The "HAT TRICK LETTER" investment strategy is three-fold:
The underlying force is the Federal Reserve inflation initiative, with its reckless accommodation policy, resulting in a prolonged monetary crisis centered on the USDollar decline. Commodity price rises will continue to be the unintended consequence. See the website pages to read the newsletter mission statement, to review articles by notable authors, to see a list of correct forecasts, and more. Go to the website to investigate and subscribe: www.GoldenJackass.com/subscribe.html
Author Note: The timing is good to invest in mining and energy stocks. The USDollar and gold are in the midst of a seasonal consolidation phase after a long significant currency decline.
Allow me to cite a couple accurate predictions from the recent past.
Jan 2003:
"USGovt economic reporting will lose credibility" (see link p.8)
Jobless levels are disputed for ignoring discouraged workers. Economic growth (see GDP) is challenged for absurd adjustments. Productivity rises from job losses, and is laced with similar adjustments. Consumer Price Index fails to measure inflation, omitting many rising items. Producer Price Index includes is so dreadful, it is suppressed altogether.
January 2003:
"terrorist attacks will hit the Saudi homeland, causing instability" (see link p.8)
The Riyadh bombings in May 2003 killed over 25 people, the first incidents which involved Al Qaeda bombings directed at Saudi citizens and police. Violence is sure to escalate. The prize of oil fields and associated wealth is too great. The Saudi Royal family and their regime are at risk. Implications to crude oil supply defy description.
Issue #1C
home: Golden Jackass website
subscribe: Hat Trick Letter
GREENSPAN ATTACKS THE SACRED COWS:
Never before has a Federal Reserve Chairman gone so far astray from his chartered duties. He is in charge of setting interest rates for overnight bank transactions, and for determining bank reserve requirements. His personal legacy will bear a marquee entitled a "CLOISTERED GREENHOUSE OF GOVERNMENT FIAT" with the greatest money supply growth in modern history. He stands as the champion of the financial sector business interests, enabling with clear signals, the astounding speculative success for professionals in Wall Street. Bankers and brokerage firms each have profited handsomely during his tenure. In sharp contrast, the common citizen has not. Hyperbole must be employed to describe this man's life work. He lately has had a bug in his breeches, even as he has taken up the mantle as the USGovt central cheerleader. The fact that govt officials sense a need for such a highly active role stands as clear implicit evidence of economic sickness.
In the last few months, Greenspan began his warnings to Congress and its many pedagogical Representatives who stood on planks built from lethal trade sanctions. Greenspan might deserve credit for nipping in the bud a 27.5% Chinese trade tariff in early autumn. He scolded as well as warned. Harkening back to late stages in the Great Depression, with an unusual recall of history which lacked revisionism, he lectured on the severe errors of protectionism. The practice ends with conflict and economic damage, price events, and often war.
My own tactic when engaged in deciphering Greenspeak is to pay close attention to his topics, but to find amusement in his actual words, typically steeped in denial of responsibility. He functions habitually within large blind spots. He is amazing in his avoidance of bearing blame for stock busts, corporate lack of competitiveness, sharply rising production costs, and profligate monetary excess. Clinton in no way owns a monopoly on Teflon. Conversely, he is "spot on" in identifying the lethal problem areas for Congress to manage and oversee, such as budgets, entitlements, trust funds, and agency debt. However, when translating his obscure language, one does well to pay heed to no more than his chosen topics. In the last two months, he has on numerous occasions discussed the merits of arguments that point to a US Dollar crisis, and to price inflation. His denials are meaningless. His topics scream loud with ominous warnings.
During his February trip to Germany, the chairman went much further in his shirking of responsibility. He has now embarked on a New Economy justification initiative, part II. Before a European crowd of economists and bankers, he spoke in detail on two major phenomena regarding the extreme imbalances within the ailing US Economy. He now employs the term "flexibility" to explain the shocking huge Asian support to our credit markets. Asian central banks, most notably Japan and China, purchase 46% of new US Treasury debt and one third of Govt Sponsored Enterprise debt. Flexibility is a euphemism used to justify a trade hemorrhage, bankrupt federal budget process, and intercontinental subsidies to maintain a mercantile system, whose customers bear increasingly heavy debt burdens. An Olympic weight lifter might be capable of dangling a small family with his right arm over a balcony ledge, but that does not mean he will remain willing for long to do so. Vendor financing has never been witnessed on such a scale in all of history. It invites reflex and disaster.
