Friday, November 18, 2011

Occupy Wall Street and Frankenstein's Monster

Dear Members of the Occupy Wall Street Movement,

I write this letter to you out of both admiration and concern. My admiration stems from your willingness to make your voices heard, as is your right (and obligation) as citizens of the country you love, to address the many failings of our modern economy.

The strife of the poor and the relentless brick-by-brick dismantling of the great American middle-class are concerns that I and many others share, as no society can prosper or be truly free when hard-working families can no longer taste the fruits of their labor because of excessive debt and inflation.

Members of OWS and the Tea Party have separately taken valuable time from their busy lives in efforts to shine a light on these issues. Your voices have attracted media attention and served notice to the defenders of the status quo in business and government that change is necessary to restore America to economic greatness.

Not only are the power centers aware of you now, they might even be beginning to fear you. As well they should. The Founding Fathers believed a government should fear its citizenry. As Thomas Jefferson said, "The price of freedom is eternal vigilance." The country and our “leaders” have been asleep at the post lately, but you have been rousting your fellow citizens from a deep slumber and for this you have my heartfelt thanks.

But my concern arises from the fact that the villagers with the torches and the pitchforks have arrived at the gates of the wrong castle.

The monster you seek to slay is but the creation of the true perpetrators of the wanton destruction of the economy. Wall Street is Frankenstein's Monster, and it has indeed been let loose upon the land to trample everything in its path. But without access to cheap credit, the Wall Street Casino pit bosses could never have devised credit default swaps and other derivatives of mass destruction. No, they could not have caused this economic carnage alone. It was monetary and banking policy set by a higher source that fostered the environment for the incubation of the monster. As such, it serves little purpose to kill it as Dr. Frankenstein, the real villain in this story, will merely create a new beast if left unchecked.

Dr. Frankenstein, for the purpose of our analogy, is the Federal Reserve and it is the institution which must be shut down if any real reform is to begin. It is the central power in our country and through the tools at its disposal – the setting of interest rates and the expansion and contraction of the money supply – it can create not only recessions and depressions, booms and busts and income inequality, but ultimately the indentured servitude of the American people.

The Fed, from the moment it came into being, reintroduced to the U.S. a centuries-old fraud called fractional reserve banking which has served to addict the government and the general populace on a powerful narcotic of financial bubbles, debt, inflation and globalism. The mechanics behind this swindling of the citizenry is so vast and complex that it is outside the scope of this letter and only the bullet points are presented here. I heartily recommend everyone read the book “The Creature From Jeckyll Island” by G. Edward Griffin for a definitive account on the subject.

To the uninitiated, fractional reserve banking is the process by which money is effectively created from nothing. To give an example of how this works, you take $100 dollars you earned from your hard labors and deposit it at your bank. So the bank now has that $100 on deposit in real money. Because the bankers know that very few people will withdraw money at any one given time, they are only required by their rules to keep 10% in their coffers which in this case is $10. They lend out the remaining $90 to customers or other banks and charge them interest. Since both the depositor (you) and the subsequent borrower both have claim to that $90, they have in effect created money where there was no money. Now, let’s say your $90 was lent to Bank B. Bank B then keeps $9 in reserve and loans out $81 to another bank or customer who pays them interest and so on and so on.

The bank pays you a nominal interest rate on deposits but charges you a much higher interest rate when you borrow. When banks receive a loan from another bank it is at the prime rate, so the interest they pay will be vastly lower than what you pay if you borrow from them as a customer. The difference in the interest rates minus the amount they pay depositors becomes bank profit. In effect, you give them money nearly interest-free and they profit off usurious interest on money they create, counterfeit really, with a keystroke on a computer, off of your real labor.

Now multiply this scenario by roughly 300 million customers and you can see how the velocity of the money supply expands nearly at the rate of the known Universe. That is inflation and it often runs the gamut from a few percent to double digits in some years. More dollars are chasing a relatively stable amount of goods, which pushes prices higher and eats away at the purchasing power of your dollars and savings. This is often called the “hidden tax” and your piddling 1% interest-bearing savings account doesn’t look so good now.

