Taylor On US Markets & GoldFinancial Markets
How Did we Get Into This Mess?
As the Kondratieff Winter, so named by our friend Ian Gordon continues to
blow colder by the day, it might be very worthwhile to enquire as to how we
have gotten ourselves into this fix. The Kondratieff winter is a
reactionary force of nature required to wipe out excessive debt loads
created during the prior spring, summer and autumn time frames. And while
the attempt by arrogant Homosapiens to defy the laws imposed on them by
God, their Creator is nothing new under the sun, we have arguably, thanks
to our 21st century arrogance, pushed the envelope on abusive monetary
practices further than any of our forefathers. I don't know why we have
become so brazen. Perhaps it has to do with the exponential growth of
knowledge and technology that has led the likes of Alan Greenspan and Wall
Street's top promoters to suggest they had invented a New Paradigm, and
thus could set out to rig the gold, equity, bond, and currency markets and
to print endless amounts of money without any serious consequences. But the
first hints that something was going terribly wrong started to appear when
massive interest rate cuts not only failed to revive our economy, but for
the first time since the 1930's failed to result in higher stock prices one
year later. Since the Great Depression, as few as two successive rate cuts
were sufficient to generate higher stock prices one year later. Now we have
had twelve successive cuts and we are getting "zip" in the equity markets
and economic growth remains very anemic. Somehow the creation of money out of thin air, for the first time Great Depression, isn't working. And now we are now beginning to pay a terrible price four our efforts to try to fool
We have made the case numerous times before. A massive creation of money, most pronounced during the late 1990's, (the autumn of the current
Kondratieff cycle) led to numerous financial bubbles of epic proportions,
some of which have partly deflated and others like the real estate bubble
which appear to still be expanding. Now, the greatest financial bubble of
all times, encapsulating not only the U.S. economy, but indeed the entire
global economy, is in the early stages of deflating. With so much money
having been created, false signals were sent out to the economy which
resulted in: 1) too much being produced, 2) the Wrong things being produced
and 3) the creation of an unprecedented amount of debt far too large to be
serviced, especially with incomes declining from mal investment. These are
problems that printing money not only will not solve, but will make all the
worse because in our fractional reserve system, printing money necessitates
creating more debt which will further worsen the global financial system.
The chart above shows huge amounts of debt have been magically created as a product of fiat money creation. But that presents us with a BIG
MACRO-ECONOMIC PROBLEM because you will note that income, illustrated by the GDP line is growing in a linear fashion compared to the exponential
growth of GDP. The Fed has tried and continues to try to remedy this
problem by simply extending more debt. But with debt being a major part of
the problem, the cure is worse than the disease! In other words, with or
without the Iraq war, we are in big, big trouble.
How did we get ourselves in such trouble? How did we manage to grow the
money supply so much more rapidly than our natural income (GDP) grew? Why
did those responsible for money supply growth engage in such a mass
delusion? Who were those responsible for this rapid money supply growth and the destruction that now lies in our path. In my view, many of the answers to those questions can be gained by taking a look at the creation of the Federal Reserve because that private institution is being used as a funding mechanism for a ruling elite that has a deep disdain for the U.S.
Constitution and who very clandestinely have been in the process of
replacing our beloved Constitution for a one world government that would
enslave us all, of course, "for our common good."
Summary of Key Markets
The Dollar Bearish - The most important market in the world, the dollar
declined last week as confidence in the currency declined with growing
evidence that the U.S. could be getting itself into another military quagmire. Your editor believes there may be a parallel with a geo-political story in the 21st Chapter of Jeremiah, when God refused to come to their aid of Israel against a Babylon, which is now Iraq. Through the Profit Jeremiah, God told Israel's King Zedekiah that he would not only refuse to help Israel, but that he would aid and abet the enemy because Israel had turned its back on God the Creator.
Whether or not this is an accurate analogy, it seems evident that the U.S.
could be in for a very, very difficult time in Iraq and that our involvement there might backfire in many ways, including the unspoken objective to defend the U.S. dollar as the world's reserve currency. Do you think our activity will lessen the resolve on the part of Islamic countries to use the gold dinar rather than the dollar as a medium of exchange between Islamic countries? Or, do you think for a minute it would reduce their desire to use the Euro as a medium of exchange over the dollar, which is a trend on the part of a number of countries including Saddam himself.
Notwithstanding the war, the U.S. has enormous economic problems related to the Kondratieff cycle which in my view would ultimately bring the dollar
down. But the political as well as economic repercussions for the U.S. from
a prolonged stalemate in Iraq, should that be the reality we find ourselves
in, could usher in a dollar demise even more quickly.
US Treasuries Bullish - A flight to "quality" helped reverse recent short
term bearish trend in the U.S. Treasury markets and we note that the longer term trend in the 30-year Treasury rates remain down. A double bottom has been put in for 30-year Bond rates at about 46 on the $TNX with the October 2002 and March 2003 highs. Given our deflationary views, we do not rule out the possibility that the bull market in bonds could still go further than conventional wisdom can imagine. However, war anxieties and a
continuing economic decline could lead to a rapid panic out of dollars which in turn would likely lead to a catastrophic withdrawal of capital from the U.S. which in turn would push U.S. rates dramatically higher even as economic activity continued to freeze up during the Kondratieff winter. This has been our fear all along which is why we have the Prudent Safe Harbor fund in our Model portfolio. That fund owns gold bullion and a host of high quality treasury instruments denominated mostly in currencies other than the U.S. dollar.
