This article has been in production now for
2 years, it has been that long since I first started researching our
financial system – and ever since then I’ve been promising myself
that I would get it all down on paper. The impetus for my research
came from the bursting of the Internet bubble – an event that
radically changed my life. As an Internet company CEO of 6 years
standing (having founded and grown my own company) my company, the
employees, shareholders, customers, creditors and my family were all
ultimately impacted by the dramatic implosion of first the dot.com
segment and then the entire technology industry.
As I write this the market has just
plummeted (nearly 400 points today alone), people are starting to
panic, Johnson and Johnson has just been added to the list of
scandals and over six trillion dollars has been wiped out. Several
family members have lost more than half of their retirement funds
and life savings and many friends are wondering what has hit them,
how, why and where from.
Now I am no financial analyst, but I’m no
dummy either. As a CEO of a 40-person company that grew from nothing
- and actually produced revenue and created value for its clients, I
became pretty good at understanding trends, people, events and the
truth. My entire career has been in financial services and high
technology companies, so I know a thing or two about investment
banks, venture capitalists, boards of directors, shareholder value
and most importantly business ethics.
On the path to becoming a CEO I witnessed a
number of interesting business events, and surmised quite a bit
about real events behind what was told to the public in publicly
traded companies. Like you, I’ve known of the deep-rooted corruption
within the political system for most of my adult life – and
understood that corporations were fueling the perversity with their
campaign contributions.
But like you I was really naïve about the
depth of the depravity, the number of people involved, the
propensity for situational ethics and just how easily the highest
paid corporate leaders in this great country could get away with
crimes that would send the likes of you and I to the big house for
many years. Once I started my research it really surprised me just
how easy it was to discover how we got to where we are today, the
information is all out there for you to read and research for
yourself - you just have to be prepared to get your head around the
grim science of economics, and to not be shocked and surprised at
just how manipulated you have been!
This article will hopefully serve to enlighten you to the point
that you feel that your own independent investigation of the truth
is warranted – perhaps if enough of us get educated on these matters
we may in some small way mitigate for the huge mess that we are
now in? But that would be no small task, as you will discover as
you read.
God Bless America, and God Bless the World!
Sincerely, Richard J. Lancaster
Download the entire report in Acrobat format (1.3 megabytes - be patient! It takes a bit of time!)
“Science without religion is lame, religion
without science is blind.'
—Albert Einstein
The Science of the
DOW Jones Industrial Average!
In January 1971 the Dow was at 760, in July
of 2002 the index was at approximately 8,000, having peaked at over
11,000 in 1999. The rise of the Dow from ’71 to ’99 was over 1200% -
while GDP over the same period rose 150% (see below for more details
on GDP, etc.), Industrial Production rose approximately 150% and the
monetary supply (MZM) rose approximately 600%. Clearly the rise of
the market had more to do with loose monetary policy and “irrational
exuberance” than the overall increase in production of the
nation!
Eventually the DOW will return to somewhere
close to the red line (see below) – its natural level given the real
state of the US economy. We are starting to see now that there is no
“new economic miracle,” just a huge bubble in equity and asset
values. The bubble was inflated deliberately through pumping up the
monetary supply (making “money/debt” cheap – as has been done many
times in the past) and then priming the pump of the corporate
controlled media with the story of an economic miracle which in turn
got the people spending feely and raising their debt levels
rapidly.
By giving Americans the feeling that they
were truly enjoying a new-found wealth (even though overall economic
performance did not prove this out) the market manipulators have
been able to suck an unprecedented amount of our savings in to the
markets and therefore at risk for the first time. Collectively we
have leveraged ourselves way beyond what we know is prudent. Our
propensity to “follow the experts” wherever they lead us is about to
cost us a large part of our retirement funds, college funds, and for
many pensioners their day-to-day income. This is a travesty, it is
the biggest financial fraud of all time and its roots grow long and
deep under the foundation of the privately owned and controlled
Federal Reserve system and its major shareholding banks.
“An infectious greed seemed to grip
much of our business community."
—
Alan Greenspan(Yes indeed Alan! Ed.)
The DOW for the past
100 years in terms of the Percentage of Growth per Decade:
The above chart helps to depict the
unusually long and high rise of the Dow over the last two decades.
Unfortunately we are about to see an adjustment that will show a
significant downturn towards historical valuations during
recessions. Typically over the 200-year history of US equities
markets the P/E ratio through a recession has been between 5 and 10
– currently the P/E is still around 40! Expect to see something akin
to the drop in the NASDAQ (which isn’t over yet) happening to the
DOW soon.
Bob Chapman, of International Forecaster fame,
recently had this to say regarding the DOW, “When the DOW cracks
8200 the average investor will finally recognize that we have just
had a bear market rally and that there is no recovery. We expect
that break will mark the beginning of capitulation, which will last
for some time.”
It turns out that you’d better have the “DOW
Religion” if you want to hang on for the long haul! The road ahead
looks a little more than bumpy, it’s more like cratered with the
implosions of WorldCom’s, Kmart’s, Enron’s, Global Crossing’s, et
al. Attempts by the Fed to remedy this situation are for naught. You
can’t cut interest rates much lower than they are already! As I
write this, the DOW closed around 8000 and is heading south daily –
with some wild up ticks occasionally just to keep the herd guessing!
The smell of panic is starting to fill my
nostrils as I see that there are the first signs of even the
mainstream media starting to speak out about the potential of there
not being a “recovery.” More and more articles are being written
regarding the appalling state of affairs, and some even dare to
mention that we may be heading towards a deeper recession or even a
depression. Of course the powers that be need to get all of their
upside out of harms way before the real panic starts – so the
corporate owned financial media is not about to start showing
historical evidence that a crash is imminent quite yet – but the
inevitable march of the markets back towards something resembling
real value is now underway and is unstoppable.
“Let me eat
cake.” — Martha Stewart(OK, I made that
up! Ed)
The S&P 500
Summit and Descent
Just take a look at the rise of the S&P
since the early nineties immediately below, of course this was
attributed to the “new economy” and a commensurate increase in GDP
and Industrial Production, which clearly were not commensurate with this markets rise,
and far lag the markets in terms of real increases. As you can see
there is some way for the S&P to fall before it reaches its real
value, and gets back in line with where it should be historically.
