Future Shock and Investor Antidotes

by DeepCaster LLC, deepcaster.com | May 15, 2009

Mainstream Media Boosters of the Notion that the economy is on the mend and that the Equities Markets recent Rally is founded on the beginning of a Real Recovery, are seriously mistaken. Those who are captivated by this Fantasy will likely have an unprofitable year or, worse, suffer substantial losses.

Indeed, investors who are taken in by this Fantasy are turning a Blind Eye to several Worsening Negatives resulting from the current course of monetary and economic policies.

In fact, U.S. taxpaying investors will be increasingly taxed to pay principal and interest on U.S. government borrowings of monies from the private for-profit U.S. Federal Reserve (which prints money for free out of thin air or with a few keystrokes).

Moreover, the Bailouts of Government Sponsored Enterprises and others plus The Fed’s Dollar Debasement policies are in fact causing Retirement Accounts to be in increasing jeopardy.

Notwithstanding these and other Negatives, there is a Strategy which can insulate Investors from losses and can provide potential for substantial profit, (even assuming the continuation of the aforementioned unwise and counterproductive policies), the highlights of which we lay out below.

Crucial to consider is The Reality of the U.S. Housing Market today. One of the two Government Sponsored Entities (controlled now by The Feds) is Fannie Mae. Fannie Mae reportedly lost in $23.2 billion in the first 3 months of 2009 alone since mortgage defaults are increasing, not only in risky loans, but increasingly in loans made to borrowers that were formerly considered good credit risks.

Indeed, Freddie Mac is in much worse shape than Fannie Mae. It has already obtained $45 billion in tax payer funds. And it is expected to need billions more in funding from U.S. Taxpayers.

But consider that Freddie and Fannie together own $5.4 trillion in Mortgage Assets, an increasingly large portion of which are at great risk of default.

Coupling the fact that these Government Sponsored Entities continue to bleed money from U.S. Taxpayers, with the current Official Budget Deficit approaching 2 trillion dollars, and the downstream U.S. government unfunded liabilities exceeding 60 trillion dollars and one realizes the U.S. Economy and Markets are in for a long hard Ordeal.

So what is the Obama Administration’s response to these Realities? – Gimmick the Numbers. Consider the following from John Williams’ Shadow Government Statistics:

Obama Administration Changes Rules in Order to Reduce Reported Deficit Level. Under mounting global criticism for its fiscal excesses, and with Treasury auctions looking like they are going to need heavier Federal Reserve support, the Obama Administration has taken some "corrective" action, by changing the accounting rules for the reporting of federal deficit. The changes only reduce the reported level of the federal deficit; they do not impact the Treasury’s excessive funding needs. The "Highlight" of yesterday’s (May 12th) Monthly Treasury Statement for April 30, 2009 was:

"The administration has reclassified prior month expenditures related to the Emergency Economic Stabilization Act (EESA- also known as TARP). Consistent with statutory requirements of the Federal Credit Reform Act and EESA, TARP purchases are now being accounted for on a net present value basis, taking into account market risk. Accordingly, budget outlays have been reduced and direct loan financing activity correspondingly increased by $175 billion."

While this gimmick already was in play in the Administration’s budget forecasts, going forward (more than halving the projected "outlays" for a likely second TARP package), the funds expended indeed are outlays and impact directly the U.S. Treasury’s borrowings. While such gimmicking would be lucky to skirt along the boundaries of generally accepted accounting principles (GAAP)-based accounting — given the inability of the government to assess "market risk" within the bounds of reality — such has not been the nature of the monthly deficit reporting. On this basis, other questions arise, too, as to the monthly accounting tied to the handling of Fannie Mae and Freddie Mac. (emphasis added)

Then, of course, there is the surging net present value of unfunded liabilities for Social Security and Medicare, but the government is not about to alter its supposedly otherwise cash-based accounting in a manner that would show a larger (by more than $4 trillion), rather than a smaller, reported annual federal deficit.

