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White Swans into Black: Golden Antidotes

"At the start of last week, we reported on the very strong demand response from the physical market due to the drop in the gold price below $1,180. This demand has continued unabated. The gold price decline comes at a good time, especially for the Indian market but also other markets such as Turkey where price elasticity is being assisted by a very strong seasonal demand reaction"

Standard Bank, Gold Physical Flow Index, 8/3/10

 

"The pace and severity of financial crises has taken an ominous turn for the worse....

With one crisis seemingly begetting another, and the fuse between crises now getting shorter and shorter, the world economy is on a very treacherous course."

Stephen Roach, Morgan Stanley, May, 2010

 

"Washington is not helping.

The massive permanent expansion in federal spending and regulatory oversight built into President Obama's budget is discouraging private hiring by raising fears of higher taxes and regulation. Simply, higher taxes discourage purchases of non-essentials and high-line durable goods…

All that spending will require higher taxes, and raising taxes on families earning $250,000 simply won't be enough finance it…

Much of the $787 Billion stimulus money was squandered on pet projects that created few jobs…

The biggest banks received more than $2 trillion in TARP and Federal Reserve assistance to clean up their balance sheets and recapitalize securities trading, while the 8000 regional banks got little assistance and remain burdened by toxic real estate loans. Consequently, more than 230 regional banks have failed, and small and medium sized businesses cannot get credit to expand."

"Morici: Friday's Jobs Report: Outlook Darkens for Economy, Obama"
Peter Morici, CNBC Guest Blog, 8/4/10

 

 

‘Black Swans' are Phenomena which are Statistical Outliers – Phenomena ostensibly so improbable  that they are not typically be taken into account when determining probabilities, even though, if and when they do occur, their consequences typically have a very high, and often very negative, impact. [All Swans were thought to be White, until a 1697 Dutch Expedition to Australia found Black ones.]

The BP Oil Disaster is arguably such a Black Swan event, given the hundreds of Deep Water Wells which have been drilled safely (although an advance look at BP's safety record might well have dramatically increased the forecast likelihood of a Disaster).

In the world of Finance and Investment, Black Swan Events are those surprise events which (defective) Analytical Models deem so unlikely that one may relatively "safely" risk their occurrence, until, of course they occur, with catastrophic results.

One such Congeries of Events is the Counterparty Failures which characterized the AIG, Lehman Brothers, and Bear Stearns debacles. These debacles show that high leverage coupled with a Black Swan event/s often has lethal consequences.

Black Swan phenomena were noted by the Latin Poet Juvenal and John Stuart Mill, but, to his credit, were recently applied to finance and investing, by Nassim Taleb in his 2007 Book The Black Swan.

Our main point here is that what are apparently ‘White Swan' Phenomena sometimes actually are, or will metamorphose into being, threatening Black Swan Phenomena. Indeed, some of these (ostensibly White) Swan Phenomena are threatening to reveal their inherent Blackness now, and that Investors need to be aware of these lest they be blindsided. As well, Investors need to acquire "Antidotes" in advance, several of which we identify here.

Thus, in what follows, we list some apparent White Swans that are really Black (and some that are immediately threatening), and suggest Antidotes.

One of the Most Visible White Swans which is really Black is the Recent Eurozone Non-Solution to the Euro-Sovereign-Debt Crisis. Mega-Bank Creditors of the PIIGS were bailed out, but the PIIGS Sovereign Debt problems were by no means solved, just extended. Investors world-wide were, and are, being "invited" by Mainstream Media spin to pretend that the Black Swan Sovereign Debt Threat is now solved, and thus is now transformed into a financial ‘White Swan'.

In fact the "Sovereign Debt Can" was just kicked down the Road a few months and will surely arise again in ever more threatening form as a Gigantic Black Swan.

Now we change our focus from that very public White/Black Swan issue of the PIIGS Bailout to one quite Hidden, but no less Threatening.

Consider the Black Swan (covered in opaque White) of ongoing Covert Fed Monetization (known euphemistically as QE, or Quantitative Easing), which is quite important because if it were Overt it would immediately create hyperinflationary pressures (which QE does create in the long run in any event).

Jim Willie cogently comments:

"…the USFed and USDept Treasury are using the United Kingdom as a ledger item for their mammoth USTreasury monetization, all barely hidden, with the TIC data used as a tiny fig leaf… At end 2009, as of the December tally, the UK owned $180.3B in USTBonds, yet somehow managed to accumulate in the new year, up to the current $350.0B. THE UK SUPPOSEDLY HAS ALMOST DOUBLED THEIR HOLDINGS IN A MERE FIVE MONTHS!!

