Introduction
This analysis is a follow-up on last month's warning about
the precarious state of the US economy. The anticipated
big correction of the New York Stock Market did not happen.
A closer look at the instruments with which the powers that
be can manipulate the Stock Market and the economy in general
might reveal some reasons why the overall correction has
not yet occurred. So far in my research I can identify three
manipulative strategies. The first strategy-the setting
of interest rates--is quite open and is deployed by the
Federal Reserve System. The two other strategies are more
hidden. A semi-secret working group created by Executive
order deploys the second strategy. This group of high US
Government officials has the task to "maintaining investor
confidence" in US financial markets. It is actively
intervening in the financial markets, but doesn't leave
any official trace of how and when it is doing what. The
third strategy has to do with the price of gold and is deployed,
seemingly in concert, by the major central banks of the
industrialized world. We'll have a closer look at all three
of them.
At the end you'll find some of the revealing articles used
as sources on the strategies discussed; an interview with
one of the architects of derivatives explaining how dangerous
they actually are; and a report to the IMF on the sub-prime
mess by a prominent economist in which he stated that "we
have created essentially in part a little bit of a monster."
But first, let's set the mood with some recent quotes and
headlines:
"The No. 2 U.S. bank said profit plummeted 32 percent
as it took large write-downs for leveraged and other loans
and recorded losses from structured products, including
mortgage debt. The drop in earnings exceeded analysts' expectations
and followed a huge profit slide at No. 1 U.S. bank Citigroup
Inc on Monday" (Reuters, 10/18/07)
"Chancellor's warning to homeowners as IMF predicts
devastating crash" (Daily Mail, UK, 10/18/07)
"Japan and China led a record withdrawal of foreign
funds from the United States in August, heightening fears
of a fresh slide in the dollar and a spike in US bond yields.
Data from the US Treasury showed outflows of $163bn (£80bn)
from all forms of US investments. "These numbers are
absolutely stunning," said Marc Ostwald, an economist
at Insinger de Beaufort. (Telegraph, UK, 10/18/07)
The Fed's Short-term Interest Rate
Fortunately, or not, the anticipated crash for last September
21 did not occur. The Federal Reserve System pre-emptively
bailed out the stressed markets on September 18 by lowering
its short-term interest rate by 0.5% to 4.75%. This was
apparently good news to the Wall Street speculators, who
subsequently drove up the Dow Jones Index with a whopping
336 points. On a micro-economic level this will be good
for those holding Adjustable Rate Mortgages, because their
new mortgage rates will be reset to a level that will be
less high compared with the level if the Fed rate had not
lowered its rate. This will mean less foreclosures and less
stress for the banks holding those loans. Therefore it will
take a little pressure out of the sub-prime mortgage mess,
but it is far from a solution. The Bank of England and the
European Central Bank did not follow and stayed put in their
rates. Meanwhile the banks had to come clean in their quarterly
reporting about their levels of exposure to the sub-prime
mess and some of the big ones reported massive write-offs.
And this is only the beginning.
Some analysts make the case that the intervention by the
Fed boils down to a sacrifice of the Dollar in order to
temporarily bail out the big banks and speculators. The
effect will be inflation, which is and was designed to be,
a more or less hidden tax on the common people. Most analysts
agree that the best gage of inflation is the volume of the
total money supply in circulation, the one that is named
M3. The Fed withdrew reporting on its volume, but some smart
analysts deduced the number from combining all kinds of
indicators and there seems to be a consensus that the M3
is at a rate of annual growth of 10-13%. If you subtract
the actual rate of growth of the GNP (ca. 2%) you will get
the actual rate of inflation for those making transactions
in dollars. It is not that the Euro, gold and oil have become
more expensive. It is more correct to see that the value
of the dollar has depreciated through the real rate of inflation.
Parasitic oligarchic finance-capitalists are just rigging
the market through their lackeys at the Fed and Congress,
while the productive free-market entrepreneurs and the common
man are holding the bag and are seemingly powerless to stop
this scheme of immoral, though legalized, wealth-transfer.
The Plunge Protection Team
Besides rigging the market in an open way by the Fed through
interest setting and providing inflationary credit and liquidity,
the financial-monetary complex developed other ways to manipulate
the markets. One of the most powerful bodies that intervenes
is the so-called Plunge Protection Team (PPT), a somewhat
sensationalized name for the President's Working Group on
Financial Markets established by Executive Order in early
1988 by President Reagan in the wake of the October 1987
stock market crash. The team consists of the heads of the
US Treasury, Federal Reserve System, Securities and Exchange
Commission and the Commodity Futures Trading Commission.
Quite a powerful lot. One of their tasks is "maintaining
investor confidence" in US financial markets. Apparently
their preferred tool when faced with an above 10% declining
stock market is to buy both stocks and stock index futures
without telling anyone. These futures are a derivative based
on the Dow Jones Index and are basically bets on the up
or down movement of the DJI. Monitoring the trades (bets)
in that market will give analysts an indicator of investors'
mood regarding the long-term performance of the DJI. By
putting an inordinate amount of bets on an upward trend
the PPT creates an artificial sense of long-term optimism
in the stock market and thereby counters a downward trend.
This scenario was first, through improvisation, applied
on the Tuesday after Black Monday, October 23 1987. Its
success in preventing a further meltdown was the basis for
incorporating the tool into the arsenal of the PPT. Some
analysts now think that the tool is not only used when larger
declines threaten to happen like in the falls of 1989, 1997
and 2001, but is now used to even prevent any meaningful
correction however small. This intervention, combined with
the ever-growing amount of available liquidity, is seen
as the major factor in the ongoing and record setting climb
of the Dow.
But, as investors start becoming aware of this semi-secret
factor and adjust their calculations accordingly, its efficiency
is diminishing and the PPT will be less powerful in preventing
the long-overdue correction. In the end the 'hidden hand'
of the market will always trump the 'secret hand' of the
manipulators. The question will be with what collateral
damage this correction will be accompanied and what the
people will do to punish the culprits and how, through Congress,
they will reform the system.
The Gold Price
The third way the international financial-monetary complex
intervenes in the financial markets is the way they suppress
the gold price and through that mechanism indirectly help
to keep investor's confidence in the whole fiat-money scheme.
The way it is done is straightforward and simple: Central
Banks throughout the world seemingly in concert keep the
supply of gold on the market high by selling off and lending
out its gold reserves with the obvious effect that the price
will be artificially low. According to an analyst working
for a big French bank with a highly rated research department
in a report called "historic" and having "enormous
consequences, " a low gold price has served to:
- calm financial markets during several periods of financial
crisis in the last decade (e.g. Japan, Asian currency crisis,
Russia and LTCM);
- improve the perception of US monetary policy; a low gold
price suggests a benign inflation outlook, keeps US interest
rates low and is supportive of a stronger US dollar;
- prevent substantial losses in the gold derivatives market
(notably from the gold "carry trade").
So, the price of gold is not subject to market forces alone,
but is suppressed to manage the overall system by managing
how the overall global financial system and its parts are
perceived. The important thing here to realize is that the
underlying assumption of this manipulation of the gold price
is the historical fact that gold has always been a stable
means for protecting ones wealth against inflation and economic
crises, and is perceived to be such in the near and far
future as well. So, if one runs a financial system based
on fractional reserve banking and creating paper and electronic
money out of thin air, and if one wants this system not
to be encumbered by the discipline that a monetary policy
tied to gold might provide, then, by sheer economic logic,
one has to diminish, manipulate and black-ball the status
of its monetary competitor, gold. Or, in the words of another
analyst, if "gold goes higher, or so the thinking runs,
then the world's confidence in the confidence-trick of paper
money backed by government promises alone might just collapse."
And this is the situation we are ever so little by little
getting closer to.
The latest crises has been a boon for gold as people's
economic instincts bring them back to the precious yellow
metal and the Central Banks are not willing to further dump
their gold reserves. The gold price is now freeing itself
from the 'secret hand' and its value is increasingly determined
by the 'hidden hand' of the free market, as should be. How
far the price will go up is of course hard to determine.
Prices of $1,000 to $2,000 per ounce are often quoted now.
Much depends on to what epic proportions the now slowly
developing meltdown will go and to what epic proportions
there might be an economic awakening by the masses and its
natural leaders from its ignorance of the enormous monetary
con-game we permitted to be taken in by.
Conclusion
First it has to be noted that the common factor in the
above three strategies is the Federal Reserve. In the first
strategy it is the sole power in setting the interest rates.
In the second strategy it coordinates with the US Treasury
and the SEC to manipulate the Stock Market. In the third
strategy it coordinates with other central banks to influence
the price of gold. Therefore, again, this institute has
to be investigated thoroughly and reformed according to
the findings and free market principles. Secondly, the more
these strategies become known, the less they will be effective.
Big investors might go along with these interventions and
even surreptitiously provide funds to make them work, but
at the same time they will have to position themselves such
that they will survive any anticipated correction and will
rather use their funds to prepare for that then to help
prop up a manipulative financial policy that is doomed.
