This past week, the dollar paused in its downward plunge as did U.S. Treasury interest rates. Ten Year U.S. Treasuries closed the week at a paltry 3.36%. The dollar index closed at 93.39. Looking at the charts, there does not seem to be any support at all until you fall to about 90. If we cut below that level, the next stop looks to be around 80.
Gold also paused this past week after rising rapidly in recent weeks. The yellow metal closed at $364.10 this week. But the picture remains very positive for gold with the spot price well above all moving averages.
Commodities as measured by the CRB and the Rogers Raw Materials Index also begin a consolidation process this past week. The Rogers Index was basically unchanged at 6523. That's good enough for a 9.07% gains so far this year. The CRB at 235.55 is below its 20 an 50 day moving average, but remaining well ahead of its 200 day moving average.
I am keeping a watchful eye on commodity prices in general because I believe that as the Kondratieff winter blows colder and colder, commodity prices will eventually break down. In the mean time, the rise in commodity prices is putting still more pressure on profit margins and is effectively taking spending power away from American consumers. In other words, while rising commodity prices put upward pressure on the CPI and PPI in the short run, declining profit margins in the midst of skyrocketing debt loads across all sectors of American society, is what makes our economy so vulnerable during the impending Kondratieff winter.
In my interview with Jim Rogers, he correctly observed that inflation always precedes deflation. But I believe we have already seen the big inflationary move of the current Kondratieff cycle during the 1970's, which in effect set us up for the disinflationary 1980's and 1990's. Disinflation, not outright deflation is still being played out, meaning that the rate of inflation continues to decline overall, but for a growing number of products, we have outright deflation.
With debt continuing to grow exponentially, the pressure is clearly downward for prices, no matter how much money is printed because remember that as more money is printed so too is more debt created. And as we remind our subscribers almost every week now, debt is growing exponentially while income is growing at less than 2% and has grown in a linear fashion over long periods of time. In essence, that is what the Kondratieff winter is all about. The deck has to be cleared of all the excesses that built up over the spring, summer and autumn periods of the cycle, with most of the excesses coming during the autumn. We may continue to see some modest commodity price rises until the debt dominoes begin to fall. But when that "threshold of lethality" for the economy is reached - demand will not only slow down, it will collapse as the debt dominoes begin to cascade out of control. Bankruptcies will beget bankruptcies and there will not be sufficient time for the Fed to act quickly enough to stop the dominoes chain reaction. When the debt dominoes topple over, the money the Fed prints will likely not be accepted by anyone because it is after all liability money. The dollar is as good only as the ability of others to pay their debts. And as debt is growing exponentially, mathematical reality suggests it is only a matter of time before corporate America is left in a dustbin of despair. Capitalism will not be destroyed, but it will be down for the count during a long cold Kondratieff winter before the next cycle begins with a slow gradual renewal of life in the next Kondratieff spring. Judging from past cycles however, that will be many years from now.
Yet Most Suggest a New Bull Market has Begun.
Seizing on the first possible good news of any kind, CNBC's infomercials constantly announce the birth of a new bull market in equities. More and more CNBC does sound like the Saturday morning cable TV smooth talking commercials. Our mainstream media is without any serious objectivity because to deliver the kind of views we hold, that everyone should sell stocks and sell them yesterday would result in a sharp demise in corporate sponsorship. The vested interest to keep the stock market up is enormous and unprecedented in American history. And because of their large audiences, these legalized purveyors of deceit hold huge sway on the thinking of the American public. In my view, they deserve a large amount of the "credit" for the refusal of the current bear market to run it's coarse so that stock prices return to historical bear market bottoms.
There are several reasons I remain convinced the bear market in equities has much, much further to run before there will be reason to generally become bullish on stocks.
First, the psychology that prevails is anything but that of a bear market bottom. In my lifetime, I remember what the psychology of a bear market is like. After I spent two years in college, in 1967 I went to work in Morristown, N.J. I remember how I assumed I could easily parlay my paycheck into untold riches in the stock market. All I had to do I thought, was study the market. I looked around and figured I was at least as smart as the average guy who had just been successful in the market so I was very confident I could succeed with a little study and effort to learn about the companies I invested in. Of course my timing could not have been worse because in 1967, we would have to wait until 1982 for a sustained bull market in stocks.
