BLACK BOX
by Chris Laird
September 13, 2005

There is a report out by Sprott Asset Management detailing the US Gov market manipulation of US stocks.....

Sprott said that while they think that the concept is valid in a crisis, like 911, the practice appears to be becoming more a habit now and is widespread. It uses the treasury in conjunction with preferred brokerage houses to levitate the US stock market... and according to Sprott, is rife with moral hazards... since the brokerages involved are privy to the Treasuries intentions, and non public information....

This reminds me of the common knowledge that Japan supported their markets in the doldrum days of the later 90's and even now, keeping the Japan stock market from collapsing and taking out all the banking industry, since the banks had huge positions in stocks that had accumulated over the boom years of the 80's and into the early 90's.... and of course the whole society had put large amounts of their savings in what was a stock bubble that had collapsed, from 40000 to about 12000 in the Nikkei....

We are seeing, once again, similar practices in the US, with what is now a practice of market manipulation by the treasury, after several financial crises in the US, the tech crash and 911.... As I have said before, the US is tracking Japan's steps virtually identically, with:

1. Stock boom/bust

2. Real Estate boom/bust

3. Zero interest rates

4. Treasury support of the stock markets...

In the case of the US, a third property boom of unprecedented size has now gripped the world.... and will be a third bubble crash....

What really concerns me about the idea of Treasury support of the stock markets is ... that can only be a stop gap... IF the market were to over run their ability to support it, the market could crash much further than it would have without the false stimulus....

Another thing is this, the stock universe has now become another BLACK BOX because of this interference that is occurring over years....

This is another reason why I have said there is just no rational to be in any equities right now (no investments)... with things like the derivatives time bomb (another black box) waiting to disintegrate and now hidden, and massive treasury manipulation of the stock markets, people who are investing in stocks and other financial instruments are doing so with NO idea of what the weather is like outside or inside the black box...

That is not investing .......This black box issue is really troubling me... lets take a look at the whole financial world today as a black box:

First lets define a black box: a black box is one where something is going on inside and there are inputs and outputs from the box. But you cannot see what is happening inside and determining what is done with inputs, and what outputs will come out. IE you are blind after you put the money in....

Looking at the US economy, I really get the impression now that even though we have a very robust financial press, we really don't have a clear idea of what is really going on. For example, the US is lying about economic statistics... I'm sure of this now. So, we have the huge US financial press and brokerage universe making observations on bad deceitful data. Also, we have Treasury manipulation of the stock market in conjunction with favored brokerage houses.... meaning they are heavily tweaking the perceived market reality, and so the stock charts for example are misleading.... we really DON'T know what the market really thinks about this or that stock....The Dow has been in a rage of about 10000 to 11000 for a long time.... even in the midst of very scary economic data....it just levitates... that is not a clear market. But people keep making prognostications on that data... as if it was real, which it is not.....So, the US economy is in reality a black box, and the US stock market is a black box too.

Also, the derivatives market, at an unreal 250 trillion, is a complete black box. The industry is allowed to self regulate... that is a joke. They are not even aware of the complexities of their instruments, and there is not timely settlement or back office transactions either... The Fed is calling the major banks involved for a meeting next week on precisely this.... They are concerned of what effect a lack of timely back office work would have on any emerging derivatives crisis... should some back out and say they aren't in a binding contract and so on... this is so widespread the FED is calling a meeting on this.... The whole derivatives field is complex, not clearly understood by even their own banks and counter parties, and is not stress tested, as if you could stress test a 250 trillion dollar market anyway... so really we are just awaiting its reaction good or bad should the next major economic crisis unfold. I view the derivatives market as the single greatest black box threat... since a real crisis involving them can just bankrupt every major financial entity and government directly or indirectly associated with them... and what major financial and business entity is not now involved??? Derivatives are heavily involved in mortgage securities, bonds of all types, currency hedges, risk offloading contracts, on and on and on. Who can figure out all that???? No, the only way to see what will happen is just to watch whatever happens happen....

