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Manipulation, Manipulation, Manipulation

(Alpheus , October 2007)


This analysis is a follow-up on last month's warning about the precarious state of the US economy. The anticipated big correction of the New York Stock Market did not happen. A closer look at the instruments with which the powers that be can manipulate the Stock Market and the economy in general might reveal some reasons why the overall correction has not yet occurred. So far in my research I can identify three manipulative strategies. The first strategy-the setting of interest rates--is quite open and is deployed by the Federal Reserve System. The two other strategies are more hidden. A semi-secret working group created by Executive order deploys the second strategy. This group of high US Government officials has the task to "maintaining investor confidence" in US financial markets. It is actively intervening in the financial markets, but doesn't leave any official trace of how and when it is doing what. The third strategy has to do with the price of gold and is deployed, seemingly in concert, by the major central banks of the industrialized world. We'll have a closer look at all three of them.

At the end you'll find some of the revealing articles used as sources on the strategies discussed; an interview with one of the architects of derivatives explaining how dangerous they actually are; and a report to the IMF on the sub-prime mess by a prominent economist in which he stated that "we have created essentially in part a little bit of a monster." But first, let's set the mood with some recent quotes and headlines:

"The No. 2 U.S. bank said profit plummeted 32 percent as it took large write-downs for leveraged and other loans and recorded losses from structured products, including mortgage debt. The drop in earnings exceeded analysts' expectations and followed a huge profit slide at No. 1 U.S. bank Citigroup Inc on Monday" (Reuters, 10/18/07)

"Chancellor's warning to homeowners as IMF predicts devastating crash" (Daily Mail, UK, 10/18/07)

"Japan and China led a record withdrawal of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields. Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments. "These numbers are absolutely stunning," said Marc Ostwald, an economist at Insinger de Beaufort. (Telegraph, UK, 10/18/07)

The Fed's Short-term Interest Rate

Fortunately, or not, the anticipated crash for last September 21 did not occur. The Federal Reserve System pre-emptively bailed out the stressed markets on September 18 by lowering its short-term interest rate by 0.5% to 4.75%. This was apparently good news to the Wall Street speculators, who subsequently drove up the Dow Jones Index with a whopping 336 points. On a micro-economic level this will be good for those holding Adjustable Rate Mortgages, because their new mortgage rates will be reset to a level that will be less high compared with the level if the Fed rate had not lowered its rate. This will mean less foreclosures and less stress for the banks holding those loans. Therefore it will take a little pressure out of the sub-prime mortgage mess, but it is far from a solution. The Bank of England and the European Central Bank did not follow and stayed put in their rates. Meanwhile the banks had to come clean in their quarterly reporting about their levels of exposure to the sub-prime mess and some of the big ones reported massive write-offs. And this is only the beginning.

Some analysts make the case that the intervention by the Fed boils down to a sacrifice of the Dollar in order to temporarily bail out the big banks and speculators. The effect will be inflation, which is and was designed to be, a more or less hidden tax on the common people. Most analysts agree that the best gage of inflation is the volume of the total money supply in circulation, the one that is named M3. The Fed withdrew reporting on its volume, but some smart analysts deduced the number from combining all kinds of indicators and there seems to be a consensus that the M3 is at a rate of annual growth of 10-13%. If you subtract the actual rate of growth of the GNP (ca. 2%) you will get the actual rate of inflation for those making transactions in dollars. It is not that the Euro, gold and oil have become more expensive. It is more correct to see that the value of the dollar has depreciated through the real rate of inflation.

Parasitic oligarchic finance-capitalists are just rigging the market through their lackeys at the Fed and Congress, while the productive free-market entrepreneurs and the common man are holding the bag and are seemingly powerless to stop this scheme of immoral, though legalized, wealth-transfer.