Bear witness to the shadow USFed debt monetization operation, operating out of the United Kingdom, or at least its accounting…

Bear in mind that we are talking about crippled England here, or the United Kingdom more generally. The UKGovt just announced spending cuts to reach 40% of budget, not the previous 20%. Britain could not cope with an extended episode in the credit crisis, according to the Bank For Intl Settlements. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly… Newly ordained Prime Minister David Cameron ordered the officials to draw up 40% cuts, the biggest in history. He has ordered cabinet ministers to draw up a Doomsday budget whose essential service spending cuts could see tens of thousands given pink slips. Yet this nation gobbled up $170 billion in USTreasurys from ripe savings in five months?? Hardly. This is a smoking gun…"

"Smoking Guns of U.S. Treasury Monetization"
Jim Willie, GoldenJackass.com, 7/22/10

 

And then there are the U.S. Treasury Reports themselves showing which Categories of ‘Investors' bought U.S. Treasury Securities.

Consider again Jim Willie and Eric Sprott and Bill Gross:

"…Eric Sprott of Sprott Asset Mgmt casts a suspicious eye at the USTreasurys for the so-called Household category in their accounting. It is a blatant ledger item for illicit monetization, a veritable crime scene without the cordoned zone and yellow tape. Sprott directs his accusations like a skilled prosecutor. He reinforces the claim of Ponzi Scheme cited by Bill Gross of PIMCO. Sprott calls the solution to finance the mammoth USGovt deficits to be the actual problem, namely hidden monetization…

… The remainder was purchased by a category called loosely "Other Investors" as a catch-all. This other group purchased $90 billion in 2008, but then turned up into hyper-drive its purchases to $510.1 billion of freshly minted USTreasury securities so far in the first three quarters of fiscal 2009…

Go to the source. The USDept Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government Sponsored Enterprises (GSE, as in Fannie Mae & Freddie Mac et al), Brokers & Dealers (who sell as intermediaries), Bank Personal Trusts & Estates, Corporate & Non-Corporate Businesses, Individuals, and Other Investors. It is far-fetched to believe parties in these groups had $700 spare billion to invest in the USTreasury market in fiscal 2009…

This category supposedly purchased $15 billion worth of USTreasurys in 2008, then jumped with ink jet assist (printing press) in 3Q2009 to a staggering $528.7 billion in purchases, a 35-fold increase. The Household is on track to buy $704 billion worth in all fiscal 2009. The bottom line is a shocker! What is the Household Sector? It is a combination of miscellaneous, ledger adjustments, and blatant monetization. Sprott calls it a PHANTOM that does not exist, but serves the purpose to balance the ledger in the US Federal Reserve Flow of Funds report…

BY THE END OCTOBER 2009, THE "HOUSEHOLD" ACCOUNTING CATEGORY OWNED MORE USTREASURYS THAN THE US FEDERAL RESERVE ITSELF. THAT IS CORRECT. MONETIZED USTREASURY BONDS ACCOUNT FOR MORE THAN WHAT THE USFED HOLDS. THE USTBONDS ARE HIDING IN ENGLAND."

"Smoking Guns of U.S. Treasury Monetization"
Jim Willie, GoldenJackass.com, 7/22/10

 

Zhu Min, deputy governor of the Peoples Bank of China is understandably worried:

"The world does not have so much money to buy more USTreasurys. The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible."

"Smoking Guns of U.S. Treasury Monetization"
Jim Willie, GoldenJackass.com, 7/22/10

 

Unfortunately, the ostensible White Swan of Fed Policy is quite threateningly Black.

"…With foreign sources unwilling or unable to support USGovt debt, the monetization card will be used repeatedly and powerfully inside the desperate US-UK quarters. When the process is more widely recognized and publicized, the USDollar will be denigrated further, and rejected as quickly as any reasonable alternative can be produced by consensus. It is that simple…

No creditor nation whose leaders are in their right mind would continue to support the USDollar as the global reserve currency when its debt securities are the object of such open fraud and high volume monetization…"

"Smoking Guns of U.S. Treasury Monetization"
Jim Willie, GoldenJackass.com, 7/22/10

 

This Covert Monetization, when widely understood, will likely have catastrophe consequences for the U.S. Dollar, and will launch hyperinflation. It could happen anytime.

A third ‘White Swan' which is really Black is the effect of the Bailout and stimulus Bills on the U.S. Economy. The Obama administration says they have catalyzed a Recovery with their Stimulus Bill. The Realities as presented by Peter Morici above, by Deepcaster, and by many others, say otherwise. ‘Nuff said.

