[NYTr] Deepcaster: US Market Intervention - Risks, Consequences, Cartel End-Game

[All the News That Doesn't Fit]

[This is the Deepcaster Letter GATA refers to in their news article
Deepcaster Letter details how US govt. manipulates major markets (12/16)
http://blythe-systems.com/pipermail/nytr/Week-of-Mon-20071210/073025.html

which for some reason they have posted only as a Micro$hit .doc file.
This is converted from the .doc file. It's long and highly technical,
but for those who don't use Winduhhhs, here it is in text. -NYTr]

Source:
http://www.gata.org/files/Deepcaster12-15-2007.doc

You can learn more about the Deepcaster letter here:
http://www.deepcaster.com

DEEPCASTER LLC - Dec 14, 2007
http://www.deepcaster.com

DEEPCASTER FORTRESS ASSETS LETTER

MARKET INTERVENTION ACCELERATING, 

Stunning Data Releases Show Risks, Consequences, and 
the Cartel End Game

"Charlie and I are of one mind in how we feel about derivatives and the
trading activities that go with them:  we view them as time bombs, both
for the parties that deal in them and the economic system."

"...The derivatives genie is now well out of the bottle, and these
instruments will almost certainly multiply in variety and number until
some event makes their toxicity clear..."

"...In our view, however, derivatives are financial weapons of mass
destruction, carrying dangers that, while now latent, are potentially
lethal."  -Warren Buffet, February 21, 2003


"The fact that the December 13 and 14, 2007 jumps in the PPI and CPI
inflation numbers were accompanied by substantial drops in the gold
price is quite significant.  After examining all the evidence, how can
a rational observer conclude anything other than that the price of gold
is manipulated?"

Deepcaster, December 14, 2007

This is the sixth in a series of Deepcaster's work originally entitled
"Juiced Numbers" regarding Market Intervention and Data Manipulation.
The primary topics of this installment are:  1) An overview of the
Market Intervention and Data Manipulation Regime, including the recent
Releases from the BIS, BLS and The Fed reflecting that market
intervention and manipulation; 2) The August – October, 2006
Intervention Phase that took down Crude Oil, as well as Gold and Silver
prices; 3) Highlights of the August & September and other 2007
interventions; 4) Cartel Intervention as the key feature of the
aforementioned Takedowns; 5) Data Massaging and The Cartel End Game.
__________

IMPORTANT NOTE:  Deepcaster had not planned to prepare an update of its
November, 2007 Letter entitled “Market Intervention and Data
Manipulation - - Consequences & Forecast for Gold, Crude, Equities and
The Cartel End Game” for some months.  However, important new data
releases from the BIS (Bank of International Settlements -- The
Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the
U.S. Federal Reserve are quite astounding.  They reflect a considerable
acceleration of Market Intervention.  They reflect dramatic increases
in OTC Derivatives, and in exchange-traded derivatives, and an apparent
intensification of data manipulation.  As we demonstrate, these
developments dramatically increase systemic risk and also reflect the
importance of creating more OTC and exchange-traded Derivatives in
order to affect market outcomes.  Because of this dramatically
increasing systemic risk, we feel it most important to issue this sixth
edition of our “Juiced Numbers” series now. 
_________ 

In order to put the Interventional Takedowns in context, the
discussion is interwoven with significant excerpts from "Juiced Numbers
#1, 2, 3, 4, and 5, Deepcaster's initial essays describing "How the
Government Gets the Statistics it wants, Markets get manipulated,
Citizens get Deluded, and Worse."

By describing the aforementioned Interventional Episodes, we provide
evidence to the skeptical of the pervasive influence of Market
Intervention.

The Interventional Context -- Overview

Deepcaster is periodically asked to explain, and provide evidence for,
our view that a U.S. Federal Reserve-led Cartel (apparently composed of
the U.S. Federal Reserve, the Bank for International Settlements
("BIS") -- The Central Bankers’ Bank -- and key primary dealers,
acting with the cooperation of major Central Bankers) manipulates a
wide variety of markets.  [Apparently one “operational vehicle” through
which The Cartel works is called “The Working Group on Financial
Markets” established after the 1987 crash, and which is often
informally and widely referred to as “The Plunge Protection Team” or
PPT.]

So it is important to explain what we mean by our claim of Cartel
Intervention, and to indicate how Deepcaster takes account of that in
our portfolio recommendations.  [It is important to note that virtually
all of the evidence we cite is from publicly available sources as
indicated below.  For example, the Gold AntiTrust Action Committee has
amassed substantial evidence regarding the manipulation of the Gold and
Silver Markets at http://www.gata.org ]

First, we do not (usually) mean that the Cartel totally controls prices
in any particular market.  Various markets are affected in varying
degrees, at varying times, by Cartel manipulation attempts.  Cartel
actions can substantially affect, but usually do not totally control,
prices in many markets -- though they certainly have that capacity
much of the time.  The price of Crude Oil is relatively difficult to
manipulate, for example, but is not immune from substantial
manipulation (as we shall show).

It is important to note that the degree of manipulation, and,
therefore, control, varies from time to time and market to market.  In
markets such as the (relatively) small cap markets for Gold and Silver
securities, Cartel manipulation attempts can have much more impact and
are, at times, and for certain time periods, tantamount to control.

To answer the exceedingly important question regarding how the markets
are manipulated one must recognize that there are two main methods of
manipulation.

I.  DIRECT MANIPULATION

Direct intervention appears to be accomplished primarily via two
vehicles:  Repo Injections from The Fed and via the Over The Counter
(OTC) derivatives reported by The Bank for International Settlements
(see http://www.bis.org and details below).  The Fed makes injections
of Repos (Repurchase Agreements -- usually TOMOs -- Temporary Open
Market Operations typically expiring in 1 to 30 days) into the market
nearly every business day.  Repurchase agreements are loans (at Fed
Fund rates) issued daily by the Federal Reserve to primary dealers, the
proceeds of which can be used to buy, for example, Dow index futures,
if the Fed seeks to boost the Dow.  The total amount of un-expired
Repos on any given day constitutes the “Repo Pool.”  Monitoring changes
in Repo Poll levels (which is publicly available information) is
crucial to determining how the Interventions will likely affect the
markets.

