Taylor On US Markets & Gold
The Economy and Paper Markets
Absent Wall Street & Political Spin, We saw No Promising Signs
Your editor keeps CNBC muted most of the day except for an occasional guest worth listening to on Ron Insana's show or market commentary by Art Cashin. Not only do I turn these guys off because it distracts me from my work, but it is clear CNBC is little more than a propaganda mouth piece for Wall Street's tout of overvalued stocks. Since Bill Murphy fist spoke on CNBC back in 1998 at the launch of GATA, CNBC and other major media in the U.S. have refused to examine mountains of evidence produced and entered into a court of law in Boston. CNBC has refused to explore that extremely important gold market rigging topic, which combined with productivity babble from the most revered Fed Chairman since 1928, paved the way for the most outrageous stock market bubble in history. Can there be any doubt that providing investors with the information they need to make good investment decisions is the least of CNBC's concerns?
But now, after all the fantasies and self serving lies told first by our policy makers and secondarily by our corporate CEO's, we mere mortal Americans are left with a very cluttered aftermath of financial destruction. And seldom do we hear talk of productivity gains these days. Want to know why? Because the news is revealing the falsehood o the new paradigm upon which Greenspan justified debasing the U.S. dollar. Simply put, productivity growth is anemic at best. Last week, the latest news displayed productivity growth of 1.5% for the second quarter, which is far far below average growth in America. On the basis of that news and a worsening employment picture, we wonder where the bulls are justifying the view that rising profits can justify current equity prices which are still stretched way beyond the norm.
At the end of this week, the trailing P/E Ratio for the S&P as recorded on a
GAAP basis for the S&P 500 still stood at an awfully high 37 times. That
equates to an Earnings Yield of only 2.70% of which about 1.8% is comprised
of dividends and the remaining 0.90% of retained earnings. This compares to
a 10-Year U.S. Treasury rate of 4.01%.
Were I not concerned about the likelihood of a major decline in the dollar
vis-à-vis other phony but less phony currencies, I would suggest simply
parking money in Treasuries and wait for this horrendous bear market to do
its thing to completion. Then when the "buy stocks" signal re-emerges as per Michael B. O'Higgins book, "Beating the Dow with Bonds we begin buying super cheap stocks. By cheap, we mean the kind of prices you pay for yields
from stocks at the bottom of bear markets. Bear market bottoms are
characterized by PE ratios for America's best companies at under 10 and
dividend yields for those same companies in the 6% to 10% range not P/E
ratios of 37 times like we have now and dividend yields of less than 2%.
What we see especially with respect to the dollar is a system wide risk for
the global economy. The U.S. as the leading super power in the world is
most responsible for spreading the big lie concerning what is in all truth
a counterfeit money system. But virtually all other nations have followed
the U.S. lead by agreeing to go along with IMF demands that no member
countries may back their own currencies with gold. So after many years of
having removed the discipline of gold, we have quite a global currency mess
on our hands. In other words, we are facing major systemic risks to the
global monetary system, which is precisely why to protect ourselves we must
step outside of the phony paper money system and exchange our paper for
real money, namely gold.
Given that we see significant systemic monetary risk in our existing
financial system, we have over 40% of our portfolio in gold and gold
related investments. Most of the rest of our exposure in shorting the U.S.
equity markets through the Prudent Bear Fund and by virtually shorting the
U.S. dollar via the Prudent Safe Harbor Fund. So far, our strategy is
working fairly well, with our Model Portfolio at the end of this past week
being up 47.12% vs. a 22.14% decline for the S&P 500.
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Keeping the Dollar Strong & Americans in Debt
This past week, statistics pointed to weakness in the economy evidenced by
a pull back in purchasing orders not only in manufacturing (we are used to
that) but also in the service sector which is where America is supposed to
excel. In fact, with readings at just about 50, both sectors are suggesting little if any growth for the economy. In other words, it does seem as if we may be teetering on the brink of another economic dip downward. But hey! Nothing is more important that preserving the wealth of the folks who finance our politicians in office, so Wall Street profits must be preserved. So we must keep the dollar strong, so Americans can keep importing goods and services from abroad so that the rest of the world avoids a cataclysmic economic decline.