Yet a fourth apparent ‘White Swan' is the somewhat rosy picture Official U.S. Statistics give us of the U.S. Economy.

Looking at these somewhat rosy recent Official Reports leads Observers to believe that there is virtually no Inflation, that GDP growth is slow but solid, and therefore, that a Recovery is underway.

The very real Positive Investor Sentiment generated by this somewhat positive picture has, along with Cartel Intervention, helped impel the markets into rally mode beginning Monday this week.

The only problem is that if the Official Numbers are Bogus, the Market Rally is built on sand and can be expected to collapse as easily as a sand castle, and sooner rather than later. (See Deepcaster's latest Alert in the ‘Alerts Cache' at Deepcaster's website.)

In fact, the Official Numbers are Bogus and the Real Numbers paint a very different picture.

Our regular Readers are quite familiar with the work of Shadowstats.com, and several have asked that we continue to provide updated ones in our articles. (Shadowstats calculates statistics the way they were calculated in the 1980's and 1990's, before data manipulation began in earnest) So here they are:

Official Numbers vs.      Real Numbers (per Shadowstats.com)

Annual U.S. Consumer Price Inflation reported July 16, 2010
1.05%                  /                     8.37% (annualized June 2010 Rate)

U.S. Unemployment reported July 2, 2010
9.5%                /               21.6%

U.S. GDP Annual Growth/Decline reported July 30th, 2010
3.17%                    /                   -1.25%

U.S. M3 reported July 22, 2010 (Month of June, Y.O.Y.)
No Official Report      /       - 5.90%

 

Clearly the White Swan of an Apparent Economic Recovery is a Delusion. The Reality is a Black Swan of Negative Economic prospects, which will inevitably have negative consequences for the equities Markets.

So what are Antidotes to these "White Swan into Black" Realities and Threats?

Our immediate answer is the Precious Monetary Metals, Gold and Silver, plus the Category of High Yield Investments whose Yields exceed Real Inflation.

Gold is a hedge against the Current Realities of both the economic contraction/deflation pressures we see today, as well as the hyperinflationary pressures (which Jim Willie's and other's Revelations about Covert Monetization reveal) which are on the horizon.

Until recent months, our positive Recommendation regarding Gold and Silver acquisition, would have had to be severely qualified (as to timing) by the Reality of ongoing Cartel* Intervention to suppress Gold and Silver Prices.

In recent months, however, thanks to GATA and others, certain Revelations (as e.g. that not all Precious Metals repositories have all the actual metal they lead people to believe they have, including the Spectacular Allegation that the LBMA has sold some 45 ounces of Gold for every ounce they actually hold), have led to a weakening of Cartel* ability to cap prices. (See Deepcaster's Alert for the week April 16, 2010: "Cartel Failing? Precious Metal Buy Reco! Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & Bonds" in the ‘Alerts Cache' at Deepcaster's website)

*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.

Nonetheless, The Cartel still remains Potent (if they were not, Precious Metals prices would doubtless be much higher than they are now).

Thus as practical Antidotes we strongly recommend acquisition of physical Gold and Silver with the Timing and in the Form of those Acquisition described in our latest Alert, as well as employing the Strategy laid out in "Defeating the Cartel... With Profit, Part 2" (6/19/2009) and "Defeating the Cartel... With Profit, Part 1" (3/28/2008) in the ‘Articles by Deepcaster' Cache at Deepcaster's website. We also recommend the acquisition of Securities whose yields are higher than Real Inflation. (See Deepcaster's Alert for the week ending July 23, 2010: "NEW HIGH YIELD PORTFOLIO: 15.6%, 26%, 18.5% & 10.6% Recent Yields" for Specific Recommendations, located in the ‘Alerts Cache' at Deepcaster's website.)

In sum, to Identify Ostensible White Swans which are, or are likely to become, Black Swans. We recommend employing the following Guidelines.

-      Get the Real Data from sources such as Shadowstats.com and GATA.

-      Assume the Mainstream Media is not providing the Full Story on Key Issues, and Search for Alternative Sources, and/or Additional Facts

-      Consider whether a particular Mainstream Story is Reliable, or whether it is likely it is "Manufactured News"

-      Consider The Interventionals as well as the Fundamentals and Technicals.

Following these Guidelines can help ensure that one does not, in making Investing and Trading decisions, rely on a White Swan which later turns out to be a Black, much to Investors and Traders detriment.

About the Author

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