The second major phenomenon is his description of a "wealth-driven" economy, whereby enormous bond liquidity has enabled inflated stock and housing asset prices. Our US Economy is dangerously dependent upon home equity loans and refinance cashouts. Seemingly endless credit extension supports essential and discretionary spending. The absence of savings has become part of our culture. Greenspan has forgotten his education, where inflated assets are not labeled as wealth generation. Rather, true wealth is generated from planning, capital investment, work, output, distribution, and responsible management. Economic mis-education of the American public continues in earnest, a national travesty. The USA brain trust geared toward macro-economic analysis and thought is horribly abysmal. A national movement is afoot, whereby micro-economics (theory of the firm) is being extended into the vacuum of macro-economics, with utterly tragic consequences nationally. For a comprehensive critique of the economist profession, see "A Statistician's Indictment of Economists" of last year.
Since the stock market bull resumption (or bear bounce?), and the economic recovery onset (or imbalanced stumble?), Chairman Greenspan has offered a truly mind-boggling post-mortem assessment of the stock market crash and subsequent economic recession. He has spoken on frequent occasions with disturbing conceit that the Federal Reserve has successfully dealt with the broken bubble's effect, rather than actually fully resolving the bubble itself. This is pure heresy by a central banker, to express pride in building three gigantic bubbles which overshadow, conceal, and relieve the aftershocks of a stock bubble bust. The US Treasury Bond bubble, the mortgage finance GSE agency bubble, and the residential real estate bubble collectively are at least ten times larger than the stock bubble. Their reactive creation is not something to elicit pride. They are not sustainable, and require constant foreign cooperation.
Other authors have captured the essence of the US Economy's extreme sickness. Richard Benson is brilliant. He elaborates on the growing debts without a corresponding assist from worker income, and outcomes. He has discussed the smokescreen of productivity indicative of job loss. See "Debt vs Income: At the Point of No Return" in February. Frank Shostak is thorough and insightful. He analyzes Greenspan's claims for economic growth, corporate restored health, household balances sheets, offering very strong disputes. He has discussed the warning signals of a decline in the money supply. See "Running on Empty" from February. These two writers are favorites of mine.
A policy of inflation has never succeeded in the modern era, without severe consequences in its aftermath. This new millennium will not permit Greenspan to cheat Mother Nature, whose economic revenge is likely to be debt implosion and unemployment. We already have widespread commodity price increases in gold, the base metals, and energy, as well as food. The metals involve precious metals (gold), strategic metals (titanium), industrial metals (copper), and intermediate products (steel). Indirectly, much of the US money creation finds itself in Asia chasing demand for commodities in world commodity exchanges (Chicago, London, Tokyo). Take note of shipping costs and the copper story, which might produce actual DEFAULTS this summer.
Suppression of the Producer Price Index only invited suspicion of even more systemic collusion among officials to distort govt statistics. The PPI index might soon draw near a 10% annual rising level, with all the components hitting multi-year price marks. The January PPI registered a 0.6% increase, followed by a March 0.8% rise for import prices. Each reacts to a faltering USDollar. For months the PPI has enjoyed inclusion of depressed used car prices, which suffer from a swamp in the wake of triple-zero car sale deals. The Bureau of Labor Statistics has long used "dynamic scoring" for Consumer Price Inflation components, and now one must wonder if similar distortive measures are soon to abuse the PPI. That scoring method enables cheaper chicken to be substituted for beef, which might suffer rising price. Copper, natural gas, gasoline, and soybeans do not have substitutes. The PPI late release in mid-March failed to roil the bond market. Some economists incorrectly claim that higher PPI offsets lower CPI, when instead it indicates a profit squeeze and an added household burden. A return of long absent bond vigilantes, known to override Fed policy on the 10-yr Treasurys, is overdue in the view of Bill Gross at PIMCO. Gross made public a shift in his personal investment funds out of bonds into a commodity-based fund, "protected against reflationary efforts." Bond investors might be wise to get defensive.
