Gain from Chaos Investing

“Yes, you.

And Trichet, and the rest of the Central Bank fools.

But especially you, Bernanke.

There's dumb and then there's really dumb. Let's take a short walk back down history lane.

You were sure there was no housing bubble.

Then you were sure it wouldn't pop.

Then you were sure when the subprime problem hit, that it wouldn't cause a recession.

Then you were sure you had it under control with Bear Stearns' hedge funds.

Then you were sure you had it under control with Bear Stearns itself.

Then you were sure it was under control with Lehman, even though you had to know Citibank and others were refusing their collateral in the repo market.

You were sure QE would support higher bond prices - and lower yields. The exact opposite thing happened.

You were sure QE2 would suppress long end yields. The exact opposite thing happened.

Oh yeah, you made excuses both times, but in fact you publicly said that in both cases the exact opposite thing would happen that did.

Now let's look at what happened just today.

Oil went up almost $7 today for the WTI contract. For each dollar that crude oil rises, we transfer roughly $95 billion (estimates vary from $90-100) outside of the United States.

That's a direct hit to GDP.

In ONE DAY the entire impact of your so-called "QE2" was ERASED.

(As an aside, yes, I can do the math on the direct import numbers; the argument here is on the total economic impact, which is as noted above. Estimates there vary somewhat, but they're centered around $90-100 billion/year/dollar increase.)

Your entire gambit and what you sold to Congress and President Obama was that you could "restart" credit expansion with your policies. Implicit in your policy was a need to do so, because without it you cannot succeed. The World Economic Forum at Davos released a paper saying that we needed, collectively, to add one hundred trillion dollars of new debt to the system to support the paltry growth numbers you and your economists are putting up. Worse, the CBO stuck up numbers in the TBAC report that show another doubling of Federal Debt in the next nine years and a rough quadrupling of debt service costs to $800 billion, implying a paltry 3% blended rate.

We had the collapse starting in 2007 because people couldn't afford the debt they already had and yet your entire scheme, to succeed, requires doubling all systemic debt AGAIN.

So how are you going to do it Ben?

Who's going to take on that debt, and how are they going to service it?

You know damn well it can't work, and won't. You also know damn well you've goaded and prodded the Federal Government into taking on $4.5 trillion in debt we cannot afford, or nearly 30% of GDP.

How are you going to take that back off Bernanke? You keep being asked this, but all you say is that you're confident "you have the tools."

Uh huh.

You don't have jack and you know damn well you can't pull your pump-job back one iota without laying bare on the table the fact that the Federal Government is supporting 12% of GDP with borrowed money. If it disappears we have an instant Depression worse than the 1930s.

The bad news is that if you keep this crap up it will disappear by force of the market, there's not a damn thing you can do to prevent it, and that day is rapidly approaching.

EVERY prediction you've made about the economy over the last five years has been wrong.

All of them.

The market is rising only because you're "promising" infinite leverage.

But infinite leverage means certain financial ruin if you're wrong about external forces. And the economy is not a closed system under your control. You cannot control other nations, you cannot control commodity speculators and you cannot control other central banks and politicians. You think you can force China off their peg, but they can suppress riots longer than we can. You think you can keep printing but now Egypt has gone down, Libya is collapsing and if Saudi Arabia folds you're instantly ****ED and so are the rest of us…

Congratulations Ben Bernnake. Your place in history is secure, and I'm sure Beelzebub thanks you daily for your cooperation.”

“Bernanke, You Stupid B******”
Karl Denninger, market-ticker.org, 2/21/11

“Hey, how 'bout that Ben Bernanke... He's a freedom fighter! Look what he's done to North Africa!

Seems like every time we pick up the paper another dictator is toppling over. Where does it lead, we wonder?...

Which leads us to ask: what's up?

The answer comes from our old friend, Jim Davidson. He pins the revolutions on Ben Bernanke. Behind the popular discontent is neither the desire for liberty nor the appeal of elections. It's food. And behind soaring food prices is Ben Bernanke.

The Arab world is a model Malthusian disaster, says Davidson. Populations have ballooned. Food production has not. Which makes Arab countries the biggest importers of cereals in the world. And when the price of food goes up, the masses rise up too.

From Jim's latest newsletter, Strategic Investment:

Food prices hit an all-time high in January. According to the UN's Food and Agricultural Organization (FAO) "the FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4 percent from December 2010 and the highest in both real and nominal terms" since records began. Note that prices have now exceeded the previously record levels of 2008 that sparked food riots in more than 30 countries…

Well, how do you like that, Dear Reader? All those billions of dollars spent propping up dictators – $70 billion was the cost of supporting Hosni Mubarak in Egypt alone – and then the Fed comes along and knocks them down.

The Fed lowers the cost of money so speculators can borrow below the rate of inflation. And then it prints up trillions more – just to top up the worlds' money supply.

Is it any wonder food prices rise?

While Mr. Bernanke modestly declines the credit for de-stabilizing much of the world, close analysis confirms that he played an informing role. His QE2 program of counterfeiting trillions out of thin air has helped ignite a raging bull market in raw materials with food and commodities – up 28% in the past six months. The fact that the US dollar has heretofore been the world's reserve currency means that almost all commodity prices are denominated in dollars. As a matter of simple math, when the dollar goes down, the prices of commodities tend to go up.

Today, Libya. Tomorrow...Yemen? Or Saudi Arabia.”

“The Role of US Debt in the Current Revolution, Cereal Wars...and Zombie Wars...”
Bill Bonner, The Daily Reckoning, 2/23/11

For several Months Now, we have thought the Markets, and especially the Equities Markets, were not pricing in Sufficient Risk.

This coming March, Equities Markets would have had a two year Bull run but for this week’s Fall.

But there are Important Reasons Equities, and other, Markets have not been pricing in sufficient risk. And knowing why certain markets have not, until this month, been pricing in sufficient risk, is the essential first step to gaining from Chaos Investing. Among the Reasons are, first and foremost,

1. The private for-profit Fed’s virtually daily POMO pumping to keep Equities Markets artificially elevated (see Graham Summers (seekingalpha.com), author of the September 28, 2010 piece - “The Only Reason Stocks Rallied this Month”) and
2. The Fed-led Cartel’s* ceaseless Campaign to suppress the Prices of the Monetary Metals, Gold and Silver, (an effort which has been less successful in recent months due in part to revelations that certain Major Gold and Silver Repositories likely do not have all the Physical Gold and Silver they say they do, resulting in Increased demand by Investors for Delivery and Personal Possession of Physical Metals – a wise move).
   
   *We encourage those who doubt the scope and power of Overt and Covert Interventions by a Fed-led Cartel of Key Central Bankers and Favored Financial Institutions to read Deepcaster’s December, 2009, Special Alert containing a summary overview of Intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 Letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.” Attention to The Interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.
   
   But Gold and Silver for years have suffered from Cartel* Price Suppression Attacks, though they have become less vulnerable to these attacks in recent months. See Deepcaster’s Article “Opportunities to Profitably Escape Paper “Wealth” into 2011 (10/07/10)” in the ‘Articles by Deepcaster’ Cache at www.deepcaster.com for details.
   
   Had there not been ongoing Price Capping, Gold and Silver would have served as an even greater “Miner’s Canary” than they already have – signaling ongoing Economic and Financial Crises, including dramatically increasing inflation, unreported by the Main Stream Media (see below).
3. The Compulsion of the Main Stream Financial Media to Censor or Minimize Market-Negative News and to promote or Emphasize, or perhaps occasionally to even Manufacture, Market-Bullish News.

But one characteristic of the three aforementioned Forces which result in the manipulation of Free Markets for a time is that they typically do not control Ultimate Market Outcomes. They just delay them, and usually worsen them.

Thus, what they do do is create Market Bubbles, or Market Distortions which, when they Pop or Unwind, typically cause a greater Reaction than they would otherwise, i.e. without the Market Interference Detailed above.

An important example is the Fed-facilitated period (approximately 2000-2008) of excessively low interest rates and high monetary creation which led to the housing bubble which burst in 2007-2008.

There is a Strategy for addressing the Challenges presented by Market Risk and the three counter-Free-Markets Forces identified above, a Strategy which can provide both Wealth Protection and Profits.

First, it involves considering both Bullish and Bearish Market Realities.

Among the Bearish are:

• USA and Key Eurozone Nations’ Debts are already unpayable without Devaluation
• Key Emerging and Frontier Markets are closely linked to the USA and Eurozone, so that all would plunge together in a Crash
• Increasing U.S. and Eurozone Money Printing (Q.E. 3, 4, 5…?) and Bailouts debases those currencies Purchasing Power, thus confiscating the Wealth of Investors, Savers, and Retirees, as well as increasing Food and Other prices worldwide, as well as Risking Hyperinflation not too far down the road and is very conducive to the Creation of Asset Bubbles. These Bubbles eventually will Pop with Severe Consequences.
• Worsening Unemployment Situation in the U.S. and other Major Nations virtually ensures More Fed and other Mega Bank Q.E (i.e. Money Printing).
• The Crude Oil Price Crisis is real and will persist for a while. Not just Saudi Arabic is at risk of Chaos, but also Algeria!

Among the Bullish are:

• Risk Assets in General, as reflected in the recent 22-months-long Equities Rally, recently soared to Record Highs
• In the Bond Market, the 10 Yr. Yield recently Rocketing to over 3.5%, ostensibly reflecting a Strengthening Economy
• Key Forces have driven many Commodities Prices Higher, bullish for producers, but not consumers
• Cartel* Markets Manipulation, though not as Potent as in past years, can still serve to boost Key Markets, temporarily
• Corporate Earnings have, generally, been recovering

So which Scenario will prevail? They both will, for a short while longer.

How is this possible?

The Resolution to this Seeming Inconsistency and one Key to Gaining from Chaos depends on Timing and Watchfulness and Sector Selection. Consider the following Guidelines and Indicators to help determine when and where to be Long and when and where to be Short in 2011.