Thus, the several primary dealers (e.g. Goldman Sachs, J.P. Morgan),
who apparently work under the Fed's direction, are able to use these
loaned funds to buy or sell various securities and futures to affect
the markets.  [Note:  One species of Repos, POMOS, never has to be
repaid, but explaining the significance of that (beyond the obvious) is
beyond the scope of this article.]  The fact that the loaned funds can
be used to purchase derivatives (as well as plain equities) gives the
manipulators the tremendous leverage which derivatives afford.

But along with that tremendous leverage comes tremendous and
tremendously increasing (as the recent data releases described below
indicate) systemic risk.

Repo additions are made nearly every business day in amounts typically
ranging from $1 to $15 billion.  Thus, every business day we know the
size of The Repo Pool, and whether The Pool is increasing or decreasing.

The Challenge:  Determining the Impact of The Interventionals

The challenge for investors and forecasters is to determine where (i.e.
in what Sector/s) and how (immediately, in increments, etc.) the funds
will be employed.  Deepcaster and those very few others, who monitor
the daily Repo injections, make educated forecasts of where and how
such funds are likely to be used based on patterns, tendencies, and
judgments.  But no outsider can know for sure (So where is the
transparency, Ben?).

Those who doubt whether the Cartel has the capacity to manipulate the
markets (and especially the larger markets like the multi-trillion
dollar currency and bond markets) are invited to inform themselves
about the multi-trillion dollar derivatives colossus at J.P. Morgan
Chase, or the $346 trillion in June 2007 (up from $291 trillion in Dec.
2006) derivatives position at the Bank for International Settlements
(the Central Banker's Bank) devoted to “Interest Rate Contracts” (see
http://www.bis.org  Then follow the path: Statistics>Derivatives>Table
19). Note that that Derivatives figure increased by some $55 trillion in
just six months!

Attitudes of The Fed/Treasury/BIS Toward Intervention

Regarding the awareness and intentions of the leaders of the U.S.
Treasury and the U.S. Federal Reserve concerning market manipulation
and public perceptions, it is instructive to review what their
leadership has said.

Former Secretary of the Treasury, Larry Summers, for example, in his
own treatise "Gibsons Paradox and the Gold Standard," indicates
"determination of the general price level then amounts to the micro
economic problem of determining the relative price of gold," Journal of
Political Economy, page 529, 1989.

This much publicized conclusion indicates that our monetary and
financial leadership know that in order to manage the general price
level and interest rates it is necessary to determine the relative
price of gold.  Therefore, of course, it follows that capping the price
of gold (and, by necessity, the price of that other “monetary metal”
silver) would be extremely important.

Regarding allegations of "news management" (which some have
indelicately called "news manufacturing") we refer you to the words of
the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise
on "Zero Bound Rate Systems."  Note Deepcaster's underlines which call
attention to the use of "communications policies" to "shape public
expectations," and to the use of the Central Bank's balance sheet and
the “targeted purchase” of Treasury Securities (yes, The Fed purchases
the Treasury’s own paper) to achieve Fed goals:

"Monetary Policy Alternatives at the Zero Bound:

An Empirical Assessment (non-technical summary page i)

In this paper, we apply the tools of modern empirical finance to the
recent Experiences of the United States and Japan to provide evidence
on the potential Effectiveness of various nonstandard policies.
Following Bernanke and Reinhart (2004), we group these policy
alternatives into three classes:  (1) using communications policies to
shape public expectations about the future course of interest rates;
(2) increasing the size of the central bank's balance sheet, or
"quantitative easing"; and (3) changing the composition of the central
bank's balance sheet through, for example, the targeted purchases of
long-term bonds as a means of reducing the long-term interest
rate." (emphasis added)
http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

To Deepcaster all this indicates that the Fed-led Cartel will go to
significant lengths necessary to control long-term interest rates (in
addition to short term rates, which, it is widely acknowledged, they
also control), cap the price of gold and otherwise achieve Central Bank
ends.

An excellent analysis of the defects of the “U.S.” Federal Reserve --
so far as the United States’ National Interest is concerned -- is well
documented in G. Edward Griffin’s superb book, The Creature From Jekyll
Island:  A Second Look at the Federal Reserve).

The one conclusion that one can make from this is that the failure to
take account of the power, force and pervasiveness of Cartel
Manipulations (i.e. The Interventionals) is an invitation to financial
and investment suicide.

The profound impact of these manipulation efforts has been most well
documented regarding the price capping of the gold market.  For those
who have any doubts whatsoever about the fact and extent of government
(Central Banks) manipulation, we have (thanks to Bill Murphy, founder
of the Gold Antitrust Action Committee) the following June, 2005
blatant admission of manipulation by the Head of the BIS (Bank for
International Settlements -- i.e. the Central Bankers' Bank) Monetary
and Economic Department, W.R. White:

"…it is perhaps worth spending a minute on what is meant by Central
Bank cooperation…{it includes]…last, the provision of international
credits and joint efforts to influence asset prices (especially gold
and foreign exchange) in circumstances where this might be thought
useful…"

For skeptics, Deepcaster asks:  What could be clearer than that?

Interventional Indicators and Helpful Tips

Indeed, if one looks at the Interventional Indicators, the fact that
the manipulation takes place is amply documented. First we have the
aforementioned quote from W.R. White, Head of the Bank for
International Settlements (BIS), in which he explicitly acknowledges
manipulation of the gold and currency markets.

