Taylor On US Markets & Gold
Financial Markets
The Fuel for the Greatest Bubble in 100 Years
Last week I expressed amazement at a fairly high profile economist's lack
of knowledge about M-3. Presumably he knew something about what M-3 was,
but he didn't have a clue about the quantity of M-3. He thought it was
somewhere in the $2.5 Trillion to $3.0 Trillion range. That economist also
argued that Greenspan and the boys at the Fed were hung up over some silly
notion of guilt about having a good time. He equated it to his own experience as a Methodist where he says he learned that having a good time was sinful. There was no reason he contended that the Fed should ever have tapped on the monetary breaks in the early part of 2000 as the stock market blowout was taking place. Nothing bubbly about the market he claimed. Just some old fashioned prudes at the Fed with outdated ideas about having a good time. Had Mr. Greenspan simply kept printing money fast and furiously as he had been doing, trillions of dollars would not have been shaved off of America's net worth. Permanent prosperity could have been ours forever he claimed, if only the Fed not tightened interest rates.
Amazingly, this economist didn't seem to think there was any relationship
between the quantity of money printed by Greenspan and the banking system.
As David Tice correctly reminded CNBC viewers time an time again as the
market was reaching its peak, the printing of money was the PRIMARY cause
of high stock prices. In affect, the money supply was increased at a far
greater pace than economic growth. A rocket scientist you need not be to
understand that can't go on forever without inflationary and /or
deflationary consequences.
GOLD
The gold markets are looking much stronger now even as the equity markets
continue their bear market run. As we have said in the past, our service is
not devoted to short term trading strategies. We will leave that to others
and I hope to work closer in the future with some other people in passing
along some of their guidance and strategies in terms of shorter term strategies. People like the Aden sisters and Harry Schultz, who have agreed
to future interviews in this newsletter, provide trading strategies. Your
editor feels more comfortable focusing on macro and micro economic
fundamentals and concentrating on the work of people like Ian Gordon, David
Tice and his associates and the likes of Richard Russell to identify primary tends in the markets.
With respect to the primary trends, we think the charts above suggest those trends are now more in focus than they were a few weeks back, at least with respect to gold and the dollar. Technically, we think the equity markets could have considerably further to run on the upside before they resume their bear market trend. If equity markets decline this year, it would be the first time since the 1930's that they declined four years in a row. And given the presidential year politics, we think the chances may be 50/50 that we could see a small gain for the year in the major equity indexes. However, just as likely in our view is the potential for a major decline and the next phase of the bear market which will be marked finally by capitulation. That the capitulation phase of this bear market has not yet
been reached is evidenced by still extremely high equity valuations. At the
end of this past week for example, the GAAP trailing PE ratio stood at more
than 33 times! As we have pointed out in the past, bear market bottoms are
marked by PE ratios under 10.
Is a Gold Conspiracy by Uncle Sam Impossible?
One of the primary arguments advanced by people who think a gold conspiracy is impossible is that they assume that in order for a conspiracy to be carried out, a large number of people would have to know about it. And,
that being true they argue that it would be impossible to keep this crime a
secret.
With respect to the alleged gold price manipulation that began during the
mid 1990's, I do not believe that is true at all. All that was allegedly
needed was for a handful of people at the very top (perhaps limited to the
President and the Treasury Secretary and Fed Chairman) to implement policy measures they believe is in the best interest of the country (or perhaps their political interests) and then let the self interests of the market place take over. For example, with respect to the apparent gold
manipulation starting around 1994-1995, all that would have been required
to pull it off would have been to make gold available to the bullion banks
as a very low cost of funding and then for the Fed Chairman to promise, as
he apparently did, that the bullion banks would not need to worry about
covering their shorts because, "central banks stand ready to lease gold in
increasing quantities should the price begin to rise." The traders at
Goldman Sachs would not need to know nor would they care that their
borrowing of gold at 1% , sale of that gold and reinvestment at 6% in the
U.S. treasury markets was part of a manipulation scheme. All they knew was
that Alan Greenspan was telling them they had a risk free means of
enhancing their bonuses.
But what about the need to EVENTUALLY pay back the gold to he U.S.? After all, if an ever increasing amount of gold has been lent out or swapped out to the markets by various central banks year after year as GATA alleges, such that perhaps ½ of the gold reported on central bank balance sheets is now out in the market, the need to cover that short position in the market would logically cause the price of gold to skyrocket.
But do governments play by the same rule we mere mortals are asked to play
by? Hardly. We know for starters that the IMF requires member banks to use Enron like accounting, such that they report their gold loans as actual
gold held in their vaults. Private sector accounting of that nature might
send a CEO to jail. But the IMF, which is controlled by the U.S. not only
permits this kind of fraudulent accounting but actually demands member
countries use it. (See articles at www.gata.org regarding the Philippines and Portuguese central banks). With respect to the repayment of gold to the
central banks, one of the world's gold market experts believes that in fact
that central banks are making plans to forgive the repayment of gold and
will in stead accept currency as payment, then simply consider the loans as
gold sales rather than gold loans that need to be repaid.
In our fractional reserve banking system, debt is the raw material from which money is manufactured.
Printing money does not create wealth. What does create wealth are
manufacturing, mining, agricultural activities as well as those who managed
those companies and improve their efficiencies by developing new
technologies. The printing of money by way of debt only gives citizens a
false sense of wealth which in turn prompts them to do some very irrational
things with "their money," like invest in an endless number of fantasy
stock stories during the late 1990's. These investments in ill-conceived
businesses, are termed "mal investment" by the Austrian economists because
most of them are not economically viable.
Yet, a lack of income resulting from mal investment does not negate
indebtedness. Banks demand the loans they made which were used in the
process of manufacturing or "printing" massive amounts of new money are not willing to excuse debt simply because people were prompted by excess cash balances to make bad investment decisions. The bankers demand their loans be repaid regardless of whether the borrowers were successful.
With mountains of new debt being created at an accelerating pace, the
amount of cash flow generated from what's left of profits allocated to
servicing debt increases dramatically. In other words, the demand side of
the economy becomes weaker and weaker as more and more of cash generated from economic growth is used to pay principal and interest on debt because debt is growing much faster than income.
Also, with so much money pumped into the economy so fast, businesses and consumers become overly optimistic about the future such that excessive amounts of production capacity is created thus reducing profit margins for business. In the past bubble, (or as Doug Noland maintains, the bubble that still largely remains unpopped) this was obvious not only in the "new economy" companies but in the old economy companies too. For example, the airline industry has thousands of aircraft sitting in the desert.
Excessive capacity not only within the U.S. exerts downward pressure on profit margins, but at present, enormous news supplies have been introduced as a result of globalization. In particular, China with many low cost advantages in addition to numerous government subsidies are causing
American companies to go out of business. As a result of huge excess
supplies, downward pressure on profits remain which in turn retards plans
to hire new employees and purchase new capital goods.
Eventually, a point is reached that can be referred to as an "economic
threshold of lethality" for the economy. My good friend Dave Morgan, who
publishes an excellent newsletter on silver (www.silverinvestor.com.) and
I, have talked about this "threshold" debt dynamic of our economy on
various occasions. At our recent conference in Chicago, Dave who is an
aerospace engineer, equated the economic threshold of lethality for the
economy to the 'breaking points' for various metals. Up to a certain
critical point, things appear normal but then suddenly, the system breaks
down.
May 16, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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