In essence, the wages you earned for your services in the work place were determined by a very shrewd assessment between you and your employer of your relative worth to each other. The worker and the employer both agree that the service and the wages when weighed on the scales are essentially in equilibrium. But then this "real" money (because its worth is honored by both parties) is then completely corrupted by being thrown into a slush-fund with fiat money that is created by the banks, money that has no correlate in worth, whether as goods or services, because they only exist as an expectation or projection. Hence you have "good money thrown after bad".

The above was merely an example of a small scale transaction between a customer and a local bank. The Federal Reserve, however, does the same thing on a much larger scale, as they are the sole, monopolistic central bank for a much larger customer: Uncle Sam.

Since the government has rarely run a budget surplus since the creation of the Fed in 1913, our deficits have to be financed somehow. This is accomplished by the selling of U.S. debt instruments made by our government (treasury bonds, for example) to the Fed, who then creates money out of thin air - in much the same manner as our earlier scenario - to loan to the government at interest. The Fed then takes the bonds as collateral. Even though the bonds are essentially IOUs, they are treated the same as hard money since they are backed by the full faith and taxing power of the U.S. government which has never defaulted. The Fed then loans out the debt instruments to its member banks who, in turn, do the same 10:1 loan daisy chain we spoke of earlier. The Fed does indeed repatriate the interest payments (after expenses) back to Uncle Sam, but the commercial banks underneath the Fed benefit from fiat money being loaned out to customers for whom interest is NOT repatriated.

All of this equates to the Fed acting as the major creditor to the United States government, and the government is ultimately you and I. You can understand the magnitude of our national debt and subsequent debt enslavement when you fathom that the Federal Reserve is not federal at all, but a private consortium of banking interests. That’s correct: only a small amount of the debt is owed to holders of treasury instruments like your sister or grandfather. The rest is owed to private bankers for whom patriotism is of little consequence. They are loyal mostly to profit. And as with all debts, they must be paid, with either fiat dollars or hard assets. That is where the indentured servitude comes into play.

When a person or the government borrows at interest, it can only be paid one way: with future labor. We can’t create money out of nothing. Only the Federal Reserve can do that as they were given full control of the money supply in the Federal Reserve Act of 1913.

As the debt rises (and is compounded by inflation eroding your dollar’s value), more and more of your toiling goes to paying interest and keeping up with inflation. You are then in the position of getting a second or third job and you have less time to enjoy life and spend time with your friends and family. For the government, it means needing more and more workers to prop up zombie entitlement programs like Social Security and Medicare. As debt spirals out of control, eventually you (or the government) will default and your tangible, hard assets like your home or car will become the possession of the bankers.

They have denied that they want those assets. The mantra we’ve heard is that “we’re not in the real estate business,” and they tagged these houses as “toxic assets.” Homes, however, can never be toxic assets. They are hard assets with actual value that were mispriced because of the Fed’s housing bubble. But honestly, knowing what you now know, if you were a banker would you rather have dollars created out of thin air and backed by nothing or homes built on terra firma that you can sell at higher prices when the next boom-bust cycle comes around?

In every walk of life and in every era of mankind, a debtor is always beholden to and will do the bidding of his creditors, lest they pull the plug and recall that debt. This is the true reason for bank bailouts, TARP, and “too big to fail”. The Fed simply called in its favor to its government debtors and Dr. Frankenstein’s vassals in Congress flipped the switch for the master and made all the bankers problems go away at, you guessed it, your expense. As long as we are in hoc to the Federal Reserve it will not be the last time, either.

G. Edward Griffin succinctly explained the way debt and inflation (as controlled by the Fed) will work in tandem to lead the people to bankruptcy:

“Inflation can be likened to a game of Monopoly in which the game's banker has no limit to the amount of money he can distribute. With each throw of the dice he reaches under the table and brings up another stack of those paper tokens, which all the players must use as money. If the banker is also one of the players – and in our real world that is exactly the case – obviously he is going to end up owning all the property. But, in the meantime, the increasing flood of money swirls out from the banker and engulfs the players. As the quantity of money becomes greater, the relative worth of each token becomes less, and the prices bid for the properties goes up. The game is called Monopoly for a reason. In the end, one person holds all the property and everyone else is bankrupt. But what does it matter? It is only a game."

