J.P. Morgan - Loving Their Handiwork

Rob Kirby
Nov 7, 2008

The following research paper was compiled as the basis for a radio interview with Patrick Timpone at One Radio Network.

Morgan is the quintessential leviathan in the Interest Rate arena through their obscenely sized Medium-Term Interest Rate Swap book which stood at 59 Trillion at June 30, 2008.

The interest rate swap book, due to its sheer size, overwhelms the bond complex by creating artificial demand for government securities. This interest rate suppressive activity began in earnest back in the 1990's and has kept market rates of interest at artificially low levels. The FUNDAMENTAL [and ongoing] MISPRICING of CAPITAL - for many years - has led to a myriad of economic excesses like the Dot Com boom, subsequent housing boom and the financial asset boom itself.

Morgan's overbearing effect in the interest rate complex required the simultaneous suppression of the gold price. This was done to make falsified inflation data seem credible. It has often been said that, "if real inflation heats up - BOND VIGILANTES would raise market rates of interest reflective of real inflation". The reality folks, the BOND VIGILANTES are extinct - they lost their jobs long ago - being swallowed by the black hole that is J.P. Morgan's derivatives book. This is documented in a laundry list of articles archived at Kirbyanalytics.com.

In the energy area [crude] - J.P. Morgan was "granted" the rights to, effectively, set up the Central Bank of Iraq in Dec. 2003:

J.P. Morgan Chase was chosen by the Coalition Provisional Authority [CPA] to "set up" the NEW Central Bank of Iraq [specifically, the Trade Bank of Iraq]. Take note how this TRADE BANK only became operational in December of 2003:

• Trade Finance. The Trade Bank of Iraq (TBI) was established in July 2003 to facilitate trade of goods and services to and from Iraq by providing irrevocable letters of credit. The TBI officially became fully operational in December 2003 and has a services contract with a multi-international banking consortium led by JP Morgan Chase. Since opening in December, the Trade Bank of Iraq has issued or has pending 183 letters of credit, totaling $708.9 million in imports from thirty-one countries. Letters of credit have been issued on behalf of Iraqi Ministries as well as several state-owned enterprises.

In that capacity, Morgan was charged with developing the framework of collateralizing movable and immovable property for the nation of Iraq.

When we take a look at "The Administrator's Weekly Report" - Feb. 28 - March 5, 2004 where it's all neatly explained for us:

V. LAY FOUNDATIONS FOR AN OPEN ECONOMY

Provide IG Staff Capability; Trade Bank; WTO Observer Status; Draft Intellectual Property law to IGC by April 15, 2004; Develop Framework for Collateralizing Movable and Immovable Property

Here's What They Did:

I'd now like to draw your attention to a research paper published just last week by the good folks over at the Commodity Futures Trading Commission [CFTC]:

CFTC's Office of the Chief Economist Releases Study on "Market Growth, Trader Participation and Pricing in Energy Futures Markets"

Washington, D.C. - The Commodity Futures Trading Commission's (CFTC) Office of the Chief Economist today released a study titled "Market Growth, Trader Participation and Pricing in Energy Futures Markets." This study provides an analysis of the composition of traders across different energy futures contract maturities and addresses questions relating to price discovery in these markets. Specifically,

• The authors use CFTC data on futures trader positions to document major changes in the size and term structure of the U.S. crude oil (WTI) futures market. The authors find that as recently as 2000, trading activity in this market was heavily concentrated in nearby contracts. Since then, overall open interest has grown two-fold, with trader activity at the back end of the term structure increasing more than twice as much as the market as a whole.
• The market growth in long-term (more than three years) positions generally started in 2004, which coincides with the growth in participation by commodity swap dealers.

We know Morgan was a major player because they admit it and brag about it:

To get your head around how ole J.P. Morgan trades energy futures, we need look no further than their own website, [article has since been removed from J.P. Morgan's site,] where they're more than happy to tell us,

Risk magazine, January 2006

J.P. Morgan was named Risk magazine's Energy derivatives house of the year in their January issue. According to Risk, "J.P. Morgan has emerged as a key player in energy derivatives over the past year." Since 2004, under the guidance of Beau Taylor, global co-head of Energy, the firm has built a leading energy trading practice. Focus has extended from natural gas and crude exotic derivatives to include electricity, coal and emissions trading. [RK bold emphasis]

They wear it like a badge of honor, don't they? To "borrow" a cliché [pun intended] - these guys really are good, aren't they?

