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Bankers vs. US Fed !!!

October 18, 2005

A battle of the titans is shaping up. The BKX bankers index is in the process of breaking down. It represents some of the largest and most powerful money center banks in the United States. Just two weeks ago, a warning was given that the BKX was in danger of breaking below critical support at 95. That level was broken last week. It was quickly rescued. The hint of a banker breakdown should generate enormous political pressure on the USFed to stop hiking rates!!!

Despite fealty bestowed to the banking community from the US Federal Reserve, the measured pace of extremely unwise and reckless interest rate hikes puts the profit margins for bankers at risk. The hikes put the Treasury yield curve and bond speculation profits at risk, as the spread trades do not look so easy anymore. Pressures upcoming on household credit card holders to double their minimal payments will likely result in more defaults, and "setasides" to loan loss reserves for bankers. It is all bad.

A HORRIBLY DANGEROUS BEARISH CHART PATTERN IS EVIDENT. It hits me in the face, unmistakable, and dire on the BKX bankers index. Check for yourself the bearish inverted Head & Shoulders pattern having taken form over the course of this entire 2005 year. No chart fits a textbook version, but this BKX inverted H&S comes close. It spells deep trouble for bankers, who can be expected to take it in the shorts soon. We see a head with peak value in the end of Dec2004. We see a left shoulder high in March2004, and a right shoulder high in July2005. The neckline stands in a ribbon of support at 93 to 95. The upper end of that critical support gave way last week, only to spring back with new energy. Could we have seen the invisible hand of Mr Govt, rather than Mr Market? Methinks yes.

The H&S chart is surprisingly reliable in offering a target, once it breaks down below the neckline. The breakdown process has begun. The peak is at 100. The neckline is at 93-95. Call it 94. The target upon clear breakdown is thus 88. Given the heavy congestion in the chart from summer 2003, one can comfortably call the breakdown target 87-88. The break below 95 was followed in textbook fashion by a return to the scene of the crime, a bounce back to mid-95.

What makes it all the more dangerous is that within the inverted Head & Shoulders bear pattern lies another massively large longer term H&S bearish pattern. The target level at 87 is itself a neckline, which does NOT seem to offer much in the way of historical support. It harbored three turns in summer 2003, hardly a strong support wall from which to bounce. If that 87 level fails, we could easily see the BKX bankers index retrace all the way back to the floor at 70 last seen in the early spring 2003. Ouch!

My personal conjecture is the Plunge Protection Team was busy late last week, and rescued this all important index. Good past earnings for the major banks like JPMorgan et al helped the process. However, continued USFed tightening will surely place monumental stress on these big banks. They must find profits, when the lending operations are under strain, when credit card operations are soon to squeeze the vise, when Treasury spread trades are harder to pull a profit from. One cannot find a more important stock index (outside the S&P500 itself) to control, in order to paint a picture of health, in order to avert a loud gong warning signal. What the SOX is to the technology sector, the BKX is to the financial sector. Yes, sports fans, the Working Group for Financial Markets, whose raison d'être is to serve as the Wizard's signal controller for the increasingly complex train station switch & signal billboard, has entered the fray to control the bankers index.

Not only is the BKX bankers index controlled, but it is moved with leverage. It trades in options which further enable both movement and profit from successful manipulation.

Some claim the USFed and its Chairman are pawns to the banking industry. We might soon see the oppositional forces aligned in clear fashion for all to see. Will comments come from the Citigroup Chairman or from the JPMorgan Chairman or even from the Wells Fargo Chairman. Could the aggressive acquisition program by the JPMorgan folks be a good thing? Hardly. Could further consolidation by the bank giants enable control or inhibit control? Hmm. Is the JPM motive to secure clear assets so as to mix in underwater derivatives, with the childlike hope that the acid will be neutralized by potable water? In my chemistry books, it was taught that neutral water plus acid still equals acid. My longstanding contention is that JPMorgan went bankrupt long ago, and has enjoyed revival and resuscitation only from its umbilical appendage to the Federal Reserve itself. Oh yes, JPMorgan married Japanese giant Sumitomo in 2002, which has made central collusion all the easier. Recall a $1500 million dowry to seal that goony marriage.

The USFed will not be making friends in high places with continued interest rate hikes. The entire tightening process inflicts harm on bankers, from both lending and trading desk operations. Calls from CEO's in money central Manhattan banks are sure to come, with the fully expressed urge for the Fed to STOP. A seat on the sidelines will be entertaining, if you know what to look for. Posturing by a CEO must be interpreted closely. If the USFed is truly under the control and aegis of NYCity banks, we will soon see evidence of strong arm tactics to stop the hikes and enable restored profitability.

The USFed Board members, comprised of the Chairman Magoo and his elves the many regional Governors, have embarked on a grand public relations campaign. Anyone who believes the Fed only recently discovered a price inflation problem, well, he or she should hustle down the local REMAX realtor and put a down payment on some Tennessee oceanfront property. My analysis has consistently pointed out the difference between COST INFLATION and the ASSET INFLATION which make for a witch's brew in the US Economic cauldron to produce a very difficult environment on PROFIT MARGIN SQUEEZE along with a HOUSEHOLD SQUEEZE. What the USFed, and many economists, often fail to recognize, and certainly fail to properly explain, is that the US Economy is suffering from numerous cross currents. That it is experiencing an unprecedented array of mixed effects. The monumental increase in money supply amidst a credit explosion has produced gargantuan trade deficits, Asian industrial buildup, and Asian reinvestment in US Treasury Bonds.