Rolling 12-Month Federal Deficit Hits $1.3 Trillion or $1.1 Trillion (New Accounting); Federal Debt Up by $1.9 Trillion Year-to-Year. Fiscal conditions continued collapsing in April 2009, as the big tax collection month had a sharp enough fall-off in revenues (down 34.1% year-to-year) to generate the first April deficit in a quarter century. The severe, deepening recession and surging government outlays have continued to pummel the government’s finances…

Gross federal debt stood at $11.239 Trillion as of April 30, 2009, up by $112 billion for the month, and up by $1.861 trillion from April 2008, which in turn was up by $537 billion from April 2007.

Annual Retail Sales Plunged Again. Incorporating annual revisions that knocked a percent or two off reported sales levels of the last two years, the annual 10.1% decline in April 2009 retail sales was the worst seen in post-World II history, other than for a 10.6% decline in December 2008...”

New Accounting Fraud for Monthly Federal Deficit Reporting

Annual Retail Sales Plunge a Depression-Like 10.1%

Shadowstats.com Alert of May13, 2009

Shadowstats calculates Official Statistics the “Old Fashioned way” -- the way they were calculated in the 1980’s and 1990’s before the gimmicking became apparent. www.shadowstats.com
Frankly, no Real Recovery is possible any time soon given the aforementioned (and other) Real numbers.

Making matters worse, The Fed led Cartel* is regularly intervening overtly and covertly in the major markets (thus further skewing Perception and Reality). Thus, we have a Recipe for a Disaster.

*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Overt and Covert Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2008 Letter entitled “Market Intervention, Data Manipulation - - Increasing Risks, The Cartel ‘End Game’, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org 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.”

The ongoing Equities Markets rally is tempting, but it is a Bear Market Rally nonetheless. After this Bear Market Rally’s peak, we expect worse things to come, the details of which (including estimated timing) are contained in our most recent Alert and Forecasts of 5/12/09, which can be found in the ‘Alerts Cache’ at www.deepcaster.com.

Fundamentally, the Fed/U.S. Treasury Policy of encouraging ever more Borrowing and Creating ever more Fiat Currency to ostensibly “Solve” Crises created by Excessive Borrowing and creation of Fiat Currency (courtesy of the private for-profit U.S. Federal Reserve) is proving to be a Certain Route to Depression-creation.

Thus today’s Depression (see Below) requires A Different Strategic Approach to Wealth Protection and to Profit - - key elements of which we outline here.

Given the over $U.S. 60 Trillion (and increasing) Downstream Unfunded Liabilities of the U.S. Government and Multi-Trillion Dollar (and increasing) U.S. Budget Deficit, it is clear these Liabilities can never be repaid without destroying the U.S. Dollar over the long term.

The Destruction of the Purchasing Power of the U.S. Dollar is already occurring; The U.S. Dollar has dropped by about 30% over the past six years, as measured by the USDX.

Even using the gimmicked Official (Bureau of Labor Statistics) Inflation Numbers, Real inflation-adjusted weekly earnings of U.S. Workers have declined 14% since 1972. (see below)

If an Economic “Depression” is defined as a Recession where a peak to trough contraction in inflation-adjusted economic activity exceeds 10% we have just recently entered into a Depression. That is because such a contraction in annualized terms was experienced in the Fourth Quarter, 2008 in real retail sales, and industrial production, and new orders for durable goods, and housing starts.

Moreover, “Peak-to-April Industrial Production is Down a Depression – like 16%” Shadowstats.com 5/15/09 Flash Update. That Ladies and Gentlemen is a Depression. Worse, indications are that this Great Depression will deepen and will be with us for many months to come.