In addition, the aforementioned Bernanke statement in his academic
paper "Zero Rate Bound Economies" can reasonably be taken as a
justification for the Fed purchasing its own paper, otherwise known as
monetizing the debt.  Specifically, regarding long bond purchases, the
purpose of this would be to boost the 10 and 30-year bonds, and,
therefore, reduce long-term interest rates.

>From the Fed's point of view, these takedowns would presumably reflect
a national policy to support the housing market by lowering interest
rates, thus encouraging continuing robust consumer spending mainly
through the vehicle of the Home-ATM.  In addition, it is very much in
the Fed's interest to focus investors' funds on purchase of their paper
(and, especially, their 10-year Note) and to buoy their fiat currency.
In this way, the Fed maintains and enhances its power.  But the “U.S.”
Federal Reserve is owned by private international banks and is not a
U.S. government entity. 

[As an historical note, recall that President Kennedy was unhappy with
Fed policy and therefore caused U.S. Notes to be printed as a
substitute for Federal Reserve Notes.  The issuance of these Notes
ceased shortly after President Kennedy's assassination.] 

Caution for Investors and Traders

Finally, we issue a word of caution to our readers.  So long as The
Cartel is in a very active interventional mode (e.g. as in taking down
the price of Gold, Silver and Oil) do not be lured into thinking that
the periodic up spikes in the prices of Gold, Silver and Oil present a
"breakout" or a buying opportunity.  As a practical matter, technical
breakouts are sometimes a lure designed to suck in more "longs" prior
to a subsequent deeper takedown. One of Deepcaster's goal is to
identify interim bottoms of Gold, Silver, Crude Oil, and other key
markets, and thus to help readers profit from their inevitable
resurgence, and ascendance to new heights.

It is essential to study the Fundamentals and Technicals even though
the Interventions can override the Fundamentals and Technicals.  One
must study the Fundamentals not only for all the usual reasons but also
because Fundamentals somewhat constrain the timing and effectiveness of
Interventions by The Cartel.

Similarly, one should study the Technicals for all the usual reasons
and, in addition, because it is in The Cartel’s interest to make its
actions seem technically plausible in order to continue to “run mainly
under the radar.”  It is not in The Cartel’s interest to make its
Interventions any more visible than they already are.  Indeed, there is
powerful evidence that The Cartel often uses and/or helps create
technical patterns which lure certain investors (such as hard asset
investors) into getting “off sides” before Cartel actions such as
taking down the price of Gold or Silver.

Consideration of Fundamentals, Technicals and Interventionals has
facilitated Deepcaster’s profitable recommendations displayed at
http://www.deepcaster.com

Significant and Increasing Systemic Threats

Dramatic increases in two major species of derivatives emphasize the
increasing magnitude of systemic risks.

Exchange-Traded Derivatives

Exchange-Traded Derivatives soared 27% to an all-time-high $681
trillion in the third quarter 2007, according to BIS figures.

The largest single category -- Interest Rate Derivatives -- increased
31% to $594 trillion, during the third quarter.

These increases reflect a remarkable increase in risk, for many
reasons, including the increased aggregate magnitude of the leverage
they reflect, and the concomitant increased opportunities for
counterparty default.

However, being exchange-traded, they are, to a degree visible.  Yet
that other main category of derivatives-over the counter (OTC) are not
visible, except for the BIS and other reporting agencies disclosures.
Yet the inherent risks are, if anything, greater.

Over The Counter (OTC) Derivatives

Consider the import of the data from the BIS' own website - - Review
Table 19 at http://www.bis.org   Follow the path:
Statistics -> Derivatives -> Table19.  
Note that as of December, 2006 there Statistics ->Derivatives were:

$6.475 trillion commodities contracts (excluding gold) outstanding
$40.239 trillion foreign exchange contracts outstanding
$291.115 trillion interest rate market contracts outstanding

But consider the stunning increases in OTC Derivatives in just the six
months between December, 2006 and June, 2007.  As of June, 2007 there
were:

	$7.141 trillion in commodities contracts (excluding gold), an
approx. $666 billion (10%) increase in only six months $48.620 trillion
in foreign exchange contracts, a $8.31 trillion (approx. 20%) increase
in only 6 months. $346.937 trillion in interest rate market contracts,
a $55.822 trillion (approx. 19%) increase in only 6 months

(source:  http://www.bis.org  statistics -> derivatives ->Table19)

What is also obvious from a comparison invited by Table 19 --
comparing June, 2005 figures with June, 2007 figures -- is the
increasing systemic threat this interventional regime imposes.  Note
also the dramatic jump in most categories of derivatives from June,
2005 to June, 2007.

Gold

Increases in the amounts of OTC derivatives outstanding for the Gold
Market are perhaps the most stunning:

>From the $359 billion outstanding at end-June 2004 they nearly tripled
to $1,051 trillion at end-June 2007, an increase of approx. 290%
(source:  BIS “Table A -- OTC Derivatives Market, Triennial Central
Bank Survey of Foreign Exchange and Derivatives market Activity”).

___

Note:  While BIS Table 19 shows a drop in OTC derivatives contracts for
gold in the 6 months from the end-December 2006  figure of $640 billion
to the end-June 2007 figure of $426 billion, it should be noted that
the end-June 2007 number ($1.051 trillion) from the BIS Triennial
Survey is a more comprehensive number, generically akin to the “upward
revisions” which the U.S. BLS regularly makes.  Doubtless some
substantial portion of the foregoing OTC derivatives contracts are for
entirely commercial purposes, but with publicly visible exchange-traded
derivatives also available for commercial purposes (and considering
publicly traded companies incur considerable risk by engaging in “dark
liquidity” OTC transactions) it strains credulity to claim that most or
all OTC contracts are for purely commercial, i.e. non-interventional,
purposes. 

