Taylor On US Markets & Gold
U.S. Economic Myths to be Dispelled
There is a general consensus programmed into the American psyche by those
who control the media that the U.S. will certainly be on the mend now that
a successful prosecution of the war hasn't taken place. But in his April 21st
article, Stephen Roach outlined the following myths about the U.S. economy
which we should be aware of because myths are always, eventually dispelled.
Here they are:
- Myth # 1 - The U.S. will recover now recover in the same US-centric
growth dynamic of the past several years, now that the war is over. The
problem is that with the world dependent on the U.S consuming more than it
earns year after year, the U.S. is now reaching a balance of payments
deficit that threatens to break the system. As my good friend David Morgan
noted at our conference in Chicago, there comes a point in time where the
system reaches its limit for such a stress. The system will snap at some
point, and certainly the knowledge that we have a banking system built on a
foundation of questionable loans as noted by Peter Fischer, should add to
this concern.
- Myth #2 - Capex spending will lead the U.S. economic recovery. Roach
points out that spending for capital isn't going to happen as long pricing
power remains weak and that pricing power is likely to remain weak as long
as capacity utilization remains weak. Its currently at 72.9% vs. a the
average of the last 30 years of 80.2%. Also, he notes that Capex never
leads a U.S. recovery because business spend to expand when strong consumer demand demonstrates the need to do so. Nor is information technology likely to boost spending because of enormous consolidation that has taken place in the It user community.
- Myth # 3 - America has fixed its saving problem - In fact the personal
savings rate has increased from 0.3% in October 2001 to about 4.0% now, but that is less than ½ the savings rate for Americans pre-bubble. Moreover,
with the huge and growing U.S. deficits now in place, in the aggregate, the
U.S. savings rate has actually swung from a surplus of 2.3% of GDP in early
2000 to a deficit of 2.3% in late 2002! What this means is that the U.S. is
now in a position to continue borrowing from foreigners such that we could
well be approaching 7% of GDP this year, which is approaching a level that
is considered a danger zone.
- Myth #4 - The Deflation problem is gone - While energy and food prices have risen sharply (as we can attest by the Rogers Raw Materials Index in our Model Portfolio), the core rate of inflation, which excludes food and energy has actually been receding sharply. In March, the U.S. consumer price index, excluding energy and food was only 0.8%, well below its cycle peak of 2.8% in late 2001 and sufficient to bring the year over year
comparison down to 1.7%, nearly a 40-year low. Moreover, Roach points out
that the conditions for further price weakness, namely weak cyclical demand
and globalization remain in place.
- Myth #5 - Postwar healing in the US is about to spark an economic
revival. - In fact things economic in Japan and Europe continue to head
downward. Europe is growing only fractionally at best and Japan continues
in its funk. Now the SARS disease seems to be impacting growth in Asia very
negatively. And in China, where growth has continued at a hefty pace, not
only does SARS pose a threat but with 71% of Chinese GDP growth last year
coming from exports, one wonders how a weakening U.S. economy can do
anything but further retard growth in China and around the globe.
Our ruling elite continue to spin us like tops all day long on CNBC and in
other news media, which is why we find the views of mainstream economist
Stephen Roach so refreshing. We should also take this opportunity to
mention another refreshing mainstream thinker named JAMES ROGERS who will be telling us what his thoughts are on the global economy in our May 2003 issue when we interview him for the second time. Be sure to keep your
subscriptions current. You don't want to miss what this free thinking
investment genius has to say.
We live in a world in which our universities espouse philosophies that tell
us there are no absolute truths. So, like children spoiled rotten by
parents who buy us everything in sight so they don't have to be with us and
discipline us, we rant and rave believing that if we throw enough of a
temper tantrum we can mold "truth" to fit our own desires. You have your
truth. I have mine. And who is to say anything is absolutely right or
absolutely wrong. Yet, the laws of the Universe, those that pertain to
social sciences as well as natural sciences don't work that way. There are
absolutes in the social sciences as well as the natural sciences. We are
about to find that out in spades. Americans who have been able to dictate
what money is and then print it to buy whatever they want and to consume
far more than anything a truly free market would have ever allocated to
them, are about to absolute absolutes in the emerging Kondratieff winter.
Which way for Stocks in the short run?
As we were going to press the Dow closed at 8440.04. As such it has once
again failed to provide a bullish signal by confirming a recent high by the
Transport average. If the Dow can close above 8521.62 which was a recent
high recorded on March 21, 2003, it will have confirmed the recent move by
the transports above its March 21st high of 2263.49. As Richard Russell,
the master of Dow Theory, tells his subscribers, for a bull market to get
underway, it is necessary for the Dow and the Transports to both close
above their most recent highs.
On Wednesday, the Dow was briefly above the 8521.62 mark but failed to
close there. Today, with the Dow losing 75.62 it finished still further away from this confirmation requirement. Confirmation could still take place but the longer it takes for one of these averages to confirm the other, the more likely that it will fail and that recent lows, more specifically those of last October 2001 are likely to be tested. And since we are in a bear market, the likelihood is that the averages will sink below those October lows. If/when that happens in my view, we could then start to see the real capitulation phase of this bear market. That will be the real painful phase of this bear market, but it will be constructive because it will represent a return to reality form the fantasy land compliments of Alan Greenspan and his printing press and his gold manipulation shenanigans that underwrote the Clinton Strong dollar policy. It was the strong dollar policy as much as any legitimate technology breakthroughs during the 1990's that lead to the stock market insanity of the late 1990's. A return to reality, unpleasant as it may be is always a good thing because it paves the way for constructive, reality based
behavior in the future, at least for a while. And, constructive behavior,
based on the laws of nature, unlike the delusional behavior of the late 1990's provides a foundation for good things to happen on a more permanent basis.
GOLD
The Gold Dinar
Nothing terribly new on the gold front so far this week. We really have to
see the dollar get weaker for gold to rise and the dollar's weakenss will
continue to be a function of the market and the economy which is why we
spend so much time talking about those issues in the first segment of our
weekly hotline.
Longer term, as it become apparent that the dollar is a losing currency,
the move into gold by a growing number of investors is about as close as a
sure thing as you can find, based on historical precedent. Not only
investors, but businessmen as well will require an asset money that does
not lose value due to cascading defaults as we are likely to witness in the
Kondratieff winter.
We have already talked about how a group of Islamic countries are starting
to look toward setting up a Gold Dinar for use as a medium of exchange
amongst themselves. How soon that will take place is certainly beyond my
knowledge though I can only speculate that U.S. military action in Iraq may
well cause it to happen sooner rather than later. James Sinclair who is
rather close to the development which is being led by the Malaysian
government, had the following answer to a question posted on his web site
this past week
Q: Jim. Do you see the use of the Dinar spreading to other non-Islamic
countries and do you see the price of gold becoming somewhat fixed
eventually.
A: Yes, I certainly do. There is an important overriding consideration here
and this is the Sino/Islamic tie. In my opinion, the Malaysian Dinar is a
front runner for the Arab "Big Six Dinar" but more so for a Chinese gold
Yuan settlement mechanism that will be used throughout Asia.
April 28, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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