The Plunge Protection Team

Besides rigging the market in an open way by the Fed through interest setting and providing inflationary credit and liquidity, the financial-monetary complex developed other ways to manipulate the markets. One of the most powerful bodies that intervenes is the so-called Plunge Protection Team (PPT), a somewhat sensationalized name for the President's Working Group on Financial Markets established by Executive Order in early 1988 by President Reagan in the wake of the October 1987 stock market crash. The team consists of the heads of the US Treasury, Federal Reserve System, Securities and Exchange Commission and the Commodity Futures Trading Commission. Quite a powerful lot. One of their tasks is "maintaining investor confidence" in US financial markets. Apparently their preferred tool when faced with an above 10% declining stock market is to buy both stocks and stock index futures without telling anyone. These futures are a derivative based on the Dow Jones Index and are basically bets on the up or down movement of the DJI. Monitoring the trades (bets) in that market will give analysts an indicator of investors' mood regarding the long-term performance of the DJI. By putting an inordinate amount of bets on an upward trend the PPT creates an artificial sense of long-term optimism in the stock market and thereby counters a downward trend. This scenario was first, through improvisation, applied on the Tuesday after Black Monday, October 23 1987. Its success in preventing a further meltdown was the basis for incorporating the tool into the arsenal of the PPT. Some analysts now think that the tool is not only used when larger declines threaten to happen like in the falls of 1989, 1997 and 2001, but is now used to even prevent any meaningful correction however small. This intervention, combined with the ever-growing amount of available liquidity, is seen as the major factor in the ongoing and record setting climb of the Dow.
But, as investors start becoming aware of this semi-secret factor and adjust their calculations accordingly, its efficiency is diminishing and the PPT will be less powerful in preventing the long-overdue correction. In the end the 'hidden hand' of the market will always trump the 'secret hand' of the manipulators. The question will be with what collateral damage this correction will be accompanied and what the people will do to punish the culprits and how, through Congress, they will reform the system.

The Gold Price

The third way the international financial-monetary complex intervenes in the financial markets is the way they suppress the gold price and through that mechanism indirectly help to keep investor's confidence in the whole fiat-money scheme. The way it is done is straightforward and simple: Central Banks throughout the world seemingly in concert keep the supply of gold on the market high by selling off and lending out its gold reserves with the obvious effect that the price will be artificially low. According to an analyst working for a big French bank with a highly rated research department in a report called "historic" and having "enormous consequences, " a low gold price has served to:

- calm financial markets during several periods of financial crisis in the last decade (e.g. Japan, Asian currency crisis, Russia and LTCM);
- improve the perception of US monetary policy; a low gold price suggests a benign inflation outlook, keeps US interest rates low and is supportive of a stronger US dollar;
- prevent substantial losses in the gold derivatives market (notably from the gold "carry trade").

So, the price of gold is not subject to market forces alone, but is suppressed to manage the overall system by managing how the overall global financial system and its parts are perceived. The important thing here to realize is that the underlying assumption of this manipulation of the gold price is the historical fact that gold has always been a stable means for protecting ones wealth against inflation and economic crises, and is perceived to be such in the near and far future as well. So, if one runs a financial system based on fractional reserve banking and creating paper and electronic money out of thin air, and if one wants this system not to be encumbered by the discipline that a monetary policy tied to gold might provide, then, by sheer economic logic, one has to diminish, manipulate and black-ball the status of its monetary competitor, gold. Or, in the words of another analyst, if "gold goes higher, or so the thinking runs, then the world's confidence in the confidence-trick of paper money backed by government promises alone might just collapse." And this is the situation we are ever so little by little getting closer to.

The latest crises has been a boon for gold as people's economic instincts bring them back to the precious yellow metal and the Central Banks are not willing to further dump their gold reserves. The gold price is now freeing itself from the 'secret hand' and its value is increasingly determined by the 'hidden hand' of the free market, as should be. How far the price will go up is of course hard to determine. Prices of $1,000 to $2,000 per ounce are often quoted now. Much depends on to what epic proportions the now slowly developing meltdown will go and to what epic proportions there might be an economic awakening by the masses and its natural leaders from its ignorance of the enormous monetary con-game we permitted to be taken in by.