___

Liquidity Injections

For an analysis of why the kind of liquidity injections The Fed has
been making (e.g. the $40 billion “fund” made available to banks on
December 12, 2007) increase the systemic (and other) risks, see “The
Fed Cure Worsens the Disease” later in this document.

The December 12, 2007 $40 billion commitment was presumably occasioned
by the credit markets continuing “seize-ups” which began in August,
2007 and which are manifested by:

The asset-backed U.S. commercial paper market shrinking 17 weeks in a
row (as of December 12, 2007), and widening U.S. Dollar, Sterling
Libor, and Euribor spreads.  For example, “the spread between the rate
of interest on 3-month U.S. Treasury Bills and AA-rated asset-backed
commercial paper has widened to 270 basis points from a mere 30 basis
points earlier this year…” Financial Times, London, M. Wolf, December
12, 2007

In our view, it is doubtful whether liquidity injections of this sort
will solve the banks liquidity challenges (precipitated, we might add,
by Fed policies and the banks own careless lending practices), but one
outcome is clear.

The banks will get their money, anonymously, (see Deepcaster’s article
on  “Dark Liquidity”) and at below market interest rates, which should
be highly profitable to them.  But, of course, this action gives no
help to struggling homeowners facing ARM resets, or to retirees on
fixed incomes, or to those losing jobs to (often international-banker
financed) outsourcing, or to all of the “little guys and gals”
suffering from rises in the cost of living and a substantial loss of
purchasing power of their U.S. Dollars.

So now let us take a brief look back to see how all this
"Interventional Firepower" is manifested in the Markets.

The August to October, 2006 Interventions - - Stunning

The late Summer, 2006 takedown of crude oil in particular was
stunning.  From its high at about $78 a barrel crude oil blew past $70
a barrel and then moved relentlessly on to $60, and never looked back.
One trader noted recently that oil just kept getting "more and more
oversold" from a technical perspective.

For Deepcaster this signaled that intervention was trumping the
technicals and fundamentals yet again.

Retrospectively, if one charts the progressive (currency adjusted)
increases in the oil price to $78 and then charts its decrease to $60,
it reflects a shocking and improbable "linearity."  That is to say,
that chart appears to have none of the characteristics of random market
fluctuations.

The aforementioned "linearity" of the Crude Oil takedown noted by
Deepcaster is another surefire sign of intervention, but not the only
one.

Most Big Media claim the big drop was due to a "surplus" of above
ground supplies and a reduction in Mid-East tensions.

But neither is entirely true.  In fact, there were massive above ground
surpluses of crude oil in early and mid-summer when crude oil prices
peaked.

And even as of October, 2006, Mid-East tensions had only just
diminished a bit, but by no means had they evaporated.  And demand for
crude oil is still increasing year-by-year as the appetites of China
and India continue to increase.  So fundamentals are still strong and
technically crude oil was dramatically oversold.  Yet the price kept
dropping.

Perhaps the most telling earmark of the second half of 2006 was
interventionally induced decline signaled by the nearly $2 per barrel
drop in the crude price on just Monday, October 2nd.

Consider that the preceding Friday Venezuela said it would reduce oil
output by 50,000 barrels a day, and that the very next day Nigeria
announced it was cutting oil exports by 5%.

The markets response on that Monday -- nearly a $2 a barrel decline.
Do we have any doubters that The Cartel was, in that situation, still
"the boss”??

Clearly the ($6.475 TRILLION as of December 2006) petroleum and other
derivatives positions, which the Fed-led Cartel utilized beginning in
2005 when natural gas prices hit $15, is the number one candidate for
causing this Crude Swoon.

Similarly, for Gold and Silver, a key feature of the late-Summer 2006
Takedown of Gold and Silver from $650 in the case of gold and about $15
per ounce in the case of silver to about $560 and $10.50, respectively,
is that, like the late-Spring, 2006 takedowns, it bore all the earmarks
of an interventional takedown and not a normal "market correction." 

The Spring 2006 Interventional Takedown

Like the late Summer, 2006 takedowns of Crude Oil, Gold and Silver, the
late April, 2006 takedown of silver and the mid-May takedowns of gold
and silver bore all the earmarks of intervention.  The late April
takedown of silver was breathtaking indeed.  In one trading day, silver
was taken down by about $2, about an 18% drop.  No explanation has been
offered for this takedown other than the dealers' "pulled their
bids" (i.e. refused to bid on silver that day).  Since there apparently
were no bids, the price of silver was dramatically reduced.  Silver
subsequently rose in early May to near its $15 highs before it and gold
were taken down in mid-May again.

One might reasonably ask what the justification is for saying there was
a "takedown" (i.e. by an outside force) rather than that this takedown
was a natural correction or a pullback.

First, and most important, there was no fundamental reason for gold or
silver to suffer such a serious retrenchment.  All the reasons for
investors to buy gold and silver as an inflation hedge were then still
in existence.  The United States trade deficit, the current account
deficit and budget deficits were looming larger than ever.  The
downstream-unfunded liabilities of the United States Government were
well in excess of $40 trillion dollars.  The tension in the Mid-East
was not any closer to a resolution; the war in Iraq was no closer to
being resolved.

And although one could make a technical case that silver and gold were
"over bought" there is still no justification for the abrupt drop
through and out of the upward trend channel, especially with
fundamentals being as strong as they were.  In sum, the explanation
appeared clear:  Cartel Intervention.

The August, September and October 2007 Market Interventions

A late 2007 example of such a Fed-led Central Bankers Cartel takedown
was the stunning October 2, 2007 $18-in-a-day takedown of Gold
Bullion.  Consider seriously the fact that this takedown was
accomplished in the face of extremely bullish Fundamentals and
Technicals.

Considering the motivation for such a takedown, Deepcaster reiterates
that Gold & Silver, the monetary metals (as well as the Strategic
Tangible Assets such as Crude Oil) are the “Mortal Enemies” of the
Central Bankers’ Fiat Currencies and Treasury Securities.  The Cartel
simply cannot afford for investors to long regard Gold & Silver as the
ultimate (or even alternate) stores and measures of value as that would
decrease the legitimacy of their Treasury Securities and Fiat
Currencies.

