Taylor On US Markets & Gold"Long Wave Student Sees Stock Market Plunge & Possible $2,000 Gold"
That was the heading for our June 11, 1999 monthly issue of "J Taylor's
Gold & Technology Stocks" in which we interviewed little known Vancouver
based stockbroker and financial history student named Ian Gordon. Ian was
predicting an ultimate gold price of around $2,000 or higher and a decline
in the Dow to below 2000.
I took a few minutes this morning to go back over my June 11th interview
with Ian and it was quite interesting reading. I would recommend you do
the same. If you no longer have your hard copy of that interview, it is
posted at www.miningstocks.com for all to read.
In mid June of 1999, the Dow was at 10800, the S&P 500 was at 1300 and
the NASDAQ was at 2500 on its way to its blow off bubble top of 5000
several months later. This was the time the Abby Joseph Cohen's of this
world were being trotted out by their firms to tell everyone America had
discovered new laws of nature, that economic cycles were a thing of the
past and that you can find your way to Easy Street just by buying and
holding. No reason to ask any questions. Just send Abby your money and let
her make you rich.
In addition to Ian Gordon, we interviewed a slew of others individualists
such as David Tice, Bill Murphy, Dr. Larry Parks, Dr. Ravi Batra, James
Cook and more recently folks like Congressman Ron Paul, M.D., Jim Rogers
and Frank Holmes. By contrast, there has been a virtual absence of
mainstream opinion represented in our newsletter, except for Jeff
Christian, CEO of the CPM group and a former underling to Bob Rubin, whom I interviewed largely because toward the end of the boom I felt I needed
someone to represent the view that the gold market WAS NOT being
manipulated. Jeff honestly declared that "Our government has never given
us a reason to doubt its truthfulness." How is it that we have come to
cover the views of so many contrary thinkers in our letter?
I believe the answer can be found in the fact that the people who's
judgment we value are folks who think for themselves rather than blindly
following the mainstream crowd. They may not always be right. But they are
think, unlike most people who simply follow the crowd because doing so
makes them fell most comfortable. But as General Patton once said, "when
everyone is thinking alike, no one is thinking." That my friends is a
precondition for a dictatorship.
One positive note however needs to be emphasized and that was the recent
ruling by our Supreme Court. In an 8 to 1 ruling against NOW, the court
stopped radical feminists from taking away the first amendment rights of
folks who believe abortion is murder. It was also encouraging to see a
large number of liberal groups supporting this decision because they
understand that once the right to free speech is taken away from one group,
all groups face that same danger.
Equities Remain Hugely Overvalued
Equity values are still grossly overvalued. At the present time, the S&P 500 P/E ratio is at 28.23 times.
S&P selling at P/E ratio of 20 is historically overvaluation. A P/E ratio of 10 has always been considered undervaluation. And typically at the bottom of bear markets, when virtually no one wants to buy stocks, the P/E ratio falls to below 10. That happens when you get a true market capitulation. That kind of psychology we have not even come close to yet. And when it does happen, CNBC will not have to keep asking "are we there yet?" "Have we had capitulation yet?" They won't have to ask because the depression will run so thick that everyone will know when capitulation arrives.
Assuming our democratic republic can be retained through the difficult days
between now and then, we look forward to that time because it will mean we
will be able to buy some of the strongest companies in the world at prices under 10 times earnings and we should also expect to have those companies
pay us dividends in the 5% to 10% range. That will mark the beginning of a
new Kondratieff cycle. But we are currently very, very far from that time
as evidenced by the black line in the chart above. Note that with the P/E
ratio of nearly 30, we have not even yet come close to the normal
overvaluation parameters of 20, never mind a typical bear market P/E of
under 10. In other words, given current earnings, the S&P needs to fall by
another 66% to reach normal bear market bottoms!
Were there some reason to be optimistic about the economy such that
earnings could catch up with stock valuations, we might change our tune
although frankly, as Richard Russell points out, the market is what you
have to keep your eye on. As a leading indicator, the equity markets are
suggesting that the economy is facing some very difficult times ahead. The
primary trend for the Dow Industrials of course remains down, evidenced by
the 200-day moving averages, which themselves continue to hit new bear
market lows. But perhaps most striking is the fact that the Dow transports
have lost ground for five years in a row. This could be the sixth straight
year of declines for this major Index which according to Richard Russell is
almost unparalleled and may portends very dire things for the equity
markets in general.
Through is work on the Kondratieff Wave, Ian Gordon provided an historical
framework and economic dynamic with which to understand WHY things are so bleak at this moment in time. But when you ask Ian in one word why our
situation is so dire, he will answer you with one word. DEBT. That Ian and
only a few other voices are crying out with this message can be explained
by an educational system that has been taken over by the folks at the
Council of Foreign Relations and even deeper rooted organizations that
control the CFR and by the fact that Americans are so willing to submit to
the mainstream thought process this organization has so greatly shaped.
