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Fundamentals & a Wall of Worries?
When confidence is gone, assets will seek their intrinsic value.
Craig Harris, President of Harris Capital Management
The information within is not a recommendation to buy or sell anything.
Do your own Due Diligence
The U.S. stock market is in the summer doldrums and will be the precursor of much greater volatility to begin in mid to late September 2002. Some readers might justifiably disagree about the doldrums. This is a quiet time to clean the slate and start afresh at understanding the facts first before trying to understand economics again. The economic market fundamentals have not changed for the better since October 2001. I believe the fundamentals have become worse.

I do recognize that fundamentals rule in the longer term of markets, and in the near short term, technical analysis seems to rule in the markets.

Yes, I think the gold and silver markets until mid August (short term) are in a mode of a deliberate shake out of weaker players in order to create new short term buying opportunities. This is part of an ongoing period of deceptions to conceal the intents of "The Powers That Be." (TPTB) The price declines are reflected in the seasonal charts. Seasonal charts indicate sharp price increases beginning in late August and September. The European gold jewelry manufacturers are on their August holidays. The India Marriage season is months away.

Circumstances and current events scream that there is something very wrong in the market place. The extent and rate of deterioration is increasing the numbers of desperate players. Desperate players do very stupid and destructive things. Many players are disconnected from the course that brought us here. Players are not yet clear as to what actually comes next. Always keep in mind to "EXPECT THE UNEXPECTED."

I believe the fundamentals are relevant as a starting point for trying to understand the economy in the next one to two years. I have deliberately stated all U.S. dollar equivalent numbers in trillions for easier comparison.

In my opinion, the following fundamentals support a flight of investment capital from paper to physical assets such as gold and silver later in 2002 and into 2003. This flight of investment capital will easily double or triple their fiat prices.

U.S. has Five Bubbles that will Burst in 2002 and 2003

  • Stock Market (at least 5 trillion dollars more in paper losses to come)
  • Consumer debt carried as assets (1.7 trillion dollars)
  • Corporate debt (2 trillion)
  • Foreign debt about to be repatriated Foreigners own 12% of U.S. stocks and 37% of U.S. treasury paper. Kurt Richenbacher reports foreigners have about 9 trillion U.S. dollars in U.S. dollar Assets.
  • Family housing & other real estate (10 trillion) The coming recession this winter will cause at least a trillion dollars in real estate foreclosures in 2003.
  • U.S. dollar over valuation. Dollar value will decline at least 20% by mid 2003 from foreign repatriation of U.S. assets. A 20% declines a loss of nearly one trillion U.S. dollars in purchasing power.

U.S. Federal Government Owes

  • 6.1 trillion dollars in National Debt. The debt is now 60% of GDP. Will credit rating be downgraded soon to AAA and then to junk status has happened to Japan, and most recently Brazil which is the 11 largest economy?
  • 13 trillion dollars for unfunded Social Security promises.
  • 17 trillion dollars for unfunded medicare and medicade promises.

The U.S. Federal tax revenue is less than 2 trillion dollars in 2002 and expenditures in 2002 will be at least 2.1 trillion dollars. Federal expenditures will rise further in 2002. Federal tax revenue will decline in 2003 due to lower taxes revenue because of a recession that begins in winter 2002.

The U.S. GDP while quoted at 10 trillion/year is probably closer to 7.5 trillion in 2002. The world GDP in 2001 is said to be about 31 Trillion/year in U.S. dollars.

U.S. Governments (Federal, State and Local)
Use Fraudulent Accounting Practices

The governments uses "cash accounting" practices while legally requiring everyone else to use Generally Accepted Accounting Practices (GAAP) of "accrual accounting". Outright fraud is estimated at 0.1 trillion of the 2 trillion (federal alone) expenditures in 2002.

The politicians now want corporate executives to sign off on financial statements and be held criminally accountable. The politicians do not want government executives or elected politicians to sign off on government financial statements and be held criminally accountable.