Indeed, a measure of the historical effectiveness of the Central Banker
Cartel in suppressing Gold & Silver prices is that, in
inflation-adjusted terms, Gold would have to exceed U.S. $2,200 an
ounce to top its all-time high of $850 in 1980.

An example of the apparent use of the Repo Pool to boost the Markets
occurred in September, 2007.  The Fed allowed the Repo Pool to drop
slightly on Friday, September 14, 2007, continuing its modest downtrend
bearish for the Equities, at that time.  But they increased the Repo
Pool on Monday, September 17, 2007 as they typically do when they
expect/intend to create major moves (or respond to events) and they
want to have sufficient Repo “ammo” to control the markets.

Sure enough, the September 17th, Monday, Repo Pool boost was a
harbinger of the Big Fed Discount and Fed Funds rates cuts on Tuesday,
September 18, 2007, and partial cause of the Equities Market launch
that day.

II.  INDIRECT MANIPULATION

The other major form of government (including agency) market
manipulation can most accurately be called indirect.  It consists of
"massaging" or hiding various statistical measures and data to create
results that suit the manipulator's (usually, whatever Presidential
Administration has power at a given time) preferences, insofar as its
political, economic, or financial or market goals are concerned.   It
is the U.S. Federal Reserve Bank’s (a privately owned “national” bank)
and the United States government agencies generation of "creative
statistics" on which we focus here.

Specifically we consider today’s massaged government and agency data in
comparison with today’s data calculated the “old fashioned way” (i.e.
sans contemporary statistical gimmickry).

Overview

Mr. Walter J. (John) Williams (see bio below) operates an excellent and
revealing website business named shadowstats.com, in which he analyzes
the U.S. government's and The Fed’s "manufactured statistics" and
develops statistics which have a better correlation to reality (i.e.
his shadowstats).

*Walter J. “John” Williams was born in 1949.  He received an A.B. in
Economics, cum laude, from Dartmouth College in 1971, and was awarded a
M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in
1972, where he was named an Edward Tuck Scholar. During his career as a
consulting economist, John has worked with individuals as well as
Fortune 500 companies.

In order to get a flavor of the statistics which are manipulated, and
the effects of that manipulation, we present a partial summary of an
excellent interview (conducted by Kate Welling, Editor and Publisher of
Welling @ Weeden), which Williams gave in 2006 regarding the subject of
government manipulation.

Williams says that regarding “what used to be called the GNP but is now
widely followed as the GDP, (and) the CPI, and the employment numbers,
all have had biases built into them that result in overstating economic
growth and understating inflation - - both of which are admirable
political goals."

Williams has analyzed and compared the way in which the unemployment
figure was historically calculated versus the way it is calculated
today.  He concluded that if it “were calculated (today) the way it was
during the Great Depression, it is now running at about 12%."  As well,
he says, "Real CPI is now running at about 8%.  And the real GDP is
probably in contraction."  Clearly, the government’s methodologies that
generated these bogus numbers are all designed to paint a more
favorable picture of the economy and the markets than is the reality.

Unemployment Figures

He explains why contemporary unemployment numbers are bogus.  Today,
the unemployment number does not include those unemployed who have been
discouraged and out of work for more than a year.  So they are taken
out of the work force completely automatically.  This results in
knocking about 5 million unemployed out of the broader measures of
unemployment.

Thus, unemployment is about 50% higher than is commonly alleged.  And
thus, "Today unemployment is really up around 12%."

Consumer Price Inflation Figures

These distortions have very real, and usually adverse, consequences for
citizens.  Consider, Williams says, the methodology developed several
years ago by Mike Boskin and Alan Greenspan for generating the Consumer
Price Index.  In their (erroneous in Williams' and Deepcaster's) view
the CPI was supposedly overstating inflation so they "fixed" it from
its prior condition of (allegedly) overstating inflation.

And here is how they did it:

Originally, the whole purpose of the CPI was to "measure the change in
the cost of a fixed basket of goods over time."  But Boskin and
Greenspan said that we should allow for substitution because people can
buy hamburger when the price of steak goes up.

But, of course, "if you allow substitutions you aren't measuring a
constant standard of living, you're measuring the cost of survival."
Williams correctly concludes.

But the effect of this statistical chicanery is very real and very
adverse to, for example, retirees because the CPI was, and is, being
used to adjust Social Security payments to compensate for increases in
the cost of living.

Today, as a result of the Boskin-Greenspan "fix" (implemented in the
Clinton Administration) it understates those increases and therefore
under-compensates retirees for those costs.

In a similar manipulatory vein, the Bureau of Labor Statistics (BLS)
during the Clinton Administration constructed and began to employ a
weighting regimen whereby if the price of something went up it
automatically got a lower weight in calculating the CPI, but if it went
down in price it automatically got a higher weight.  The result, of
course, was, and still is, to further shaft those people (like Social
Security recipients) whose income was dependent upon the CPI measure.

"If the same CPI were used today as it was used when Jimmy Carter was
President, Social Security checks would be 70% higher," Williams
dramatically emphasizes.

Hedonic Pricing

But perhaps the most outrageous aspect of the government's
numbers-manufacturing business has to do with its using "hedonic
pricing."   ("Hedonics" is the study of how to create pleasurable
sensations.)  Hedonic pricing is the practice of creating pleasant (to
the government manipulators and to a credulous public) pricing.

Using its hedonic method, the BLS says the price really doesn't go up
for a product that has "improved" in quality because the consumer is
getting greater benefit or pleasure from it.  Therefore, if computer
power increases by a factor of 10, but the sticker price of computers
has only increased by a factor of 2, then the hedonically adjusted
price would be much lower for CPI calculation purposes even though the
computer is actually twice as expensive (in dollars actually paid) as
it was years earlier.