The interests of the CFR which are comprised of some of the wealthiest but
most invisible families in the world. When these folks initially created
the Federal Reserve so that they could usher in a legalized counterfeiting
scheme, by creating legalized tender out of thin air they set the stage to
gain political and economic control of America with the goal of eventually
gaining control of a one-world government. In the process this group has
done a great job of snuffing out the light of freedom from the American
people. But essential to that process was the "education and indoctrination process of our university students. Keynes and Friedman work well for these folks because these economic theories seem to legitimize fiat money over gold. But in that process, a self defeating dynamic is at work, that being the pernicious effects of the exponential growth of debt late in the Kondtraieff cycle when debt reaches a threshold of lethality as so well illustrated by Ian Gordon's work.
Jim Rogers Explains Why the Dollar is in Big Trouble
As for the dollar, the following essay from Jim Rogers reflects to a great
degree our own thinking. Incidentally, we are excited to tell you that Jim
Rogers has agreed to another interview for "J Taylor's Gold & Technology
Stocks. We hope to publish that article in our May 2003 issue. We first
interviewed this brilliant individual thinker in our April 2002 issue. But
for now, forget may and read the following provocative essay by Jim Rogers.
THE DOWNWARD SPIRAL
By Jim Rogers
In late January, the Senate confirmed John Snow as our new U.S. Treasury
Secretary, the 73rd in the government agency's two-hundred plus year history. Snow, like Paul O'Neill and Robert Rubin before him, promised to
follow a strong dollar policy and take steps to help spur on a U.S.
economic recovery and long-term growth.
Well, I know you've just started your new job, Mr. Snow, but I've got some
sobering news for you. You and your pals can keep talking about this alleged "strong dollar policy" until you're blue in the face, but it's not going to make a lick of difference if you don't start managing our currency more responsibly. The dollar is not just in decline; it's a mess. If something isn't done soon, I believe the dollar could lose its status as the world's reserve currency and medium of exchange, something that would lead to a huge decline in the standard of living for U.S. citizens like nothing we've seen in nearly a century.
"Oh, Jim," the disbelievers crow. "You're just being extreme. That would
never happen. After all, the dollar has reigned supreme for several decades"
True, but it seems to me that people forget that that supremacy isn't a
gimme. A sound currency, after all, reflects solid economic fundamentals:
little to no debt, a trade surplus, a stable balance of payments-the
difference between a nation's receipts of foreign currency and its
expenditures of foreign currency-and growing international reserves.
That's not exactly the picture you get when you look at the U.S. balance sheet. Our national debt to foreigners is now around $6.4 trillion, with
interest payments alone last year totaling $333 billion. We're importing
far more goods than we are exporting. International reserves remain around
$60 billion, but we're attracting far less direct foreign investment every
year. Our current account deficit runs at roughly $500 billion a year, or
five percent of our gross domestic product. Think of it this way: It costs
us about $1.3 billion a day in the foreign markets just to keep the dollar
afloat. We're like the untrustworthy brother-in-law who keeps borrowing
money, promising to pay it back, but can never seem to get out of debt.
Eventually, people cut that guy off.
As a result, the U.S. dollar continues to fall against its foreign
counterparts, down 18 percent against the euro in 2002 and 10 percent
against the yen. That's not the worst it has been in history, but it's certainly a substantial slide. With a war, a slow economic recovery and future threats of terrorism looming on the horizon , there's little reason to believe things are going to improve.
What's worse, little is being done by Washington's economic gurus to pull
us out of our economic quagmire. Faithful readers know I believe Alan
Greenspan is the grand maestro of this economic debacle. Our esteemed
Federal Reserve chairman is the first to "buy any assets" or lower interest
rates to pump money into the economy and give investors the illusion that
things aren't as bad as they really are. Sometimes I wonder if our central
bank is just going to print money until we run out of trees. People say
that inflation is a dead issue, but you wouldn't guess that shopping where
most of us buy things.
History teaches us that such imprudent fiscal behavior has always led to
economic disaster. During the early 1920s, rampant inflation destroyed the
value of German currency. German workers had to be paid twice a day just to
survive; it took a wheel barrel full of bills just to buy a loaf of bread.
In England during the 1970s the government continued to boost its money
supply, injecting its economy with liquidity, until debt levels spun out of
control. Suddenly, no other countries would buy their sovereign bonds.
Finally, the International Monetary Fund had to step in and bail the Brits
out. Quite a shift for a country that only 50 years earlier was one of the
richest nations in the world. Want a more current example? Just look south,
to Argentina, where its currency recently lost so much value that the
government prohibited its citizens from making withdrawals at the bank.
