The U.S. Dollar Index - 95.80. - The most important market in the world is the US dollar market because the dollar is by far the dominant world currency. At its Friday close of 95.80, it has risen above its 20-day and 50-day moving averages but remains significantly below its 200 day moving average which is at 99.91. So far it has also stayed below its downtrend line dating back to last October and below most recent peaks of 101.50. Not surprisingly, the rise in the dollar has occurred in concert with the recent bear market rally in the equity markets. We expect that as the equity markets resume their primary bear market trend, the dollar will continue its downward trend as well. Whether the U.S. Treasury market declines in concert with a decline in equity prices and the dollar is what we are less sure of.
The dollar is all about confidence. For decades the banking and political elite have managed to carry out quite a "con job" on the American public. But with the Kondratieff winter winds slowly but surely blowing colder, and with America rather quickly moving toward insolvency, the day is surely approaching when the con job will fail. Unfortunately, we are confident in making that prediction because we do not see how the U.S. will manage to change the direction in which it is heading, when the only solution our policy makers are willing to consider are fiscal and monetary stimulus. Both policies were tried and failed utterly in similar post bubble environments, namely during the 1930's and during the second half of the 1990's. The reason our current policies are destined to fail is because the "cure" is actually the cause of the disease. In our fiat currency system, money is manufactured from debt, so that as you grow the money supply, you grow debt. And when money and debt is grown at a much more rapid pace than an economy is capable of growing, you create structural economic problems such as: 1) Mal investment, leading to a large number of corporate failures. 2) Reduced pricing power because of oversupplies resulting the excessive creation of money and 3) debt servicing charges which weaken the demand side of the economy as present and future consumption is forgone in favor of past consumption.
The U.S. is running a huge Federal budget deficit and a huge trade deficit which is adding enormously to America's private sector debt. Tricks will be pulled and many more stories of "prosperity is right around the corner" will be spun. But as the old saying goes, you can't fool mother nature. What really gives a currency strength, when our national balances sheet is comprised mostly of liability money rather than an asset money like gold or silver? A sound economy that threw off enough cash flow to service debt might be a good answer. But the U.S. is needing to go deeper into debt every day not to build infrastructure and greater production in the future, but simply to maintain our current high standard of living. Therefore, it is only a matter of time before the dollar lie is revealed to the world so that more than a mere "handful" of gold orientated newsletter writers and investors get the picture. And when the U.S. economy falls, it is impossible to see how the dollar will survive.
We would expect the primary bear trend for the dollar to resume in the near future as the debt and equity markets also again conform to their primary bearish trend. Hopefully, the decline in the dollar will remain "orderly." A very rapid decline could lead to untold economic and perhaps political tragedies around the globe since the dollar is the world's reserve currency.
What is the answer for the U.S. economy and the dollar? I believe the only policy that can work is one that allows us to return to a laissez faire economy because only then will the markets be able to return to their natural equilibrium positions. However, at this advanced stage of intervention induced economic pathology, the pain of submitting to market forces is extremely great. With respect to the dollar, the world is locked into a system where global demand is driven by an over consuming America. So Japan has been printing huge amounts of yen which they use to buy the dollar to weaken their own currency in order to keep selling their goods to America. Even more pernicious for the American economy as well as the global economy is the Chinese currency that has been locked in to the dollar at an artificially low rate. Allowing the free market forces to bring these currencies to their rightful free market levels would result in a major reversal of what Dr. Stephen Roach of Morgan Stanley calls a U.S. centric global growth pattern. The adjustment would call for Americans to immediately reduce their standard of living and to begin saving more while the Asian countries begin to save less and consume more. Since the Asian countries depend on economic growth by selling to America, policies required on both sides of the trade imbalance would be extremely painful. Hence the trade imbalance just keeps getting worse and worse. What we have is the equivalent of two trains heading toward one another with neither willing nor able to stop the inevitable crash.
Unfortunately, the virtues of free market economics having been subverted in our universities by the ruling elite, which may explain why not even Republicans any longer adhere to Austrian economics or even those of Adam Smith. Not even our economic students are taught how free markets benefit everyone over the longer run. We used to be taught Adam Smith in America. Now we hear more about the virtues of Marx disguised as Keynes. Ignorance may be bliss as long as one can avoid dealing with reality. But ignorance only deters folks from preparing as best they can to deal with reality, as they must ultimately do. The only question now is how much longer do we have before we are forced to deal with a collapsing U.S. dollar and collapsing U.S. economy?