Equities - Bearish - Based on certain technical indicators we thought at the end of last week that the equity markets might be ready for a major bear market rally. Had things gone the way we were led to believe they would in Iraq, I think we would have seen a powerful bear market rally that might have given us a chance at some solid trading profits. But with things not going so well in Iraq, we have seen a reversal of these markets as well. We could still see a major rise in equity prices in this secular bear market with some positive movements on the geopolitical front, but with stocks remaining extremely overvalued (the latest P/E ratio for the S&P 500 is 30.84 times) we continue to believe that PE ratios need to decline by a factor of at least 2/3 from current levels before we can begin to think about a new equity bull market. And given our dismal outlook for the U.S. and global economies, those ratios are going to have to take place by plunging share prices rather than from rising earnings.
Commodities - Neutral - A major decline in oil prices as the war was getting underway led commodities into a nose dive such that the CRB had actually fallen below the 200-day moving average and below a multi-month up-trend this week before rallying just above the 200 -day moving average on Friday. Disruptions of oil supplies caused oil to rise. We have not been nearly as bullish on commodities as some others have been because of our believe that the severity of economic contraction will ultimately overwhelm bullish factors for commodities such as a) a weaker dollar, b) lack of new capacity and c) reallocation of wealth from the west to Asia where the propensity to spend for basic creature comforts is presumably greater than in the west. Indeed, this is why we argue that ultimately our current system will be brought down by deflation rather than inflation and why we like gold, a monetary commodity, but not commodities which, owing to a lack of portability or durability are not monetary assets. Having said that however, we plan to retain our allocation to the Rogers Raw Materials fund because for the foreseeable future we do believe commodities should provide a better store of value than the dollar.
Gold - Neutral - Technically speaking, gold managed to sneak back into neutral territory on Friday by moving above it 200-day moving average. The
Plunge Protection Team is alive and well now that we have another fox guarding our Exchange Stabilization Fund. No doubt about it, we started to
see where natural forces would take gold when Treasury secretary O'Neil
resigned. But then just as quickly a defiance of natural market forces was
orchestrated by Secretary John Snow who has given the gold, dollar and
equity markets a "snow job" that would have made former Treasury
secretaries Rubin and Summers proud. A resumption of the trashing of the
trashing of the gold market, as first noted during Bob Rubin's stint at
Treasury, resumed the very day Mr. Snow filled the Treasury Secretary
vacancy post O'Neil. The circumstantial evidence of his manipulation of the gold price starting the very day he took over the Treasury post is quite solid.
Why is it important to know if the gold price has been manipulated to lower levels? It is important because if it has been manipulated to levels below natural levels, a time will come when the efforts of these sinister forces to
suppress the gold price will no longer work. Confident in our view that the
price of gold has been manipulated, and equally confident that Frank Veneroso's supply and demand study projecting an equilibrium price for gold
above $600/oz., we believe it is only a matter of time before the lid blows
off the price of the yellow metal. Economic problems facing the U.S. can be
obscured from public view by "capping" the price of gold. As Lawrence
Summers wrote in an academic paper, by capping the gold price, the dollar
could at least for a time, continue to strengthen even as huge amounts of new paper money was being printed. Hence the birth of the Clinton Strong
Dollar policy. That policy was undertaken for their political and economic
gains of both parties in Washington. But the manipulation of the gold markets during those years contributed greatly to the excessive bubbles of
the late 1990's which means we are now going to face untold hardships as
the laws of the markets are beginning to lead to massive debt repudiation,
unemployment and bankruptcies. This is an environment in which could rise
dramatically, no matter how hard the authorities try to stop it, as they always have in the past when the dollar is in trouble. That is why we
continue to insist that gold play a major role in our Model Portfolio.
While technically, gold has broken down into a neutral posture, we note it
is now once again above its 200-day moving average and well above its
up-trend line that dates back to early 2001. In other words, gold is climbing that wall of worry that is typical of early stages of a bull market. I believe James Sinclair is exactly right when wrote today on the Internet: "Those that believe that the resolution of the Iraq War itself is super bullish for general equities and bearish for gold are kidding themselves. Anything can happen short-term. However, the economic implication of Guns, Butter and Rebuilding is an impossible equation that has enormous pro gold implication long-term".
Gold Shares - Bullish - Gold shares have led gold down after leading it up
in the initial phase of this long term gold bull market. On Friday the gold shares began to act very positively and I would not be surprised to see them exploding on the upside, leading gold bullion higher once again. As I look at the XAU chart, I see Friday's share price actions moved definitively above the recent downtrend line. Another day or two like Friday and the technical picture for the shares could turn very bullish. I view the current weakness in the shares as an opportunity to add to your gold share positions if you are still under weighted. Our Model portfolio has approximately 30% directly invested in the gold shares and another 15% or so indirectly via the Prudent Bear and Prudent Safe Harbor funds.
April 1, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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