To provide the basis for addressing Protection and Profit Strategies (and lest anyone believe that we have not recently entered into a Great Depression), consider the following:

The Federal Reserve Board’s Release reporting borrowed and non-borrowed Bank Reserves show that non-borrowed Bank Reserves were at about a paltry $100 billion as of February 11, 2009 whereas borrowed bank “reserves” were over $600 billion. This looks like the very definition of insolvent “Zombie” Banks to us. Moreover, (and notwithstanding the recent modest rally in bank stocks), the financial condition of the banks’ debtors - - the U.S. Taxpayers/consumers - - continue to deteriorate. But U.S. Taxpayers/Consumers are 70% of the U.S. Economy! This does not bode well for future economist prospects.

Moreover, the pace of Hyperinflation is accelerating, notwithstanding the deflationary effects of dramatically lower energy and equities and other asset prices. Fed-generated real money supply growth (M3), is still at about 7% annualized as of May 8, 2009 (per www.shadowstats.com). Such a dramatic increase in Money Supply Inflation ultimately translates into Price Inflation.

Worse yet, Real GDP annual growth was a negative 5% as of the April 29, 2009 shadowstats report, contrary to the Official Figures that it was about a negative2.5% (shadowstats.com).

Worse also, the Real U.S. Unemployment rate is 20%, (May 8, 2009) as opposed to the recent Official Figure, which claims it is just under 8% (shadowstats.com).

And annual Consumer Price Inflation (which has recently taken a dip from over 13%) is still almost 7% annualized (shadowstats.com 5/15/09) and not merely a negative 0.7% as the official statistics would have us believe.

Thus, Today we have Hyperinflation (see below) coupled with a Contracting Economy - - the worst of both worlds if you will. Deepcaster and several others (including the eminent Dr. Richebacher R.I.P) forecast that we were headed for this sorry state a few years ago, but our warnings went unheeded.

Given this background we now address Profit and Protection Issues by providing Guidelines.

Strategic Guidelines for Identifying and Realizing Profit Opportunities and Insulating Against Losses

Be Just as Willing to “Go Short” as to “Go Long”. Given the Foregoing Economic and Financial Market Realities, there will be many months and probably several years before the markets-in-general are in a durable healthy uptrend, as we have demonstrated in several articles. Thus, one must be just as willing and able to “go short” as to “go long”. Fortunately, there are unprecedented opportunities to “go short” (as well as long) via, for example, literally scores of short Exchange-Traded Funds. Carefully chosen and timed, these can be excellent vehicles for garnering profit in “fear markets”. For example, Deepcaster entered last September having recommended a total of five short positions. All of those subsequently were liquidated for significant profits.

Buy and Hold Rarely Works Anymore. As the market performance in the past year has demonstrated, those who adhered to the Outdated Strategy of “Buy and Hold” likely got smashed. Many have lost up to 50% of the price “value” of their portfolio with little prospect of recovery (absent employing Strategies suggested here). See “Opportunities to Escape Paper ‘Wealth’” in the “Articles by Deepcaster” Cache at www.deepcaster.com. What many of these investors did not realize, and hopefully now realize, is that we are now in a radically different economic and market environment which will, with very few exceptions, make “Buy and Hold” a very unprofitable strategy for several years.

The Basic Reality: Hyper Stagflation. We are in an Apparent Deflationary Environment (e.g. energy prices have dropped dramatically and the Equities Markets and other “Assets” have lost Trillions in Nominal Value). This Apparent Deflationary Environment masks an underlying Hyperinflationary Reality - - the Trillions in Fiat Currencies which are being printed and lent in a futile (in the long term) Attempt to stimulate the Economy are greater than the Trillions lost in Equities Markets Takedowns and other Asset Devaluations. Thus The Basic Long Term Trend is a Hyperinflationary Economic Decline - - the worst of both Worlds. We expect $20 hamburgers in three or four years.

Raise Cash - - Cash is King in this Credit Squeezed Environment. What Cash? So long as the deleveraging continues the U.S. Dollar should remain relatively strong. When the deleveraging is perceived to be beginning to end, the U.S. Dollar will begin its collapse. In such an environment the Swiss Franc is the currency of choice. Of course, the ultimate Money is the Precious Monetary Metals, Gold and Silver but, given The Cartel’s* periodic Interventions to drive lower their price we advocate acquiring them using the Strategy described in our Article “Defeating The Cartel…with Profit” (3/28/08) in the ‘Articles by Deepcaster’ cache at www.deepcaster.com.

