Taylor On US Markets & Gold
THE FINANCIAL MARKETS
The Teeter-Totter and the 50% Rule
Just in case you have not noticed, I have a deep admiration for the work of
Richard Russell. I quote him perhaps more than anyone else. He is a man of
great experience in life and the markets. He is a man principle and
integrity and he is without a doubt the number one practitioner of Dow
Theory. I have little doubt that this man will go down in history with the
other Dow Theory greats like Charles Dow, William P. Hamilton, Robert Rhea
and E. George Schaefer. Given that my work as editor of this letter
involves a daily awareness of financial markets, I am willing to proclaim
the following: After the Bible, which I try to read every day, "Richard's
Remarks" published every day except Sunday, is the one publication I
believe to be the most important in guiding me through my day." I'm not at
all putting Richard Russell's writings in the same category as Holy
Scripture. But I know of no one who provides a more accurate compass with
respect to the major direction of the financial markets than this man.
A close second to Richard when it comes to seeing the big picture as far as
I'm concerned, is my good friend Ian Gordon, who takes an even longer term
perspective on where we are and where we area headed financially. The Bible
trumps both of these authors and all others through history because it
provides a road map of where we are and where we are going, not just in
terms of the market cycle (as Russell does) or our life cycle (as Ian
Gordon does) but rather through the endless confines of time, space and
eternity.
As Richard Russell pointed out, stock market bulls finanally received a
positive Dow Theory sign for equity bulls last week when the Dow
Industrials finally confirmed the Dow Transports, although as Richard
Russell point out, the longer it takes, the less compelling the confirmation.
But another Dow Theory milestone we are watching carefully these days came
ever so close to flashing a green light for the bulls on Friday as the Dow
surged higher in the early hour of trading. What we are watching for is
the 9504 mark on the Dow. Why so? Because this marks the half way mark
between the Dow's all time high of 11722 and its low so far in this bear
market of 7286. Russell or perhaps it was one of the earlier Dow theorists
who compared this to experience of a teeter-totter. It takes a considerable
amount of energy to push yourself up to the horizontal level or the ˝ point
of the arc. If you can get over that point, it is very easy to rise much
higher. But getting over that point is quite a chore. The Dow folks
suggest that if the market can rise above the 50% point, it has a good
chance of testing the old highs. But if it fails to rise above that level,
chances are the next major move will be to test the old lows.
The Dow tried to reach the 50% point on Friday during the first hour or so
of trading, but then failed miserably as the index swung from a major rise
to a 75-point loss by the end of the day. Having expended all its energy to
get ever so close to the 9504 level only to reverse direction and head down
75 points could represent a big turning point for the Dow. The question now
is Will the Dow make another run at the 9504 or head back down to test the
7286 low? That would of course be in sync with what is still, we believe
the very early stages of a major secular bear market - most likely the
worst since the 1930's.
Of course that won't happen if policy makers can help it. Greenspan is
printing money like an absolute fool in an attempt to deceive the public
into buying the notion that he can create wealth by printing money. But as
my friend Marshall Auerback pointed out in an excellent article published
at www.prudentbear.com , Greenspan and other Fed members are quickly
loosing their credibility. I would urge you to read Marshals article August
19th article titled, "The Greenspan Put, The Bernanke Put….Now the McTeer
Put?" Marshall points out how the Fed went about promising endlessly
rising equity prices (the Greenspan Put), endlessly rising bond prices (the
Bernanke Put) and how recently Robert Mcteer promised the market to cap
gold prices in a CNBC discussion between himself and Steve Forbes. Marshall
pointed out how the Fed failed to make good on the Greenspan Put (the end
of the New Paradigm) and the Beranke Put (the recent bond market crash).
Given all the global problems facing America now not to mention the abysmal
track record for the first two abovementioned puts, Marshall wonders how or
why investors should expect the Fed can make good on its promise to cap
gold and thus guarantee endless prosperity in dollar denominated instruments.
Where's the Beef?
"There is no means of avoiding the final collapse of a boom brought about
by credit expansion. The alternative is only whether the crisis should come
sooner as a result of the voluntary abandonment of further credit
expansion, or later as a final and total catastrophe of the currency system
involved."
Ludwig von Mises,
Human Action, A Treatise of Economics,
Yale University Press, 1949
I remain convinced that most of the positive news we are hearing with
respect to the economy is much ado about nothing, at least in the
longer-term scheme of things. With an unprecedented amount of monetary and
fiscal stimulus, we are again seeing some modest economic growth in the
U.S. However, As Stephen Roach has constantly pointed out and Richard
Duncan too in "The Dollar Crisis," this growth, modest though it is,
remains pathological because it is dependent on the U.S. continuing to dig
itself deeper and deeper into national insolvency. But your editor
continues to remain convinced beyond any doubt that the U.S. and its
currency is heading for a major tumble. The only question is one of timing.