Another fradulent accounting practice is the continuing restatement and redefining of economic numbers such as Consumer Price Index (CPI), Producer Price Index (PPI), Gross Domestic Product (GDP), and so forth put out by the Federal government.

U.S. Banks have 35+ Trillion Dollars (notational value)
in Financial Derivatives.

Just 10% of these derivatives going wrong will put big U.S. commercial banks into default. World wide, derivatives with a notational total over 100 trillion dollars exist.

The commercial banks at most risk are JP Morgan and Citibank.

Physical gold and physical silver have been leased out by banks and carried as assets. There is insufficient metal to return to banks from which it is leased. In effect, there are naked options being sold in both gold and silver. A sudden physical delivery demand in these tiny markets will cause prices to double and triple. The Silver market size is about 0.01 trillion dollars. The gold market size is about 0.1 to 0.15 trillion dollars.

Declining Confidence

Investor confidence has declined by more than 30% so far in 2002. Confidence by most market players and stakeholders continues to decline. One writer suggests that the stock prices is inversely proportional to the number of times the phrase "Declining Confidence" is used. Continuing factors contributing to the further confidence declines are:

  • The mostly inept U.S. "war on terrorism" which is adding to government costs & debt. There are few positive measurable results from this war since Sept 11, 2001. Saudi Arabia may be providing more financing and other support of terrorist activities than Iraq and Iran combined.
  • U.S. Government is being seen as being asleep or inept on many regulatory functions. The blame game and agency turf wars are the government's highest priorities in this so called "U.S. war on terrorism."
  • Numerous scandals by U.S. banking, brokerage firms, corporations, and accounting firms being communicated by the public media. Many more scandals will be made public in 2002 and 2003 which are now only barely breaking stories.
  • Increasing corruption revelations within the U.S. government and elected representatives will be made to sway U.S. voters in the November 2002 elections.
  • Growing record bankruptcy numbers. More than 10 large U.S. corporations (a billion or more) having gone publicly into bankruptcy in 2002 At least another 100 large corporations are on the verge of bankruptcy in 2002. U.S. bankruptcies in 2002 are breaking the 2001 all time bankruptcies both in number of bankruptcies and bankruptcy dollars.

This can only lead to:

  • A lower economic activity. This means a recession beginning in winter 2002 and a smaller gross domestic product (GDP) in 2003.
  • Higher unemployment rates ( greater than 7% in 2003) from less economic activity.
  • More corporate and personal bankruptcies in 2002. Bankruptcies in 2003 will break the record of 2002.
  • Real Estate markets will initially be buoyed by money flight from stocks into real estate. This will be followed by growing foreclosures and big losses in late 2003 from investor inability to meet mortgage payments.
  • Further stock market index declines in 2002 and 2003.
  • Higher interest rates in 2003 to compensate for increasing uncertainty risks.

Many Foreign Countries will experience
economic crisis in 2002 and 2003

Foreign Countries in financial difficulties and having a banking crisis are:

  • China banks have 20% to 50% non performing loans. (about 0.8 trillion in loans)
  • Japan It is estimated Japanese banks have 20% non performing loans. Japanese savers have 10 trillion equivalent U.S. dollars in fiat based on confidence.
  • Germany has its own real estate bubble about to burst and banks are losing money. A German banking crisis will become a widespread public concern in 2003.
  • Argentina has about 0.1 trillion U.S. equiv. in banking defaults. Banks are closed.
  • Brazil, the 11th largest economy is going the way the way of Argentina and desperately seeking IMF funds to prop it up for awhile.
  • Uruguay has already had one bank holiday due to currency crisis.
  • Paraguay & Bolivia are small economies headed into recessions.
  • Venezuela is about to go bankrupt like Argentina.
  • Columbia is right behind Venezuela.