No amount of manipulation, whether it be inflating earnings,
receiving generous tax kickbacks by the government, or falsifying
business deals with offshore entities, is going to make a difference
at this point. The dye is cast, the market will return to its
natural place – and potentially will go lower than it should as an
adverse reaction to all of the fraud drives most of us to never want
to invest in another public company again!
The S&P 500 P/E Ratio since 1971
(Below)
Once you’ve consumed the rise of the S&P
500 in real terms, then take a look at the rise of the S&P P/E
ratio below, and the enormous spike in the most recent years as
earnings have fallen off dramatically. The P/E has topped at around
45. Historically, as you can see from the chart that shows the
recessions of the 70’s, 80’s and 90’s, the market has traded in the
5-10 P/E range through “official” recessions. This evidence makes
the current advice we all receive from the financial media and
financial “experts” to be a huge anomaly. How can these journeyman
experts not see what is so apparent – the S&P is massively
overvalued based on any metric you care to measure! Simply put, what
on earth can justify this current
situation?
Either Earnings
have to rebound at record levels or the Price of the stock has to come down to
reflect the lack of earnings.
Which do you think it will be??
I found these next
two charts fascinating and somewhat predictive of pending events.
Look at the rise of the S&P since 1941 on the left, and then the
demise of the Nikkei since 1980 on the right. The Nikkei has
plummeted from a high of nearly 40,000 to a low of nearly 10,000.
The S&P has already come down 35%, but based on the performance
of the Nikkei in what would appear to be better economic
circumstances in Japan during the 80’s and 90’s than what appear to
be the case in the US in the 00’s, then you can get a visceral feel
for where we may be headed? I know its ugly, but sometimes you have
to clean up the mess after the party is over!
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As I was trying to finish up this section on
the S&P a new piece of evidence came to light. Clive Maund, an
English technical analyst and trader living in Bavaria, published
the following chart in his short and prescient article “The Great
Crash of 2002.” Clicking on the chart will take you to his
essay. Basically Clive is calling out the classic Head and Shoulders
Reversal that is underway with the S&P, and where the likely
sell off will end. I agree with his analysis!
"Indeed I tremble for my country when I reflect
that God is just."
—Thomas
Jefferson
The NASDAQ Crash and
Aftermath
On February 8, 1971, the Nasdaq began
trading for the very first time. As you can see (below) the market
trudged along at a reasonable clip, staying slightly ahead of
inflation and providing a pretty good annualized return on
investment to the more tech-inclined investor. Then the early
nineties happened and things got out of control! Never before in the
history of financial markets has there ever been a bull so strong or
a crash so deep as has been seen with the Nasdaq through the course
of the last decade or so.
At its peak in early 2000, the Nasdaq had a
market cap of more than $6 trillion. Today, its value has crashed to
less than $2 trillion, and that is still $1 trillion too much!
Surely with the resources of the free worlds central banks the
public could have been informed of the likelihood that they were
witnessing one of the biggest bubbles of all time and that a crash
was inevitable? Instead what we were Fed (so to speak) was
“irrational exuberance” – a diversion from the real reason -
incredibly loose monetary management by the Fed that led the people
to believe they could all be rich by throwing everything they had at
the Nasdaq. Now, we all know that ignorance is no defense in
the eyes of the law, so the people have to take their lumps for
being manipulated. But what about the manipulators? What price
should they pay for destroying the wealth of a nation, and pocketing
billions for themselves in the process?
And what are we going to do to return this
nation, and the world, back to a sound monetary system? That dear
reader is the $150 Trillion question ($150 Trillion is the current
size of the Derivative Monster that I will address later in the
essay). The Nasdaq lesson is evidence for all doubters that we have
already lived through a massive crash, now if you doubt that lesson
take another look at the fundamentals and you will see that the DOW
and S&P are analogous to the Nasdaq and will ultimately (and
soon I believe) suffer the same fate – if they aren’t already.
“Why then, is
gold the unmentionable, four letter word of economics? Why,
even today, does serious mention of gold brand the advocate in many
circles as an ignoramus, a crank? The answer is threefold: A
misunderstanding of the role of money; a misreading of history; and
finally, visceral revulsion to the notion that a metal can do a
better job of guiding monetary policy than a gaggle of finance
ministers, central bankers and well-degreed economists.”
—Malcolm
Forbes
The Price of
Gold, the “Archaic Relic,” since 1971
On August 15, 1971, humanity
entered the first era in its 5,000 year recorded history in which no
circulating paper anywhere was redeemable in gold, by anyone. From
1933 until 1974 it was even illegal for a U.S. citizen to own gold
bullion! Gold was confiscated as the United States was bankrupt and
the citizens’ gold was needed in order to bail out the US Government
that was in debt to the Federal Reserve. President Richard Nixon
closed the “gold window” in 1971, an action which broke the last tie
between gold and circulating currency, resulting in our modern
financial system that is called a “floating currency” (or “fiat”)
system. An ounce of gold in 1971 was priced at around $38 and today
is nearly 10 times that at over $300, having peaked at over $800 in
1980-81.
President Nixonappoints Alan Greenspan as Chairman of the Council of Economic Advisors, July 1974 (Picture courtesy of
www.nixonfoundation.com)
Gold is as good as cash, liquid but
non-interest-bearing. Through 200 years of American history,
equities appreciated at a compound annual rate of over 8%, bonds at
roughly 5% and gold at over 1%. In the past decade all of those
historical trends have become temporarily irrelevant as we are told
by the US government, the Federal Reserve, Wall Street and
institutional economists that the entire historical context is
meaningless as we are in this “New Economy.”
There is a massive controversy raging within
the gold industry, many insiders believe the gold mining industry
has been manipulated by the financial community, and that the price
of gold (POG) has been kept artificially low through the strategic
buying and selling of gold futures/swaps/certificates by the worlds
dominant central banks, the Bank of International Settlements, gold
bullion banks, the Federal Reserve, US Treasury and some of the
largest mining companies who are a part of this cabal.
The lowering of the POG is an attempt to
guarantee the return on certain interest rate derivative contracts
that number in the tens of trillions of dollars of notional value.
The cost of controlling the POG is miniscule compared to the upside
gained by making interest rate contracts more predictable.