Liquidate Debt - - Debt is the Enemy of Cash in this Cash is King Environment. Debt demands Repayment, with Cash that is ever harder to obtain.

Credit: Use it or Lose It: But only if you Must for Safety’s Sake. Lenders are Cutting Back or Eliminating Credit lines and raising rates. (Outrageous, of course, since it is the U.S. Taxpayer who has bailed many of these lenders out!) So if you do not have a sufficient cash cushion and can foreseeably make the payments, consider borrowing from that credit line. If you fail to do so, it may be reduced or eliminated.

Become more Self-Reliant. The Hard “Econo-Reality” is that in this increasingly “Hard Times” Era of increasing unemployment and decreasing economic strength - - a “Hard Times” Era which will likely persist for several years - - there will be more, much more, potential for civil disturbances and reduction in, or outright cut-off of, basic public services, and essential supplies as well. Given the increasing desperation of an increasingly large number of the population there will be more personal safety risks. Public infrastructure services upon which we have come to rely such as utilities and roads are likely to be compromised periodically, and increasingly severely. Prepare for blackouts, periodic interruptions of water and food supplies, and civil, and very uncivil, disturbances. Be prepared to combat increasing threats to Liberty and Privacy in the deceptive guise of ostensible Security. “Be prepared” is not just a wise motto for Boy Scouts.

Track the Interventionals and the Real Statistics. Many Otherwise Astute Investors were Blindsided by the Takedowns in the Equities and Precious Metals Markets in September, October and November, 2008. But they need not have been!

If these Otherwise Astute Investors had been tracking the Interventionals and monitoring the Genuine Key Statistics rather than the Gimmicked ones issued by Official Sources they would likely have seen the Takedowns coming and would not only have taken steps for Protection, but also for Profit.

Perhaps the single most important factor in the recent performance of certain Major Market Sectors is the Interventionals - - even more important than the Fundamentals or the Technicals.
There is compelling evidence that The Fed-led Cartel* of Central Bankers and allies and agents (e.g. certain primary dealers) are regularly engaged in Overt and Covert Interventions in a wide variety of markets as described in Deepcaster’s articles cited above. In order to understand why the Interventionals are the most important, it is essential first to examine how it is that investors typically do not get accurate Key Statistics from Official Sources.

Consider, in more detail for example, U.S. Consumer Price Inflation and other key Data cited above: the sky-high energy and food costs of 2007 and 2008 tend to belie what we were told by Official Sources about the CPI. According to Official Sources, from 1992 through the beginning of 2008 the CPI never went much above 4% annually but only bumped up to about 6% late in 2008. But these figures simply do not square with our own experience of the inflation of prices of practically everything during that period. Nor do they square with certain objective measures as e.g. those from shadowstats.com (see above).

Profit Opportunities from Money Supply Inflation

By encouraging massive lending and massive expansion of the actual Money Supply for years, the private for-profit Fed has guaranteed massive inflation. (Of course the private owners of The Fed profit immensely from this money which they “print” for free, because they then lend it to American Taxpayer with interest!) Similarly, key Central Banks around the world that have conducted similar actions and have thus bolstered massive monetary inflation. What this means is that, in the long run, the U.S. Dollar and many other major currencies will buy less, much less, in the future.

However, given that the financial system and key heavyweight investors are awash with printed and borrowed money, certain Key Sectors should explode upward very soon until the long-term negative Economic Fundamentals drag them down again. Of course, this would not happen in one fell swoop, it would happen in Spurts. And, indeed, we think that one Spurt resulting from this Monetary Inflationary “Juice” is not far off. Indeed, we have already forecast that this should be reflected in higher prices in certain Key Sectors identified in Deepcaster’s latest Alerts and Letters posted at www.deepcaster.com.