Trouble is, Americans have been buying their heads off, not because they
have wealth but because they are encouraged by policymakers to live beyond
their means. This is in defiance with a basic economics 101 fact of life,
namely that if you live beyond your means today, you shall have to pay for
it in the future. Unfortunately for Americans, the future is now or just about now, which is why Greenspan's constant pedal to the medal action isn't making the U.S. economy travel any faster nor is it leading to improving corporate profits.
Not only the strong dollar but continuous excess supplies left over from
excessive money creation in the 1990's compared with huge increases in
global supplies from populated countries, most notably China is keeping
profit margins very low for almost any sort non-service U.S. company you
care to mention. And so with profits under pressure, we should not be
surprised that jobless claims, as reported last week, climbed back up above
400,000. In addition there were some major layoff announcements last week with job-cut announcements in August rising 46% for a total of 118,067. This all adds up to a dim profits picture against a backdrop of hugely overvalued equities.
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Bearish Markets
- The U.S. Dollar - The U.S. dollar index has stabilized in the 105 to 108
range since it bottomed in mid July. It is down from around 120 in the
January-February time frame. But technically, the dollar continues to look week with its close on Friday slightly below its 20-day moving average of 106.85, its 50-day moving average of 107.53 and its 200-day moving average of 111.69. A growing economy is what is needed to foreigners confident in their dollar investments. Absent that, given the huge amount of foreign money in the U.S., the dollar could be in for a major decline which as noted above would adversely impact the bond markets, interest rates and yes eventually the housing market.
- The Dow Jones Industrial Average closed at 8427.20 which compares
unfavorably with its 20-day moving average of 8615.36, its 50-day moving
average of 8783.77 and its 200-day moving average of 9463.06. At the end of this week, the Dow was poised just slightly above a downtrend line
extending back to the May-June time frame. A break below that support line would suggest a test of the July-August lows which had already taken out the September 2001 lows. This is a very bearish market which even an establishment guru like Bill Gross sees going to 5000.
- The S&P 500 - closed at 893.92 on Friday. As such, it compared
unfavorably with its 20-day moving average of 909.87, its 50-day moving
average of 927.72 and its 200-day moving average of 1033.51.
The New York Composite - Friday's close of 484.84 is below the 20-day moving average of 491.20, the 50-day moving average of 499.39 and the 200-day moving average of 544.51.
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GOLD
As noted above, gold continues in a bullish mode and closed this week near
a breakout point. When that breakout will take place is anyone's guess. It
could come any time but I do believe we will see a mighty rise in the price
of gold when the U.S. dollar begins to drop dramatically. From a chart
perspective the dollar does look vulnerable.
The performances of gold and the dollar really boil down to the issue of
confidence or lack thereof in the dollar. And as I noted above, what is
needed for the dollar to stay strong is for corporate earnings to remain
strong so that employment and the capital goods sector can grow. As a
leading indicator, a decline in equity values that I believe is likely to come before the end of this year, could set off a panic in the dollar and a
flight to quality into the only legitimate money, which is of course gold
and perhaps silver.
Noting that the market just recently had its first 90% down day in 2002,
Richard Russell said the following last week: "I think where we are now is
on a track for the wide-open panic phase of this bear market. Note, I did
not say a panic moment or a panic day, I said a panic phase. The panic
phase could take a week or a few weeks or a few months.
"Before the panic has ended, stocks will be knocked to their knees,
consumers will be in shock, the housing bubble will have burst as will the
auto-buying bubble, the July 23 lows will be history and the "A" wave of
this bear market will finally have come to an end.
"When the panic phase ends, investors and speculators will be in shock, and
the stock market will appear to be shattered - torn apart, literally in pieces.
"That will give us the most "sold-out" market in years. This sold out
market will set the base for the corrective (upside) wave "B" of this bear
market. The "B" wave should be an upside whopper, and it should carry well
into next year. After this corrective "B" leg will come the final "C" leg -
but I'll talk about that when the time comes."
If Russell is right in his view of the stock market - and I think he is -
is there any doubt that the dollar will come under enormous pressure on the
downside? Is there any doubt in this kind of an environment, that gold will
rise dramatically on the upside as investors around the world transfer
enormous quantities of fait money into gold, which has and will always
retain solid intrinsic value even in the midst of an economic neutron bomb
explosion?
