Taylor On US Economy, Markets & Gold
As a whole, stocks remain enormously overvalued. Thanks to Decision Point
(www.decisionpoint.com) we know the latest GAAP S&P 500 earnings yield is a measly 2.24%. Of that yield, 1.38% is paid out in dividends which means that these companies are retaining only $0.86 for every $100 invested in
these stocks. So if you buy the S&P 500 Index, you will put $1.38 in your
pre-tax pocket for every $100 you invest. How much of the $0.86 that is
retained is hypothetical since even GAAP accounting is in large part based
on theoretical concepts.
By contrast you can buy a 10-year Treasury and get paid $5.41 for every
$100 you invest. Moreover, this income is exempt from local taxes. So why
do stocks remain so popular? Because people remain convinced - thanks to
the ongoing hype and spin on CNBC that there will always be a bigger fool
who will pay a higher price for stocks purchased today. And since over the
past 20 years that has been true a great deal of the time, it is hard for
investors to relate to the historical fact that so much of the time over
the past 100 years, that has not been true. If investors want to know the
truth rather than engage in pure fantasy, the truth is there to be had.
People frequently interviewed in our newsletter like David Tice, Ian
Gordon, Dr. Ravi Batra, over the past three years. And in April, we will be
featuring our interview with Jim Rogers who has been saying get out of
stocks and into raw materials.
The outrageously low earnings yield of 2.25% suggests investors remain
highly confident that the U.S. economy and hence that stock prices will
regain their upward momentum. Otherwise they would be buying Treasuries
that yield more than 5% in cash with favorable tax treatment. But when you
look at the fundamentals of our economy and the global markets there is
real reason for concern. Consider some of the following points.
- The U.S. Trade deficit grew unexpectedly in January to $28.5 billion, up from $24.7 billion in January. The trade deficit on physical goods grew to $34.1 billion, from $31 billion in December. How long can this red ink flow without it negatively impacting the dollar? The reason for the January expansion was an apparent "economic recovery" in the U.S., or at least a willingness on a part of Americans to spend more borrowed money. This is troublesome not only because you cannot live beyond your means forever, but also because the U.S. is no longer able to produce the basic essentials for the survival of a strong nation.
- Trade deficits are financed by recycling them into U.S. investments. But with U.S. investments so overpriced and with demand pricing power continuing to decline, how much longer can this go on? Greenspan himself is worried about these deficits and the hemorrhaging of interest payments back to the owners of capital that is being sent to the U.S. In his March 13th address to the Independent Community Bankers of America conference in Honolulu on March 13th, here is what Alan Greenspan had to say. "During the past six years, about 40% of the total increase in our capital stock in effect has been financed, on net, by saving from abroad. This situation is reflected in our ongoing current account deficit, which, by definition, is a measure of our net investment in domestic plant and equipment financed with foreign funds, both debt and equity. But this deficit is also a measure of the increase in the level of net claims, primarily debt claims, that foreigners have on our assets. As the stock of such claims grow, an ever-larger flow of interest payments must be provided to the foreign suppliers of this capital. Countries that have gone down this path invariably have run into trouble, and so would we."
- The Securities & Exchange Commission is still protecting the U.S. Housing Bubble by allowing Fannie Mae and Freddie Mac to avoid file insider transactions, file audited financial statements and register their securities with the SEC. This is allowing these organizations to expand the leverage on their balance sheet and God knows what else that allows the housing mania to continue. Sooner or later this will result in another destabilizing implosion.
- The IMF warns that setback against the fight against terrorists could set back the U.S. economy. It should be obvious by now that the war against terrorism is not going as well as first depicted in our press. Moreover, tensions are mounting in the middle-east to the point where more and more talk of nuclear war is being discussed. As it becomes obvious to the markets that the U.S. deficit is beginning plunge back into a sea of red ink in order to pay for an ever expanding war, what will that do to an already overvalued stock market? I think it is interesting to note that the U.S. Federal deficit grew to $204 billion since last September. If George W. keeps it up, he might oversee a larger deficit than his father who ran some of the largest deficits in our history!
- State budgets are collapsing due to plunging tax receipts. If the economy is rebounding, why are tax receipts still in decline? If local and federal tax receipts continue in decline, that is a sure way to know all this talk of a rising economy is pure baloney. Remember the government always gets its money!
- The U.S. production of real things continues to decline as evidenced in the trade numbers. But what you don't see talked about much in the press is GM's plans to cut $3.4 billion in spending this year. GM told securities analysts that it will cut $2 billion from its North American material cots; $1.3 billing from its manufacturing, engineering, and health-cares budgets; and $1 billion from capital spending. Obviously cuts in a basic industry like this will put downward pressure in other related industries such as machine tools, steel, etc.
In general the living standards of Americans are getting squeezed. And as
Dr. Ravi Batra told us when we interviewed him, as that happens, people
tend to borrow more and more until eventually a threshold of lethality is
reached at which time the economy collapses and debt repudiation and an
economic depression get underway. The consumer has never really let up in
his spending patterns except for a brief period immediately following 9/11.
With 2/3 to ¾ of the American economy depending on the consumer and with
the consumer already running full speed, that leaves recovery up to capital
spending because it is hard to perceive additional demand coming from
consumers. And yet, what CEO in his right mind is going to undertake huge
capital projects when profit margins are being squeezed thanks to global
oversupplies, an overvalued U.S. dollar and cheap manufactured goods form
China and elsewhere.
Could We be on the Verge of a Raw Materials Bull Market?