Basically, we are seeing insider trading by the elite on a scale
that is almost unimaginable. The magnitude of the manipulation is
gigantic, nothing of this scale has ever been seen before and will
probably never been seen again – at least lets all hope not!
For a full understanding of how this
manipulation has been perpetrated it is important to study the
material available from GATA (www.gata.org). Adam Hamilton
has also written extensively about this subject (www.zealllc.com/), and one of the best
websites to study is Gold-Eagle (www.gold-eagle.com). Some of the most
revealing commentary is based on Lawrence Summers “Gibson’s Paradox” essay of the mid 1980’s,
and another great read is Alan Greenspan’s essay from 1966 “Gold and Economic Freedom” – somewhere
along the road Alan “turned” and became a fiat currency believer,
read the essay.
Gold plays a very intriguing role in the
history of humanity, and its role is far from over. I have a feeling
that we are heading towards a Global Dollar currency (fiat-based of
course), controlled by the same families that hold the reigns on the
International Monetary Fund, the World Bank, the Fed and many of the
largest banks. The challenge coming up will most likely include a
battle over whether a new global monetary system will be backed by
gold or not. During the ensuing battle you can be sure that an
education on the history and perceived value of gold will be
critical if “we the people” are to influence the outcome.
The bottom line for me is that gold appears
to be undervalued in these current circumstances, and perhaps quite
dramatically so. With each dip in the equities market, and weakening
of the US dollar, it is reasonable to expect a commensurate increase
in the POG. However, of late, we have not seen any evidence of this
at all. Indeed on a few occasions lately the markets have declined
with the dollar, and gold has followed them down too! This to me is
clear evidence of manipulation.
There is so much that can be said about the position of gold in a recession/depression,
and its value as a standard for a stable monetary system free of
the kinds of manipulations we are experiencing with the current
Fed cabal. However, time and space are limited! To get a much clearer
picture research some of the sites and links mentioned above….Oh
yes, and it might be worth taking a little risk on some gold mutual
funds, unhedged mining stocks and having a little physical gold
in the closet for a rainy day. Bare in mind though, I am no financial
advisor and you invest at your own risk.
|
Thanks to www.fallstreet.com
for the above chart. I think this chart should act as a warning
to many of you who choose not to believe me - and who are heavily
in to new equity funds. According to www.lipperweb.com,
more than 99 percent of equity funds investing in U.S. stocks lost
money in the second quarter of ‘02- nearly 14 percent on average.
That was the worst quarterly performance since 1987's third quarter
(the last major stock market crash). By contrast, "Gold funds, infinitesimal
in scope compared to overall mutual fund assets with just $4 billion
spread across 41 class shares, scooped up gains of roughly 18 percent
for the quarter and are ahead 59 percent year todate."
"The
sense of responsibility in the financial community for
the community as a whole is not small. It is nearly nil.”
— John Kenneth Galbraith
The Gross Domestic
Product Revolution?
There has been some significant growth in
GDP over the past 3 decades, but this ain’t no revolution.
GDP has risen from under $4 Trillion in ’71 to
nearly $10 Trillion in ’01 – a rise of nearly 150% over 30 years.
This is a great achievement in and of itself and Americans should be
proud of their progress. However, when GDP is compared to the rise
in the stock markets (5000% in the case of the NASDAQ), the rise in
real estate prices, the rise in currency in circulation and the rise
in debt, it becomes eminently clear that there was no revolution in
productivity - - just a revolution in how the numbers were spun to
make us all believe there was a miracle underway.
I
read Bill Bonner’s work most days, and the rest of the contributors
to “The
Daily Reckoning.” He and his cohorts have been saying it “as
it is” for some time now. Here is a part of what they published
in January 2002, from “Predictions for 2000 and beyond:”
“….the American economy, supposedly the main
creator and principal beneficiary of the New Era, still looks a lot
like an ordinary economy -- with one major difference -- one heck of
a lot of credit.When the US economy was compared to Japan and
Germany by the Economist, for example, it looked anything but
extraordinary. Measured in GDP per capita, from '89 to '98, the US
performed about as well as Japan and both did worse than
Germany. And compared to it's own recent past the US
economy has been far from spectacular. GDP increased by 5.5% in
1992. The figure is only 4.7% in '99. What's more, as Dr. Kurt
Richebacher has shown, 78.5% of that GDP figure for this year is
computers.
Uh... do you think computer sales really
account for 78.5% of economic growth? Not a chance. The whole thing
is a fiction, if not a fraud. The computer figures are enhanced --
because the statisticians adjust the numbers for computing power.
What they're really figuring is not economic activity in dollars and
cents -- but in gigabytes per second. If they did the arithmetic the
way they did in 1992, computers wouldn't make up 78.5% of economic
growth, but only 2.3%.
"Putting it straight," writes Dr. Richebacher
in his December issue, "the exploding computer power... has
accounted entirely for the US economic 'miracle' since
1996..."
What caused this “virtual revolution” in
valuations across almost the entire US asset base was far less the
growth of GDP and far more the saturation of easy credit released in
to the system by the Fed. As I have said, I was a high tech CEO
through most of this period and had absolutely no idea that we were
inside a credit bubble until it was too late – I was not alone.
Total Industrial Production is up,
commensurate with GDP, which is pretty intuitive eh!? This next
chart shows the economic downturns in the 70’s, 80’s and 90’s quite
adequately, and the beginning of the large decrease we are in right
now. The big question we need to answer going forward is: Just how
much industrial production are we likely to see in the future with
so many manufacturing jobs already exported to China, Mexico and
other area’s of cheap labor? Just how many American’s can thrive in
what is rapidly becoming a service-based economy remains to be seen.
We have already put our wives/mothers to work in order to sustain
our lifestyles – perhaps we should return to Victorian England and
put kids back to work as well – but this time as central bankers,
financial analysts, investment bankers, stockbrokers and other
service-based professionals (let’s be honest here, how could they do
any worse than the bunch we have right now?). I’m sure Charles
Dickens would see kids working in boiler-room trading positions as
an improvement over the dark satanic mills of Lancashire?? (Oh, did
I mention, I’m English. But like Englishmen before me, I believe I
am a true Patriot).
“I believe
that banking institutions are more dangerous to our liberties than
standing armies. Already they have raised up a monied aristocracy
that has set the government at defiance. The issuing power should be
taken from the banks and restored to the people to whom it properly
belongs.”
