correct forecast of five weeks ago, Crude is Making “Another Trip up to 88ish during the Santa Claus Rally. Now this trip will likely not be smooth and we could even see a spike to 90ish.”
Henceforward increasing World Demand will compete with a worsening economy to determine Crude Prices. Like Copper, Crude Prices are a “Canary in The Coal Mine” for Economic Activity.
Guideline: Crude is the most “Honest” Indicator of All the Major Markets Indices.
The foregoing are some of the Considerations Essential to Profit and Protection in 2011.
Best Regards,
By DEEPCASTER LLC
www.deepcaster.com
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DEEPCASTER HIGH POTENTIAL SPECULATOR
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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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