So what is the final conclusion on this black box phenomena? It is that any real crisis will probably come on with no warning at all. That any financial instrument really has hidden liabilities, and is over priced. That the markets are manipulated, and since they are now a black box, it does not make sense to have one dime in it. I really get the feeling that the only thing I can trust is my car, my boat, my house, my gold, IE anything I CAN SEE.... and anything that is not in clear view is suspect and subject to default. If its in a market, you cannot see the reality. This was not always the case but is most assuredly the case now.

This is the reason why I have the prudent squirrel newsletter... we don't promote anything that you cannot see.

I know that there are a lot of readers who think that my position that there are no investments anymore think I'm out of my mind.... etc.. But once again a major story about the PPT (plunge protection team) reveals that the markets are not transparent, and if you can't see what is happening in them, then why attempt to invest in them?????

Hey, I'm either out of it, OR....... the repeated stories that are coming out about the backdrop of the markets are confirming what I am saying.... and here is some further detail:

Fed convenes with biggest derivatives bankers to solve untimely contracts.

Last week I wrote that the Fed was convening with the biggest derivatives banks, Solomon, Morgan, Citi, etc... to discuss the fact that many derivatives contracts are not being completed in a timely manner (i.e. the back office work not being completed after the contracts are agreed upon)... this problem is so widespread that the Fed has called these banks to talk about what to do....

The reality is that when they make their derivative deals, it is not entirely clear who the counterparties are... until all the back office contract work is completed... and that is not happening in a timely manner... The Fed is concerned that should there be a crisis, that counterparties will either welsh, or wont know the true state of their positions....

This is a recipe for financial disaster.....The fact is, that the derivatives mammoth is every bit as sick and in trouble as we have been saying for years, and it is just a matter of time before they lose control.,.. I mean if they don't even complete their contracts in a timely manner, what does that tell you for their so called self governance and risk management practices... and with a market that now has 250 trillion in notional amounts.... The derivatives industry said the real value of the contracts is more like 9 trillion, and the notional amounts are not really indicative of the real risk. THAT IS BULL. A derivatives contract that has a notional amount that is used to calculate the leverage, and the price movements are based on the notional amounts like a leveraged bet. When they say it 250 Tril, IT IS that, and it is not the value of the contract... let me give you an example.... Suppose you have a gold future on 100oz... and put up a 2500 margin.... suppose the contract moves up 1 buck an ounce giving you a contract value of 100 plus...the value of the contract is 100 bucks,. but if you don't exit the contract, your EXPOSURE is still 100oz (that would be the notional amount)... and if things go against you, the exposure will be what is used to calculate your new value of the contract.... and if it goes down say 5 bucks, you now have a negative value of 500... that just appeared..... it is the NOTIONAL amounts that provide the leverage and the risk... so when they say the notional amounts don't really indicate the risk, they are trying to hide the fact that the notional amounts really are what the bet is...saying it is really only the value of the contracts is obfuscation.....

IF the derivatives industry is going to get away with THAT kind of shenanigans... and basically lie about notional risk.... and so on, and then add to that their ridiculous black box operations.... hey this just is terrible!

And that industry can wipe out the whole world's financial apparatus in a flash.... this is ridiculous! I'm sure that all the FED will do is slap their hands.....

SO,,, a black box stock market, black box derivatives market, a highly manipulated bond market and carry trade, hyper bubble real estate bubble... and so on... I would not have ONE dime in any financial instrument, and that includes stock......

Of course, while things stay up... I will look like a dummy to those who are still making their paper profits... I understand that.

I guess my reply to such people is that the reward does not justify the risk for right now, and I would just be out of the markets.

I think it is time to call yet another major paradigm change: The existence of massive market manipulation, first in Japan for about the last ten years, and now in the US since 1997, first sporadic and now becoming a regular thing.... if both the Japan and the US, the two largest economies on the planet, have ongoing active market manipulation by their treasuries.... then I will say the new paradigm is that the markets are not open or free anymore....the old paradigm was the markets could make their own way... but now that is clearly not so much the case.