"Unfortunately, it is not a game in the real world. It is our livelihood, our food, and our shelter. It does make a difference if there is only one winner, and it makes a big difference if that winner obtained his monopoly simply by manufacturing everyone's money.”

What makes this all the more outrageous is how contrary fractional reserve banking and the Fed are to the ideals of the Founding Fathers of our country. They warned us of the evils of usurious bankers controlling the nation’s currency.

George Washington, in a letter to Jabez Bowen wrote, “Paper money has had the effect in your State that it ever will have, to ruin commerce--oppress the honest, and open a door to every species of fraud and injustice.”

In a letter to John Taylor in 1816, Thomas Jefferson wrote, “And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

He also stated to John Wayles Eppes, “Bank-paper must be suppressed, and the circulating medium must be restored to the nation to whom it belongs.”

How truly wretched that such fervent opponents of fiat currency would have their visages printed upon the Federal Reserve Notes that we today call money.

Only by heeding the words of the wise, past and present, can we hope to prosper again as a nation. If it doesn’t happen soon, the Monopoly game will be over and Dr. Frankenstein’s victory will be complete.

But always remember, capitalism is not the problem. Capitalism, through innovation, industriousness and self-reliance, gave America the standard of living that has been slowly squandered. Corruption of power and cronyism between banks and governmental officials are the real root causes of our maladies. Ignore the zealots in your movement who say otherwise.

There is much to do. Write to your congressmen to demand action. Peacefully and respectfully make your voices heard by putting your best foot forward. Find common ground with the Tea Party. Continue lending a hand to the least amongst us. Steep yourselves in economic theory and join with those, like Ron Paul, who for so long were lone voices in the political wilderness warning America of this economic meltdown.

Removing the undue influence of the Federal Reserve is the most important step Occupy Wall Street can take along the path towards returning the control of the people’s money back to the citizenry as Washington and Jefferson desired.

Thank you very kindly for taking the time to read this.

May the warmest regards keep you strong in the cold, challenging months ahead,

A Fellow Citizen

Friday, October 21, 2011

Economic Meltdown Hall of Fame Class of 2011

Actors have the Academy Awards as the pinnacle of achievement. Athletes have Hall of Fames. Presidents have Mount Rushmore.

What do great economic minds who warned the country of the disastrous results of financial bubbles get? There is that Nobel Prize thing, but that is rigged in the favor of insiders and is the domain of partisan hacks.

No, for the most part these distinguished thinkers are usually mocked and called Chicken Littles on CNBC or Fox Business, ignored by the mainstream media and sabotaged in the halls of Congress.

We here at The Chartographer's Map Room believe they deserve far better treatment. After all, if someone who can throw a ball 100 mph can be exalted by the public, shouldn't our brave thinkers who were lone voices crying in the wilderness get some love? We think so, too.

So, welcome to our first annual Economic Hall of Fame induction ceremony. Honorees had to meet two essential criteria:

1. That they are independent thinkers and truth-tellers and aren't Wall Street shills. If they are involved in government, they must be people who put the truth and ideals ahead of partisan politics and can cross political aisles as necessary.

2. That they had to be ahead of their time and had predicted some aspect of the economic disaster in which our country is embroiled.

So without further ado, here are the six distinguished individuals of the Class of 2011: (And yes, there will be an Economic Meltdown Hall of Shame coming soon as well)

Ron Paul:
Presidential candidate who has been an advocate for Austrian Economics before it was cool. Steadfastly refuses to compromise his principles for votes. Recognized early that financial bubbles and fiscal irresponsibility would place the U.S. economy on the brink.

Peter Schiff:
Endured scathing mockery from lesser minds on CNBC and Fox Business with a smile and good cheer. He nailed almost every aspect of the meltdown, yet no one except Ben Stein had the good grace to apologize to him. Worst of all, most of the fools who were wrong are still getting airtime on financial television.

Ross Perot: That giant sucking sound of U.S. jobs being outsourced can be tracked all the way back to the early 1990s, when NAFTA and other one-sided "free trade agreements" were enacted. The man who heard that noise first? Former Presidential candidate, Ross Perot.

Pat Buchanan: He's been called every pejorative in the dictionary for what he's written about immigration and shifting demographics and its effects on the culture and the economy. What he hasn't been called often enough is simply, "correct". He's warned about NAFTA, globalism, outsourcing, a lack of economic patriotism, the destruction of the nuclear family and the dwindling of the presence of worker's unions. All of these have been factors in leading us to national financial insolvency.