Williams also notes that sometimes data manipulation attempts are
overt, such as the time during the administration of George Bush I, in
which a computer industry official was approached and asked to boost
his sales reports to the Bureau of Economic Analysis.  Williams is
careful to point out that manipulation is a bipartisan phenomenon.

In the Clinton Administration, the manipulation resulted from the CPI
numbers being re-set using weighting.  "They basically reduced the
number of people being surveyed in the inner cities (which had more
unemployment (Ed.)) and then claimed they replaced them statistically.
But the effect was immediate.  You saw a drop in all the unemployment
measures that would normally be influenced by inner-city surveying.
Thus, of course, the statistical replacement reflected a lot less
unemployment than actually existed."

The adverse effect of this "numbers manufacturing" extends far beyond
its adverse affects on any particular group such as retirees.  If
someone relies on these buggy statistics and invests in the stock
market based on happy economic reports, they may well lose the money
(and will likely lose purchasing power) because of that reliance.
Williams says "I am…disgusted by both parties at this point, especially
because we have no one of substance taking on very severe issues, like
the trade deficit and federal deficit that are going to create terrible
times for people in this country if they are not addressed."

Williams focuses on what he considers, and what Deepcaster considers,
"so dangerous that if it isn't addressed - - and I am afraid maybe that
even if it is addressed - - that it has gone past hope of repair; and
that is the fiscal condition of the Federal Government."

Budgetary Chicanery

Typical statements of the budgetary condition of the government (by
whatever administration is in power) do not include accrued pension and
retiree benefit liabilities.  Certainly this is not a small omission -
- and usually results in differences between the official numbers and
the real numbers.

Williams notes "where the official federal deficit in 2004 was reported
at about $412 billion and the GAAP-based deficit was around $616
billion they said that if you added the net present valuing of the
under-funding of Social Security and Medicare, the one-year deficit in
2004 was $11.1 trillion."

In fact, the 2005 statement (of the U.S. government) shows that total
yet unfunded downstream federal obligations at the end of September
were $51 TRILLION, Williams calculated.

Of course, foreigners are financing most of this deficit spending.
Williams notes that last year alone, foreign investors bought enough
U.S. Federal Debt to cover all the debt issuance of the U.S. Treasury.
But we have no assurance that this will continue.  Indeed, once this
foreign buying even begins to slow, U.S. interest rates must rise to
finance our debt, the interest costs on which are already running at
nearly $3 billion per day.

As Deepcaster has repeatedly noted after the current deflationary
episode has passed, this process will eventually lead to a very high
rate of inflation, high interest rates and a very sharp decline in the
dollar, quite possibly followed by a deflationary depression.  Williams
notes (consistently with Deepcaster's view):  "Once the selling
pressure starts it's going to be massive.  You're going to see a lot of
dumping of U.S. securities, particularly Treasuries."

"To absorb them you're going to see a sharp spike in rates or the Fed
will step in, provide liquidity in market .... the end result, when it
does all come together, will be something akin to hyperinflation.  But
at the same time, you'll also have a very depressed economy." …That
possibly could evolve into a hyperinflationary depression as much as I
hate to use that term."

Williams concludes by saying "so we're talking about a global crisis of
unprecedented proportions.  Probably one that could lead to the
collapse of the current currency system."…As crazy as it sounds, I
think the only thing they will be able to do is go back on some kind of
gold standard."  And, indeed, gold and silver are the Bedrock Assets so
far as Deepcaster is concerned.  And this is why the Fed-led Cartel
makes such forceful efforts to cap their prices.

Finally, Williams talks about where we are today.  Indeed, he says we
are already in a recession.  "What I found is that if you adjust the
real GDP numbers that the government releases for the myriad revisions
and redefinitions…you'll find that there is a happy overstatement of
growth of about 3% on a year-over-year basis."  The problem very simply
is this - - the consumer is the primary driving force behind economic
activity and the only ways that consumers can fuel consumption growth
are through rising income, debt extension, or savings liquidation,
that's where he gets his cash.

But the consumer is not really seeing any income growth.  “Now this is
where the playing around with numbers really gets good.”  We've already
talked about hedonics and all the other manipulations of the CPI.  But
they all pale next to the impact of imputations in the GDP that are an
outgrowth of the theoretical structure of the national income
accounts.  

“Any benefit a person receives has an imputed component…when the
government puts all of it's imputations into income, its growth
generally remains positive and has very little relation to reality."

How do we know when the end is near?  Deepcaster and Williams agree on
the answer.   "If I were looking for one factor to signal the onset of
some really serious problems, I would watch the dollar.  If you start
to see a sharp sell-off, or if the selling starts to pick up a little
steam and begins to look like a panic, or you start to hear talk of an
Asian country dumping a little extra in the way of dollars, it will be
a sign of really bad times to come."  Ominous!

Key Statistics

The Fed chose to stop reporting M3 in March, 2006, clearly to hide
their massive monetary inflation running, as of October, 2006, at 14%
per year (according to shadowstats.com) a doubling time of only 5 years!

But, consider major data calculated “the old fashioned way” by
shadowstats.com.  As of November 6, 2007, shadowstats.com edition, M3
was increasing at about 15.3% annually, an increase from 14.7% in
October, 2007.

Gross federal debt totaled $9.07 trillion as of October 31, 2007, up
$72 billion from September.  Gross domestic product (GDP) while
estimated by the Bureau of Economic Analysis at 3.90% (+/-) is
estimated by shadowstats.com to reflect an annual contraction of about
2.3% for the 3rd quarter 2007.  As of the end of October 2007, whereas
the official estimate of the Consumer Price Index inflation for core
inflation was estimated to be 2.2%.  Shadowstats estimates consumer
real price inflation as of the end of October was about 11% annually.