World Stock Market Index Declines

The stock markets world wide in general point to an impending world wide economic decline in 2002 and 2003. Many world stock market indexes are showing in technical analysis a "head and shoulders" formation with indications of at least another 10% down move after the summer rallies and before the end of 2002. A web site for the many foreign stock exchange indexes with charts can be found at: http://quote.yahoo.com/m2?u

Current 2002 Market Fears (worries?)
Fear Is Faith In The Devil!
from a roadside church sign

  • A recession beginning in the U.S. and lasting amore than 3-months.
  • Higher interest rates on bonds. (long term bond losses if sold before expiration)
  • Impending stagflation in winter of 2002. Stagflation being defined as inflation for essential needs, and deflation of luxury items.
  • Terrorist attacks on U.S. soil. (insurance companies go down in value)
  • Concerns insurance claims for terrorist attacks cannot or will not be paid.
  • Regional War(s). Wars create inflation. Sometimes they have collateral damage on homeland soils. Wars in 2002 or 2003 could be:

    • U.S. vs. Iraq and/or Saudi Arabia,
    Huge U.S. air bases are being pushed to completion in Eritrea, Afghanistan, Georgia, Yemeni and elsewhere for operational use in September. A successful U.S. attack beginning in Mid to late September is intended to divert public attention from economic problems and for Republican party to regain U.S. Senate control in the November 2002 Election.
    Pakistan vs. India
    China vs. Taiwan
    North Korea vs. South Korea

  • Stock and financial derivative margin calls
  • Declining market value of most investments.
  • Impending higher U.S. unemployment (7% or higher rates in 2003) This will reduce consumer demand in the market place.
  • Losses incurred from bankruptcies by corporate customers and others.
  • Pension fund losses resulting in smaller retirement incomes.
  • Accounting records being fraudulent or outright misleading

The rumor mill grinds exceedingly fine!
Oh! for the days when one would cook
breakfast, lunch and dinner and not the books!
Goldenrod.

  • Current expected (in the media) corporate earnings increases will not occur in the fall/winter corporate financial sheets do to accounting changes such as:
    1. Stock options being expensed where not done so before.
    2. Outright fraud being discovered in past years.
    3. Losses from Pro-forma accounting and in off shore accounts.
    4. Major one time charges for restructuring and write offs of intangibles.
  • U.S. trade deficits of more than 1 billion dollars increase per day in 2002 soon becomes unsustainable. More than one trillion dollars from abroad is needed each year is reported by some writers to keep the U.S. dollar from crashing.
  • World trade wars will intensify. U.S. exports will decline in 2002 and 2003.

Current Insignificant Market Fears

The following are currently insignificant market fears which are not currently causing loss of investor confidence.

  • Election of Hillary Clinton as President in 2004 because of economic difficulties and the successful blaming of President Bush as being a Herbert Hoover.
  • An asteroid striking the earth and causing major lasting damages.
  • Global warming causing oceans to rise 20 feet or so within 10 years causing ocean ports to be flooded and unusable with economic losses in the trillions.
  • Widespread public knowledge of space aliens with bad news.
  • A devastating 7.0 earthquake centered in a highly populated industrialized center such as in the U.S. or Japan.
  • A volcano explosion on the order of Krakatoa which blew up in the 1800's.
  • The sun ejecting a large mass which strikes earth. (sterilization of earth?)
  • Appearance of a airborne virus that easily spreads world wide causing 30% death rates within a few weeks much like the flu virus in the early 1900's.
  • A revelation that 80% of the 280 million oz of U.S. physical gold is no longer within the U.S. borders or physical control. This gold has been exported for clandestine operations over the years.
  • With an impending recession in 2003, State and local governments will have insufficient tax revenue for their budgets. This will necessitate hefty new taxes, hefty existing tax increases, or federal government assistance in form of grants or payment transfers.

Is there a "wall of worry" to be climbed?


Wally Bently
All flames, replies, and comments are appreciated. My e-mail address has been changed to: wallybently2@aol

August 5, 2002

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