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March 19, 2005

Pirates of the Caribbean
by Rob Kirby

Although I cannot be sure exactly where, I'm certain I read somewhere a famous quote that's attributable to one of the swashbuckling pirates [either Blackbeard or Greenbeard, perhaps?] of yore, namely, that "your word is your bond." In this case the quote evokes connotations of there being honor among thieves, if you will, in that cads who earn a living through illicit means generally tend to stick together when the going gets tough cause after all - it's a brotherhood.

Way back in yesteryear, some of these notorious pilfering cads used to take refuge in the largely uninhabited and virtually lawless Isles of the Caribbean. Apart from the obvious benefits of offering a warm climate and convenient place to hide and store booty, they offered any would be pirate the added convenience of proximity to world shipping lanes - or a steady and growing supply of unwitting victims. But suffice to say, that historically, the Caribbean has served as a convenient and preferred place for some of the worlds most illustrious and celebrated criminals and profiteers to both base their operations and/or hide their illicit gains harvested from their adventurism on the high seas.

There is branch, or discipline, within modern economics that encompasses a somewhat artful [even if it is a little dodgy] discipline known as technical analysis. At its core, this discipline involves careful study and measure of events that have occurred in the past and utilizing historic recurring patterns of how events unfolded to predict how events [economic occurrences] might unfold in the future. Followers, or believers, of the predictive powers of technical analysis are generally devout in their belief that history tends to repeat itself. As such, if this is true, I would argue mankind is subject or condemned to repeat reprehensible conduct, be it profligacy or outright currency debasing fraud and theft by officialdom since history is replete with examples of the same.

Speaking of "your word being your bond" generally and bonds, specifically - I decided to take a look at yesterday's TIC numbers published jointly by the US Treasury and Federal Reserve.

In doing so, one might choose to notice how America's traditional financiers [Japan, China and Korea] have actually reduced their holdings of US debt obligations but our new best friends, the Pirates [hedge funds?] of the Caribbean have dramatically stood in for the debt fatigued Asians in accumulating a walloping 23 billion in additional US debt in the latest reporting month [Jan. 05]. Go figure, ehh, who would have ever thought that pirates could or would ever be so charitable?

Upon further examination of the red line in the table above depicting the Caribbean banking centre and their holdings of US securities; what stands out above all else is that this line, unlike any other jurisdiction in the world, looks contrived, lacks continuity and its erratic fluctuations give the appearance that this line is being used as a "plug". Actually, the term 'skullduggery' comes to mind. It should be remembered that other jurisdictions in the world are home to hedge funds also, yet none of them exhibit such wild fluctuations in their monthly reporting. Strange, ehh?

You see folks, it's officialdom and their Wall Street shills themselves that would have us believe that Caribbean based hedge funds have actually 'picked up the slack' so to speak [if you want to call 23 billion slack], and anted up this enormous amount of investment capital to float the American government's profligacy pontoon boat. They also tell us that there is a shortage of "long term" paper in the market and this has been the primary cause for long term rates remaining so stubbornly low. Upon further examination of the detailed TIC data supplied, compliments of the good folks at the Treasury, here:

http://www.treas.gov/press/releases/js2314.htm

We find that, indeed [and admittedly counter intuitively to me], foreigners have been seemingly snapping up securities - massively favoring the long end of the [interest rate] curve versus the short end. This is evidenced by this quote on the U.S. Treasury's web site [link above]:

Net Long-Term Securities Flows

"Net foreign purchases of both domestic and foreign long-term securities from U.S. residents were $91.5 billion in January compared with $60.7 billion in December."

With such being the case, here is a somewhat simplistic but I would argue accurate depiction as to what has happened to these friendly and extremely generous Caribbean based hedge funds in the past month and a half:

*10 yr. 4.00 % cpn. gov't bond in the month of Jan. yielding 4.00 % = price of 100.00

*Same bond in March with a yield of 4.5 % = price of 96.03 [4% loss]

Remember folks: Hedge Funds typically employ leverage when they "invest". 10 dollars in bets for every 1 dollar in equity [shareholder's contributions] is perhaps a conservative measure in assessing leverage employed by hedge funds engaged in the Bond Trade. [Using LTCM as a well documented benchmark, they used leverage of roughly 100:1 whilst plying their trade in supposedly much riskier Russian bonds].

So using this conservative metric of 10:1, anyone can see that in the past six weeks alone, Hedge Fund losses on their acquisition of 23 billion in additional US debt has likely resulted in losses in the neighborhood of 40 % of the principal allocated to acquire the position. In such case, this would represent nothing short of mortal body blow to their capital invested in these bonds. [Utilizing 25:1 leverage in the same example, their equity capital would have been completely wiped out] If such were the case, this would surely be front page news in the main stream financial press now wouldn't it? But we all know this is not the case, since nothing to this effect has been widely reported, or even under reported in our responsible main stream financial press.

In fact, the only story relating to hedge funds to receive any press whatsoever, in the past six weeks has been from relatively obscure KL Financial, based in Florida.

http://www.sec.gov/litigation/complaints/comp19117.pdf

It has been reported that one of KL's founders and head trader, John Kim's aggressive trading led to the KL's demise - no mention of bonds. KL's various troubled funds [rumored to be 200 - 300 million in aggregate] that regulators have swooped in on seizing and freezing are all mainland U.S. based and have nothing to do, whatsoever, with the Caribbean? So what else could it be?

How about the Carry Trade? In the carry trade, hedge funds would naturally buy the long end of the curve and fund at the short end. With the yield curve flattening as much as it has, the effects of such a strategy would have been doubly disastrous.

The foregoing suggests that hedge funds categorically did not buy these securities. The explanations being offered up as plausible by officialdom and fed to us by the main steam financial press are not consistent with empirical facts or market observations. There are no wide spread or significant losses being reported by the hedge fund community from ill gotten losses in the Treasury market.

The answer to the question posed above, dear reader, rests with one determining who else in the world has pockets that deep, to buy 23 billion bucks worth of securities in a single month? One might surmise that a printing press would be required to come up with that kind of cash on such short notice, ehhh? Observing my surroundings, I can see rapidly rising prices for virtually everything. Look at the CRB index. Look at the price of oil. Look at the price of houses. Look at the sorry state of the dollar and listen to its biggest holders complain that they are holding too many of them? Weigh all of this against the claims from officialdom that inflation is not a concern - citing doctored CPI, PPI and an anemic gold price level long suspected of being rigged. Once again, the numbers being reported by officialdom are quite simply inconsistent with empirical realities. This is all highly suggestive that someone, somewhere, is working overtime creating [printing perhaps?] a little, no - a lot, of extra ca$h. Who would or possibly could do such a thing?

While I do not put too much faith in technical analysis, my suggestion to you, dear reader, is that history is indeed repeating itself and maybe Pirates still inhabit the Caribbean. Perhaps they are aided and abetted in their modern day financial piracy by Wizards and Snowmen, with printing presses, who reside in Washington? Could it be that the booty they have confiscated from us all is nothing more than the diluted purchasing power of the currency we all work for? If so, true to form - like the days of yore, these cads are sworn to secrecy as they pillage and harvest our wealth for their own self serving, grand illusion, fiat preserving ends.

From where I sit, it all looks like pilfering pirates profiteering, pushing phony paper, purposely positioning people - portending a perilous plunge from the proverbial plank.

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Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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