—
Thomas Jefferson
Inflationary
Monetary Policy and the US Dollar
Money of Zero Maturity (MZM) is one of the
most useful measures of just how inflationary current Federal
Reserve policy is. There has been a 600% increase in MZM since ’71,
whilst productivity has ramped at 150%. Clearly, cheap credit is the
fuel driving asset valuation higher and not productivity.
Adam Hamilton has been a constant
inspiration to me whilst on my quest for the truth in all things
economic, I find his prose to be so easy to read – and his style is
so fluid and punctuated with satire and ironic comedy. As I was
trying to put the finishing touches on this article he published yet
another wonderfully germane piece on inflation. Below I have
reproduced a quote from the essay (“US Postal Inflation Proxy”) as well as one
of the charts, which describes the huge increase in inflation (a
hidden tax the American people simply do not understand) in terms of
the rise of first class postage.
I have added this at the last minute because Adam counts the number of postage
rate hikes since the 1971 period, so this addresses a theme that
runs throughout this research – that of the gold standard. Apparently
the cost of postage hardly rose at all for over 75 years, then rose
only slightly until the 70’s:
“Since 1960 however, there have been an
almost unbelievable 15 first-class postage rate hikes in this
relatively short period of time. The vast majority of the
hikes, 12, came after Nixon’s dollar gold standard default in August
1971, when the inflationary floodgates were blasted open that
allowed the Federal Reserve to ravage America’s hardworking savers
with an endless deluge of rampant monetary growth.
In the opening days of 1960 it cost only 4
cents to mail a first-class letter anywhere in the States.
Today it costs 37 cents, an enormous 825% increase. The graphs
in this essay tell the story of the first-class rate hikes since
1960 and offer some insights into their potential usefulness as a
general price inflation proxy.
All the data in this essay is monthly.
It is all indexed to January 1960 to make that month equal to the
100 level so everything is growing off a common base for
comparability. In both graphs, the white percentage numbers
after the data-series labels are compound annual growth rates for
each respective data series. The comparison between US
first-class postage rates over time and the CPI as well as various
money supply growth rates is an interesting sight to behold.”
Click on the chart to read the rest of his
excellent article
The people of the world have so little
knowledge of the function and dynamics of money. Our banking
fraternity and their cohorts feed off this naivety. Politicians are
dependent on us not finding out their dirty little money secrets.
The Fed will disappear overnight if the people wake up to the
gigantic scam that this fiat currency system is burdening them with.
Going forward we need to find a way, once we’ve been through the
mess that is coming at us, to educate future generations on the need
for a sound monetary system – one that is not so easy to abuse by
Philosopher Kings who lust for power and have more money than they
could possibly spend in several lifetimes.
One of the outcomes of US Fed monetary
policy has been a dramatic weakening of the dollar in recent months.
The Euro is now, as I write, at parity for the first time in 2
years. Arguably the dollar needs to go lower to reflect its real
value, and to help the US economy in terms of the balance of trade
and the current account.
However, psychologically, for the USD to
sink much below the Euro would be a dent in the pride of the US, as
well as a signal to foreign investors that their money may be safer
in Europe not America. Any major move by foreign money out of the
US, even a large-scale downturn in the amount of foreign investment
daily in the US (which needs to be around $1.3 billion a day in
order to fuel current debt repayment – i.e. just to make interest
payments) will be disastrous to the stock market and the economy as
a whole.
Unfortunately such an exodus of foreigners from a belief in the US is starting
to look inevitable, not only are they unconvinced that the President
is the right man for the job (too much unilateralism for most Europeans
(I would guess) but they are shaken by the fraud, corruption, scandal
and continued over-valuation of US companies. In general European
companies are trading at P/E’s far below their US equivalents.
At the heart of this entire mess is the
Federal Reserve and their manipulations of the economy through
monetary policy. A radical and fundamental change in policy to a
sound monetary system, away from fiat currency and back to the Gold
Standard, or something similar, is now essential.
www.ino.com is an excellent tool for
charting; here below is a chart of the US Dollars performance over
the last 12 months – not a pretty site if you are a dollar investor
– but it is necessary for the dollar to fall in order to try to
balance the US economy against the rest of the world’s – currently
it is still over-valued. This is a paradox for sure, we need the
dollar to fall, but if it does so does everything else.
“I do not feel obliged to believe that
the same God
who has endowed us with sense, reason and intellect
has
intended us to forgo their use.”
— Galileo
The Derivatives
Monster
Off-balance-sheet liabilities in the form of
derivatives contracts are a relatively new financial mechanism, the
least understood and the most toxic of all financial instruments
ever invented by the dubious genius of Wall Street. Derivative
trading, whereby major banks securitize packages of debt in to
interest rate contracts (or other types of securities) worth
trillions of dollars, really took off around the mid-1980’s. This
type of mega-trading is considered too important for government
oversight and so is left unregulated. This to me is absolute proof
of the power of the banks and the puppet-like status of politicians.
The policing of this trading system is left to the participants –
primarily the major banks and corporations of the world. How
convenient.
Ironically although the system is
unregulated by the US Government, and therefore “we the people” – it
is we the people who will be taxed in order to pay for any mistakes
these bankers of dubious genius actually make. The most horrific
scandals in our financial history have been brought about by
derivatives traders who got it all wrong, usually to the tune of
billions of dollars, and occasionally trillions of dollars.
Some recent notable examples of derivative
debacles include Orange County ($1 billion), Barings Bank ($1.5
Billion), Metallgesellshaft ($1.5
Billion), Long Term Capital Management
(which carried contracts with a notional value of $1.3 TRILLION) and
Enron ($3+ billion). What has been learned by the public through the
course of these rolling financial catastrophes is that derivatives
are inherently unstable, and require some of the world’s most
sophisticated financiers to be bailed out by the likes of the New
York Federal Reserve, the US Treasury and the largest banks of the
nation. Several times the global financial system has been close to
collapse based on the instability of these investment vehicles –
luckily the folks that schemed this stuff up were able in the past
to stop a global financial meltdown and return the markets to
stability, but we’ve been very close as recently as 1998 to a
complete financial collapse.