First it has to be noted that the common factor in the above three strategies is the Federal Reserve. In the first strategy it is the sole power in setting the interest rates. In the second strategy it coordinates with the US Treasury and the SEC to manipulate the Stock Market. In the third strategy it coordinates with other central banks to influence the price of gold. Therefore, again, this institute has to be investigated thoroughly and reformed according to the findings and free market principles. Secondly, the more these strategies become known, the less they will be effective. Big investors might go along with these interventions and even surreptitiously provide funds to make them work, but at the same time they will have to position themselves such that they will survive any anticipated correction and will rather use their funds to prepare for that then to help prop up a manipulative financial policy that is doomed. Smaller investors just have to wizen up, get out of bubbles and incorporate these manipulations into their calculations, or loose their funds. The net effect will be that, however sophisticatedly manipulated, the market always will catch up, though the corrections might come this time like an earthquake with lots of damage and misery in its wake. Therefore, lastly, the risks to individual households is still enormous and sound preparation is still of great importance.
Meanwhile there is still the possibility, to be investigated further, that the US Government might temporarily bail out the system with tax payers' money and that it might get some help from China with its amassed fortunes, but then will have to pay with some geopolitical quid pro quos. China has its own vulnerabilities in the economic equation, for its economy is dependent on American consumption, it has an increasingly restless population asking for more justice and freedom, and the Chinese Government wants to showcase its economically transformed society during the coming Olympic Games. At least till then, some opine, they will help with under cover monetary interventions.

Articles and Sources

Article: No name

Author: Robert McHugh, Ph.D

Source: McHugh's weekend Market Newsletter, No. 679 (October 5, 2007)

URL: https://www.technicalindicatorindex.com (get free 30 day subscription)

Excerpt: The appearance of a mega rally is not suggestive that this economy is about to prosper. Hardly. This coming mega-rally is artificial, a hyperinflationary induced rally, where trillions of dollars of fiat currency are printed out of thin air and find themselves being used to bid stock prices higher. Wall Street wins, but that is about it. The consequence is a massive increase in the cost of living which will make these coming stock market gains at best a breakeven for many astute investors, with many uninvested middle income folks in danger of finding themselves headed into lower income status. Inflation is the great wealth thief, and it is coming with a vengeance, and on purpose, by the Master Planners.


Article: Rigging the Market; the secret maneuverings of the Plunge Protection Team

Author: By Mike Whitney

Source: Information Clearing House, 09/14/06

URL: http://www.informationclearinghouse.info/article14979.htm

Excerpt: ….. "deregulation" has created an economic monster which requires more and more tinkering from the stewards of the system. Without the stopgaps provided by the Plunge Protection Team and the actions of similar organizations which forestall business bankruptcies, (bailouts) the whole over-leveraged system would quickly crash and burn. The irony is that the same corporate kingpins and banking moguls who've benefited the most from removing the rules for prudent investment are now trying to create a safety net for when it inevitably begins to unravel.


Article: The Plunge Protection Team Intervention Risk Indicator

Author: Robert McHugh, Ph.D.

Source: March 6, 2006

URL: http://www.financialsense.com/fsu/

Excerpt: For the past several years, we have seen repeated "out of the blue" short-covering rallies just about the time a decline seems to be gaining some momentum. Our suspicion has been that the "Working Group" established by law in 1988 to buy markets should declines get out of control has become far more interventionist than was originally intended under the law. This group has since been dubbed the Plunge Protection Team. There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy markets when they decide markets need to be bought, including equity markets. ….

It's sad we have to anticipate this central planning intervention into what used to be free markets, but if we can be prepared, then we can still trade both the ups and the downs profitably. Unfortunately, we must now deal with the metamorphosing of capitalism into corporatist fascism - which simply means, what is good for corporations is right, at the expense of our nation's founding principles and individual rights.


Article: How Central Bankers Control The Gold Price

Author: Adrian Ash

Source: BullionVault.com, October 1, 2007

URL: http://www.financialsense.com/fsu/

Excerpt: Why suppress gold? If gold goes higher, or so the thinking runs, then the world's confidence in the confidence-trick of paper money backed by government promises alone might just collapse. That was the threat in the late 1970s. Given last month's run on Northern Rock in the United Kingdom...and now the collapse of NetBank in the US...that might come to be seen as a possible threat again today.


Article: Remonetisation of gold: Start hoarding

Author: Paul Mylchreest

Source: Crédit Agricole Cheuvreux International Ltd.