I did fine in the late 1970s investing in some junior gold mining stocks but in general it was very difficult up to 1982 to find anyone who really believed the stock market was a good place to invest. Psychologically, during the 1970's the market experienced what is always experienced in bear markets and that is CAPITUALATION. Simply put, people gave up on stocks. So far the mood is one of "cautious optimism." People think that somehow stocks will come back because the boys on CNBC are telling them they will come back. They don't ask why or how. They simply have faith in those talking heads. This faith would be well placed in God the Creator. But the talking heads on CNBC who are bought and paid for by the establishment? I don't think so.
Secondly, Equities Remain Grossly Overvalued - Providing evidence of my first point, namely that the capitulation phase of this bear market has not yet taken place, is the data in the following chart (compliments of www.decisionpoint.com).
If the capitulation phase had taken place, given current corporate earnings levels, we would be looking at an S&P 500 index selling at around 300 rather than at 963.59 where it closed on Friday. Bear market bottoms are typified by P/E ratios under 10 times and dividend payouts of between 5% and 10% for blue chip companies.
Stephen Roach Worries about Deflation
This past week, Stephen Roach pointed out that despite increasing talk of deflation by the Fed, most people are really not taking it seriously. The note that the Fed talks about it as if the chances of it were so remote that there is really no need to worry. But Roach quite properly points out that the Fed has to spin a "don't worry be happy" picture when it talks about deflation because to do otherwise would trigger a panic toward the very deflation they claim to be trying to avoid. We think the Fed is very, very concerned about deflation. Otherwise they would not be talking about it at all.
That the markets are not yet taking deflation seriously is obvious to Roach by the Inflation adjusted Bond yields that are indicating the market is anticipating price rises in the 1.5% to 2.0% range. Also he notes with equity prices surging, the equity markets are not at all pricing into the future, prospects of deflation and plummeting profits that would follow.
Yet Roach notes that we do need to look to Japan as a guideline to what can happen here. He acknowledges that the U.S. is not Japan and that things are different. But he also notes the following similarities, which no doubt the Fed is also watching.
Bond market similarities. In 1995 the smart money in Japan was shorting the bond markets, believing that interest rates could not go further. Yet interest rates plunged and plunged some more. Recently here in the U.S. the biggest bond gurus in the world have been suggesting bond rates had bottomed. Our smart money guys have, over the past couple of weeks proven to be equally wrong as U.S. Treasury rates have now fallen to 50+ year lows.
Currency Market Similarities - Roach notes there are currency market lessons to be learned from Japan as well. The Bank of Japan set out to print money like mad and to weaken its currency, hoping that inflation would result. With regard to this, Roach said the following, "Inasmuch as I continue to believe that the dollar is in the early stages of a secular downtrend, the Japanese experience certainly intrigues me. In a climate rife with deflationary risk, there are no guarantees that a falling dollar will lead to higher inflation and/or higher long-term inflation rates."
Banking Problems - Roach admits for the moment that the U.S. banks appear to be in much better shape than the Japanese banks. But he notes "…America has record debt loads, especially the household sector, where debt-to-GDP currently stands at a record 80%--fully 15 percentage points above the ratio prevailing in the recession of the 1990's. The US also has flexible labor markets and a relatively flexible wage-setting mechanism. Should deflationary risks get to the point where Corporate America needs to slash labor costs more aggressively-both headcount and compensation -that would severely impair the household sector's debt-servicing capacity. The result would be a sharp increase in non-performing loans and a concomitant outbreak of distress in the American banking system. Debt deflation is the most lethal strain of deflation. America's record private sector debt loads are hardly comforting in that regard. While any progression of debt-related dislocations in the US would undoubtedly be different than it was in Japan, the endgame could be comparable."
Monetary Policy has not worked - While talking about deflation the Fed has gone out of its way to assure us that there is no need to worry because it can always print enough money to eliminate deflation. Did the Japanese try to do that? You bet it did! Roach notes, "Since early 1997, Japan's broad money has increased by about 20%, its monetary base has surged by 84%, and the BOJ's balance sheet has expanded by 122%. Yet over that same six-year period, Japanese nominal GDP has actually contracted by 6%. In other words, the monetarist prescription has failed miserably in Japan-hardly a comforting result for other central banks as they now face the perils of deflation."
An Unbalanced global economy
Another theme Dr. Roach repeatedly voices concern about is what he terms the U.S. centric global economy. Roach is rightfully concerned about a lack of global balance in savings and consumption. Since the rigged gold market induced "strong dollar policy" of the Clinton Administration, starting in the 1994-95 time frame, more and more the world has depended on the U.S. as a consumer of last resort. If the U.S. had earned a sufficient amount of wealth to consume only what it earned, that would be one thing. But as Roach points out, the U.S. has been consuming more and more by drawing down its savings while entering into unprecedented levels of debt.