As pointed out in "Export Inflation, Import Deflation" in a March2005 article, monetary inflation in the modern day queer US style has brought about both RISING PRICES and FALLING PRICES. The key is to know where oversupply exists, and where shortages exist. In general finished products are in oversupply, while materials and energy are in shortage. Most US economists still prefer to think in aggregate to conclude in incredibly childlike incompetent unlearnable unrealistic laughable manner that "inflation is the threat" or that "deflation is the threat." The reality is that monetary inflation is the threat, and the downstream consequence is for both rising prices and falling prices in a wicked maelstrom of their own making. My doubts continue that US brand of economists can properly influence policy makers to stop the direction of destruction. The most vivid evidence of the destruction is the dependence on asset inflation, blessed as legitimate by our central bank, for the sustenance and growth of our teetering economy.

When the hurricanes hit, it became clear to the world that the United States had no resolve in financial matters. Why should we, when as world currency holders and benefactors, we can print money with abandon and coerce the world to supply the capital necessary to pay our bills? Before the French finance minister, Chairman Greenspan admitted our broken budget process long ago out of control. He was embarrassed to be quoted. My personal take is that Greenspan, soon to exit his post, is eager to lay blame on the US Congress, in order to deflect attention away from his serial bubble engineering modus operandi. He supplied the quote, enjoyed its broadcast, and left it up to the Dept of Treasury to issue lame denials. He thumbed his noses at Treasury.

The real reason for newfound awareness of price inflationary threats is to provide political cover for a series of continued measured rate hikes by the USFed. The real reason for the sequence of upcoming painful rate hikes is to keep foreigners motivated to support the USTBond sales by the USGovt. The absence of responsibility has never been more starkly clear when the $250 billion Transportation Pork bill was left intact. Its funding, in its entirety, should have been scrapped and redirected to the Gulf Coast for reconstruction of vital infrastructure. No way! Instead, heralds trumpeted how the entire reconstruction would be a boon to the economy, and how all building projects would aid economic growth, and how the budget deficit would balloon.

The USFed saw fit to react when the US Congress and Administration leadership decided not to act with fiscal responsibility. If the federal deficit is to rise by over $200 billion as a result of storm damage and repair, then we must encourage foreigners to continue to finance the bills. BECAUSE LIKE A SPOILED BRAT, THE USA CERTAINLY DOES NOT INTEND TO PAY THE BILLS !!! We are the world leaders, and leaders shuck their bills.

The USFed wants to prevent a run on the USDollar. They also want to prop up the Treasury yield curve, so that the long end can also rise as they push up the short end. Long-term interest rate must not be permitted to go equal to or below the short-term interest rate. To flatten or go inverted would issue a strong unmistakable signal of upcoming recession, where the US Economy would go into reverse and experience a pullback. The job loss would be huge during any shrinkage. We will see how much higher costs will be passed along. Just today, the September Producer Price Index came in at a whopping +1.9% against a core of +0.3%. Let's see how much comes through to the Consumer Price Index. Well let's be clear. Statistical defense mechanisms prevent much of any numerical arrival of higher index values in the CPI, due to heavy hedonics, heavy substitutions, and basic fraud. Perhaps with food prices down a bit here, they might over-weight food as a component. Perhaps with a slight drop in driving miles, they might under-weight gasoline. So higher costs might be passed along, but the CPI will be slow to reflect this arrival.

No way. The USFed wants to manage the USDollar, which when the rate hikes stop, is in very big danger of a massive worldwide selloff. No way. The USFed wants to support the yield curve, which already is making lives for bankers very difficult. If the long-term rate heads back toward 4.0%, banker profits will vanish and the BKX bankers index will show this loud and clear. The USFed walks a tight rope. They have undoubtedly put the US Economy at risk, when higher costs are already locked into the tangible side of the equations. Imposing higher interest costs at this time seems reckless.

As banker distress becomes more obvious, the risk will again be transferred to the USDollar, with or without higher interest rates. The drag which Greenspan describes from higher energy costs is exacerbated by his own higher borrowing costs, amplified by higher minimum credit card payments. A slower US Economy will surely discourage investment in the US asset base, whether stocks or housing or commercial development. We must soon resort to more distortion of the US GDP, which is in all likelihood going to be negative but reported positive. Yes, a recession in real terms will be endorsed as growth. Inadequate removal of price inflation will render cost inflation as growth, in more fraud on the statistical front. By the way, it only takes a grade school education to debunk economic statistical falsehoods and corruption. A blind eye is key to perceived confidence in our economy and its health.

The only solace of support will come from the bond world. In the last three years, the sickly distorted bloated US Economy has been kept afloat by housing. In the next year, look for the sickly beast of the US Economy to be kept afloat by higher yielding bonds. In time, that too will fail. As the Austrian School of Economics is well aware, the real economy eventually prevails over the financial sector, full of shinanegans and interference and gamesmanship, not to mention the heavy hand of controls. Chairman Greenspan has a "scheiss storm" to greet him upon his retirement.

My eyes will be watching the 4.5% mark for the 10-yr TNote yield, and also the 119 mark for the euro currency. Both levels are being challenged, will be challenged, and will continue to be challenged during this battle of the titans.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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