God, Gold, the Fed and Capitulation
For the Record
From: Sean Trainor firstname.lastname@example.org
Organization: Crowne Gold
To: American Patriot Friends Network APFN@apfn.org
Here is a very complete essay on our global economic position. Now this is not
put out by the CNN media who are owned by the AOL Time Warner group who have
been personally responsible for over $240 Billion stolen from investors. No,
this is good old American research.
For the Record
By Richard Lancaster
God, Gold, the Fed and Capitulation
"O SON OF BEING! Busy not thyself with this world, for with fire We test the
gold, and with gold We test Our servants."
- Bahá'u'lláh, from The Hidden Words
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
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
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
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.'
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!
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
"Indeed I tremble for my country when I reflect that God is just."
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."
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 bale 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 Nixon appoints 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
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
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'
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
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
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
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
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."
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
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
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)
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
- 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
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
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
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
- 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
"Of all men's miseries the bitterest is this:
to know so much and to have control over nothing."
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 messe 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
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
".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
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
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
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.
Via 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:
Bob Prechter "Conquer the Crash."
Clive Maund "The Crash of 2002."
Bob Chapman, "International Forecaster," email: email@example.com.
"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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