There is an assumption on the part of pop financial gurus like Larry Kudlow, that we have a free market and that it is working just fine, and will work even better if we have more tax cuts and the Fed prints enough money. And Mr. Kudlow always used to say week in and week out that since the gold price was declining, the Fed should just print more and more money. Larry apparently thought the gold market was free and he seemed to assume that all our markets are just fine. The problem with that line of thinking is that the most important market in the world, namely the market for the world's reserve currency, the dollar, is a rigged market. The quantity of money is not set by the market, but rather by a very small group of men who created the Federal Reserve and who to this day, decide how it is run. They not only choose what we are forced to use as money but how much of it will be created out of thin air and when that money will be created. With the most important market in the world, the market for dollars in which 75% of the world's commerce is priced, how can anyone assume we live in a world of free market capitalism. Yet under that assumption, politicians and bankers and think tank muppets have treated the growing U.S. centric trade pattern exactly that way without ever stopping to think how a rigged currency, a currency that is severely overvalued on a trade weighted basis could throw the global economy into disarray.
But alas, the end game appears to be in sight. Not because the U.S. wanted a weaker dollar, but because the pressures that built up under attempts to fool mother nature with respect to the dollar are finally about the blow the lid off of the pressure cooker. Having defied the laws of nature so long, this adjustment process could well be very quick and violent or it could be long and drawn out. Either way, the distortions that have been built up for the sake of short profits and political gains are severe and the return to equilibrium, which will require America to drastically reduce its consumption, most likely as a result of a massive decline in our standard of living via a depression, will be most unpleasant.
John Murphy's Take on Deflation
During the 1990's bubblemania we used to see quite a lot of John Murphy, on CNBC. In those days, John's technical analysis was giving a green light to stocks. But now that the technical picture is bearish, seems we don't see much of this master technician any more. Based on a quote published with permission at www.decisionpoint.com, John pointed out that some key intermarket relationships between markets have taken place over the past five years that are related primarily to the threat from deflation.
Most notable according to John has been the decoupling of the bond market form stocks. John said, "For the first time in the Post war era, collapsing interest rates didn't help stocks. That meant that bond prices rose while stocks fell…..More than anything else, the decoupling of bonds and stocks was the main signal that deflation had become a serious threat. The last time a major decoupling of bonds and stocks had occurred was during the deflationary 1930s."
Murphy noted that he recently showed some slides that illustrated how Japanese stock prices fell along with global interest rates. John noted, "They said Japanese style deflation couldn't happen here. The fact is that it has been happening for the past five years."
I believe the U.S. has pushed the strong dollar/weak gold price policy as long as the laws of nature allowed it to. But now with the dollar weakening, not because of a policy change but because the U.S. has no choice, (for a host of reasons including deflationary pressures and perhaps because it has no more gold to sell), the U.S. dollar has begun a considerable decline. This I should think sets in motion another characteristic of the 1930's, namely a beggar thy neighbor competitive devaluation dynamic, that unfortunately seems to make Ian Gordon's Kondratieff winter that he outlined in 1999 ever more real.
GOLD
I am indebted to my friend Dr. Bob Shields, President of Piedmont Mining for passing along the following article that was published in the New York Post this past week on May 29th.
Dollar Dumped by Gold Diggers
By Paul Tharp
" A touch of gold fever is sweeping the world, and could worsen into a deadly allergy to the dollar.
"Some investors think gold is ready to hit $400 an ounce -and keep soaring-for the first time in seven years, because there aren't enough safe currencies, bonds or stocks to handle the world's trillions in cash hordes.
"The sinking dollar has prompted Asia's central banks to call a session next month on whether to unload their dollar holdings, which account for about 90% of the world's dollar reserves.
"Gold has jumped 15 percent in recent weeks, but softened here yesterday to $365.20, down $2.60. The dollar, after hitting a new low of $1.1932 against the euro earlier this week, strengthened to $1.1772, but is still off 21 percent in the past year.
"Currency speculators increasingly are using gold to hedge their gambles with the dollar, euro and yen. Some investors believe that if the U.S. Treasury bonds get dumped by more foreign investors, gold could skyrocket."
Is the West too Sophisticated for Gold?
Another event that could turn gold upward is the legalization of Chinese citizens to buy gold from their banks on June 1st. The Chinese had earlier allowed gold to be traded in Shanghai. But now it will be possible for average Chinese people to walk into their banks and exchange fiat money for real money, namely gold.