The U.S. Treasury Markets - Have we hit the lows in interest rates and the peak in U.S. Treasuries? We have seen a powerful rise in U.S. Treasury rates. The general explanation for the rise in rates is an optimistic one. Smiling faces on CNBC assure us rates are rising because the economy is getting stronger. But is it? Rates are rising in part because corporations as well as individuals are borrowing so heavily. But are businesses borrowing because their prospects are stronger or are they borrowing more because they need cash to remain solvent? We know for example that General Motors recently borrowed billions of dollars and that a major portion of that borrowing was not to tool up for increased production and profits but simply to fund its pension plan obligations. And with the vast majority of S&P 500 company pension funds underwater, we suspect General Motors is not the only company tapping into current debt markets at near historically low rates to refinance liabilities.
Corporate borrowing to stay solvent is one of three "bad" forces we can think of that is forcing interest rates to rise. The other force that we think will eventually be equally serious will result from a move of foreign capital out of dollars. Another is the enormous and growing need to borrow by our Federal and Stage governments. Still a third reason why interest rates could rise dramatically is when the dollar resumes its primary bear market trend. With America choosing to live for today and apparently willing to damn its future, foreigners hold in excess of 40% of U.S. Treasury debt. If/when the dollar begins its next slide, how much foreign savings will exit the U.S.? If a large amount foreign savings does leave the U.S., interest rates could quickly skyrocket even as the economy plunges toward the depth of the Kondratieff winter. You can be sure that foreign savers are watching our markets very carefully. When economic news last week suggested the U.S. economy may not be growing as rapidly as Wall Street salesmen have been touting, Japan's markets reacted accordingly.
But back to the question about U.S. interest rates. Have they hit their lows? I'm not as sure as the bond experts that they have. Toward the end of the last Kondratieff winter, 30-year rates declined to something like 2 ½%. If as we expect, the U.S. economy continues to slide deeper into the Kondratieff winter, foreign capital somehow stays here and if somehow the dollar does not collapse but grows weaker in a slow but orderly fashion, I think it is possible we could see still lower rates on the long bond, though at the present time. Currently the 30-year Treasury rate is under but very close to its 200 day moving average.
If interest rates have bottomed and if we start to see longer term rates surging higher in spite of Fed Reserve attempts to suppress them, that could be the beginning of the end of the housing boom which in turn could quickly spell FREEZING TEMPERATURES as the Kondratieff winter heads toward "January." Indeed the recent rise in interest rates have reportedly already reduced home re-financings in a significant manner.
The Equity Markets - The biggest rallies in stocks take place during bear market rallies. Until the old highs are taken out AND unless we see PE ratios returning below 10 times, we will continue to believe we are in an equity bear market and we will continue to structure our Model Portfolio accordingly.
With an earnings yield of 3.03% this week, that translates into a PE ratio of 33 times! That is more than twice the average of 14 times for the S&P 500. If you could make the case for a rapidly rowing economy with strong corporate profits, you might be able to justify these values. Based on projected earnings, PE ratios are closer to 20 times earnings, which is of course more acceptable, though still on the high side from an historical perspective.
But there is a problem with believing forward looking earnings. Sell side analysts have been highly inaccurate in their earnings forecasts since the bear market began back in 1999. "Stronger economic growth and much higher corporate profits that justify higher stock prices will take place in the "second half of the year." that is the refrain from Wall Street and the Bush Administration. Sounds a lot like the spin given to our parents and grandparents in the 1930s when the Hoover Administration repeatedly said "Prosperity is right around the corner."
Well who should you believe about the future of Stocks. Sell side analysts whose jobs depend on the continued sale of equities or Corporate CEOs who have to live with the market realities of the business they are in. I think we have to listen to the Corporate CEO's whose jobs are not as sensitive to the stock market as are Wall Street stock promoters. I say that not only because the CEO have had a better track record since the bear market began but also because they are putting their money where their mouth is. Again, I go back to what my good friend and money manger Wistar Holt pointed out to me, namely that insiders are continuing to be huge sellers of their stock. Wistar sent me an email last week pointing out that one page 8, column 8 of the July 7th issue of the "Wall Street Journal," insiders were selling $26 million worth of stock for every $1.1 million they were buying. He just totaled up the top 10 buyers vs. sellers on that list. Whether the ratio would be much different for smaller players is unknown. But what this tells us is the big boys are selling stock like mad and buying virtually nothing. When insiders who have the best visibility possible for the markets they deal in are selling the shares of their companies and doing so in such an overwhelming manner, why should common ordinary folks rush back into the equity markets?
SILVER
Silver was very strong last week. It rose to $4.78 and well above its 200 day moving average of $4.60. However for silver to convince anyone that it is about to make a real move, it is going to have to rise above its 2002 twin peaks of over $5.00.