Ironically the men most responsible for
these massive meltdowns rarely are punished, in fact in the case of
Long Term Capital Management the company’s founders actually were
paid handsomely for their help during the bail-out of the company,
and then went on to become economists at the nations elite
universities, presumably so they can teach future generations how to
avoid causing global financial meltdowns?
“Derivatives are part of the vital machinery
of the bank. We have put it at the heart of the business,” said
Saman Majd, Global Head of OTC Derivatives at Deutsche Bank,
recently. No doubt this is the case. But if derivatives now play
such a vital role in world banking then isn’t it time we the people
had a little more say-so in how they are managed, how much leverage
a bank can take on (JP Morgan Chase has currently leveraged its
equity over 750 to 1!! This is unheard of in the past, no bank of
the importance and position of a JP Morgan Chase should be allowed
such leverage, after all they are FDIC insured, if they fail…….you
got it…….. we the people pay).
When you realize what has been mentioned
above is but a small percentage of the overall liability we face
within our financial system, and that J P Morgan Chase Bank has
derivative contracts with a notional value in the range of $30
TRILLION all to itself (see www.FDIC.org for the latest
numbers), then you begin to wonder just how the financial system is
going to perform through the perpetual War Against Terrorism we have
been led in to. Adam Hamilton has noted: “How will the massive
inverted derivatives pyramids fare in brutal and unforgiving bear
market environments? Only time will tell.”
No one knows how these new financial
vehicles will weather a major bear market. Derivatives have really
only been traded since the beginnings of the bull market which began
in 1982. We are at the beginnings of potentially one of the longest
and ugliest bear markets of our lifetimes, and possibly of all time
– just how derivatives will fair?
Derivative trading data is very difficult to
come-by as derivative trading is unregulated. Therefore I have
reproduced here (above) a chart from the Chicago Mercantile Exchange
(CME) - the big granddaddy of derivatives trading, and where it all
originated. There is a curious note on this chart which questions
why there should be a major spike in trading in the week before
9/11. Apparently derivatives thrive on uncertainty, which makes it
almost appear as if some of the major derivatives traders may have
had some forewarning of the impending catastrophe that was 9/11.
Whether the same people who shorted United Airlines stock prior to
9/11 were connected to these derivatives trades we may never know,
as the government in its infinite wisdom has declined to pursue
these potentially critical pieces of evidence of terrorist activity.
I guess the fact that some of the world’s most respected companies
performed the trades is something too poignant to discuss?
Given the very dirty history of certain New
York banks, with the financing and support of Nazi Germany prior to
and during WW II, and their hands in almost all of the recent
financial scandals – from Enron to Kmart to Argentina – the very
close association with Big Oil (coupled with the trillions in
derivative contracts) I think it may be time to investigate the
nature of this spike and who placed what trades with whom, etc.
Some of the best commentary and analysis
available on the “Derivatives Monster” comes from Adam Hamilton.
Below you can see the phenomenal growth of derivatives from
approximately $7 TRILLION in 1990 to over $51 TRILLION in 2001 with
just the major US Banks (of which JP Morgan Chase is by far the
largest holder with nearly 60% of the total – an amount too
staggering to even imagine).
Adam explains, “The red line below is the US
banks’ total notional derivatives exposure on a quarterly
basis. The blue line is the four-quarter moving average of the
annual absolute rate of growth in the total US banks’ derivatives
holdings. For example, to get the Q4 2000 data point the Q4
1999 total notional amount is subtracted from Q4 2000’s, and the
difference is divided by Q4 1999 to determine the absolute
year-over-year growth rate for each quarter. The four-quarter
moving average of this quotient is the blue line shown below,
representing the annual growth rate in banks’ derivatives exposure.
The US banks’ derivatives holdings literally exploded in the 1990s,
up over 721% from Q1 1990 to Q3 2001 to the current unbelievable $51
trillion with a “t”.
The bottom line appears to be that unregulated
derivatives trading is in massive growth mode, way beyond what
industrial production and gross domestic product would indicate
should be the case. It appears that the derivatives marketplace is a
phantom, barely visible to the masses, understood only by Wall
Street and with no oversight – but with the ability to bring us all
to our knees. This defines the term “rogue,” we’ll be very lucky if
this situation doesn’t bring us to our knees in the very near
future.
“I can measure the motions of bodies, but
cannot measure human folly.” — Sir Isaac
Newton, who lost a fortune in the South Sea Bubble of 1720
The Real Estate
Bubble and Rising Bankruptcies!
Clearly we are now witnessing gravity at
work(pun intended,
Ed),and what will likely be the end of the current real
estate bubble. Interest rates for home loans are at 40-year lows,
prices have risen over the past 30 years. The real estate bubble is
now arguably the only major financial mechanism for continuing to
drive the US economy spluttering forward. Rental occupancies have
fallen dramatically as low-income families race to buy their first
home while rates remain so low. Fannie Mae and Freddie Mac have
recorded their best years ever in 2001 and the first half of 2002.
Clearly the low interest rates are driving more people in to home
ownership, driving prices higher and providing some much needed
confidence to consumers that their net worth is actually growing,
but its an illusion!
This home equity-fueled “confidence” in turn
is driving homeowners to take out second mortgages in record
numbers. These home equity loans are being used to service existing
debt, and fuel consumer spending. As of June though, the spending
binge is starting to falter as household debt reaches new highs,
unemployment remains high and financial scandals rock the equity
markets.
“Housing prices in 14 major
markets throughout the country are out of whack in relation to
household incomes and mortgage payments,” according to industry
consultant John Burns, in an article, published in www.realtytimes.com on July 10th
2002. Apparently 20 of the 44 markets surveyed were already
overvalued."In the near term,
this leverage is boosting real estate, but on the other hand, it
sets up the sector for a possibly painful correction," says Martin
Weiss of the Weiss Ratings,
Inc.
The simple fact of the matter for me is that
people with lower income levels are now able to jump on the home
ownership bandwagon for the first time by putting zero down on a
house, taking out an adjustable rate mortgage and making low
payments in at least the short term based on historically low
interest rates. But when interest rates rise this sector of the
market will be hit the hardest, as they are already reaching beyond their means to get on the
first rung of the housing ladder in the first
place.