Americans have been indoctrinated by the Fabian socialists, who have infiltrated political system via such elite organizations as the Council for Foreign Relations, the Bilderberg Group and the Trilateral Commission to think of gold as a barbaric relic. That was a major lie that has been sold to us so that the ruling elite so that they could print money out of thin air so they could fund the socialist/collectivist society they desired with of course themselves in control. A small side show of this overall scheme, the one that GATA has been working so hard to call attention to, has been the gold manipulation required to keep confidence in the paper money they use to perpetuate their wealth. These are the people who are at the hart of the gold trashing, strong dollar policy that has been the stimulant of the global imbalance Stephen Roach is so worried about. But the Chinese and hopefully some elements of Europe like the Germans and French will remain fiercely independently in favor of gold over the U.S. dollar so that the tyranny of the U.S. dollar imperialism is held in check at least to a certain extent.
Our ruling elite has had to trash gold decade after decade in order to be able to rob and pillage their way into the ruling elite of America, which was supposed to be a government by the people and for the people. Instead, we have powerful families like the Rothschild's and Rockefellers who are sticking it to people around the globe, using some very sophisticated highly educated think tanks to do what Stalin with "the barrel of a gun" in Russia. In the end, the results are the same though the trip to the land of tyranny has been no doubt far more pleasant than what the poor people of Russia suffered under the Bolsheviks. But make no mistake. The battle is real and that is why what is going on in the gold markets these days is farmore important than whether or not we make money with our gold stocks.
$370 Gold is a Big Deal for the Cartel
The following quote by David Rockefeller, founder of the Trilateral Commission, in an address to a meeting of the Trilateral Commission, on June 1991 as well as the extensive work by G. Edwin Griffin ("The Creature from Jekyll Island") should be pondered with great seriousness by all who cherish the freedom and liberty our Founding Fathers designed for us in the U.S. Constitution. "We are grateful to the Washington Post, the New York Times, Time magazine and other great publications who's directors have attended our meetings and respected their promises of discretion for almost 40 years. It would have been impossible for us to develop our plan for the World if we had been subject to the bright lights of publicity during those years. But, the work is now much more sophisticated and prepared to march toward a World government. The supranational sovereignty of an intellectual elite and World bankers is surely preferable to the national auto-determination practiced in past centuries." Our good friend Bill Murphy, founder of GATA reminded us of this shocking quote from one of the most elite members of the global community who seeks to dictate a one world policy. The Rockefeller clan are among the "landlords of the world" who are calling the shots and deciding which wars we fight in and who are elected officials are going to be and what gets discussed on TV and what does not. I'm afraid Bill Murphy has it right. He started out looking at strange activities in the gold markets and that path led him right to the ruling elite who weave a web of corruption way beyond the imagination of even our best fiction writers. Following is what Bill Murphy had to say this past week about how this ruling elite has been trying to hold gold below the establishments' retreating line of defense which has now risen to $370 "For the third time in a row, The Gold Cartel aggressively attacked by taking gold lower in Access trading last evening. They had it down $2/$3 as the light kangaroo trading period got underway in Australia. Same comment from me again. Markets that are not manipulated just don't trade in such a patterned way. "With the dollar correcting to the upside, crooked cabal forces really let into bullion once Comex commenced trading, smashing it down $9 in the early going. Yet, as we also saw the previous two days, gold held the $360 area like a rock and drifted back up as the day wore on. "It now has to very clear to any gold trader, or market observer, that $370 is a big, big deal. It should also be clear that there are powerful buying forces out there challenging the increasingly desperate Gold Cartel. The increasing volatility and enormous volume is extremely gold friendly, for it is evidence that some very large buyers want gold and think it is going much higher. When gold takes out pivotal $370 in the days and weeks ahead, it ought to explode. The stakes are high for the cabal, for when that occurs, it could set off massive gold derivatives problems at various counter-parties. That's why they are making such an effort to keep gold below $370."
If the establishment could have driven gold down below $255, they most certainly would have done so. That gold has risen from a low of around $255 to around $370 now is powerful testimony to the fact that the establishment is in the process of losing control. They never want to see higher gold prices because that is an admission that gold is better than the paper money they uses as mechanism of theft and to fund their consolidation of power. I would to take this opportunity to say "Thank you" Bill Murphy and Chris Powell for setting GATA in motion and also to the scores of other supporters of GATA who have contributed to GATA" either with donations or editorial content. Your willingness to pursue truth and make it known throughout our country and the world, especially when doing so is considered in most circles as politically incorrect, makes GATA a most valuable instrument for those who seek liberty above tyranny.
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June 2, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com