Taylor On US Markets & GoldFINANCIAL MARKETS
Richard Russell frequently talks about how day-to-day news is little more
than meaningless noise when it comes to the future of the economy. Markets are forward looking because they are collectively discounting the future. So it is always better not to pay too much attention to the daily chatter in the main stream media because it can do little more than to distract us from the big picture and more importantly what the market is telling us about the future. We have seen the manic nature of the equity markets. A better than expected earnings report from a major company or a better than expected employment number or consumer confidence number can send equity prices rising dramatically and then when the short term traders cover their short positions, we see explosive rallies on the upside as happened yesterday.
It is very interesting also to observe the psychology of post bull market
and early bull markets. My good friend Chuck Cohen who frequently posts
his thoughts at www.lemetropolecafe.com has some real good insight on this
topic. He frequently tells me how these indicators say that equity investors believe with each decline, that this must be the bottom. They are fearful of missing the major turning point, because they believe a resumption of the greatest bull market in history is imminent. Never mind that stocks remain about as overvalued in terms of earnings as ever in history. Never mind that real wealth is flowing from the U.S. to China. Never mind that profits continue to disappoint. Never mind that for the first time since the 1930's two or more successive rate cuts have failed to lead to higher stock prices one year later. Never mind that a full twelve rate cuts have failed to bring about the inflationary results in the equity markets and in the economy that our bankers and politicians seek. Investors recalling the gold old days are simply afraid they will miss the next stock market party. A careful study of history should convince them any serious secular (stocks) bull market is at least a good number of years away.
But like Pavlov's dog, when CNBC rings the bell and tells us the market is at a turning point, the vast majority of folks begin to salivate over the
prospects of rising stock prices. Still fresh in their minds is the feast of the late 1990's. They just can't fathom missing out on it first to recoup losses and secondly to reach that place called "Easy Street" that the establishment has been so eager to promise them in exchange for their
hard earned money.
And so, given the nature of our general population, which seems not at all
inclined to question conventional wisdom, the slow Chinese water torture
that takes us slowly to lower and lower levels on the major indexes could
last for quite a long time as Wall Street kept touting conventional wisdom
that simulative monetary and fiscal policy will inevitably lead to a recovery. Bailout after bailout however, will only serve to deepen the problem in the long term while offering momentary respites of ever decreasing duration. And so my guess is that we are heading in the direction of Japan, toward very long term-substandard period of economic growth in which equity values will have to decline on the same scale as that of Japan. A lack of pricing power caused by: a) excesses of the 1990's leading to excessive supplies, b) globalization and phony currency relationships especially between the Chinese currency and the dollar, allowing China to rob commerce from the rest of the world, c) rising commodity prices as a result of a weakening dollar should all serve to lead to disappointing earnings which in turn is likely to lead to weakness in employment and the capital goods sector.
When will these negative factors change for America? It would happen sooner rather than later if the politicians and the Fed would take their cotton picking hands off of the economy and allow it to self adjust. And the
Chinese problem would self correct if we had policy makers interested in a
fair and balanced monetary system based on a currency that allows true
production costs to govern trade rather than phony relationships like the
one between the Chinese Yuan and the dollar, which obscures true market
signals thanks to a dollar Yuan relationship that falsifies costs of products and services and thus a misallocation of resources and global market disequilibrium. The real problem is that the folks who really run American - the Fed and the bankers behind the Fed could give a rats tail about America. They are after profits and if that means gutting American industry in favor of China they could care less. And so, nothing is likely to be done about the extremely unfairly devalued Chinese currency which is also gutting the manufacturing capability of China's Asian competitors.
In a video discussion between Jim Rogers, Marc Faber and Daniel Yergin, Marc Faber remarked that the dollar would have to devalue by 80% before the U.S. could be competitive with China.
What the Equity Markets are Saying
Ok enough chatter. What are the equity markets telling us about the future?
If you believe markets discount the future, then the S&P 500 is not giving
investors any reason yet to look on the bright side. Long and short term
averages are in decline and the current equity prices are substantially below all the moving averages. In theory even an overvalued market like the SP&P could reverse with a sudden rise above the moving averages. If that happens, (and in the short term it could given a technically oversold market) we will have to listen to that. But for now and given that equities remain hugely overpriced based on historical P/E relationships, we remain very bearish on the stock market in general.
How overvalued are the equity markets in general? According to Decisionpoint.com the GAAP P/E ratio as reported last week for the S&P 500 was 27.21 times. Historically, bear markets bottom when the P/E ratio is at 10 or below. A P/E ratio of 20 has always been considered to represent an overvalued equity market. Despite the possibility of a rise in the price of
equity in the near term we remain absolutely convinced we are still fairly
early in a secular bear market that we think may turn out to be as severe
in the end as that of the 1930's.
Did the New Treasury Secretary do this to Gold?
Was it just a coincidence that the gold markets took a hit on the very first day our new Treasury Secretary took office? As Bill Murphy pointed out, it was almost exactly when O'Neil left as Treasury secretary that the price of gold began to rise. Then about the time our new Treasury secretary had a chance to sit down at his desk and drink his morning coffee, on his first day on the job (Feb 7) the new "fox" in charge of the chicken coup (The Exchange Stabalization Fund), seemingly wasted no time in overseeing a
breathtaking $7 decline in gold. Then on Wednesday, the yellow metal got
hit for $10 on the downside.
While we think it is possible the new Treasury secretary wasted no time in
using the ESF to go put the cap back on the gold market, more than likely
it was the increase in margin requirements implemented to help the troubled
crony capitalist banking friends of our policymakers that caused gold to swoon. But the bullish dynamics for gold remain the same. Despite the
contention that the new treasury secretary is in favor of a strong dollar,
in light of an economy that is becoming increasingly weak, there is less
justification now than in the past for a strong dollar. As Marc Faber opined, the dollar would have to decline 80% before America could compete with the Chinese in carrying out industrial activities that actually add to the wealth of nations. A strong dollar would necessarily mean that gold would have to be put back in its box, but if that becomes the suicidal policy of America, it will quicken our demise toward a deflationary collapse of the system.
February 17, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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