David Walker: That rarest of governmental officials: a high-ranking civil servant who vastly outperformed his salary. The former Comptroller of the Government Accounting Office toured the country for years warning the nation of the dangers of partisan budget shenanigans and "the demographic tsunami that will never recede. He was ignored by Washington. But not here.

Nouriel Roubini: "Dr. Doom" proved painfully correct in his essay, The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to
Financial Disaster
. Mr. Roubini also deserves a nomination for this concise and cogent interview with the Wall Street Journal.

Thursday, October 20, 2011

Buying Gold Until the Trend Breaks

Whenever one actively trades a massive bull market, such as gold today, it is best to buy near its dominant support line and sell once it veers too far from its moving averages.

I believe gold's month-long consolidation period is at its end and expect it to rally from the 1600-1625 per troy ounce level. If you look at the gold weekly chart below, you will see the past 6 or 7 times it has kissed its trendline have been excellent buying opportunities. The trend is the trend until proven otherwise.

A wise strategy to cover you in case the trend does break, is to place a stop-loss order a reasonable distance below the trendline to avoid a fakeout.

I saw people rushing in to buy gold when it started going parabolic at 1900. It was, in fact, the time to sell. We had come too far too fast. To be a good trader, you simply cannot chase stocks or commodities. This is why I will continue to belabor the point: Buy Normalcy and Sell Mania.

Chart courtesy of

Friday, October 14, 2011

Fighting the Invisible Hand and the Plunge Protection Team

In my last post of 10/4, I stated buyers would need to step in that day to avert a crash. Boy, did they ever. The 1100 level on the SPX was breached and took us to the 1075 area when Ben Bernanke and the Plunge Protection Team rode to the rescue with reassuring comments that traders ate up with knife and fork.

This is a fairly common occurrence and one you have to account for when you attempt to trade from the short side. It's yet another reason why it is FAR easier to trade bull markets. When you go short in bear markets, you not only have to fight the faster pace of trading and volatility (since fear is stronger than greed) but also the Invisible Hand of the PPT.

Although no governmental official will ever acknowledge intervention in the stock market and it sounds like some grand, kooky conspiracy theory, traders have known about the PPT and the President's Working Group on Financial Markets for years.

Government has a vested interest in preventing market crashes and averting chaotic market conditions for obvious reasons. No incumbent wants to witness a market crash on their watch. It naturally decreases his chance of re-election. Nor does the Federal Reserve since its members are political appointees.

Economies, markets, banking systems, governments and currencies are all confidence games in essence. Once confidence is broken in any, panic ensues. Panic is the ultimate doomsday scenario for all of the above entities and some form of intervention WILL occur. Whether it be Fed injections, governmental bailouts, or reassuring words or outright lies from officials (to wit, think Hank Paulson and Ben Bernanke denying the Housing Bubble), some Hail Mary pass will be attempted to assuage the public that things will turn out just fine.

Market interventions are historically rare but more common of late with the manifold problems the world faces. Please do not take this to mean there are PPT injections into the market on a daily basis. But the PPT uses interventions as a brake on chaotic selling and preventing crashes at strategic technical moments.

If I could see that a significant close below 1100 on the S&P would spur a crash, then so can the PPT. It is why I said in my last post that the trading day of 10/4/11 was THE day of importance but also threw in the caveat that there might be one desperate attempt to keep the SPX above 1100.

One could rant and rave about how wrong and anti-free markets this is, and they would be right. However, it is a given. If you attempt to make money by trading the short side, expect a well-timed intervention when things are at their bleakest and act accordingly.

As a cautionary tale, Ben Bernanke roasted me badly on 8/16/2007. I had predicted the economic debacle for quite a while and determined that the moment of reckoning had come technically. I bought about $5,000 in cheap, out-of-the-money puts and the market fell dramatically but orderly. My puts within a few days had increased to $25,000. I sold about 1/4 to at least lock in a small profit in a worst-case scenario but let the rest ride as a crash was imminent and a life-changing opportunity was coming.