URL: http://www.gata.org/files/CheuvreuxGoldReport.pdf

Excerpt: Central banks have loaned out 10,000-15,000 tonnes of their gold reserves, between a third and a half of the reported total. Gold loaned by central banks to bullion banks or their counterparties is immediately sold into the physical market for conversion into jewellery, etc. …

Since the mid-1990s, much of this gold lending has been aimed at suppressing the gold price. A low gold price has served to:

- calm financial markets during several periods of financial crisis in the last decade (e.g. Japan, Asian currency
crisis, Russia and LTCM);
- improve the perception of US monetary policy; a low gold price suggests a benign inflation outlook, keeps US interest rates low and is supportive of a stronger US dollar;
- prevent substantial losses in the gold derivatives market (notably from the gold "carry trade").

The leader in the fight to expose the suppression of the gold price is the Gold Anti-Trust Action Committee (GATA). GATA was established in 1999 in the US, but is little known outside the world of "gold bugs". Despite official denials, there is much evidence to back the gold price suppression claims. Support for GATA has come from senior Russian officials. Our analysis confirms the view that central banks have loaned out 10,000-15,000 tonnes of gold, ….


Article: Gold at $2,000 Per Ounce: Forecast by France's Largest Bank's Equity Brokerage

Author: n.a.

Source: Gold Investments, Dublin, Ireland

URL: http://www.gold-eagle.com/editorials_05/goldinv020606.html

Excerpt: Cheuvreux is the equity brokerage house of Credit Agricole. They distributed a 56-page report during the week endorsing the findings of the Gold Anti-Trust Action Committee (GATA) that the price of gold has been surreptitiously suppressed by western central banks and that those banks do not have the gold they claim to have.


Article: The Risk of a U.S. Hard Landing and Implications for the Global Economy and Financial Markets

Author: Nouriel Roubini

Source: International Monetary Fund, September 13, 2007

URL: http://www.imf.org/external/np/tr/2007/tr070913.htm

Excerpt: So we have created essentially in part a little bit of a monster. Of course we all know the benefits of financial globalization and securitization and all those things, I am not saying that I am against them. But you've created a financial system in which if you take out mortgages, the mortgage originator does not care: he or she maximizes volume and [gets higher] income. Then the bank originates the stuff and packages it in MBSs and then they get the fee and they shove it to the investment banks. And the investment banks tranch it in all the different tranches of CDO and then shove it to their final investors and the rating agencies give their blessings. You would think that the final investor is the one who has to provide the market discipline but after four stages you do not even know what it is, and after CDOs you have CDOs of CDOs, and CDOs of CDOs of CDOs. ….
But you have a whole system in which essentially people were making income not from bearing the credit risk but essentially transferring it somewhere else and getting the fees, and in most of the financial system that is how it gets its profit these days, so there is a fundamental kind of problem. On top of that the regulators [were] asleep at the wheel and let this stuff occur without any kind of constraint.
So there is this element of what are the sizes of the losses and all the rest. Then there is the other element that creates this uncertainty of who has the losses is what Bill Gross referred to as `Where's Waldo' problem, or, as I refer to it, as where the next skeleton is going to pop out or walking on a minefield and so on.


Article: No title

Author: Robert McHugh, Ph.D.

Source: McHugh's weekend Market Newsletter, No 667 (September 18)

URL: https://www.technicalindicatorindex.com (get free 30 day subscription)

Excerpt: It is official: The decision has been made to sacrifice the U.S. Dollar in favor of hyper-inflated markets. The Fed and PPT [Plunge Protection Team] have spoken. The Fed dropped short-term interest rates half a percent to a Fed Funds target of 4.75 percent, and the Dow Industrials and all the major indices followed with a galloping up day, the Industrials rising 335.97 points to 13,739.39, the largest single day price move in four years. The Fed has chosen to boost Bond, Stock, and Real Estate markets at the expense of the Dollar. Winners also include Gold, Silver, and the HUI Amex Gold Bugs index. This scenario has transpired precisely as we suggested it would back in January of this year. A middle of the year sharp stock market decline, followed by a sacrifice of the Dollar, resultant hyperinflation, then a mega-rally in all major markets, including precious metals and the HUI.


Article: Are we headed for an epic bear market?

Author: Jon Markman

Source: MSN Money

URL: http://articles.moneycentral.msn.com/Investing/

Excerpt: Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.



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