Smaller investors just have to wizen up, get out of bubbles
and incorporate these manipulations into their calculations,
or loose their funds. The net effect will be that, however
sophisticatedly manipulated, the market always will catch
up, though the corrections might come this time like an
earthquake with lots of damage and misery in its wake. Therefore,
lastly, the risks to individual households is still enormous
and sound preparation is still of great importance.
Meanwhile there is still the possibility, to be investigated
further, that the US Government might temporarily bail out
the system with tax payers' money and that it might get
some help from China with its amassed fortunes, but then
will have to pay with some geopolitical quid pro quos. China
has its own vulnerabilities in the economic equation, for
its economy is dependent on American consumption, it has
an increasingly restless population asking for more justice
and freedom, and the Chinese Government wants to showcase
its economically transformed society during the coming Olympic
Games. At least till then, some opine, they will help with
under cover monetary interventions.
Articles and Sources
Article: No name
Author: Robert McHugh, Ph.D
Source: McHugh's weekend Market Newsletter, No. 679 (October
5, 2007)
URL: https://www.technicalindicatorindex.com
(get free 30 day subscription)
Excerpt: The appearance of a mega rally is not suggestive
that this economy is about to prosper. Hardly. This coming
mega-rally is artificial, a hyperinflationary induced rally,
where trillions of dollars of fiat currency are printed
out of thin air and find themselves being used to bid stock
prices higher. Wall Street wins, but that is about it. The
consequence is a massive increase in the cost of living
which will make these coming stock market gains at best
a breakeven for many astute investors, with many uninvested
middle income folks in danger of finding themselves headed
into lower income status. Inflation is the great wealth
thief, and it is coming with a vengeance, and on purpose,
by the Master Planners.
===============================
Article: Rigging the Market; the secret maneuverings of
the Plunge Protection Team
Author: By Mike Whitney
Source: Information Clearing House, 09/14/06
URL: http://www.informationclearinghouse.info/article14979.htm
Excerpt: ….. "deregulation" has created
an economic monster which requires more and more tinkering
from the stewards of the system. Without the stopgaps provided
by the Plunge Protection Team and the actions of similar
organizations which forestall business bankruptcies, (bailouts)
the whole over-leveraged system would quickly crash and
burn. The irony is that the same corporate kingpins and
banking moguls who've benefited the most from removing the
rules for prudent investment are now trying to create a
safety net for when it inevitably begins to unravel.
============================
Article: The Plunge Protection Team Intervention Risk Indicator
Author: Robert McHugh, Ph.D.
Source: March 6, 2006
URL: http://www.financialsense.com/fsu/
editorials/mchugh/2006/0306.html
Excerpt: For the past several years, we have seen repeated
"out of the blue" short-covering rallies just
about the time a decline seems to be gaining some momentum.
Our suspicion has been that the "Working Group"
established by law in 1988 to buy markets should declines
get out of control has become far more interventionist than
was originally intended under the law. This group has since
been dubbed the Plunge Protection Team. There are no minutes
of meetings, no recorded phone conversations, no reports
of activities, no announcements of intentions. It is a secret
group including the Chairman of the Federal Reserve, the
Secretary of the Treasury, the Head of the SEC, and their
surrogates which include some of the large Wall Street firms.
The original objective was to prevent disastrous market
crashes. Lately it seems, they buy markets when they decide
markets need to be bought, including equity markets. ….
It's sad we have to anticipate this central planning intervention
into what used to be free markets, but if we can be prepared,
then we can still trade both the ups and the downs profitably.
Unfortunately, we must now deal with the metamorphosing
of capitalism into corporatist fascism - which simply means,
what is good for corporations is right, at the expense of
our nation's founding principles and individual rights.
=============================
Article: How Central Bankers Control The Gold Price
Author: Adrian Ash
Source: BullionVault.com, October 1, 2007
URL: http://www.financialsense.com/fsu/
editorials/ash/2007/1001.html
Excerpt: Why suppress gold? If gold goes higher, or so
the thinking runs, then the world's confidence in the confidence-trick
of paper money backed by government promises alone might
just collapse. That was the threat in the late 1970s. Given
last month's run on Northern Rock in the United Kingdom...and
now the collapse of NetBank in the US...that might come
to be seen as a possible threat again today.
==========================
Article: Remonetisation of gold: Start hoarding
Author: Paul Mylchreest
Source: Crédit Agricole Cheuvreux International
Ltd.
URL: http://www.gata.org/files/CheuvreuxGoldReport.pdf
Excerpt: Central banks have loaned out 10,000-15,000 tonnes
of their gold reserves, between a third and a half of the
reported total. Gold loaned by central banks to bullion
banks or their counterparties is immediately sold into the
physical market for conversion into jewellery, etc. …
Since the mid-1990s, much of this gold lending has been
aimed at suppressing the gold price. A low gold price has
served to:
- calm financial markets during several periods of financial
crisis in the last decade (e.g. Japan, Asian currency
crisis, Russia and LTCM);
- improve the perception of US monetary policy; a low gold
price suggests a benign inflation outlook, keeps US interest
rates low and is supportive of a stronger US dollar;
- prevent substantial losses in the gold derivatives market
(notably from the gold "carry trade").