While we are holding on to the idea that Ian Gordon's Kondratieff Winter
model is on track, we also think Jim Rogers may be right in his bullish
posture toward raw materials. We interviewed Jim on Wednesday March 27th. He is convinced the Rogers International Raw Materials Fund, which you can get into for as little at $10,000 is going to benefit from a major bull
market in commodities. Three major reasons: 1) For twenty to twenty five
years, there has been very little expansion in capacity for almost all raw
materials. At the same time the stock piles have been drawn down. 2) The
U.S. and governments everywhere are printing money like mad. This he argues will have to result in increased demand for raw materials. (This is one
area we and Ian Gordon might dispute). 3) War. Jim points out that wars
are always bullish for raw materials.
Could Ian Gordon and Jim Rogers both be right? We think so. But in any
event, be sure to read our interview with Jim. As always he has some honest
and unique views on the world. He is right more often than not. It is very
much worth at least considering his ideas seriously.
What I believe is likely though is that repeated attempts to inflate our
way out of another Depression will continue to prolong the time required to
fix the problem. It is my sincere belief that we are about to discover what
Japan has been discovering, namely that there is no way out of a
deflationary spiral than to let the markets do their work. Any attempt to
override the natural forces of markets by printing money, rigging stock or
gold prices will only prolong the agony and delay the recovery. This should
be no great new discovery for Americans who were brought up with free
market indoctrination. Yet even Milton Friedman now seems to be selling out
to this line of thinking. Apparently he is not willing to face the reality of what is about to hit us. Apparently Dr. Friedman cannot stomach the thought that the Austrians were right when they maintained that it is impossible to limit money supply growth to 2% or 3% without the discipline of gold. Going "Cold Turkey" is the only way to recover. Yet our economy.
Accordingly we continue to stay put with our current Model Portfolio,
though we are entertaining the idea of finding some room to make an
allocation to the Rogers International Raw Materials Fund, which we will
tell you more about in our April issue.
GOLD
Jim Rogers on Gold & Raw Materials.
Jim Rogers has some very outspoken ideas about gold. He is bullish on gold,
but at this stage at least he is not as bullish on gold as he is commodities in general. His fund has a 3% weighting in gold bullion. We think his relative lack of enthusiasm for gold is in part because he doesn't understand the extent to which the bullion banks have already dishorded the yellow metal to keep the price down. We think he isn't yet aware of the enormous short position the gold bullion banks are about to face, thank to the endless gold carry trade they were encouraged to engage in. Getting money at ½% with a guarantee from Mr. Greenspan that "Central Banks will continue to lease out increasing amounts of gold should the price begin to rise," was too good to pass up. It was a heck of a party as long as it lasted. By my oh my. What a hangover these fellows are about to experience!
Never subjected to the emasculation of his God given talent by an
increasingly intrusive corporate fascism that threatens to destroy us all,
as a regular on CNBC, I recall Jim providing high quality information to
investors unequaled by few others on the tube. Thank God people like Jim
Rogers still exist in America. He is not only a financial genius, but he
is willing to share his insights with others. In my view, that makes him a
national treasure. As editor of this newsletter, I am grateful and humbled
that this Wall Street giant was willing to share his views with the readers
of J Taylor's Gold & Technology Stocks by way of the following interview,
conducted on March 24, 2002.
Another Good Week - Gold Continues to Look Bullish
Gold had another good week last week. It closed in New York at $303.20.
The yellow metal is continuing to look very bullish. At the end of this past week, its 50-day moving average was $292.39 and its 200 day-moving
average was $280.54.
Two facts come to mind that I found very encouraging at the end of this
past week. First, the percentage of days in which gold finishes lower in
New York at the close of business is far less than in the past when gold
finished lower more than 90% of the time. Secondly, attempts now by the
Germans to scare people away from the gold markets does not seem to be
nearly as effective as prior attempts by Britain, Switzerland and a host of
other countries.
What is clear is that that demand for gold is rising around the world. In
Japan, investors have been buying gold like mad. They see gold as a safe
store value - a place where they can transfer their wealth out of paper
currencies that may evaporate into thin air as their accounts are no longer
insured. But with events heating up to very high temperatures in the Middle
East, apparently a great deal of gold is now being purchased from those
countries and also reports are that China is continuing its buying spree.
Add to that factor a stock market that at best is heading sideways for a
long time to come and at worst will plunge to much lower levels, and a
dollar that is extremely overvalued and you have the ingredients for a
massive new bull market in gold as people transfer money out of dollars
into gold.
Interestingly, Dow Jones reported last week that the Malaysian Prime
Minister Mahathir Mohamad proposed making the Gold Dinar a common currency for trading among Islamic countries to reduce dependence on the U.S. dollar. The prime minister would use gold for international trade only and would not propose to use it as a national currency.
The Dinar, an Islamic currency used in the Middle East since the beginning
of Islam, is tied to the value of gold in the open market. By using the gold Dinar for trade settlement, the cost of doing business will be reduced as the need to hedge is minimized according to the Malaysian Prime Minister.
Interestingly, the report stated that the Malaysian Finance minister drew
up plans for an electronic payment system that uses a common currency for
trade among Islamic countries. The would presumably use the Gold Dinar as
their unit of currency in this plan. Presumably, this system would be at
least somewhat similar to GoldMoney which was invented and patented by
James Turk.
But the important thing to note is that these Muslim countries in the
Organization of the Islamic Conference, which number fifty-seven, are
thinking along these lines so that they do not need to rely on U.S.
dollars. One would think as tensions heighten between the U.S. and Muslim
countries and as the U.S. continues to police money movements, this kind of
system may be seen as a way of getting around U.S. restrictions and to hide
their plans for commerce and perhaps mischief as well.
April 2, 2002
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
Email this Article to a Friend 
Printer Friendly Version