Thus, these considerations provide speculative opportunities, which have high profit potential as well as high risk. We are, after all, in a worsening Bear Market. The Rampant Monetary Inflation reflected in M3 and in the various Bailouts and Loans will provide several trillion dollars for equity investment. And this tremendously increased monetary base is available to inflate the paper value of the Equities and other Markets, when money managers first think the markets have a chance for a sustained (for a few months, or even weeks) Rally, and, when The Cartel Interventional Regime “agrees” with them.

Ascertain the Facts; Eschew Big Media Fictions

Other key figures are gimmicked or “spun” as well, with the complicity of the Mainstream Media. Consider the cost of “The Bailouts.” We were told that the cost of “The first Bailout” alone would be $700 billion. But the true cost of that Bailout to American Taxpayers (and, indirectly to investors around the world) will be much higher. One November, 2008 estimate put it at $3.5 trillion and growing, and this did not (and could not have) included any subsequent Stimulus Bill or other Obama Administration authorizations.

Astoundingly, the much-touted recently passed Obama administration Stimulus Bill will likely not create any net new jobs for American Workers.
That is because:

The Stimulus Bill allows 300,000 construction jobs to go to Illegal Aliens, as reported in a recent study by Robert Rector of The Heritage Foundation, and
“According to various Official Sources, about 138,000 work authorizations per month are issued to permanent (e.g. via green cards) and ostensibly temporary (e.g. H1b etc.) legal immigrant workers.

That’s over one and one half MILLION foreign workers per year! (even after deducting 156,000 from the annual number that are estimated ‘reauthorizations’)
The Stimulus Bill Does Nothing To Reduce This Flow!

So in other words and considering all the above, the flow of New Legal And Illegal Immigrant Workers In The Next Two Years will Take Virtually All The Three To Four Million Jobs Ostensibly Created By The Stimulus Bill!”

The foregoing is excerpted from a recent Alert Issued by the Washington D.C. non-profit Carrying Capacity Network, which sensibly advocates solving this problem with a zero-net-immigration Moratorium www.carryingcapacity.org and Real (not virtual) Fencing at the Border. Such a Moratorium would dramatically reduce the approximately two million annual legal (and help reduce the approximately two million illegal) immigrants and their offspring added to the U.S. Population annually. (As well, it is pushing an “Abolish The Fed! U.S. Treasury Instead!” Initiative.)

Thus, The Stimulus Bill is not likely to create or save three to four million jobs for American Workers. Indeed, if the recently introduced Illegal Alien Amnesty bills are enacted the job losses and social service costs will dramatically increase.
The Cartel* is still Potent, but not Omnipotent.

Many Hard Assets Partisans recently had the distasteful experience of being victims of the Cartel’s March 18 – 20, 2008 and subsequent Takedowns of Gold, Silver, Crude Oil, and other Hard Assets. Other Hard Assets Partisans, including Deepcaster, profited.

While anger is a natural and understandable reaction to such continuing Perfidious Covert Market Intervention, we suggest it is more constructive to adopt an Investing/Trading Strategy which will help eventually to defeat The Cartel* and to profit along the way.

The Basic Rule is to acquire Gold, Silver and Strategic Commodities as Fortress Assets, but with Caveats described in our Strategy.

A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan while at the same time insulating oneself from future Takedowns. The details of this Strategy are set forth in Deepcaster’s Article ‘Surmounting Cartel Advantages’ (5/08/09) available in the ‘Articles by Deepcaster’ cache at www.deepcaster.com. The Strategy (particularly as applied to the Gold and Silver Markets) is designed to help avoid such unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way in Gold, Silver and Strategic Assets Investments, in spite of Cartel Interventions.

DEEPCASTER FORTRESS ASSETS LETTER Wealth Preservation, Wealth Enhancement, & Financial and Geopolitical Intelligence. Gravitas, Pietas, Virtus

contact information

DeepCaster LLC USA | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.