Additionally, when interest rates do start to
rise, and house prices start to stagnate and then go lower, with the
stock market already in full retreat, most people will enter in to a
form of paralysis. All wealth creation vehicles will be broken down
on the economic highway for the first time in nearly 20 years. John
Kenneth Galbraith has said that is takes approximately 20 years for
the collective sub-conscious to completely forget the last downturn,
so we will be right on track to be horribly surprised by the speed,
depth and painfulness of the coming crash.
Of course when you have record amounts of
debt, sooner or later you get record amounts of loan defaults
followed closely by rising bankruptcies. Personal and Corporate
Bankruptcies in 2002 are heading “for a second straight record
year," reports Bloomberg most recently.
Over 250 companies, with $250 billion in
assets, were put in to bankruptcy in 2001, beating a 10 year-old
record by over 200%. Over 100 publicly traded companies have filed
so far this year, representing nearly $50 billion in assets, which
does not include WorldCom’s over $100 billion of assets currently in
bankruptcy custody. The potential for an acceleration in the rate of
corporate bankruptcies going forward is all too likely, especially
now companies are being scrutinized by the very politicians and
government watchdog’s that not so long ago were turning a blind eye
to their every shenanigan!
Here’s a little ditty off the Tele from when
I was a kid in England, this was meant as a public safety message
and was accompanied by a cartoon. I guess it can be viewed that way
today! I wish I could remember the entire rhyme – I think it’s a
classic!
“Sir Isaac Newton
told us why an apple falls down from the sky, And to this day
it’s very plain all other objects do the same, A bolt, a bar, a
brick, a cup invariably fall down not up.”
“We're living in a North Sea Bubble We're trying to spend our way out of trouble You keep buying these things but you don't need
them But as long as you're comfortable it
feels like freedom My American friends don't
know what to do But they'll wait a long time
for a Beverly Hills coup War! What is it
good for? It's good for
business”
—Billy Bragg (British musician)
Unemployment
Of course the unemployment rate pretty much
moves inverse to the major markets, at the troughs in the major
markets you typically see spikes in the unemployment data. It is
these types of correlations that consistently and logically repeat
themselves decade after decade that make the kind of financial
analysis I am presenting here kind of hard to refute! But that’s
just my opinion!
Without a doubt we have lived through a
glorious period of very high employment, and for that we should all
be thankful. Growing up around the high unemployment rates in
England during the 60’s and 70’s was quite painful, nothing strips
meaning from life more than the inability to find meaningful
employment.
As is evidenced by the chart below we are
now climbing an unemployment spike that is alarming to most of us.
Clearly we are not in record-setting territory yet, and lets hope
for all our sakes we don’t get there, however the indicators are not
good unfortunately.
“Capitalism without failure is like
religion without sin. Bankruptcies and
losses concentrate the mind on prudent
behavior.”
— Allan H. Meltzer
Total US Federal
Government Debt
Federal Debt has risen nearly 700% since
1971 while industrial production has risen a more serene 150%.
Clearly more disposable income is needed annually by the government
in order to come close to balancing its budget. It’s either “tax the
people” directly or print money in order to pay for goods and
services “needed” by the government (an invisible tax on us). This inflationary
monetary tactic, of printing more money to cover inept government
fiscal management, is the biggest hidden tax still little understood
by the people. When the US population eventually wakes up to the
simplicity of the frauds perpetrator against them by a handful of
elected officials they will undoubtedly want to exact some revenge.
I believe during the French Revolution, and at other periods in
human history, usury bankers and their flunky government bagmen have
been publicly executed! Lets hope for the current crowd that the
masses, when they figure out that they have been so easily
manipulated, do not chose such a course of action!!
Michael Hodges on his very easy to
understand website plots government debt way back in to the 1800’s.
He see’s the debt “soaring 10 times faster than the economy's growth
since 1913” – I think the reference to 1913 has something to do with
the creation of the Federal Reserve that year(hehe! Ed),an
institution owned by private banks which controls the setting of
interest rates and the flow of credit. It appears that the more the
government spends the richer the Federal Reserve banks get, the
higher our tax burden becomes, the poorer the poor get and the more
unstable the world becomes in general.
Federal Debt fuels the “virtuous loop”
between Federal Reserve banks and the politicians and government
employees. For anyone who dips in to government funds to make a
living there is an inherent conflict of interest in exposing this
little understood area of our nations financial life. The Fed
encourages the government to overspend, which requires the creation
of more debt, as government is spending 10 times faster now than the
nation is producing. The Federal Reserve banks themselves own nearly
$500 billion of government debt, which of course is interest bearing
– so the people managing the store are also the stores main
customers! There is something inherently mal-adjusted about this
arrangement.
Of course the people who are in place to
regulate this incestuous and unnatural relationship are themselves
paid from the nations coffers, so as long as their income and
benefits are rising commensurate with the amount of money being
printed and debt being consumed then they are satisfied.
Fundamentally the Federal Reserve Act of 1913 is unconstitutional
and represents the largest fraud in the financial history of the
world. When you consider that the world is now running itself on a
fiat based currency system with the US dollar as the core symbol of
value – then you can begin to grasp the absolutely awesome power of
the Federal Reserve and their current Chairman Alan Greenspan – but
of course Alan has his masters too, its not like he dreams these
schemes up all by himself.
All of the nations on earth are forced to
accept the US governments promise that the US dollar will continue
to be valued at or near its current level. If you were a foreign
entity looking at the current machinations of the US markets, the
frauds, scandals, lies and cheating, and yet were forced to accept a
“promise” that the US dollar would continue to be worthy of its
pre-eminent status as the worlds “store of value” would you continue
to invest in the US equities market, continue to hold US dollars,
and to believe in the ability of this government to keep its
promise? This is the situation we now face in America.
To make matters worse we need to attract
$1.3 billion+ of foreign cash in to the United States everyday in order to stay solvent. We are
dependent on foreign investment to sustain our current lifestyle,
and that level of foreign investment is predicated on the confidence
that the US government will keep its promises, and that the US will
continue to be “investable.” Unfortunately we are finding out,
around about now, that foreigner’s confidence in us has dropped
dramatically; we are attracting only a few hundred million dollars a
day at this point. Pushing us closer to the edge of capitulation of
the markets and the entire financial system.
“You have a choice between trusting
to the natural stability of gold and the honesty and intelligence of
the members of government. And, with all due respect for these
gentlemen, I advise you, as long as the capitalist system lasts,
vote for
gold.”