Onward, our chairman continued during his Humphrey-Hawkins testimony before Congress in late February. I did my personal duty, and sent a formal detailed FINANCIAL MEMO to House Rep Bernie Sanders, who in Vermont used to be the mayor and boss of an old college roommate of mine. He has become, along with House Rep Ron Paul of Texas, an ardent antagonist of the Fed Chairman. During the testimony before Congressional budget and finance committees, Greenspan assailed the committee members for their budget deficits, driven largely by spending increases and outsized entitlements. He warned not to contain deficits with added tax measures, since such levies would frustrate the recovery underway. Sanders delivered hard questions, even if in the form of back-to-back harangues.
Without losing stride, Greenspan reviewed the unsustainable Social Security and Medicare demographics and associated bankrupt trust fund. He suggested reductions of benefits to those not yet qualifying, and to jack up the minimal age requirement itself. Anyone under the age of 40 years, in my opinion, will not see a dime from this ransacked trust fund. Worse still, as baby boomers soon come of age, the Medicare prescription drug bills will cripple the budget process. Within one month after Congressional passage, the drug bill program suffered a revision to estimated costs for the next three years, from $400 billion to $540 billion. Such is the nature of "tyranny of the masses" warned by none other than Senator from Nemesis Karl Marx.
As though not enough, Greenspan delivered well-deserved criticism for Fanny Mae and the GSE agencies. The Dept of Housing and Urban Development might soon yield supervision to the Dept of Treasury. He cited low levels of capitalization, which balance over $4 trillion in debt. Perhaps changes are coming to opaque and fraudulent accounting, endless deferred derivative losses, huge bond speculation in hedged rates, and undersized establishment of capital requirements. What the clever chairman neglected to direct attention to was the most urgent warning signal of all. The GSE agencies, with their mortgage creation and debt issuance, were responsible for roughly 25% of all new money creation in 2002 and 2003, outside the purview of the Federal Reserve. This is immense, dangerous, and completely out of control. Direct reference might have disturbed the embattled currency markets. Why else would Treasury become involved?
Evidently Greenspan is worried that cracks in the Fanny Mae monolith might widen, and wreak havoc on the banking system. That is precisely what can be expected to unfold. The Financial Times reports a $6 billion (and growing) gap between its current market value of derivative positions and regulatory capital. Worse still, "analysis of Fannie's accounts suggests it may have incurred losses on its derivatives trading of $24bn between 2000 and third-quarter 2003. That figure represents nearly all of the $25.1bn used to purchase or settle transactions in that period." Officials at Fanny Mae decline to disclose losses, because in their words "we don't believe it's all that meaningful." So this is the impetus behind our bull market in housing? A house of cards !!!
Govt agencies have become a mortgage recycle center, resembling a financial centrifuge. Banks and private mortgage agencies assemble, then sell entire portfolios to the federal agency "hedge funds" operating under a protected umbrella. In doing so, they free up more funds to lend to homeowners, in a mortgage merry-go-round. They earn origination points, finder's fees if you will, in what could be described as a sanctioned money laundering operation. For those who are unfamiliar, our nation's federally guaranteed mortgage agencies (or is it limited liability?) are funded roughly 1/3-rd by foreign central banks. They know full well that home equity extractions sustain consumer spending on imported products, built by workers in China and Asia, our new credit masters.
Greenspan has suddenly begun to defend his legacy in the wake of the greatest stock bust in US history, and the grandest expansion on debt in world history. My personal view is that he is running scared and does not fully believe his own incessant babble about flexibility of foreign credit dependence, nor wealth generation through inflation to support an entire economy. He surely sees huge risk all around him, and might actually see crises on many fronts. Being an unelected official with enormous unchecked powers, he presides as a financial czar. His performance is ripe for criticism, and his role like a serial bubble engineer. He might rationalize his failed legacy, and pre-emptively deflect blame. Another possible view is that the chairman (age 78) plans to step down before any new term. He might plan to depart before the feces hits the fan. Some have called his actions in recent months to be "a victory lap."