Gimmicked BLS Statistics

Finally, perhaps the most laughable or tragic, depending on one’s mood,
was the November Jobs Report which was, according to Williams, was
heavily manipulated to bring in the reported $94,000 gain in non-farm
payrolls as opposed to an outright contraction.  The report again, was
“statistically indistinguishable from a monthly contraction” according
to Williams.

The Bureau of Labor Statistics appears to be using a variety of
gimmicks to come up with the manipulated figures.  Perhaps the most
notorious (for lack of a better word) is the net “birth-death”
adjustment whereby the BLS estimates gains or losses of jobs due to the
creation or destruction of businesses.  Noteworthy from the November,
2007 report was an estimated 14,000 new “construction” jobs added and
25,000 new “financial activities” jobs added in October, 2007.

But how could this be?  In October, 2007 Capital Spending was
decreasing, the housing market had increasing numbers of unsold homes,
the economy was slowing and the Financial Services Industry had been
hit hard by the credit freeze-up from August, 2007 from which it has
still not recovered.  The BLS expects us to believe that nearly 40,000
jobs were added in these two sectors alone in the month of October?

III  SYSTEMIC RISKS

On the Brink of a Cartel-Facilitated Systemic Meltdown

The August, 2007 credit freeze-up and the Fed’s bailouts of August 17
and September 18, 2007 illustrate just how close to the brink we are.

“The Fed’s September 18, 2007 rate cuts temporarily bailed out their
buddies on Wall Street, while simultaneously inviting hyperinflation,
and sacrificing the U.S. Dollar, the long-term health of the U.S.
economy, and the best interests of taxpaying middle-class American
citizens and future generations of Americans.”  Deepcaster, September
18, 2007

“...(the rate cuts are) ..a temporary bandage…not going to solve our
problem…I think we’ll have more problems in the stock market this year
and 2008... :  Jim Rogers, September 18, 2007

“Nothing that has been done will correct...the economic problems…because
the real problem is a trembling $20 trillion mountain of
Over-The-Counter...derivatives... think about the Weimar Republic...”
Jim Sinclair, September 18, 2007.

A major cause of the liquidity crisis is the period of excessively low
interest rates created by the Greenspan Fed after the tech-wreck of
2000.  This encouraged a proliferation of heavily leveraged
“commercial” paper as well as excessive borrowing by sub-prime
borrowers and others and risky lending by sub-prime lenders,
particularly via adjustable rate mortgages (“ARMS”).  This
proliferation of ARMS was sure to cause problems when any financial
bumps in the road were encountered, and/or when the ARMS interest rates
reset to higher levels and the sub-prime borrowers were unable to pay.

As of October, 2007, ARMS are resetting now at about $40 billion/month
and will continue at this rate into 2008.  The resulting growing
mountain of risky and imploding debt creates not merely increasing
default risk in the real estate sector, but also creates greater
systemic risk.

In sum, excessive and risky mortgage lenders encouraged by low rates
and borrower standards has predictably led to increased defaults which
has led to heightened perception of risk in CMOS (see below) resulting
in the markets “seizing up” in August, 2007.

And, of course, the Greenspan/Bernanke crew at The Fed surely should
have known this -- known in 2001 that, via their rate cuts, that they
were setting up a situation which would have resulted in an excessive
and risky lending “bubble”, resulting inevitably in large increases in
defaults, and that this would result in title to valuable properties
passing, dirt cheap, to the Central Banks client banks, just as they
did in the Great Depression of the 1930’s.

The Fed’s “Cure” Worsens the Disease

However, as a “temporary cure” on August 17, 2007, The Fed decreased
the discount rate (whereby banks can borrow directly from The Fed) by
½%.  The result was that borrowings (!) by banks (so they could do more
lending) jumped from a daily average of $6 million to $1.3 billion in
the two weeks ended August 29, 2007.  A staggering 21,600% increase.

The key point is The Fed administered a cure (enabling even more debt)
which, in the long run, worsens the “excessive lending disease.”

The Fed’s discount rate cut (i.e. enabling more borrowed liquidity)
“cure” is simply creating more of what got us into this terrible
situation in the first place, which was excessive borrowed liquidity.
Coupled with non-transparency (e.g. hiding M3 – Where is the
transparency, Ben?) and excessive monetary printing, the liquidity
increases and easy credit have led to, among other things, the moral
hazard of lenders lending recklessly to borrowers who should not be
borrowing to being with.

Even so, its “Solution” of allowing even larger injections of “borrowed
liquidity” as opposed to “earned liquidity” (which is healthy liquidity
achieved through savings out of earnings) temporarily calmed the
markets.  Yet it is increased “borrowed liquidity” which worsens mid
and long-term systemic risks.

For this crucial “borrowed vs. earned” liquidity distinction we are
indebted to Dr. Kurt Richebacher (R.I.P.) whose sensible prescriptions
have been utterly disregarded by the U.S. Federal Reserve and which
prescriptions, had they been followed, would have resulted in our not
being in today’s liquidity and derivatives crises.  [May the
straight-speaking, realistic and erudite Dr. Richebacher rest in
peace.  He passed away in early August, 2007.]

Dr. Richebacher explains why credit (i.e. debt) financing, or “borrowed
liquidity” as he calls it, is so pernicious:

	“Available liquidity is, of course, most important.
Nevertheless, we find it most important to distinguish, first of all,
between two different sources of liquidity:  borrowed and earned
liquidity.  Present excess liquidity in the United States and several
other countries is of a peculiar kind.

	It does not come, as would be normal, from unspent current
income – in other words, from saving.  In the absence of any new
savings, all the liquidity creation occurring in the United States is
borrowed liquidity.  Generally, borrowing against rising asset prices
is in diametric contrast to earned liquidity from savings out of
current income.  By definition, this is liquidity from credit inflation.

