Preparing for More Big Ones

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“The debt markets have been warned…

‘The incremental parts of our foreign reserve holdings should be invested in physical assets… we will liquidate (U.S. Treasuries)…when…’

To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate."…

The Chinese are clearly vexed with Washington, viewing the Fed's QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.”
“China to 'liquidate' U.S. Treasuries, not dollars”

Ambrose Evans-Pritchard, The Telegraph, London, 9/16/11

Reality #1

The Chinese, by some accounts holders of over $2 Trillion in U.S. Treasury, agency, and other debt, are clearly fed up with the Fed’s dollar debasement policies, which erodes the value of their 2 trillion worth of U.S. dollar holdings.

Their being fed up with the Fed might not matter much, except that they have the leverage to do something about it. “Liquidate” was the word the advisor to the Chinese Central banks used when referring to their U.S. Treasury holdings.

It is not rational to assume that China would destroy the economy of its largest trading partner, the USA, by engaging in an ongoing liquidations of U.S. Treasuries.

But it is entirely reasonable to assume that that leverage will be used to limit significant further any dollar degrading, inflation producing QE.

And any such massive selling of U.S. Treasuries into the market would cause yields, and thus borrowing costs, to rise dramatically.

And such would doom any prospects for economic recovery soon.

And it would usher in a new era of hyperstagflation.

In any event long-dated U.S. Treasuries are arguably the largest asset bubble in history, a bubble which will burst at some point, but not quite yet.

Preparation #1

Borrowing costs will not move significantly lower, indeed they are bound to start rising starting some time in the next few months. If you must borrow, act now to lock in low fixed rates. And increasingly focus investments on the precious monetary metals & essential tangible assets sectors. (But the precious monetary metals are subject to ongoing price suppression actions, so timing and form of investments is important – see #8 below.)

Reality #2

But the window for obtaining credit on reasonable terms is already closing. Mega-banks have not been lending much to small business (the jobs producers) or households, and now are becoming increasingly reluctant to lend to each other.

Euribor (the average rates of 50 European banks lending to each other) has spiked in the last few months, just as it did in 2008, prior to the market crash.

Indeed, the bank runs have started. Industrial giant Siemens just pulled €500 million from a French bank and redeposited it with the ECB. And as the credit markets go, so go the equities markets, soon after.

Preparation #2

Prepare for an equities market multiple-downleg crash, as we have been urging our readers to do for months.

Reality #3

A key characteristics of the 2008 financial markets crises was increasing counterparty risk and counterparty failure. As several developments, like the tightening interbank credit markets, show, counterparty risk, and thus the risk of counterparty failure, is rapidly increasing.

Preparation #3

Before making any investment, or trade, carefully evaluate the counterparty risk, and continue to evaluate it so long as you hold the position.

Which leads us to:

Reality #4

ETF’s are inherently highly risky, but do have advantages. Therefore use them only in a speculative portfolios, NOT for long-term core positions.

ETFs are relatively low cost, and allow investors of modest means to trade whole sectors or markets throughout the day, BUT many are quite risky.

Consider:

  • they have inherent counterparty risk since, inter alia,
  • about half do not match or track the index they purport to and
  • about half are “swap based”, i.e. they use derivatives agreements to simulate the performance of the underlying assets and
  • liquidity tends to dry up in times of crises, and especially ETF liquidity at just the time when investors need liquidity and
  • leveraged ETFs, due to compounding and other issues, often do not achieve the % leverage they aim for, e.g. a 300% leverage ETF may only achieve 250 or 200% leverage on the upside, and may magnify losses by more than 300% on the downside

Note: while the foregoing do not apply to all ETF’s, any ETF should be carefully evaluated before investing in it.

Preparation #4

Use ETF’s for speculative purposes only, and only if you can tolerate great risk.

And do not fail to continuously evaluate counterparty risk, and be especially careful if crises are impending.

Reality #5

The private for-profit Fed and other major central banks continue to print/digitize massive amount of their fiat currencies into existence for free, thus creating monetary growth far in excess of GDP growth (de facto contraction in the U.S.). This is degrading the purchasing power of these fiat currencies and will eventually create hyperinflation.

Preparation #5

Our strategy for surmounting hyperinflation is laid out in our article “Essentials for Wealth Acquisition Acceleration (7/28/11)”.

Reality #6

Official statistics are often seriously bogus. Real U.S. CPI is now running at 11.4% (Shadowstats.com) for example.

Preparation #6

Use the real numbers such as those generated by Shadowstats.com.

Shadowstats.com calculates key 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 September 15, 2011
3.8%                               11.4% (annualized August, 2011 Rate)

U.S. Unemployment reported September 2, 2011
9.1%                               22.8%

U.S. GDP Annual Growth/Decline reported August 26, 2011
1.55%                                      -2.83%

U.S. M3 reported September 9, 2011 (Month of August, Y.O.Y.)
No Official Report             2.30%

11.4% CPI is threshold hyperinflationary.

Reality #7

Perhaps most important of all, fundamentals are lousy.

  • Sovereign and other debt problems have not been solved
  • Economic growth is not occurring
  • Unemployment is rising (already 22.8% in USA)
  • Inflation is rising (already 11.4% in USA)
  • Stimulus and “bailouts” worked only to support the mega-banks, not small business or households
  • U.S. housing starts continue a 3 year pattern of bottom-bouncing

Preparation #7

See preparations 1 through 6.

Reality #8

Buy gold and silver notwithstanding ongoing Cartel* price suppression activities, preferably near the interim bottoms of Cartel-generated takedowns.

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.

Preparation #8

Track the interventional patterns, as we do. These facilitates maximizing profits and minimizing losses from precious metal trading.

Reality #9

Long-term, the U.S. Dollar and other fiat currencies are likely doomed.

Preparation #9

Diversify among inflation resistant tangible assets with gold and silver and essential foodstuff central to your core positions.

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