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By Robert Fitzwilson of The Portola Group

April 6 (King World News) - Western Corruption & A Possible Kill Shot On The Dollar

Below is a picture of a popular food item one finds when walking the streets of Istanbul.  It is a meat dish that starts with deboned meat cooked on a rotating, vertical spit.  When ready to serve, the meat is shaved off with the long knife and served in a sandwich with vegetables.  The sandwich is called a doner kebab derived from the Turkish word “döner,” which means rotating.

Last week started out with a bang.  It was reported that an extremely sophisticated scheme using state of the art technology enabled shadowy characters to effectively shave billions of dollars from unsuspecting stock market traders and investors.  We were reminded of the döner kebab imagery to describe what has been happening to even the most sophisticated investors, funds and institutions....

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As reported, the scheme that was recently uncovered relied upon fiber optic communication lines and incredibly fast computers to do what is called “front running.”  One of the most notorious cases of front running was the use of pigeons by the Rothschilds to notify their brokers in London that Napoleon had been defeated by Wellington.  Their trades were executed before other investors had received word by more traditional, slower means.

What brought the most recent case to light was odd behavior noticed by large funds and institutions when placing trades.  Their screens would show an amount of shares for sale, but the moment the institution placed their trade, the offers mostly disappeared.  New offers would reemerge at higher prices.  Many of the funds and institutions suspected an insider giving out advanced notice.  None suspected that technology had been used to see their trades between the time entered and the arrival for execution.  Instead of pigeons versus horse in the 1800s, it was a race between electrons.  Tens of billions of dollars were being effectively skimmed out of the system according to what is being alleged.

Investors found out that, like the Turkish sandwich, they too were “donors.”  Those with the fastest technology were able to profit on virtually risk-free trades.  The lawyers and the investigators will have to decide whether what went on is legal or not.  Front running is not new.  Trading on inside information is supposed to be illegal.  Will this just be front running on a massive scale or trading on inside information is an interesting question.  It is immoral to be sure, but there is certainly no lack of immorality in the world we find ourselves today.

One thing we know for sure is that pensioners and endowments will have a lot less money for retirements and education.  At a time when there is rampant underfunding of these pools of money, it is a shame that such a scheme was created to siphon money away in an already challenging investing environment.

Individuals should not assume that their trades came away unscathed.  It is also reported that the brokerage firms were being paid “hundreds of millions of dollars” for order flow.  The question will have to be addressed as to whether even small trades were directed in block size to slower platforms enabling non-institutional money to be skimmed by the scheme.  Prominent firms quickly came out to denounce the scheme.  We will see after the investigations are finished the totality of who was complicit.

The week also saw increasing tensions between Russia, China, Iran and the United States.  Threats were flying back and forth.  Through barter as well as non-U.S. dollar transactions, the dominance of the dollar as the “petro-” and reserve currency could very well be under a sustained attack.

It is partly a function of the sanctions levied against Russia, but the ability of those nations to attempt a “kill shot” on the role of the dollar has been steadily building in recent years.  China has effectively cornered the market on gold.  A coordinated effort to dump U.S. Treasuries by those countries could very well test even the Federal Reserve’s capacity to control interest rates.  As the supply of oil to the global market continues to fall behind demand, power is shifting West to East as has been the gold.

The U.S. is still a very powerful force in many ways.  However, a combined Russia, China, India and even Saudi Arabia would be a very potent rival for world dominance.  The Fed’s playbook is to keep interest rates low and stock prices high.  In light of the tectonic movement in geopolitics we are witnessing, we do not envy their task.  They might have met a formidable opponent who is able to to match their power.

Despite the shakeout at the end of the week in stocks, the headlines were worse than the damage so far.  Investors need to keep a very close eye on the indexes, looking for a possible sustained break to the downside while continuing to add to holdings of physical metals and miners.  We also have a strong conviction that the price of oil must go up as the disconnect between supply and demand widens.  The majors and the drillers are two of our favorite ways to participate in that sector.

But coming back to the possible move against the U.S. dollar by China, Russia, India, and even Saudi Arabia, there are two major questions here:  First, how long can the Fed continue to expand its balance sheet?  Second, how long can the West continue to hand its gold over to an alliance that may use it to crush the dollar, and subsequently end the key to Western global dominance.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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