But how real is the growth that is being reported by our politicians?
Growth is highly suspect according to Kurt Richebacher, who wrote a piece
for "The Daily Reckoning" this past week. Here are some of the points this
great Austrian economist made in his Daily Reckoning article that was
posted this past week.
- "In realty, the U.S. economy is in recession, as reflected in the dismal employment performance."
- By using various statistical adjustments, U.S. growth rates are grossly overstated vis-ŕ-vis other countries. In other words, our politicians are using statistics to lie. Their goal is to manipulate the numbers so that growth here in the U.S. at least appears to be more robust than in other countries. Howe else are we to keep capital flowing into the U.S.?
- The argument of people like Larry Kudlow and other CNBC cheerleaders is based on the notion that all this monetary and fiscal stimulus has got to result in higher growth rates. But they simply ignore the fact that this conventional wisdom has been largely disproved already given the relative ineffectiveness of 13 rate cuts over the past couple of years.
- With respect to an economic recovery, Richebacher makes the case that the second quarter was no better than the first. If anything it was weaker. For example, "production posted gains of 0.1% in May and June but it decreased at an annual rate of 3.2% in comparison to the first quarter."
- The assumption made by Kudlow and others that we are going to see a huge recovery is based on the notion that capital spending will rise dramatically. But Richebacher notes that there is no reasons to be optimistic about it. Moreover, if you eliminate military and aircraft expenditures, capital goods orders were down 0.4% in May following a 2.8% decline the month before. New orders for machines were 4.3% below their level a year ago and among those, orders for computers and electronic products were down by 9.6%."
- The bulls argue that higher profits will drive capital spending. But Richebacher points out that "aggregate after-tax profits of non-financial corporate business, as measured by NIPA were $197 billion in 2002, even lower than the $205.3 billion in the recession year before. In fact Richebacher points out that "profits have been and continue to be heavily inflated by special factors. We note: first, big 'inventory profits' deriving from rising oil and commodity prices; second, big gains from financial activity and speculation; third, big currency gains by foreign subsidiaries of U.S. firms; fourth, an unusually large rise in the profits of foreign firms in the United States; and fifth, continuous, heavy under-funding of pension fund obligations"
- Fraudulent Corporate Reporting Continues - Richebacher pointed out an example of how the American investor is continuing to be defrauded by corporate America, notwithstanding all the additional regulation that serves to make doing business more and more costly, especially for small public companies. Here is what Richebacher had to say about that topic. "If the poor profit performance needs any further proof, it is in the unfaltering 'earnings-management game.' Despite the condemnation of past accounting tricks, the familiar tricks to make profit numbers look better than they are have remained in rampant use. A common ploy is to report fictive 'pro forma' profits; another is to measure them against deliberately reduced 'expected' profit. For example: the reported profits of Apple Computer topped expected profits by a whopping 67%. In actual fact, they had fallen 41%."
This kind of nonsense, illusion and willful deception by our corporate and
political leaders, not to mention the nonsense in the so called liberal main line churches in America, reminds me very much of the following passage in Jeremiah. "An appalling and horrible thing has happened in the land: the profits prophesy falsely, and the priests rule as the as the prophets direct; my people love to have it so, but what will you do when the end comes?" (Jeremiah 5:30, 31)
The context of the prophet Jeremiah's remarks was in Old Testament times
when the Children of Israel, God's chosen people, chose to ignore the reality of God's law, the Ten Commandments, which by the way are still the basis for much if not most of the laws of western civilization. There was an eagerness to escape that reality of those laws then just as there is a
willingness on the part of Americans today to ignore financial and all kinds of other immorality of our day. History revealed Jeremiah was right. The Children of Israel did pay dearly for this willful defiance of reality based on the Creator's laws. Strictly in a temporal sense, I believe the following remark of Ludwig von Mises will prove to be just as prophetic for America.
"There is no means of avoiding the final collapse of a boom brought about
by credit expansion. The alternative is only whether the crisis should come
sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system
involved."
GOLD
If you are a gold bull, the picture above is a beauty to behold because it
clearly shows gold is in a secular bull market. What we now have above is the monthly average gold price, the 20-month moving average of those monthly averages and the 40-month moving average of the monthly average. With the spot monthly price above the 20-month average and both the spot month and 20-month average above the still declining 40-month moving average, this is a picture perfect bull market. The long-term bullish picture began to emerge back in June 2002 when the 20-Month average moved above the 40-month average.