	One thing is certain about borrowed liquidity:  it depends on
rising asset prices.  Once asset prices stop rising (see current U.S.
housing prices) this liquidity suddenly evaporates.  Moreover, ever
larger credit injections are needed to keep asset inflation - - like
any other inflation - - rising.  Nevertheless, there inevitably comes a
point in which asset prices, for one reason or another, refuse to rise
further and then the big selling without buyers begins.  Never before
in history has there been an exception from this disastrous end of
asset inflation.”

ARM resets and consequent defaults and foreclosures are far from over.
Indeed, ARM resets will continue at a $4 billion/month pace until well
into 2008.  By correctly anticipating the foregoing, Deepcaster was
able to recommend that its subscribers take profit on two “short”
positions in August, 2007.

In sum, the August freeze-up will be the of several credit market
freeze-ups due to defaulting borrowers and reckless lenders, magnified
by the leverage of $20 trillion plus of OTC Derivatives and grossly
excessive “borrowed liquidity.”

Ominously, also, on the very day of the September Fed rates decreases
were announced, the Treasury International Capital Flows (“TIC”) data
for July, 2007 was released.

The bad news was that foreign capital flows into the United States hit
their lowest levels since December, 2006, when one considers only the
data for long-term securities.  When short-term and long-term
securities are considered together, the Treasury Inflows jumped to over
$100 billion -- more than enough to cover the $60 plus billion trade
gap for July.

The key point is that while foreigners are still willing to support the
United States’ overspending and over-indebtedness they are moving to
shorter dated securities.  Thereby, the data is not so subtly telling
us that the days of foreigners carelessly financing the U.S. debt are
limited.  Acute analyst Dan Norcini concluded from the economic and TIC
data that “…the Fed will burn the Dollar down, rather than let the U.S.
Equity Market collapse.”  Apparently so.

Thus it is important to conduct a reality check on how these Fed
policies affect American workers.  Surely they are a primary cause of
wage levels continuing to deteriorate.  Real median income of full-time
year-round workers fell from $44,600 in 2002 to $42,250 in 2006 (for
males) and from $33,800 in 2002 to $32,500 in 2006 (for females)**.

One final point:  as detailed in the section above “Significant and
Increasing Systemic Threats”, the Fed’s December 12, 2007 liquidity
injection represents the creation of more unhealthy and destabilizing
borrowed liquidity!

Williams' excellent analysis raises a further question which Williams
does not address, but which Deepcaster shall address.  When the
resulting (and nearly inevitable) crash appears near, what "cover" or
"incident" might the government and/or Fed leaders then in power,
create via their “communications policy” to deflect the public’s
justifiable rage away from the numbers manufacturers and manipulators
themselves, who caused the crisis in the first place?  In the meantime
we must all cope with The Interventional Regime.

So it should not be surprising that Deepcaster gives considerable
weight to the realities of market and data manipulation factors in
selecting its portfolio recommendations, to maximize the opportunity
for preserving and enhancing wealth.

Deepcaster’s specific Forecasts for Gold, Crude Oil, Equities and the
U.S. Dollar, as well as a listing of profitable recommendations, can be
found at www.deepcaster.com, click on “Latest Letter” and Alerts Cache.”

The Cartel End Game

Deepcaster agrees with Williams that we are looking at an international
crisis of unprecedented proportion.  It is also clear to Deepcaster
that those who run the Fed-led Cartel cannot be so stupid as to not
know where their hyperinflation of the money supply (according to
shadowstats.com M3, as of October, 2007, was increasing at an annual
rate of 15% which is a five year doubling time!), and other policies
are leading us.

Thus if The Cartel leaders know what they are doing what is their End
Game?

The only rational conclusion to draw is that they expect (and may even
be pushing) the Dollar to go into further and further decline, and to
continue their other policies, until there is a Systemic Crisis.  (Very
short-term, Deepcaster earlier Forecast the U.S. Dollar to “bounce”
into the 1st Quarter of 2008 -- a Forecast that is being fulfilled --
but that does not affect the fact that The Primary Trend for the U.S.
Dollar is down.)

And we expect that systemic crisis will likely lead The Fed-led Cartel
to implement the final and dramatic stage of its apparent “End Game”
plan which Deepcaster describes in detail in his June, 2007 Letter
posted at http://www.deepcaster.com  (path:  Latest Letter>Archives).
Consult Deepcaster’s Letter for details, including the backup
documentation.

The “Real Numbers” as of November, 2007

That the U.S. economy is headed in the direction of stagflation is
pretty clear from the shadowstats.com November, 2007 statistics.
According to shadowstats.com, Real Consumer Price Inflation is running
in excess of 11% a year and, as we commented above, the money supply
figure (M3) is increasing at 15% per year, or a doubling time of about
5 years.  Moreover, GDP growth is a negative number.  It would appear
that The Cartel-charted-course (which we describe in our June Letter)
toward a hyperinflationary Recession/Depression as a catalyst for a
painful transition into the apparent “End Game”, is on track.

To be sure, this course involving an explosion of the money supply
(“money from helicopters” to use the phrase associated with Chairman
Bernanke) and the massive and increasing use of derivatives to
intervene in a wide variety of markets is fraught with danger.
Deepcaster, Warren Buffet and Jim Sinclair have all pointed out the
dangers.  Indeed, Sinclair has aptly described the financial system as
sitting on a “$20 trillion trembling mountain of derivatives…think
Weimar Republic.”  Unfortunately Jim Sinclair and Warren Buffet are
correct.

In sum, with The Cartel’s increasing use of derivatives comes an
increasing risk of a financial meltdown.  We had such a harbinger of
one in August with the credit market freeze up of August, 2007 but The
Cartel was able to rescue its major International Bank and Wall Street
clients from this one.

So far The Cartel has staved off a systemic meltdown.  But, alas, it
may well not always be so.

Deepcaster
December 14, 2007

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www.deepcaster.com
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