The selling of "long dated" oil futures [by guess who?] began in earnest in 2004. We know this because the CFTC has told us. Long dated futures [similar to long dated bonds or Medium-Term Interest Rate Swaps] is where EXPECTATIONS are formed about the future price of commodities.

And we all know how important expectations are, where inflation is concerned, to folks like Chopper Ben Bernanke.

We all read and hear from officialdom that the prospects for inflation, while elevated somewhat recently, always remain anchored and/or subdued on a forward looking basis:

...if the public experiences a spell of inflation higher than their long-run expectation, but their long-run expectation of inflation changes little as a result, then inflation expectations are well anchored. If, on the other hand, the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably, then expectations are poorly anchored. -FED Chairman, Ben Bernanke, July 10, 2007

In this speech titled, Inflation Expectations and Inflation Forecasting, Mr. Bernanke goes on at length about the influence that 'expectations' have on inflation but he fails [intentionally, perhaps?] to mention its true cause:

"Inflation is a phenomenon caused by the increase of money supply relative to the growth of production capacity for goods and services."

Having firmly established themselves in the crude oil marketplace, in Dec. 2005 J.P. Morgan moved on to the Natural Gas Arena:

In the Nat. Gas space, J.P. Morgan began "serially taking the other side of their client Amaranth's trades" - inflicting serious damage on the Bank of Montreal along the way - as they wrestled the price of Nat. Gas down from 15 bucks to today's levels. This is all outlined and documented at these links:

http://www.financialsense.com/Market/kirby/2007/0507.html

http://www.financialsense.com/fsu/editorials/kirby/2007/0518.html

When Amaranth finally succumbed, it was none other than J.P. Morgan Chase who conveniently consumed their offsetting "long" Nat. Gas position.

What this has all devolved into was recently, eloquently and accurately put to me by a fellow researcher / writer Wayne Krautkramer:

"I fear that we are dealing with something far different at this time.

They have unleashed the forces of chaos upon us.

We witness the western governments giving their Treasuries the power to directly tap the income of the citizens to use in market manipulation.

The joke is that they are giving the citizen's wealth to the very same people who caused this debacle.

So much for the myth of humans having intelligent, discerning minds!

So now we know the rules.

This is similar to a rigged poker game.

There are two ways to rig a poker game.

The first is to cheat with the cards.

The second only applies to a no limit game.

Invariably, someone will buy the pot, as no one else in the game can match the resources he is playing with!

This is what we are seeing."

Of course, the reason why J.P. Morgan's financial adventure-ism has not yet landed them in the financial dog-house is no doubt rooted in this:

Dawn Kopecki reported [spring of 2006] in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye."

Folks need to realize that J.P. Morgan "IS" the Federal Reserve. They undoubtedly have a "pass". This becomes clear when one stops and really analyzes the words of Dallas Federal Reserve President, Richard Fisher;

"The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the US dollar," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

This report, from Reuters, continues: "We seek to get it right. And the answer to your question is we will do what gets it right," said Fisher.

Answering audience questions after a speech to the Dallas Friday Group, Fisher said the US dollar is a "faith-based currency" dependent on the credibility of a central bank.

"In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity..."

Don't you just love the way they maintain the faith, their credibility and keep getting it right?

This rancid injustice has already led to the situation where COMEX futures precious metal's prices have decoupled from, and bear no resemblance to the costs of obtaining physical stocks of the same.

This appears to have also happened in the interest rate complex with Libor [London Inter Bank Offered Rate - a futures generated price] becoming a poor proxy for where banks will actually lend money.

How long before this fecal odor infects the energy complex leading to the demise of the petro-dollar is anyone's guess?

Are you a believer?

Rob Kirby

email: rkirby@kirbyanalytics.com
website: Kirby Analytics

Find out where we are headed -- subscribe here.

321gold Ltd