I don't follow silver nearly as closely as I do gold because I view silver more as a commodity than as a money. Evidence that silver is a commodity more than money is seen by the fact that it has a relatively small above ground supply in relation to gold. Like most other commodity metals, the above ground supply of silver is less than one year while the above ground supply of gold is over 40 years. That's why I view silver pretty much as another commodity with some monetary potential. Indeed, silver has most of the characteristics of money that gold has that make it suited to become money and it has been the second most demanded money of all time. Silver is portable. It is durable and it is relatively rare which keeps its value higher than most other metals except for gold and platinum group metals. But most silver is currently used for commercial purposes. Perhaps silver could evolve more as money if the politicians were for example to make gold ownership illegal.
As a commodity, silver can perform very well in an inflationary environment as can most commodities. However, during the 1930's silver did not perform well. In fact, it was subsidized by the Federal government during the 1930's in an attempt to keep silver miners employed. But silver is an asset. Like copper, zinc and led, but unlike paper money, it has some value. Just how much value it and the other metals will retain in the midst of the Kondratieff winter remains to be seen.
Who really knows silver well and one person I have a deep respect for is David Morgan who writes an excellent newsletter called "The Silver Investor." I would suggest you check out Davids work at www.silver-investor.com. David and I have been on a number of panels together at gold shows. I have come to know him well and I am convinced he knows the silver markets as well as anyone. David does not share my rather pessimistic views on silver so if you seek a different view on it, visit his site.
Silver Exposure in "J Taylor's Gold & Technology Stocks" - Some of you do not share your editor's views on silver, you may be interested in some of the companies on our list that have some significant silver exposure. Here is a rundown of the companies with at least some significant silver exposure.
GOLD
If you buy our view on the Kondratieff winter and the deflationary depression that this term implies, then you have to love gold as an alternative to the paper assets being touted by Wall Street. One of our few Wall Street heroes is Stephen Roach, Ph.D. economics and head economist at Morgan Stanley. For a guy from such an anti-gold, pro fiat money establishment firm, Dr. Roach is saying some rather daring things these days. Jim Rogers told me it was General Patton who said, "If everyone is thinking alike, no one is thinking." Today, with few exceptions like Jim Rogers and Stephen Roach, almost everyone on Wall Street are "thinking alike and hence not thnking." We should not be surprised because such is culture of most corporations. Like any good collectivist institution, you dare not stray from the party line. But Roach most clearly seems to be his own man. Otherwise he would be saying the things that gladden the hearts of Wall Street's paper pushing merchants.
So unless Roach is fulfilling a face saving role for Morgan Stanley (assuming they see a dismal future as well) it is hard to see Roach as anything other than independent. Most certainly the words penned by Stephen Roach do not make Wall Street happy. In the July 7th issue of Forbes, he talked about his concerns of deflation and he also suggested investors should consider buying gold stocks or gold mutual funds. We discuss the views of Stephen Roach almost every week so we won't go into them more now except to publish the following quote from the Forbes article.
"Roach is 'worried and appalled' that investors have played chancy junk-bond and emerging-market debt-and are dipping into the same technology trends that got them into trouble in the first place.
"Instead, he says, he would think seriously about putting a 'nontrivial portion' of his portfolio into precious metals like gold. Gold? Isn't that a classic hedge against inflation? Roach says it's a safety asset that will attract investors during any time of economic extremes-either inflation or deflation."
So there you have it. Off the top of my head, I can quickly name four big Wall Street pros who are very bullish on gold but who have not traditionally been seen as gold bugs. They are Frank Veneroso, Michael B. O'Higgins, Richard Russell and now Stephen Roach. Now as I think of it, I'm sure there are many more such as my friend Marshall Auerback who is a successful investment pro by any definition. The only thing is most pros who are bullish on gold are not very visible which perhaps makes it more possible for them to quietly take their long gold positions.
Having worked for both large-scale commercial banks and one Investment bank in New York, I have a pretty good sense for how repressive these institutions can be when it comes to freedom of thought. Thinking outside of the box, the dimensions of which are established for the conformity of all employees, is strictly forbidden at least within the confines and job description given to Wall Street employees. The need to be free to contemplate life's biggest riddles without a repressive father figure standing over me to tell me what and how to think is what prompted me to carry out my newsletter "hobby" until I resigned from ING Barings in August 1997. Working for financial institutions allowed me to earn a decent living but it did not allow me to think or ask serious questions about what really is going on in politically, economically, socially or spiritually. These large institutions are in effect fascist collectivist ordeals that most people put up with simply to advance their careers. Unfortunately, America is quietly turning into a country where freedom of thought is becoming as alien as it has become to say Cubans who never lived under anyone but Castro. Few seem to care about our loss of freedoms. They will but then it will be too late.
July 14, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com