So why doesn't our government do something about our flagging currency? At least over the short-term, the declining value of the dollar does have its
perks. A declining dollar is certainly good for domestic manufacturers who
must compete with foreign companies. As the dollar drops, their manufacturing costs decline and it's much easier for these companies to
compete. The global economy is already sluggish, and the falling dollar
makes U.S. exporters far more competitive. Again, it's the illusion that
things are better when they really are not.
Remember also: Our manufacturers may be better off, but foreigners then
suffer so the world as a whole shows no improvement. That is why similar
practices in the 1930s were known as "beggar thy neighbor".
While this helps U.S. manufacturers, it's not necessarily good news for
consumers. The cost of imports, like foreign cars and foreign liquor, will
rise. Since foreign goods become more expensive, U.S. companies may respond by raising their prices, even slightly, because they can. In the end, the dollar loses value, but we're still paying the same real amount for many
The bigger problem for the American economy is that foreign investors and
foreign governments may soon lose their appetite for the declining U.S.
dollar. Interest rates, which are now absurdly low, will need to rise to give foreign investors an incentive to invest and hold on to our currency. If not, these foreign governments and investors may look for somewhere else to hold their money. Historically, when investors recognize that a currency
is being debased or devalued, they tend to look for sanctuary in currencies
that remain stable at the insistence of the population. For years, the
Swiss franc was synonymous with monetary stability.
While currencies like the Swiss franc or the Japanese yen or the Danish
krone-all of which I own-are in better shape that the U.S. dollar, I don't
have a whole lot of confidence in them either. All of these countries'
governments have adopted the U.S.'s dangerous habit of manipulating their
own currencies to compete in the world market. It's a double-bind of sorts:
Singapore's government wants to keep its currency strong and sound, but if
every other country's currency is declining against the Singapore dollar,
their exports become prohibitively expensive and it becomes impossible for
them to compete. They are forced to play the monetary monopoly, shuffling
the money supply, adjusting interest rates, just to make their products
And what about the Euro? It's certainly stronger than the U.S. dollar,
which is down 18 percent against the euro for 2002. I believe the success
or failure of the Euro is one of the most important questions of the
twenty-first century, one with profound implications on the global economy.
The world needs the Euro, because it needs an alternative to the dollar.
There really are only two currencies with enough liquidity to be the
world's currency-the U.S. dollar and the Japanese yen. (The Swiss may have
a sound currency, but there just aren't enough francs out there.) The
European Union has everything going for it-an enormous population base, a
balance of trade surplus. Most of its nations are creditors, not debtors.
If the Euro succeeds, people may actually stop using the dollar as a medium
of exchange and as a reserve currency.
That said, I believe that the Euro is a flawed currency. Many of the
European Union's 12 member nations just don't run a tight ship. Germany,
which became the poster boy of fiscal responsibility in the mid-twentieth
century, has again started running up huge debts. (Have they forgotten
about the wheel barrels?) The Portuguese are running an enormous deficit.
What's going to happen when these countries can't balance their books? Is
Brussels going to send tanks into Lisbon? I doubt it. It may take years,
even decades to root out all the problems in the EU's inherently flawed
system. Remember: Hundreds of billions of dollars (yes, dollars, for the
moment) have been invested in this new currency. Banking systems have
changed. Accounting systems have changed. Even parking meters have changed. If it fails or even struggles, there may be huge economic losses.
How long does the dollar have? A year? A decade? I'm not so sure. As long
as there's no other currency stepping up to the plate and EU continues to
struggle with the euro, the U.S. government will likely be able to continue
to jigger the books, essentially floating our enormous tab on the backs of
the rest of the world.
But remember: Whenever there has been an economic crisis like this, a new
player has always emerged on the economic landscape. A century ago, few
people would have believed that the dollar was going to emerge out of the
19th century as the dominant world currency. There's always a phoenix that
rises from the ashes. Who will it be for the 21st century? My guess is the
Chinese yuan may eventually have its day in sun. The nation has a recipe
for a sound currency-a huge population, an enormous balance of payments
surplus, and a sizeable GDP to match. China is now the world's largest
importer and the world's second largest creditor (Japan is first). For the
moment, its currency is not convertible, which must change now that it has
been admitted to the World Trade Organization. There are still a lot of
cultural barriers to get over-rampant xenophobia and fear of capitalist
interests-but nothing assuages fears like steady flows of money into your
Gresham's law says that bad money tends to drive out good money. Well,
whether we like it or not, whether we want to believe it or not, the U.S.
dollar has become bad money. Despite proclamations from Washington about a strong dollar policy, I see no reason to believe that the dollar won't
continue to decline, that we won't continue to borrow like beggars and put
Band-Aids on gaping wounds in our monetary policy. That is, until the day
when our creditors say enough is enough. And that day may not be far off.
March 4, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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