The leader in the fight to expose the suppression of the
gold price is the Gold Anti-Trust Action Committee (GATA).
GATA was established in 1999 in the US, but is little known
outside the world of "gold bugs". Despite official
denials, there is much evidence to back the gold price suppression
claims. Support for GATA has come from senior Russian officials.
Our analysis confirms the view that central banks have loaned
out 10,000-15,000 tonnes of gold, ….
=============================
Article: Gold at $2,000 Per Ounce: Forecast by France's
Largest Bank's Equity Brokerage
Author: n.a.
Source: Gold Investments, Dublin, Ireland
URL: http://www.gold-eagle.com/editorials_05/goldinv020606.html
Excerpt: Cheuvreux is the equity brokerage house of Credit
Agricole. They distributed a 56-page report during the week
endorsing the findings of the Gold Anti-Trust Action Committee
(GATA) that the price of gold has been surreptitiously suppressed
by western central banks and that those banks do not have
the gold they claim to have.
=====================================
Article: The Risk of a U.S. Hard Landing and Implications
for the Global Economy and Financial Markets
Author: Nouriel Roubini
Source: International Monetary Fund, September 13, 2007
URL: http://www.imf.org/external/np/tr/2007/tr070913.htm
Excerpt: So we have created essentially in part a little
bit of a monster. Of course we all know the benefits of
financial globalization and securitization and all those
things, I am not saying that I am against them. But you've
created a financial system in which if you take out mortgages,
the mortgage originator does not care: he or she maximizes
volume and [gets higher] income. Then the bank originates
the stuff and packages it in MBSs and then they get the
fee and they shove it to the investment banks. And the investment
banks tranch it in all the different tranches of CDO and
then shove it to their final investors and the rating agencies
give their blessings. You would think that the final investor
is the one who has to provide the market discipline but
after four stages you do not even know what it is, and after
CDOs you have CDOs of CDOs, and CDOs of CDOs of CDOs. ….
But you have a whole system in which essentially people
were making income not from bearing the credit risk but
essentially transferring it somewhere else and getting the
fees, and in most of the financial system that is how it
gets its profit these days, so there is a fundamental kind
of problem. On top of that the regulators [were] asleep
at the wheel and let this stuff occur without any kind of
constraint.
So there is this element of what are the sizes of the losses
and all the rest. Then there is the other element that creates
this uncertainty of who has the losses is what Bill Gross
referred to as `Where's Waldo' problem, or, as I refer to
it, as where the next skeleton is going to pop out or walking
on a minefield and so on.
=================================
Article: No title
Author: Robert McHugh, Ph.D.
Source: McHugh's weekend Market Newsletter, No 667 (September
18)
URL: https://www.technicalindicatorindex.com
(get free 30 day subscription)
Excerpt: It is official: The decision has been made to
sacrifice the U.S. Dollar in favor of hyper-inflated markets.
The Fed and PPT [Plunge Protection Team] have spoken. The
Fed dropped short-term interest rates half a percent to
a Fed Funds target of 4.75 percent, and the Dow Industrials
and all the major indices followed with a galloping up day,
the Industrials rising 335.97 points to 13,739.39, the largest
single day price move in four years. The Fed has chosen
to boost Bond, Stock, and Real Estate markets at the expense
of the Dollar. Winners also include Gold, Silver, and the
HUI Amex Gold Bugs index. This scenario has transpired precisely
as we suggested it would back in January of this year. A
middle of the year sharp stock market decline, followed
by a sacrifice of the Dollar, resultant hyperinflation,
then a mega-rally in all major markets, including precious
metals and the HUI.
===================================
Article: Are we headed for an epic bear market?
Author: Jon Markman
Source: MSN Money
URL: http://articles.moneycentral.msn.com/Investing/
SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1
Excerpt: Rather than joining the crowd that blames the
mess on American slobs who took on more mortgage debt than
they could afford and have endangered the world by stiffing
lenders, he points a finger at three parties: regulators
who stood by as U.S. banks developed ingenious but dangerous
ways of shifting trillions of dollars of credit risk off
their balance sheets and into the hands of unsophisticated
foreign investors; hedge and pension fund managers who gorged
on high-yield debt instruments they didn't understand; and
financial engineers who built towers of "securitized"
debt with math models that were fundamentally flawed.
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