The bull market in gold, which is still largely a stealth bull market remains largely ignored by the vast majority if not 99% of investors who continue to follow the mindless and destructive pap spewed out on the public air waves by Wall Street cheerleaders who feed the major media disinformation campaign. By no means do we think investing in gold, especially during these early days is going to be easy. The monthly volatility shown in the chart above speaks of the difficulty of remaining focused on the longer term picture which is made evident by the secular bull trend of the 20-month and 40-month moving averages. Indeed, as Marsahll Auerback noted in his excellent essay this past week, we can look for the Fed and other policymakers to create all manner of disinformation regarding gold in the months to come.
"Prior to all of the discussions of unconventional measures, the price of gold was quite stable. It would clearly complicate the Fed's efforts to pacify the bond market if market participants began to buy gold because they feared a future deliberate dollar debasement by the Fed. Consequently, we fully expect the management of the gold price to become an even more integral component in the Fed's expectations management game, as it seeks to extricate itself from the consequences of a credit bubble of its own
making." In other words, Marshall thinks the Fed and other policy makers will fight tooth and nail to keep the gold price around the $350 area, having already lost the power to keep it $100 lower than it is now. The long-term chart of gold above, which shows the yellow metal in a powerful secular bull market, suggests policy makers will not be successful over the longer term with its "gold put" than it was in pushing up stock prices (the Greenspan put) or pushing up bond prices (the Bernanke Put).
With regard to the efforts to cap the gold price, Marshall started his essay with the following August 15, 2003 comment from Richard Russell. "Here's the central banks' problem. If gold heads higher in a dramatic way, people will start asking questions. 'What's happening, why is gold rising in price? Is something wrong with the dollar? Why has Rolex raised the prices of its gold watches?' So at this strange and peculiar time in history, governments don't want higher gold. In fact, they don't want attention directed to gold at all. 'Let it lie,' says the Fed, 'Let it do what it wants as long as it's not noticed by the crowd.' Then in connection with why this "gold put" is likely to get away from the policymakers, Marshall again quoted the following remark by Richard Russell made on August 14thl:
"The rise in long-term interest rates is a serious threat to the Fed's
intentions and, of course, to the US economy. I'll remind you that there's a total of around $38 trillion in debt built into the US economy, and all this debt has to be financed. Much of this debt was taken on during a time of declining interest rates along with the soothing syrup of inflation. "But what if the background turns hostile? What if the background becomes one of rising interest rates and deflation? That, of course, would be Alan Greenspan's worst nightmare. It would also be a nightmare for Wall Street, for US business and for US consumers (all of whom are loaded with debt)."
Marshall concluded his essay with the following two paragraphs:
"Russell is correct: in today's world decades of government intervention to
prevent financial crises and price deflations have encouraged economic
agents to accumulate the highest private debt burdens ever attained -
higher even than those created by the most severe deflations in the past.
Even without price deflation, these debt burdens are now acting to suffocate demand and threaten stagnation, recession and financial crisis.
Given these excessive debt burdens, even a mild price deflation would prove
to be dangerously 'corrosive.' So the need for a debt confiscating policy
of inflation mounts, but not so obviously in a manner which sends the bond
market crashing and the gold market into a speculative frenzy. Taking Mr.
Greenspan's recent remarks in conjunction with those of Mr. McTeer and the new game plan of the Fed becomes more fleshed out.
"A sell-off of the magnitude that we have seen recently in the bond market
might very well short circuit economic recovery. Even if this engendered
an ostensible abatement of disinflationary pressures, it is unclear as to whether bonds could retrace the recent highs, given that market
participants have also become more aware of the fact that the recent rally was created in part by manipulative expectations management by the Fed.
Similarly, holding up a $350 target for gold constitutes another dangerous
advancement of the expectations management game, since it gives speculative forces yet another target with which to test the Fed's true intentions. Alan Greenspan's options are becoming narrower by the day. The stock market "Greenspan put" has expired worthless; similarly, the bond market's "Bernanke put." Is the "McTeer gold put" about to be exposed as similarly futile effort in expectations management?"
Gold Investing Requires Patience
I would again direct your attention to the Spot Gold price in the chart above. Note how volatile it is. Think back to how you might have felt earlier this year when gold took a steep nosedive. Yet notice at the same time, how bullish the longer-term picture has remained. The psychology of an early bull market is very negative and investors feel very uneasy. They constantly want to take profits too early and the policy makers that Marshall is talking about will exercise all manner of mind control games to shake you out of gold. My advice is keep your eyes on the big picture both in the chart above and the major economic and financial problems that the U.S. faces and then diversify your holdings along the lines we suggest in our Model Portfolio. We have reason to believe thinking outside of the mainstream disinformation thought process will continue to pay off as evidenced by our continuing Model Portfolio success over the past three years. Not that despite the major rally in stocks this year, we have now managed to outperform the S&P 500 again so far this year.
August 25, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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