Everyone always wants to know how soon will these events take shape. I
would not be surprised if we see some major moves to the downside for
stocks this fall, and that the dollar and then finally in the U.S. Treasury
markets will follow downward as foreign money leaves the U.S. As flight to
quality means leaving a very sick monetary system, and exit out of this
sick paper money system into gold should cause a major rise in the yellow
metal. Since no currency in the world is any longer backed by gold, where
else but gold (and possibly silver) will money flow?
Indeed news this past week suggests some of the other countries around the world see trouble ahead as the U.S. economy and that as a result, they are trading dollars in for gold. According to a Dow Jones report coming from
Singapore, Asian central bans plan to buy more gold as their economies
expand post-Asian crisis and their foreign exchange reserves are rapidly
building up. The huge trade deficits that are benefiting Asia are resulting
in huge dollar holdings. Even if they keep the same percentage in dollars
and gold, the rapidly rising deficits mean a huge increase in demand for
gold by these central banks who in fact know how important gold is to
monetary stability.
Asian central banks' gold holdings in absolute amount will increase even as
Asian central banks maintain a fixed percentage of gold in reserves
according to Tan Khee Giap, an associate professor with Singapore's Nanyang Technological University. In other words, as Asia becomes more wealthy vis-à-vis the west, it will be increasing its gold reserves. That is
consistent with the observation James Turk has made in the past, namely
that gold follows wealth around the globe. So the flight from gold from
the U.S. Treasury, which is much greater than the U.S. is admitting is a
sign that the U.S. and other western banks are in economic decline.
So now, here is another reason why the ability of our policy makers to
engage the American public in a world of make believe by rigging the gold
price through its sale/lease/swap on to the markets will ultimately fail.
In fact it is also possible that the U.S. Treasury may in fact be running
out of gold. Remember that when they lease it they lie to us by pretending
gold remains in the U.S vaults. And when the swap it with say the German
government, they also lie by pretending it is still owned by the U.S.
***********
The 5 Keys to a Long Term Bull Market in Gold www.financialsense.com
- The US Current Account must be in a deficit position and growing. Yes,
this is a present condition and shows no fundamental signs of reversing for
a significant time. This is the account that measures the amount of US
dollars in the hands of non-US entities. It is usually invested primarily
in US Federal Debt instruments.
- An intact negative trend in the US Dollar overall must exist. It should
have the characteristics of a bear market. This is in fact true for the US
Dollar today. We have a classic long-term top called a Head & Shoulders
formation, which was subsequently confirmed by price and volume action.
Even dollar bulls now are looking only for the dollar to stabilize at lower
levels. This criterion is in place for a long-term bull market in gold.
- The general commodity market is showing in many ways, both fundamentally and technically, that it is in a base formation from which one can expect higher prices. We shall discuss the technical characteristics further to sustain that this ingredient has begun to support gold long term.
- Trust in paper assets must be waning for gold to assume an investment
role internationally. We see the recent decision against Andersen, the
comments on GE & IBM accounting practices and Enron as examples of
causative items, which have turned investors away from the absolute belief,
in existence from 1980 until now, that paper assets were storehouses of
value. We believe this ingredient is in favor of gold's long-term bull
market.
- The momentum in the appreciation of the bond market must be
decelerating. We see this ingredient as becoming positive now to a
long-term bull market in gold.
These five items as they gain in strength will further accelerate the
underpinnings of a long-term market in gold. It was the forming of these
constituents of a long-term bull market in gold that has given rise to the
move of gold from $260 to $330.
Therefore the Gold Cartel is in Harms Way. A bankruptcy of the derivative
dealers who represent, in part, 72 Trillion Dollars of derivative positions
(called by Buffett - "Sewage") of the highest mountain of debt ever created
on Earth is the reason why gold could go to $1450 -- $1700/oz.
When gold reached $887.50 in March of 1980, $900 was the price that would have balanced the balance sheet of the USA defined as the comparison between Federal asset gold and external debt obligations. If a derivative failure was to happen in the next 5 years it would, depending on when it happened, produce a number between $1450 and $1700 on gold to balance the balance sheet of the US as described above.
September 10, 2002
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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