— George Bernard Shaw
Federal Government
Expenditures
Federal government expenditures continue to
rise unabated; in fact any sign of
recovery in the US economy is mostly a function of hugely increased
government spending on the War Against Terrorism (aptly shortened to
WAT?). Without the massive infusion of freshly printed US dollars in
to the US economy the recession would be seen to be that much
deeper. The false economy of government spending is forcing the
ultimate rehabilitation of the economy that much further out – and
therefore to be that much more painful later. Clearly there is no
political will left that could begin a program of economic
rehabilitation in an honest and orderly fashion.
Needless to say the rise of government
expenditures far outpaces the rise in GDP or Industrial Production.
The inevitable conclusion to such a predicament is one day waking up
inside a political system that is more analogous to Communism! We
already have a centrally controlled economy; if you can call what
the Fed is doing “controlled.” Maybe I should re-phrase that and
call it a centrally uncontrollable economy? Clearly our financial
masters believe they can control this runaway locomotive, after all
they’ve been pulling the strings since 1913 and the Federal Reserve
Act.
However, in my humble opinion, their ability
to get their arms around this mess is minimal. Chaos in the Universe
has a way of leveling the best-laid plans of rats and men! The Lord
moves in a mysterious way, and it isn’t towards the corporatization
of the world.
Globalization is essential to all of our
futures – and I believe it is the natural evolutionary path of
humankind (we have evolved from the family unit, to the tribal unit,
then to the city state, then the nation state and now we need to
evolve in to a World Commonwealth of Nations). But this should not
happen with corporate interests being the only driver, there are
human reasons way beyond materialism and profit that should be in
first place here. For one, the people need to be in first place, not
corporations. Then, the environment needs to be way ahead of
business interests. “Unity in Diversity” (protecting the unique
cultures and individual forms of governance in the unique countries,
needs to be a priority), universal education, the creation of a
universal language so we can all communicate more easily, the
emancipation of women globally, the elimination of extremes of
poverty (and of incredible wealth) – these are all the things our
leaders should be driving our nations towards. But instead we have
the WTO, NAFTA and GATT.
The secular agenda has run its course for
nearly 100 years now and is failing badly.
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“Of all men's miseries the bitterest is
this: to know so much and to have
control over nothing."
—Herodotus
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Federal Government
Surplus or Deficit
In the not too distant past the country was
trending in the right direction in terms of the Federal Government
surplus (even as the total amount of government debt was rising
quickly and the politicians were stealing from Social Security,
etc.), but as this chart shows in a few short years spending and
income have caused a massive reversal in fortunes. By the end of
2002 we will be firmly in to Deficit territory again.
Today we are told by the Fed that the
government expects to run a surplus over the next ten years of
nearly $1 Trillion, revised down from $5 Trillion in the last couple
of weeks. That’s a serious revision indeed, and is it believable?
You decide. Herodotus was so right about the miseries we have to
endure today, to know what is happening, to understand the
manipulations but to have no control or even influence over the
outcome is perfect misery to some of us.
"It rests with men whether they will make the
proper use of the rich treasure with which this knowledge provides
them or whether they will leave it unused. But if they fail to take
the best advantage of it and disregard its teachings and warnings,
they will not only annul economics; they will stamp out society and
the human race."
— Ludwig von Mises Total Debt
Summary
One of my favorite graphs put together by
Michael Hodges and his “Grandfather Economic Report” is the one
below where he depicts Total American Debt, including household,
corporate and government, over the growth of our National Income. As
has been stated several times above, debt has grown at a far greater
rate than income. When this happens to you or I we go broke pretty
darn quick! But thanks to the “perpetual motion money machine”
controlled by the High Priests of the privately run Federal Reserve,
we as a nation are able to spend with impunity – but there are
limits.
What we have all been experiencing in
the past 2-3 years is the testing of those limits to the expansion
of the paper money machine. Clearly we are beginning to see the end
of the current system. What is such a travesty is that so few people
are educated that this is really the case. Monetary systems, fiat
currency limitations, fractional reserve banking, usury lending
practices, Federal Reserve ownership, etc. are not things taught in
High School, and rarely taught in post-graduate courses either.
Keeping the American public naïve as to how these institutions and
systems work I believe is fundamental to their longevity – and to
the continuation of the current elite establishment.
From where I sit, we would all be better off
if we were functioning inside of a responsible, honestly governed,
sustainable financial system which was not predicated on usury
banking for its medium term survival. I guess the outcome to the
mess we are now in will to some extent dictate whether “we the
people” are going to break the backs of the monetary monopoly we are
only just beginning to understand?
The bottom line on this chart is that we
have reached the point where we can no longer afford any more debt
to fund our lifestyles; we will not be able to pay the interest, let
alone the principle! This truly is the “Limit to Growth.”
"The rumors are untrue and
irresponsible." (7/16/02 Reuters)
— A spokesman for J.P. Morgan said in New York referring
to the bank being unstable and likely to tip over soon.
JP Morgan
Chase Stock Price Compared to the S&P 500 and the DOW, since
1971, of course!
What is so interesting about the price of JP Morgan Chase stock is its correlation
to the S&P 500 and the DOW, the movements of the indexes are
so close to those of the bank – its almost as if they are somehow
mysteriously connected? Of course there are some variances, but
they appear minor to me in the grand scheme of things.
When you consider that JP Morgan Chase has consistently been implicated
over the past few years in many of the major financial scandals
(LTCM, Enron, Kmart, Argentina) and is the largest shareholder in
the New York Fed, then it is worth trying to understand this correlation.
JP Morgan Chase needs to be singled out for
special consideration because it is so vital to the US economy and
many of the Fortune 100 companies who bank with it. The
extraordinary leverage, 750 to 1, of its derivative contract value
to equity base (derivative contracts for the bank are approximately
$30 TRILLION and equity is currently $40 BILLION) is unheard of in
financial history, and to the objective outsider appears to be a
train wreck of global proportions just waiting to happen.
The political activities of the banks chief
advisor over time, Henry Kissinger, and the central role in American
economics and politics of the Rockefeller family – who have
controlled the bank for nearly 100 hundred years, add an intriguing
twist. Just what will happen over the months and years ahead as the
global economy tries to unravel and make sense of itself is yet to
be seen.