Credit does go to the unduly esteemed chairman for his urgent warnings about our untenable and worrisome financial bodies. Not so fast. He sidestepped criticism of the huge speculative apparatus behind a massive financial leverage pyramid under his own nose, the Treasury yield carry trade. The entire US Economy has become fatally dependent upon the bond speculation, which may be so extensive as to prevent interest rates from ever rising in stable fashion again. Recall in 1994, long rates rose dramatically as a recovery was guided higher. Back then, $250 billion in bond speculation sloshed within the bond machinery. Now $750 billion has flooded the same expanded machinery. The wealth creation, spoken about by Greenspan, relied upon for incomes and spending, emanates from his inflationary policy. He is an advocate for the bank community, not the people. Actions, statements, and inferred beliefs of this reckless chairman will continue to be monitored closely. His communiqués are often smoke screens to either hide the truth, or to justify his next errant policy. The Fed is the Dept of Inflation.
Fortunately, Chairman Greenspan has chosen to speak publicly less on his pet topics, wherein he engages in a massive disconnect from reality and sound analysis. I refer to productivity, capacity utilization, price inflation, and technology. He completely misses the detrimental signals of high productivity, misinterprets unused (obsolete) mfg plant, cannot identify price inflation, misjudges the painful effects of harnessed technology, and cannot detect the slow bleed of capital, jobs, and debt brought on by globalization. These will be topics of future newsletters. Greenspan has degraded into a poor student of international economics and central banking. He has been the focal point of a tragic attempt to re-invent the field of economics, with the US Economy its rat laboratory. He clearly represents the Ruling Elite in New York City.
Alan Greenspan has made a back-peddle of 180 degrees in his recent statements, yet few challenge his leadership, judgment, or credibility. We are a nation of math and economics illiterates. The chairman seems confused, arrogant, and perhaps desperate, quite the mix. He advised home buyers to utilize adjustable mortgages just a month ago, the final phase of a long process of attacking sacred cows. If rates continue to rise, ARM holders will be hurt, but bankers will be off the hook. In the three-month process of attacking sacred cows, he must have developed callouses from patting himself on the back so often. Now he tells us to expect higher interest rates. He believes deflation is no longer a threat (translation: inflation has taken root), pricing power is returning, and growth seems sustainable. One day after he warns of eventual interest rate hikes before Congress, he implies that rates might be kept fixed until job growth improves. His worst nightmare might be the arrival of bond vigilantes, who are raising dust in their fast ride over the horizon.
Trust in the Fed is on the wane. Experienced traders note its wrong forecast on jobs, and now point with suspicion to claims of low inflation. They are beginning to sense deep structural problems, indications of a destructive pathogenesis. Skeptics note too much cheerleading by an institution intended to be less in the public eye. His critics have great difficulty in arguing with him, since his language is steeped in a confusing juggle of poorly understood concepts. Of our myopic, unaccountable, and unelected financial leader, it should be said: "but for the subtleties, he has no wisdom."
Allow me to cite a few profitable stock selections from the recent past. They have each appreciated as a result of the strategy outlined in the preface. Several other stocks are poised for similar increases, as they develop and discover according to plan. Data: 4/23/2004.
Athlone Resources Ltd (ATH.V = ALMLF) in natural gas, crude oil cited Oct 23, 2003 at C$0.74, now roughly back at the same price Dr Richard Appel's top pick for year 2004 (see article)
Cardero Resource Corp (CDU.V = CUEAF) in gold, copper, silver cited Sept 23, 2003 at C$1.76, now C$2.97 for a gain of 69%
Taseko Mines Ltd (TKO.V = TKOCF) in copper, gold cited Nov 2, 2003 at C$0.77, now C$1.81 for a gain of 135%
Jim Willie CB is a statistical analyst with 23 years of experience in industry. He holds a PhD in Statistics, and functions unencumbered by the limitations of economic credentials. Any stock cited requires due diligence for personal investment, with no guarantees given. Past performance is no guarantee for future results. No compensation has been received by any company for opinions offered. Visit his website to find articles from fine authors and charting tools at www.GoldenJackass.com