What does all this mean? We have a black box financial universe now, I mean the whole thing. Lets list some of the main components:

Since at least 2001, the US and Japan have created an unprecedented bond carry trade, that has tweaked the bond and now RE markets, and is only a market of intervention and abuse. Since the mid 1990's Japan has been overtly supporting the Nikkei, in huge amounts, and this continues.

Since at least 1997 the US plunge protection team is literally forestalling almost all stock market corrections with what must be UNGOLDY amounts of slush funds from the FED, scattered here with the favored brokerage entities, and with favored partner nations (Japan and Britain). Since the last two years there are rather clear indications that the FED may be supporting its own bond market, through massive purchases from unknown secret entities in the Carribean, and also the participation of, again, Japan and Britain.

Now on the last, there are still appetites for US TBONDS that are legitimate, since there is no quality yield available world wide....but

We have clear massive secret and overt manipulation for years of: The US stock market, the US bond market, and and we have a monstrosity world wide derivatives market that is the single greatest black box threat that has ever existed in the world... and is not in control, but is showing signs of losing control....

The US markets are black boxes!

Now, I want to get to my main conclusion about what to do about this dangerous BS.

Of course you already know that I am going to recommend Gold bullion.... and I am. But let me go a little more into the thinking of why I keep coming back to that again and again....

When I wrote subsistence crisis and depression coming, in there I stated that I was racking my brains for a long time to come up with good strategies to make it through all this coming economic chaos... and the best one that I had was gold bullion.....and I have been on that refrain now for a year.

You all know that I am not high at all on stock period. And while some gold stocks are probably good to have, If i was making a decision to have a gold asset, then it would be bullion and not a stock, but there are reasons why I keep coming back to bullion bullion bullion...:

First again, let me tell the main conclusion that I am now running under:

I don't trust anything that I cannot see, that is not in my immediate possession.

This is my primary weapon against a black box world. If I have it IN MY POSSESSION, and I can see it, etc.... then I am effectively out of the dark ether that has become the so called 'markets' today....

I believe that is what was working in the back of my mind, about stocks and all my rantings about gold vs any other asset and also why I have said too, that there are no investments....

NO INVESTMENTS and my new 'I don't trust anything I cannot see' paradigm....

I have written that there are no investments because assets are either over priced, or their performance is not out in the open but subject to insider manipulation, one set of data for the insiders (like the FED or the Preferred stock holders) and one set of data for public consumption....

The fact that yields for quality sovereign debt like US T bills are so low, just indicates that all the huge amounts of capital out there just don't see anywhere worthwhile to put all those trillions.... But if the yields of quality sovereign debt is so low, and that has been the case for quite a few years now, then that indicates that the whole risk universe is over priced.... particularly if the yields STAY so low for years.....

This implies that all the yield calculations for either conservative investments or even analogous speculating instruments are all skewed too low to justify the risk. ie risk is discounted way too much....(yes, I have been saying this well before G just said it )

Now, you combine the problem that yield is too expensive (way too expensive) all across the investment spectrum... with massive market manipulation and a black box US stock market, Black box US bond market, Black box $250 Trillion derivative market..... and I just get back to my position that

I don't trust anything that I cannot see.

Now, I can see my truck, my boat, my cat, my food, my garden, my GOLD COIN. And I trust all these... I am not seeking a paltry interest return year after year right now.

I am seeking to PROTECT what I have now. It is a fact that most people never get out of any investment market at the right time, and they LOSE their gains they so painstakingly have built over the last bull market.... Their mistake is a 40% loss that always seems to come about every 10 or 20 years in any of the markets...and most people never get out before those drops.

A stock depends on many things to be worth anything:

• Honestly of the company.

• No government confiscations (look at SA gold companies and the mandatory sale of a huge percent to black interests by government order... this is essentially confiscation, see my article World Hostility and Your assets, an article that presaged many of the troubles the SA gold miners are facing today.

• Natural disasters, earthquakes and so on.

• Insurrections not happening and on and on and on.

A gold coin doesn't depend on anything to keep its value in good and bad times.

© 2005 Christopher Laird
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