On that fateful morning, the futures were down massively. The most I had ever seen. The Nikkei was down almost 900 points and when the markets opened within minutes we were down 45 handles on the SPX. My puts went up exponentially that morning alone and I was literally planning an early retirement. It was options expiration as well.

Within a half-hour of the opening of trading, after more shorts had been brought in by the technical break, Ben Bernanke announced a liquidity injection causing the mother of all bear traps and short-covering rallies. The SPX rallied 30 handles in moments and ended higher on the day. The market was saved from a crash for a short while seemingly out of the blue. My early retirement was now just a measly $2,000 profit. Let's just say I was not happy with Chairman Bernanke and the PPT that day.

(Pardon my language in that link, by the way. It was not my finest hour as a human being, but the purpose of this blog is to show you the nitty-gritty of trading and I have to be transparent to build an intellectually valid trust with my readers. A member of that message board had accused those of us who were short of being ghoulish profiteers and I unloaded on him.)

The PPT knew the importance of that day. They knew by giving the market some crack on options expiration that they could cause a bear trap of epic proportions and lift the markets higher. It was my rude awakening into the ways of the PPT. I vowed from that moment forward I would never allow the PPT to burn me again and whenever I am short, I am always aware that the Invisible Hand is out there ready to guide the market where it wants it to go. It was an expensive lesson that I hope you don't have to learn. It also was the day I learned slow, steady gains and disciplined trading was the right path to follow.

Monday, October 3, 2011

Urgent Market Alert 10/4/11

Well, the market is officially at its "uh oh" moment. The S&P finally put in the lower low I was expecting in exactly the time frame predicted in late August. October has historically been a lousy month for the market and the breaking of 1100 should kick off even more significant selling. There could be one more last gasp attempt to elevate back above 1100, since it did not get significantly below (and the VIX has not broken its flag yet). But I don't expect that to occur. Here's why:

The moving averages are now curling downward, 1100 and Fib 38% have been breached (with a big, ugly red candle) and refer to my previous posts for the hideous monthly charts. Add to this, the longest and harshest wave down on my Elliott Wave count is still to come.

If the market is to keep from crashing, buyers will have to step in on the 10/4/11 trading day.

All charts courtesy of

Daily chart:

Weekly chart:

Monthly chart:

Saturday, October 1, 2011

Too Big to Fail

By Matthew G. Pickup,
Guest Contributor

Once, not too long ago, it was widely held that capitalism was a game of winners and losers. The players would proceed on the basis that the market would either respond favorably or unfavorably to their respective offerings. The game was only viable if the possibility of great reward was accompanied by great risk. After all, what incentive is there to play any game if one does not at the very least pay lip service to honest competition?

So here we are, circa 2009-2011, and the jig is up. The game is rigged. The Wall Street paper traders, who incidentally create nothing, can and do reap the rewards of speculation but perversely can also rely on tax payer hand outs to resurrect their failed business ventures under the hateful rubric ‘too big to fail'. Historians and scholars have for years struggled to find the right translation for Voltaire’s infamous phrase ‘ecrasez l’enfame.” One widely agreed upon construction is ‘crush the hateful thing.’ Could Voltaire have meant and felt exactly the same thing about the Ancien Regime as we today feel about the monstrous entitlement that belies ‘too big to fail’? Crush the hateful thing.

So. We’ve all heard the hated phrase. Like an insufferable smug uncle, they (you know who they are) pat you on the back and say ‘sometimes ya gotta take one for the team son’. Naturally the plutocrats and their creatures amongst the cognoscenti media sell this tough love in the language of unassailable technocrat authority – you can hear the sonorous lecturing tone dripping with condescension (Sen. Dianne Feinstein, Warren Buffet anyone?) for the great unwashed middle classes who have the chutzpah to argue from the evidence of their senses (to say nothing of common sense) and the quaint audacity of Aristotelian logic. The law of the excluded middle says; A) the lot of the middle class is improving; B) the lot of the middle class is worsening. It cannot be both A and B. In exhibit A we have stagnant wages, spiraling living costs, rampant joblessness, decaying infrastructure, failing schools, criminalization of dissent, signs of rapid acceleration towards a police state and wholesale demographic replacement via unchecked third world immigration. Clearly, all signs point to B.