What is apparent to me is that the role of
this bank, and its Philosopher Kings, will be critical to the
overall stability, or lack thereof, going forward. One comment that
has been making the rounds of late is that the bank is simply; “too
big to fail and too big to bail.” Where exactly that leaves us is
anyone’s guess then.
“…as the king by his
prerogative may make money of what matter and form he pleaseth, and
establish the standard of it, so may he change his money of what
matter and form he pleaseth, and establish the standard of it, so
may he change his money in substance and impression, and enhance or
debase the value of it, or entirely decry and annul it…” English
Court Decision, 1604
Conclusion
Through the process of writing this article
I have been reading four books concurrently, which is typical for me
– I am rarely reading less than two books at any given time, some
kind of attention deficit thing I guess. The four books I am
currently almost done with are as follows:
Call to the Nations, Shoghi Effendi – a
spiritual perspective on what happens next in the world, from a
Baha’i viewpoint. This is a short compilation of letters and
writings of Shoghi Effendi (the pre-eminent interpreter of Baha’i
scriptures) from the 1930’s to the 1950’s and was published in
1977.
The Clash of Civilizations, Samuel P.
Huntingdon – a secular viewpoint that “predicted” a clash between
Christianity and Islam. This book was written back in 1995 –
Kissinger and the current establishment heavily support this
book.
Stupid White Men, Michael Moore – a funny
attempt to tell everyone about who is running the show and what they
are all about, and what can be done about it – this book has been a
New York Times Bestseller for the past 13 weeks but has never been
reviewed by the “serious” press, ever. It was published the week
before 9/11.
Conquer the Crash, Robert Prechter – a
highly professional and complete perspective on what is happening in
the world of economics and what you can do about it. This book is
hot off the press, the ink is still fresh.
As a group these books represent a
phenomenal resource for anyone interested in the 6 billion
inhabitants of this beautiful planet, and their welfare. The views
contained in all of the books are very diverse, and they all
approach their chosen subjects from a unique perspective in my
opinion.
The bottom line for me in all of this
research though, is the intuitive sense I get from all of the
material that the only salvation we can
hope for is a spiritual one. As a race of beings the human race has
lost its way. Rampant secularism in the form of
consumerism/materialism has run its course, and is now failing very
badly. Secularism failed in the form of Communism, National
Socialism and is now about to fail with Capitalism. Don’t get me
wrong here; I’m not anti-capitalist or anti-globalist, I believe in
globalization (but of a more benign variety – I actually believe
globalization is inevitable and a natural part of our evolution) and
I believe in a form of capitalism (but not one that consumes
relentlessly and without care).
By reducing the role of Faith and belief in
God to something purely private, modern society has become lost in
its own material consumption. There is nothing to rally behind now
other than cultural, national and racial biases – a destructive
force. Without a quick return to “In God We Trust” our society will
most likely implode. I am losing faith that our society has the
ability to make that adjustment by itself, without the cleansing
power of God to show us the error of our collective way and point us
towards the correct behavior.
I am very bullish on the overall outcome for
humankind, and have a firm belief that we will learn, one way or the
other, that we are indeed all One Race and completely
interdependent. Whether our current institutions and leaders can
peacefully move us towards a global federation of independent, but
interdependent, states without a major conflagration – as the global
financial system creaks and cracks – is the $150 trillion
question.
In the past the money power has chosen
aggression to resolve systemic financial problems, I fear that will
be the case again, but hope and pray this can be mitigated for.
Regardless of whether I am correct in terms
of my geo-political interpretation, I remain convinced that the
current financial system is near the point of total collapse, that
the US markets will capitulate within a matter of months not years
and that a new monetary system will be needed – and that the one
probably being planned already is another fiat-based system that
will be doomed to fail before it gets off the drawing board! I am
also convinced that we are destined to be managed by bankers unless
and until we stand up for what is right and reduce bankers to their
rightful position – being servants to the people, not the other way
around.
Usury banking is the scourge of our race and
needs to be extinguished once and for all. Statesmen and women need
to come forward; honest, decent folk who currently wouldn’t go near
politics or finance for all of the opium in Afghanistan, Vietnam,
Cambodia and Burma combined (or all the oil in Saudi Arabia, Iran,
Russia and Iraq combined!!). The only way we will attract decent
folk back to our institutions is to clean house, and quickly. But
how we can do this while the house is being run by war profiteers,
oil barons, banking moguls and media giants who are all in cahoots
with each other is why I believe there is only a spiritual solution
to this most complex human issue.
Vaya con Dios!
"O SON OF MAN! The true lover yearneth for
tribulation even as doth the rebel for forgiveness and the sinful
for mercy." —Bahá'u'lláh, from The Hidden
Words
Thanks to the following resources, I have used these online
sites and commentaries variously throughout my research:
www.depression2.tv
www.bigcharts.com
www.economagic.com
www.zealllc.com
www.gold-eagle.com
www.kitco.com
www.ino.com
www.stockpoint.com
www.fallstreet.com
www.fdic.org
www.bahai-library.org/
www.lemetropolecafe.com
www.gata.org
www.dowtheoryletters.com
http://mwhodges.home.att.net/
www.dailyreckoning.com
www.comstockfunds.com
www.elliotwavetheory.com
www.thestreet.com
www.lipperweb.com
www.realtytimes.com/
www.weissratings.com/
www.ronholland.com/
www.investmentrarities.com
www.mises.org/
Bob Prechter “Conquer the Crash.”
Clive Maund “The Crash of 2002.”
Bob Chapman, “International Forecaster,”
email: bif4653@comcast.net.
"Of all the enemies to public liberty war is, perhaps, the most to
be dreaded because it comprises and develops the germ of every
other. War is the parent of armies; from these proceed debts and
taxes. And armies, and debts, and taxes are the known instruments
for bringing the many under the domination of the few. In war, too,
the discretionary power of the Executive is extended. Its influence
in dealing out offices, honors, and emoluments is multiplied; and
all the means of seducing the minds, are added to those of subduing
the force of the people. The same malignant aspect in republicanism
may be traced in the inequality of fortunes, and the opportunities
of fraud, growing out of a state of war...and in the degeneracy of
manners and morals, engendered by both. No nation could preserve its
freedom in the midst of continual warfare."
—James Madison, April 20, 1795
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