Understanding the Market's Gyrations

By Kevin Freeman
August 11, 2011Aug 11, 2011

The recent market gyrations are suspicious to say the least. Stock prices collapsed almost 20% in a few weeks including several declines of 400 points or more on the Dow in single sessions. The same issues at work were those that caused the 2008 collapse include credit default swaps, naked short selling, and high-frequency trading, The difference this time around, however, is that the focus of the attack was initially on sovereign debt and currencies. We described this as Phase Three in our Pentagon report.

When the U.S. Treasury debt was downgraded by S&P over the weekend, the markets reacted violently negative. Ironically, investors panicked and sold assets, raising cash. The cash was then dutifully placed in Treasury bonds, the very instruments that were downgraded. We believe that this will be short lived. In fact, today's auction of 30-year Treasury Bonds went very poorly. According to a Financial Times article this evening:

But the most extreme move is in yields on 30-year US Treasuries, which are rising by the most since the early 1980s, a rise of more than 27 basis points to yields of 3.75 per cent. That followed an auction with the poorest demand in nearly three years, as investors balked at buying risky, long-term notes that yielded just a bit more than inflation, and dealers were left with inventory to sell.

Whether or not this is the end-game attack on U.S. Treasury debt remains to be seen. But, we already know that the debt has been downgraded and there is a growing chorus demanding that the dollar lose its reserve currency status. A dramatic spike in yields would hammer bond investors and increase funding costs for American debt. Under normal circumstances, however, higher yields would make a currency more attractive. In this case, however, an attack on the dollar's reserve status will weaken the currency AND increase funding costs.

It is important to keep in mind the article in Qiushi from earlier this year which said:

It suggested that China should use its economic clout and trade as a weapon to rein in neighbours….

China on its part, it said, can consider the idea of launching economic warfare through strategies to contain the US dollar and making effective use of forums like the IMF and initiating a space war by developing strong space weapons… It also said the China should also launch a public opinion war by making an effective use of the free media in the US and other democracies.

"Of course, to fight the US, we have to come up with key weapons. What is the most powerful weapon China has today? It is our economic power, especially our foreign exchange reserves (USD 2.8 trillion). The key is to use it well. If we use it well, it is a weapon; otherwise it may become a burden," it said.

China, it said, should ensure that that fewer countries should keep their forex reserves in US dollars.

"China, Japan, the UK, India, and Saudi Arabia are all countries with high foreign exchange reserves," it said analysing each country's ability to align with China against the US.

So in view of this China should "pick up courage" and go for aggressive buying of other currencies, including the Indian Rupee hence taking the lead in affecting the market for US dollars.

This approach, it said, is market-driven and it will not be able to easily blame China.

"Of course, the most important condition is still that China must have enough courage to challenge the US currency. China can act in one of two ways. One is to sell US dollar reserves, and the second is not to buy US dollars for a certain period of time," which will weaken the currency and cause deep economic crisis for Washington.

Given the fact that China is the biggest buyer of US debt, its actions will have a demonstrable effect on the market.

"If China stops buying, other countries will pay close attention and are very likely to follow. Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans wealth will be enormous.

"The US will not be able to withstand this pressure and will curtail the printing of US currency," it said.

This is reminiscent of when the Russians rerportedly approached the Chinese in 2008 to sell Fannie Mae and Freddie Mac bonds to force a bailout from by the Treasury and create economic crisis for our nation. The source for this tidbit was none other than Treasury Secretary Paulson writing in his memoir On the Brink.

So much is happening so rapidly now that it is difficult to keep up. We are getting reports from around the world aware that the current financial crisis is far from a natural occurrence. In fact, it looks quite a bit like what was reportedly described by Stephen Lerner in a secret meeting of Leftists intent on crashing the market by destroying banks (as we shared in our post, The Invisible Gorilla). Even the nature of the riots in London are suspect.

Keep in mind that radical Marxists, anarchists, and the Muslim Brotherhood worked together to produce the Arab Spring and the fall of Mubarak in Egypt.It would be foolish to assume that these groups wouldn't be trying to work here as well. The comments attributed to Stephen Lerner of SEIU would appear to be a "smoking gun" of such efforts.

We have received reports from international intelligence sources that our basic hypothesis on Economic Warfare is accurate. In fact, recent reports seem to corroborate that we are in Phase Three now. Here is a report from a Blogg in Belarus:


For those who don't speak Belarusian, the Google translation contains some interesting comments:

In 2009, a report commissioned by the U.S. Defense Department  had given evidence that terrorists or hostile states, using the vulnerabilities of the U.S. financial system, implemented a financial diversion, which has led to economic collapse in 2008. Economic analysts and the Government Commission for the Exploration of the financial crisis blamed (the crisis) on economic factors such as the proliferation of risky mortgage lending and weak federal regulation and supervision, The author of the report to Pentagon, financial analyst Kevin Freeman, added the new element – "external forces" – a factor that the commission did not consider at all! "There is sufficient evidence to suggest that external forces provoked, and took advantage of increased economic difficulties in 2008," – said the report

We are now seeing a new wave of attacks. It can be assumed that the unrest in London – (is) a sort of accompaniment. All very serious…."

It is interesting to note that in the aftermath of the this week's market declines, governments in Europe and Asia have instituted various bans or restrictions on naked short selling and credit default swaps. This indicates that they understand how serious things have become. If the attacks were to continue, the fragile economic recovery would be wiped out completely. Our primary concern is that for some, that is the intention.

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved