Taylor On US Markets & Gold
Financial Markets
The Fed is trying its best to avoid discussing the "D" word lest the people of America catch on to what we are saying here. The Fed talked last week about "declining inflation," (A.K.A. disinflation) because they know what it means. It means companies will not have sufficient profits margins to hire people and to buy capital goods. It means that with declining incomes that result from lower profit margins, the mountains of debt that were created especially during the feel good autumn days will be harder and harder to pay and that debt servicing costs will sap the demand side of the economy still further. They must know that eventually the house of cards known as the American financial system must collapse because there will simply not be enough income from which to service the debt. But they also know that if this understanding were widespread even among economists, never mind the American public, there would be no hope at all of avoiding deflation. So in typical Fed fashion they select their words very carefully to avoid a mass panic in the markets. But what they are no doubt really worried about is not disinflation, but the direction in the change of prices which as the chart below suggests is heading toward outright DEFLATION.
Richard Russell started his May 14, 2003 issue of "Richard's Remarks" with
the following sentence and chart:
"This is the chart that scares hell out of Greenie and the Fed. It's the
core rate of inflation, which on the latest (March) reading fell to a 'frightening low' of 1.7%."
How was it that a host of folks we have featured have managed to see this
picture emerging back in 1999 and in the case of David Tice, much earlier, even as brown nosed politicians in Washington were deifying Alan Geenspan
for his role in bringing about a permanent prosperity for America? In
answering that question, I keep coming back to the following quote from
Oswald Spengler's "The Decline of the West."
"What is truth? For the multitude, that which it continually reads and hears. A forlorn little drop may settle somewhere and collect grounds on which to determine 'the truth' - but what it obtains is just its truth. The other, the public truth of the moment, which alone matters for effects and successes in the fact-world, is today a product of the Press. What the Press will, is true. Its commanders evoke, transform, interchange truths. Three weeks of press-work, and the 'truth' is acknowledged by everybody."
And so the establishment proclaims and shapes "truth," not objectively, but
subject to its own interests, most of which are short term in nature. That is why one certain economist at the CMRE could not know what M-3 is. He has been trained like Pavlov's dog to replay what he has been taught and since he has been taught that the amount of money created out of thin air is not
important, he did not have a clue about such a basic statistic as the amount of money that is flowing in the U.S. economy and around the world. That "truth" defined by our elite explains why Mr. Greenspan had to deny we were in a bubble and why he and the U.S . Treasury continue to lie about the suppression of the gold price. That is why CNBC allowed Bill Murphy one time only to talk about the gold conspiracy and why the discussion of the gold conspiracy is "off the table." Objective truth, takes a back seat to subjective truth when it conflicts with the whims and wishes of the establishment. We have chosen to feature people who do not buy into the self serving "subjective truth" as defined by our ruling elite because these people know there is a bigger truth than that defined by the ruling elite. They know the laws of nature ultimately cannot be fooled, which is why they were able to predict the future of the U.S. economy was not so bright even as analyst after analyst was deceiving the American people daily on CNBC. People like Ian Gordon, David Tice, Bill Murphy, Congressman Ron Paul, Dr. Larry Parks, Dr. Ravi Batra, Jim Rogers and quite a few more over the years have been interviewed in J Taylor's Gold & Gold Stocks because they think outside of the box into which the establishment tries its hardest to enclose around us.
Money is Manufactured with Debt
The debt/GDP dynamics that David Tice talked about in our 1999 interview
with him are clearly pictured in the chart below. Because the reality of
the numbers pictured on this chart cuts through all the "subjective" truth of the establishment and because it is also true that "objective" truth shall set you free," we feel compelled to publish this chart over and over again. CNBC's talking heads, Congressmen and Federal Reserve elitists can ignore the relationship below if they like, but they do so at their own peril. This chart makes a mockery out of the claims of Greenspan and other Federal Reserve elites that they can simply print money to deflation.
We do agree in theory with Jim Rogers that the Fed could do an "airplane drop" of money across the U.S. without immediately entering corresponding
liabilities in the banking system. But as word of that activity spreads, we
think the U.S. dollar, which is still the worlds' reserve currency, would
immediately be rejected such that is value would immediately collapse,
triggering waves of defaults, bankruptcies and unemployment with the very
rapid result a deflationary collapse of the system.
Indeed, the Fed may already be carrying out somewhat unconventional
monetary measures, or perhaps the mere suggestion of doing so is causing
the markets to react in a way the Fed desires. (See Marshall Auerback's
excellent article titled "Has the Fed Already Gone Unconventional?" at
www.prudentbear.com/internationalperspective.asp.) Although the dollar
continued to decline last week, the most shocking move in the financial
markets was, in my view, the decline in the 30-year US Treasury rate, well
below prior support levels. Rumors abound that the Fed is or will buy the
Long Bond, to cap long term interest rates and thus keep the housing market
alive.
Chart is courtesy of www.decisionpoint.comWhat ever is happening, the chart above shows that the 30-year bond rates
have clearly broken below their prior lows which is strange especially given the continued weakening of the dollar and continued strength in the equity markets and also the enormous increase in the money supply. Recently Mr. Greenspan has been growing money at a rate of about $2.1 trillion annually. Bear in mind that when Greenspan took over at the Fed in 1987, through all American history, the money supply (M-3) had risen to $3.5 trillion. M-3 is now 8.7 trillion so that in just 15 year Greenspan as more than doubled our nations money supply. Indeed Greenspan is literally driving America toward bankruptcy as he tries to pump and pump and pump us out of the grasps of a monster deflation. Unfortunately, given the dynamics of the Kondratieff winter, we do not see how this will not end very, very badly for Americans.
The Beginning of the End?
On May 12th of this past week, Stephen Roach, Chief economist for Morgan
Stanley wrote the following:
"The big moves in financial markets always seem to be driven by the unwinding of fundamental imbalances. The disequilibria can be economic,
geopolitical, or purely financial. Recent examples include the great disinflation from 1982 to 2002, the end of the Col War, and the popping of
the NASDAQ bubble. And now the unwinding of a new disequilibrium is at
hand-the rebalancing of a US -centric world. I continue to believe this
will be a mega macro play for years to come that could have profound
implications for world financial markets."
The main concern that Roach has been expressing for many, many months now has been the US - centric world economy in which the US continues to
provide most of the global demand, not by consuming the fruits of its own
labor (its own income) but rather from borrowing money from foreigners. The trade imbalances are now joined by a growing federal budget deficit and the combined indebtedness of America has been growing and growing now for quite a few years, with collective debt growing larger and larger as a percentage of our GDP. Only a fool could think this trend could continue indefinitely. GATA and your editor believe very strongly that the rigging of the gold price was key to the enormous imbalances that Stephen Roach notes began in the mid 1990's. We do not think it was an accident that the dollar became STRONGER even as huge amounts of new money was being created to ensure one country bailout after another took place starting with Mexico. Were the gold price not manipulated by a grand dishording of gold, the dollar would have gotten weaker, not stronger when more and more of it was being printed for the politically convenient bailouts of the Clinton years. By
intervening in the markets, the Clinton administration were able for while
to fool mother nature by seeing the dollar strengthen even as its supply
skyrocketed and even as the U.S. balance of payments went deeper and deeper into deficit. So the intervention in the gold markets paved the way for the enormous global imbalances that Roach is rightfully so concerned about now and which one way or another must be reversed.
To Roach, it is possible that the only remedy for this imbalance is a much,
much weaker dollar. He pointed out last week that on a broad trade-weighted basis, the dollar surged by some 47% from May 1995 through early 2002; to date, it has fallen only 9% from that peak." In other words, Roach thinks the dollar has to get much weaker before a return to a balanced global trade or at least a significant reversal in the trends take place. What
clearly has to happen is that the U.S. has to start saving more and consuming less while other countries need to consume more and save less. The existing trend cannot go in one direction indefinitely and all signs are now point to the prospect for a reversal in the near term. The only question is whether the reversal will be smooth or violent. There is also no question but that the result will be a much lower standard of living for Americans.
Since the dollar is the world's reserve currency it is the most important
price in the world. And its decline will have a very profound impact on many markets for many years to come. A major decline in the dollar will ultimately result in much higher interest rates in America, which can be expected to spur savings here while reducing interest rates in the stronger currency countries, thus leading to stronger growth in those countries. But higher interest rates will be problematic for America because of its enormous debt load.
Another problem with the reversal of the US centric global trend is that
many of our major trading partners are already in a recession or nearly so.
The sudden inability to export to America could really send those economies
reeling. And with the dollar weakening, there could be a huge competitive
currency devaluation not unlike what had happened in the 1930's with every
country trying to increase exports by devaluing their currencies vis-à-vis
their trading partners. Indeed, that is already happening to a certain extent with China pushing its currency to artificially low levels. And since it is pegged to the dollar, as the dollar declines, China continues to reap huge benefits vis-à-vis the yen and other Asian currencies. And since all currencies are interrelated debt currencies, all are subject to global fiat currency system risk created by global excesses of debt in relation to income. High levels of fiat currency system risk is why gold is looking better and better every day. But I think there is little doubt that Roach is right in saying that we are at a very major turning point in the global economy. And from where I sit, it is very difficult for me to see how the future can be bright for the dollar and dollar denominated financial assets, which is why we are sticking with the Model Portfolio as outlined in our May 2003 issue. Basically we are positioned to short the dollar, short the stock market and go long on gold, gold stocks, energy and other commodities and long on a handful of technology stocks that we think have an ability to reduce the cost of producing essential goods and services such as water, food, energy and health care.
Equity Markets Remain Way, Way Overvalued Still
Another reason we are sticking with our equity short position is because of
the facts pointed out by Carl Swenlin in the following discussion which can
be read weekly at www.decisionpoint.com
"THE REAL P/E RATIO
"The "as reported" P/E for the S&P 500 (a.k.a. earnings based on GAAP --
Generally Accepted Accounting Principals) is the historical standard for
reporting earnings. The normal range for GAAP P/E ratio is between 10
(undervalued) to 20 (overvalued). The investment sales industry would like
us to think that "pro forma" or "operating earnings" is the same as GAAP,
but operating earnings are a fabrication prone to gross distortion. There
is no standard by which operating earnings can be judged because operating
earnings are not based on real accounting -- all revenue is included, but
selective expenses are ignored. This version is becoming known as EBBS
(Earnings Before Bad Stuff). Standard & Poors has introduced a third
version called "core" earnings, which is more critical and analytical than
the other two, and is designed to reveal the true condition of the company.
We can only use GAAP earnings for historical comparisons, because there is
no historical record for the other two. Core earnings should be used for
individual company value analysis. Pro forma earnings should be ignored.
"The following are based on S&P 500 12-month trailing earnings as of Q4
2002 (Source: Standard & Poors). The estimated P/E is calculated by
dividing the most recent S&P 500 close by the EPS:
"As Reported" (GAAP) EPS is $28.00; P/E is 33.73.
"Core" EPS is $23.75; P/E is 39.76.
"Pro Forma" EPS is $45.98; P/E is 20.54.
"Based upon the latest GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:
"Undervalued (P/E = 10): 280
"Fair Value (P/E = 15): 420
"Overvalued (P/E = 20): 560
"EARNINGS UPDATE: As of May 14, 2003, S&P 500 earnings reporting for Q1 2003 is 90% complete. So far "as reported" earnings for the quarter are
running ahead of estimates ($12.26 versus $11.43). "As reported" (GAAP)
12-month trailing earnings through Q1 2003 are (so far) $30.66/share. The
P/E (based upon Thursday's close) is 31.
"GAAP earnings estimates through Q4 2003 have improved greatly since last
week's report -- they are expected to rise to $42.82, which would result in
a P/E of 22 (based upon Thursday's S&P close of 946). Remember, the top of the normal P/E range is 20, so, even if these estimates are realized, we
will still be well above normal overvalued levels.
"Here is a link to the S&P web site where you can download their
spreadsheet for your own analysis. Standard and Poors Web Site. "The charts below, courtesy of www.decisonpoint.com. offer perspective regarding prices and P/Es relative to normal historical ranges.
Courtesy of www.decisionpoint.comKeeping it all In the Proper Perspective
"The idols of the nations are silver and gold, the work of human hands.
They have mouths, but they do not speak; they have eyes, but they do not
see; they have ears, but they do not hear, and there is no breath in their
mouths. Those who make them and all who trust them shall become like them." (Psalms 135: 15-18)
GOLD
The chart below provides a picture of golds current technical strength.
After having dropped below its long and short term moving averages and
below its trend line, the yellow metal is now decisively above all its moving averages. At present, the $355 area seems to represent a considerable resistance level, with the Cartel seemingly slamming gold very hard in New York every time that line is reached.
Courtesy of www.decisionpoint.comWith Very Bullish Fundamentals for Gold.
Should we Care that the Markets are Rigged?
A host of economic conditions as well as more liberal laws and institutions that make it easier for people around the world to own and buy gold, are
beginning to weigh heavily on the ability of western central banks to trash
gold in order to make their paper currencies appear better than gold. One
could argue, indeed many of my gold bug friends do argue, that GATA and
others should not be so concerned about the Fed and the Treasury rigging
the gold price. After all, central banks have always done that and they
always will. One highly regarded gold mutual fund manager told me once that
he sees no point in confronting the establishment about gold manipulation
because it will only get you in trouble. He suggested that it is better to simply recognize gold manipulation is going on and then position yourself
to reap windfall profits when the government and the Fed are inevitably
overcome by market forces.
From the point of view of personal safety and career advancement, that is
no doubt good advice. And while providing for ones family is a noble endeavor, in my view the advice given by the gold mutual fund manager is
also some what cowardly advice, because it says that bigger issues of
justice and liberty are not important enough to fight for if it means our
careers might be interrupted. And that is why I hold Bill Murphy and GATA
in such high esteem. I see "wild Bill" as one of today's revolutionaries,
willing to pay a price in terms of insults and disdain by a large number of
people as he fights against what is for all practical purposes a system of
legalized theft via the printing press. Sure Bill hopes to make money in
gold when it finally turns around. Sure it was a profit motive that caused
him to take a hard look at the evidence of gold manipulation. But since
then, I have had many discussions with Bill in which he voices concern for
the enormous economic imbalances and carnage that lie ahead of us thanks to the strong dollar policies orchestrated by Clinton administration. The
problem is, the by rigging the gold price, the Clinton Administration defied the natural laws of economics which state that as the dollar was being increased as a torrid pace during the second half of the 1990's, its price should have declined, not risen. Summer's understanding of Gibson's
Paradox and the need to "cap" the gold price were put to work to defy
natural economic laws and now we are going to pay a price - big time!
Institutional Changes Bode Well for Gold Bulls
Time will not permit me to discuss the following issues in the depth I would like, but there are three very bullish developments that I think are very positive for gold bulls. In a way, these developments remind me of some of the positive changes that took place in the 1970's that stimulated demand for gold at that time. One I have in mind was the legalization of gold ownership in America under President Ford.
1. Gold Ownership by Chinese Citizens. China is expected to soon make it
legal for individuals to buy and sell gold. They will be able to open
accounts with four major commercial banks - the Bank of China, Industrial
and Commercial Bank of China, Agricultural bank of China and China
Construction Bank to buy and sell gold bullion and gold investment
products. If China is smart, and I believe they are very smart, they are
looking at the crumbling foundations of America's economy and the crumbling foundations of our Federal Reserve balance sheet and concluding that if they enhance gold ownership in China, they have the basis of burying the U.S. economically in the coming years. Given the cultural affinity for
gold on the part of the Chinese people I believe this liberalization of gold ownership could be at least as significant in driving gold to new highs as the legalization of gold ownership for Americans was in the 1970's gold bull market that saw gold rise to $850 per once.
2. The emergence of gold bullion equity funds. The World Gold Council has
registered a gold bullion fund, aimed at making it easy and much less
expensive for Americans and people around the world to own gold. The World
Gold Council is seeking approval for gold bullion fund shares to trade on
the NYSE. The proposal is supposedly similar to a gold bullion fund that is
trading in Australia in which each share represents 1/10 of one ounce of
gold. The fund would not lend out any gold, but would keep it in its
vaults for a 100% backing of the shares. The cost of managing this fund is
expected to be exceptionally low and of course, the investor does not have
to worry about storing his gold or paying taxes on is purchase as he would
have to if he took possession of it. In a May 16th column written by Thom
Calandra, www.CBS.MarketWatch.com, he quoted John Hathaway as suggesting this new development could stimulate a very small but still sufficient demand in gold bullion " in time to cause gold to trade comfortably in excess of four digits ($1,000 in terms of U.S. dollars, euros and just
about any other currency."
Calandra also stated, "…in the coarse of the past 12 months, more than one
gold mining executive has told me they see the price of gold rising in the
short term to $600 an ounce after the launch of the NYSE-traded ETF. What is the short term? A year or less."
3. The development of the Gold Dinar. According to James Sinclair, the move
toward the use of a gold backed dinar among Islamic nations as a medium of
exchange for trade among themselves is defiantly moving forward. The
Muslims are tired of owning dollars and using them as a medium of exchange
and their leaders also seem to understand that the dollar's days are
numbered. Moreover, from what I have read about this movement which is
taking place with the blessing of the Malaysian government, leaders seem
not only to understand that the dollars days may be numbered as a reserve
currency but they also seem to understand better than Christians and Jews
in the U.S. that our fiat money system is a legalized system of theft
carried out by those who print money. Clearly the Muslims see money as a
means the U.S. uses to control their lives and they are tired of it.
Judging by the recent weakness in the dollar, the world is starting to wake
up to the enormous injustice of paper money. Especially since 1971, the
U.S. first used fiat money to rob its own citizens (reallocate wealth
through inflation to pay for socialist programs like Vietnam and The Great
Society). But now, with the U.S. sphere of influence expanding with each
overseas conquest, even friendly nations are starting to get fed up with
this systemic means of picking their pockets by way of our dollar printing
presses. Other nations are starting to reason that if they cannot beat us
militarily, they can certainly do so financially, especially given the fact
that the U.S. is by far the greatest debtor nation in the world. I agree
with Jim Rogers who recently argued on TV that it is not geopolitical
concerns that are causing foreign nations to dump the dollar (and buy gold)
but rather it is the inherent weakness of the U.S. monetary system. On the
other hand, it is also my belief that the hostilities between the U.S. and
the rest of the world has fostered many countries to begin to examine the
realities of the U.S. currency more closely. And having taken a look they
are now seeing great weakness and vulnerability upon which they may take
advantage form a geo-political standpoint.
Facing truth is always a good thing in the long run, though in the short
term it can be hugely painful. The pain of a plummeting dollar may be about
to begin for the U.S. who has used measures of deception for a number of
years to allow us to live beyond our means. Paying the Piper will not be
easy, but it will be easier for investors who have protected themselves by
owning gold.
May 19, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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