Equities, for example, are perhaps just coming to the end of a 22-months-long Bull Market. But Given the aforementioned Negatives, it is highly unlikely that this Bull will survive throughout 2011. Thus, Deepcaster monitors a number of Indicators which will signal it is time to take profits from the Long side (of e.g. Equities) and jump onto the Short Side e.g. via Short ETFs, such as those we have already recommended. The farther we go into 2011, the more likely an Equities Markets Crash becomes, indeed one may have begun just this week.

Among the Many Fundamentals and Indicators we watch are U.S. Dollar levels and U.S. Long Bond Rates, Treasury International Currency Reports, POMO and TOMO Injections, Euro-PIIGS Status, Fundamentals, Technicals, and Interventionals, Geopolitics, and, especially, Real CPI and GDP Numbers, as opposed to the Bogus Official Ones.

Specifically, Shadowstats.com calculates Key Statistics the way they were calculated in the 1980s and 1990s before Official Data Manipulation began in earnest.

Consider the following Bogus Official versus Real Numbers

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

Annual U.S. Consumer Price Inflation reported February 17, 2011
1.63% / 9.07% (annualized January, 2011 Rate)

U.S. Unemployment reported February 4, 2011
9.0% / 22.2%

U.S. GDP Annual Growth/Decline reported January 28, 2011
2.79% / - 2.21%

U.S. M3 reported February 12, 2011 (Month of January, Y.O.Y.)
No Official Report / - 2.21%

Also crucial to Monitor are Gold and Silver Prices, not merely as Indicators of Fiat Currencies Purchasing Power Deterioration (though they are important for that), but also of Cartel* Interventions and Interventional Capacity.

In the Medium and Long Run, we see the aforementioned Equities Bearish Factors overwhelming the Bullish Ones, which will have Severe Negative Consequences for Equities-in-General and for certain Commodities which are in Elastic Demand.

Given this negative Scenario Safe Havens with Great Profit Potential are Gold, Silver (with Caveats) and Agricultural Commodities in relatively inelastic demand (such as Wheat and Foodstuff in general).

Medium and Long term, we are very Bullish on Gold and Silver. Short-term they are under intense Cartel Attack, but have been moving higher nonetheless.

But, Financial and Economic Conditions are such that we do not recommend shorting Gold and Silver, even in advance of a likely Cartel* Takedown attempt.

Deepcaster recommended response to Cartel Market Manipulation (i.e. in the Precious Metals Market) is fivefold:

1. Buying on Dips, coupled with a Willingness to Tolerate Great Price Volatility
2. The Core Holdings of Ones’ Precious Metals Position are best held in one particular form (see our Precious Metal Recommendations) of the Physical Metals, in Personal Possession
3. that Well Managed reasonably priced Miners be bought on Dips, and, if one is a Trader, a portion sold near interim highs
4. that a portion of Ones Holdings be in a Dividend Paying Precious Metals Fund such as one which we have Recommended, and
5. Regarding Silver, since it is also an Industrial Metal, it is especially vulnerable to Slowdown in Economic Activity and (for the Shares) Takedowns in the Equities Markets.

In sum, we expect another Markets Crisis will launch in 2011 (and may well already have just this week) and Gold and Silver are the place to be.

Gold and Silver are the single most important Means to Profit and Protect regardless of Economic, Financial, or other Market Conditions.

Consider, finally, that, given the aforementioned Negatives, a Crisis is likely “baked into the cake.” The Fed’s (and Eurozone Bankers) Price boosting via Q.E. can not go on forever, and, in any event Q.E. worsens the Inevitable Crash because it serves only to pile more Debt upon already Unpayable Debt.

The Bond Markets have already been Signaling that Q.E. will result in increasing Inflation and Interest Rates which will Seriously Injure the Equities Markets, and Burst Equities and other Key Asset Bubbles.

These Asset Bubbles are not just limited to the Eurozone PIIGS though e.g. Greece (with a E$1.2 Trillion Debt) is likely eventually to Default, which coupled with other Sovereign Defaults will create an Existential Crises for the Eurozone Financial System and Political Union, and thus another Systemic Crisis for all Major Economies and Markets.

This Crisis is being Exacerbated by The Libyan Chaos and the possibility of it spreading to Mega-Oil-Producer Saudi Arabia, Algeria and Iran.

Finally, those who believe The Ongoing Ostensible Recovery is Sustainable, should Consider the following Debt to GDP Chart from the Bank for International Settlements, The Central Bankers Bank.

Global Debt (Fiat Currency Purchasing Power Degradation) Risk

Conclusion: Most Major Fiat Currencies are not reliable Stores of Wealth.

Thus Gold and Silver and businesses involved in Food Production (e.g. Deepcaster recommended three undervalued ones in the last month) should be the most significant Long Positions for Profit and Protection in 2011.

And Short ETF’s in particularly Vulnerable Sectors should serve as both Hedge and Potential Profit Centers.