No, our new plutocrat overlords on Wall Street and Washington are here to set the record straight; while risk and reward , success or failure (bankruptcy) may be part of small capitalism, who cares if Vinny’s Pizzeria, or Rob’s Hardware and Supply thrives or dies, really, but woe betide America if the sumptuous life styles of the great paper traders and high wizards of arcane finance should ever diminish, for so vital are the services of these celestial personages that ruin for them must, perforce, mean the collapse of our economy, civil society and possibly even Western Civilization itself. Too big to fail. Verily, they are Capitalists and they are to ordinary men as man is to the ape. Yessir, be glad you worked all that overtime at the autobody shop, Joe, because while all your sacrifice and drudgery almost certainly will not buy your children a brighter future, the sweat of your brow means a few more years of rich Bernaise sauce and chateau lefite for your infinitely more refined and well manicured betters in the Hamptons. Be proud of your toil, and as the yoked oxen stoically plow the hard ground so should your unsung servitude be your badge of pride. The great paper traders can hang on to their Swiss chalets a little longer and their lovely pleasure craft are a few more years postponed from being commandeered by the People's Republic of China as fishing junkets for the glory of the proletariat.

(Ladies and gentlemen it is with the gravest trepidation and existential dread that I inform you of breaking news that the Euro is in peril. Something about the insolvency of Greece spreading like an unspeakable contagion across the Continent, threatening to bring down the very European Union itself! Horror of horrors, sic gloria et transit mundi. Obviously the situation cries out for a bailout which only the prosperous North can deliver. Apparently however the self righteous heartlessness of the Teutonic peoples in their cold and misty hinterland has reared its ugly head for they do not want to help their Mediterranean brothers. These mean spirited Goths talk of a strong work ethic and spending within ones means and all this self reliance stuff. Where is their humanity I ask? The Greek model was a noble one: shorter weeks, perpetual job security and a lavish welfare state, yes its true that it was fiscally unsustainable but the intentions were good and that’s the important thing. We would do well to be mindful of the wise teachings of professor Jeffries, who tirelessly cried out against the perpetual victimization of the Sun People by the callous predatory Ice People.)

To wit, in America we have socialism for the rich, underwritten by the waning middle class, in Europe we have socialism for the profligate Mediterranean South, paid for by Northern Europe, whose citizens mostly get up before 10 in the morning. Do we begin to see a trend?

The author proposes the following allegory for illustration. At some point in the history of conservation, the relevant authorities realized that in attempting total suppression of natural forest fires they has in fact created the perfect conditions for truly cataclysmic conflagrations, fires that could utterly destroy a forest. This is because natural fires cleanse forests from accumulating detritus and decay and allow for the possibility of new growth. When the natural order is subverted the massive accumulation of decaying biomass provides the necessary fuel for an unstoppable Biblical-scale firestorm. So in attempting to protect nature they had brought into being an unnatural occurrence the results of which were the opposite of their intentions.

If half of the American dream is that the ambition of a hot dog vendor can lead him to rule over a mighty business empire the other half demands that the hubris of a CEO can bring him down to selling hot dogs.

Unhappy about all of this? Deal with it. Be happy because the Nanny State will give you the table scraps and leftovers …to quote from the peerless insight of Jello BiAfra: “Do not attempt to think or depression may occur…at last, everything is done for you.” George Orwell famously said that his nightmare vision of the future was of a jack boot kicking a face over and over and over again, ad infinitum. Well this author’s present nightmare is of the middle class taking it in the shorts over and over and over and over…

Thursday, September 29, 2011

The Doldrums Before the Storm

There hasn't been much to comment on this week. This large bearish flag/compound head and shoulders pattern we've been trading in for the past 6 weeks in the S&P is just taking its own time as is its wont.

The prognosis remains decidedly bearish as the 50 and 200 day EMAs are both curved downward and the monthly MACD death cross is imminent. 1100 remains the important number on the S&P.

While we await the Big Picture unfolding, there are short-term trading opportunities. When trapped in trading ranges, oftentimes trading off candlesticks will be fruitful. During this flag, candles with big wicks have proven to be good for two-to-three day reversals. I've circled some of the reversal candles on the chart below.

All charts courtesy of StockCharts.

Daily chart:

Big Picture: