Taylor On US Markets & Gold
FINANCIAL MARKETS
Last week was another up week in what has become a major bear market rally in equities. However, Friday was a bummer for the bears as equities in
general were taken down rather hard on the downside. The Dow for example,
lost 84.56 points or 0.9% for the day to close at 9503.34. Interestingly,
this is just a smidgen below the 50% mark between the all time Dow high and
the low thus far in the bear market, that midway point being 9504. This
50% point is considered an important technical point by Dow Theory folks,
the most notable and revered practitioner of which is Richard Russell.
www.dowtheoryletters.com
The news that triggered a sudden decline in stock values was an
"unexpectedly" sharp decline in jobs. According to our governments figures
(which I always consider suspect no matter which way they go), 93,000 jobs
were lost in August. That was the biggest job loss since March.
These job losses may have been unexpected by the mainstream press and Wall Street, both of whom have been whooping it up for a recovery and an
expansion of Wall Streets bubble which has never yet been entirely
deflated. Even if you look take a look at what is really going on rather
than what Kudlow and Cramer tell you is happening, you see the picture is
not very bright. Sure consumers are spending their fool heads off by going
further into debt. But they are buying mostly when things are deeply
discounted. So profit margins remain weak, which may be why insiders are
selling 30 times more shares than they are buying. It may also be why
companies continue to survive by firing people and postponing major capital
expenditures. In addition, as discussed below, we have no end of serious
structural problems in the global economy that are highly worrisome to
anyone willing to think outside of the establishment box they try to keep
you inside.
Filtering out the day to day noise and highly pro-equity bias of the
mainstream, we negative news is, unfortunately what we expect and have been predicting, not because we are negative folks by nature, but because we see from a big picture viewpoint, major, major structural problems for the U.S. and global economies that have been in the making for decades. The problems have been caused by a disregard for classical economic laws as defined by Adam Smith and more recently by the Austrian economists. The Keynesians, which are in fact more Marxists than free market practitioners, have largely indoctrinated our nation into believing certain falsehoods, which
after many decades, are now starting lead to some very ominous disequilibria in the global economy. One such global imbalance is the overvaluation of the U.S. dollar, which as Richard Duncan, author of "The Dollar Crisis" points out, will with near, if not complete certainty collapse in value. The "smart" money now seems to be sensing this is true as evidence by the move now toward "real money," GOLD. (See my comments below of evidence big money is starting to buy gold)
We are constantly bombarded by a biased and dishonest Wall Street, which I might add, gets its dishonesty quite naturally from government, which with
its growing monopoly powers, dictates rules and laws crafted with one thing
in mind. Reelection. For example, governments and the banks they "regulate"
are involved in one of the most basically dishonest practices in the world
today, namely in the creation of money out of thin air. That the government
prosecutes Enron and WorldCom executives while refusing to allow an audit
of its own gold supply and all sorts of other improper accounting procedures would be laughable if it were not so serious. Government prosecution of wrongdoing is tantamount to putting the fox in charge of the chicken coup.
Not only has the ability of our bankers and government to print money led
to a massive redistribution of wealth from those who produce it to those
who print the money, but it has also led to a huge and growing
disequilibria discussed by Mr. Duncan in his book. Also, a few members of
the establishment here and there, like Stephen Roach of Morgan Stanley for
example, are beginning to take note of huge and growing imbalances that the
Austrian economists have been talking about for years. So far, I have not
noticed Stephen Roach make the connection between these growing imbalances and the creation of endless quantities of money out of thin air, as Richard Duncan does in "The Dollar Crisis," but another Morgan Stanley analyst, namely Joachim Fels of the company's London office is definitely hitting on it in his brilliant essay titled "Bubble Trouble," published on August 27, 2003. I would highly recommend you read Mr. Fels' essay at
www.morganstanley.com/GEFdata/digests/20030827-wed.html . In this article he stated, "The story of financial markets in recent decades is best told as a succession of ballooning and bursting bubbles sweeping through multiple asset classes. The heroes and the villains in this story are the central banks, in my view. They have unleashed serial bubbles, time and again, by pumping excess liquidity into increasingly deregulated asset markets. And over time central bankers have become prisoners of their own (or their predecessor's) past actions. To address the serial bubble problem, central banks would need to both mop up the excess liquidity sloshing around in the financial system and redirect their monetary policy strategies. But, with the world economy still in a fragile state, at least partly due to the
hangover from the greatest of all asset bubbles, neither seems particularly
likely anytime soon, in my view."
Except for his remark that it is not possible to say when this apparently
irreversible monetary pathology commenced, I agree fully with Mr. Fels'
analysis of our current monetary malaise. Perhaps as a 56 year old, my life
experience takes me back further does the life span of Mr. Fels. But the
date I can speak of from my life experiences as the date when this trouble
bean was August 1971. That was when President Nixon unilaterally defaulted
on our nations' obligation to pay foreign governments one ounce of gold for
every $35 dollars turned back to the U.S. (Actually, an earlier start date
back to World War I can be assigned as the day when the earliest pathological seeds were sewn that has led to the gigantic monetary mess we
are in today.
In any event, with the actions of President Nixon in 1971, the gigantic
allocation of wealth from the private sector to government and the banking
industry was enabled. Not only has the trashing of the gold standard made
it possible for the rich to get richer and the honest hard working wealth
creating average people to get the shaft, but that act has enabled self
serving makers and shakers in government and the banking industry to an
extent I the corporate world guide the world economic and financial system to the brink of a global financial meltdown. (I believe that statement is
not in conflict with the views expressed by the very mainstream Richard
Duncan in "the Dollar Crisis."). In his essay, Mr. Fels does correctly suggest that our policymakers have gotten themselves on an increasingly faster treadmill from which there is no easy exit. He along with his boss, Stephen Roach describes the growing imbalances of a U.S.-centric global economy and why they are worrisome to say the least.
When Financial Promiscuity Began according to Mr. Fels
Mr. Fels said he recognized the problem started with the 1987 stock market
crash, which took place just two months after Alan Greenspan took over at
the Fed. Indeed, I believe that is when the "Plunge protection" team gained
enormous prominence in America. It is understandable why that event led to
a growth in government manipulation of our markets. As the "Wall Street
Journal" pointed out, the entire financial system nearly melted down. There
were no takers for the strongest companies in America as sheer fear led
America's equity markets to freeze up. The specialists on the floor of the
exchange had literally gone broke in buying the equities that were being
sold by a panic stricken American populace. At that time I was working at
Westpac Banking Corporation and a fiend of mine headed up the broker-dealer lending unit of the New York office. I recall him saying that the Fed was assuring lenders that if they lent money to the broker-dealers, so that
they could support the equity market, the lenders would be guaranteed to
have their money returned. Not a problem, thought our policy makers. We can simply print money out of thin air. And so they did. And so the financial
pickle we now find ourselves in was born.
So from that crisis on, Mr. Fels quite properly pointed out that with each
major problem facing the global economy, the U.S. pumped huge amounts of
money (debt) into the system, which in turn resulted in more and more
outlandishly overvalued asset prices. Like a drug addict injecting heroin
into his veins each time withdrawal pains become unbearable, Alan Greenspan
pumped the U.S. dollar drug into the veins of the global economy during
each of the following crises. 1) Recession in the early 1990's "resulting
in a bond bubble in 1993 which burst with a bang in 1994." 2) Massive
"waste capital" (the Austrians call it "mal investment") was pumped into
the Asian markets in the mid 1990's. Mr. Fels said that when the Asian
emerging market rally ended in tears in 1997, and the Russian crisis followed in 1998, all the major central banks reacted yet again by pumping even more liquidity into the system which inflated another bond bubble, which popped in 1999. 3) Then it boosted equity prices further and provided the fuel for the enormous tech stock bubble of 1999 and early 2000 by pumping up the money supply still more. I might add that the excuse for - pumping a huge amount of money into the system in 1999 was the Y2K worry that proved to be largely overblown and unless I am mistaken, another excuse for printing billions of dollars out of thin air was the the Long Term Capital Management debacle prior to the Russian problem.
Mr. Fels notes that if the central banks could bring themselves to admit
they have been part of the problem by printing so much money, progress
could be made in the future toward eliminating the pathology of excessive
money growth. But he quite rightly notes that "The reason is that once a
bubble bursts, this can have nasty consequences for the financial system
and the real economy. Almost immediately, central banks come under
pressure to "do something about it," and that something is usually rate
cuts and fresh liquidity, which starts the process all over again. Over
time, this should encourage a mushrooming of excessive risk taking (as
there is always the famous "Greenspan put") and of the financial sector in
general. Moreover, as the experience of the last few years amply
illustrates, the inflation and deflation of asset bubbles tends to
destabilize real economies via a multitude of channels such as wealth
effects, balance sheet effects, and credit excesses or crunches."
Where Have you Gone Milton Friedman?
Of course we once did recognize that excessive money growth was a problem. Milton Friedman, who hated gold and got into some real big fights with the likes of John Exter over the need to retain gold as money, always
maintained that 1) it was imperative that central banks control the money
supply to 2% or 3% per year and 2) That a gold discipline was not needed to
keep the money supply under control because central bankers could simply
control that by decree. I wished I had the opportunity to ask Dr.Friedman
what went wrong. Why, if that was so easy did our policy makers screw up? I
know the answer to that but I wonder if Dr. Friedman does. Whether due to
senility or simply because of his own human weakness, Dr. Friedman has
recently recanted his views that "money matters." A remarkable viewpoint
indeed from a man who played a most significant role in selling monetarism
to America. Perhaps Friedman simply buckled under the same pressures to
print money with each crisis as noted above by Mr. Fels, I don't know.
Stephen Roach commented on Dr. Friedman's extraordinary mea culpa, which I would encourage you to read at:
www.morganstanley.com/GEFdata/digests/20030609-mon.html
The Lies are about to be Exposed
Clearly a couple of the big lies taught to economics students in America,
namely that 1) Gold is a barbaric relic and 2) that governments and central
banks can manage their economic affairs and that therefore free markets for money cannot be allowed to survive, are about to be exposed for the lies
they are! Unfortunately we are going to pay a hellish price for the
implementation of these lies into policy.
What will trigger the eventual collapse of our monetary system? Or put
another way, why can the monetary authorities not continue to just keep
printing more and more and more money out of thin air to bail us out a
growing number of problems all of which have been caused by earlier
transfusions of money into the our economic veins? Friedman now in effect
says, "Why worry when you can always print more money." That is also what
Larry Kudlow and other Republican supply side proponents like Steve Forbes
seem to think. So insignificant is the money supply in the minds of economists these days that fellow supply side economist of Larry Kudlow,
Brian Westbury incredibly didn't have a clue about how much M-3 was
circulating when he spoke at a recent CMRE meeting in New York. He looked
over at Larry Kudlow who was sitting at a table next to me to seek help
while Dr. Larry Parks kept informing him the number was $8.6 TRILLION, not the $3 TRILLION Westbury insisted it was. I still find it incredible that an economist of such prominence and who is constantly talking on CNBC, did not know how much money is in circulation. But in fairness to him, he is a
product of an educational system designed to confuse and muddle issues of
truth and consequences one of the most significant of which are facts about
money.
Could a Tight Chinese Monetary Policy Trigger a Collapse?
Marshall Auerback offers still another possible trigger that could set our
global economy spiraling on the downside. Go to
www.prudentbear.com/internationalperspective.asp to read his always
excellent weekly column. This last week, Marshall's article was titled,
"China Tightens-The Beginning of the End of Global Relation?"
Marshall points out how dependent the world has become on growth in China.
But now there are some signs that China may be setting out a more stingy
monetary policy. A tighter money supply in China would in theory at least
lead to a stronger currency which should delight our Treasury Secretary who is pushing China to revalue its currency vis-à-vis the dollar. But
everything in economics has at least two sides to it. In concluding his
essay, Marshall said the following:
"After so many years of false starts, it can hardly be comforting to
contemplate a reliance on Japan as a potential offset to China's growth,
but this is the best-case scenario. The worst case is that China proves
rather too successful in pricking its domestic real estate/capex bubble,
and Japan's current growth momentum proves to be yet another false dawn.
At a time when America's own external imbalances becoming so extreme, the
maintenance of the existing status quo is hardly something the markets
should greet with unmitigated glee, as they appear to be doing today. We
leave the final word to the Financial Times:
"'The accumulation of foreign exchange reserves in Asia is unsustainable.
The appetite of foreigners to fund US consumption can last quite a while
but not forever. At some point the well of finance will begin to run dry,
putting downward pressure on the dollar, raising long term interest rates
in the US and damping growth.' "China and Japan effectively constitute the "fuel" that has allowed the US motor to continue to run. But if either of these countries decides to slow down the supply of economic gasoline through their tolerance of ever expanding deficits, the game is over. That's why what China decides today will matter in the rest of the world tomorrow.
Why I'm Sure this is a Bear Market Rally
The S&P 500 currently selling for an extremely high 29 times earnings. Historically, and until about 1996, the year when Alan Greenspan announced the existence of "irrational exuberance" in the equity markets, the upper bounds for P/E ratios had been around 20. When the market got to 20, it usually decline substantially. The average value for stocks was around 15 times. When the markets go to around 10 times, stocks were usually considered a good value. At the bottom of bear markets, equities would sometimes fall below 10 times and dividend yields would often rise toward the 5% to 10% range.
When stocks become unbelievably cheap, you will know the bear market is
over. Until then, based on long standing history, going back much further
than the chart below, it is safe to assume it is not over. In fact, we are
looking forward to the day when we will be able to buy stocks again at
very, very cheap prices. However, the intervention and money pumping
discussed above is serving to delay the normal cleansing of markets that
are so necessary if markets and hence citizens are to remain free.
Unfortunately, as the chart below illustrates, with the discipline of gold
being removed, so much money has been pumped into the economy that it has
resulted in extreme overvalued asset prices, also as discussed above by Mr.
Fels of Morgan Stanley. The ultimate decline will unfortunately be that
much greater and thus the demolition of wealth by those who are not
prepared with gold and other tangible assets will be that much greater.
GOLD
The above picture which displays the monthly average gold price in the rid
line, the 20 month average gold price in the purple line and the 40-month
moving average in the yellow line tells suggests we are still in the very early stages of a powerful bull market in gold. Yet if you were to ask people on the street if they own gold or if they think it might be a good idea to own gold as an investment asset, I bet you would be hard pressed to find 1 out of a 100 who answer in the affirmative. In fact, with most investors never having lived through a gold bull market, owning gold appears to be the dumbest investment imaginable to them. That is of course their own stupidity because they have not studied history to see how gold has protected portfolios time after time throughout history as policy makers inevitably and always destroy their currencies.
The Smart Money is Just Starting to Sniff out Gold
It is during the early stages of a powerful new bull market when fortunes
are made. That is because during the early stages the market in question
remains undervalued. For me, as a long time believer in the virtues of gold
as a store of value, this is one of the easiest times to be in the gold market. What will be tough for me is to know when to get out. But I remain confident that day remains many months and most likely many years away. Yes, we will have rough times here and there. But for those of us who take a long term perspective and who look at the big picture, rather than monthly, weekly and daily movements, this is the time when we look forward to price pullbacks so we can buy more gold and gold shares because we are confident of the fact that the price of gold is heading much higher.
It was perhaps a year or so ago, that Barton Biggs told his clients in a
weekend missive they might consider buying gold as an investment. When news of that got out into the public, all hell broke loose, and Mr. Biggs made
sure the first chance he had on the following Monday he went on CNBC to
play dumb about his knowledge of gold. We can only surmise the Mr. Biggs
was told by his employer that if he wanted to keep his job he had better
recant. We have often wondered what Mr. Biggs has done personally with his
own money since then.
This past week, a professional Wall Street Money manager whom I met a
couple of Christmas parties ago, contacted me to pick my brains on gold and
the gold markets. I recall how he politely listened to me tell him about
GATA's allegations back then and why I believed the gold markets were
rigged as part of the implementation of the Clinton strong dollar policy. I
believed he was listening, but I knew he was not buying it, at least not
entirely. I'm still not sure he believes in the conspiracy, but this much I
do know. He told me this past week that some of his highly seasoned big
clients are now suggesting they put some of their money in gold. That is
why he called me.
Then this past week, I received a very kind notice from a staff member of a
liberal U.S. Senator who said he reads my material on GOLD-EAGLE. Also, in
the past number of months, Richard Russell has talked increasingly about
the bull market in gold. Richard has some 10,000 subscribers, many of whom
are very profile folks. The Bank of China for example had been a subscriber
in the past. Most institutions and high-ranking folks use assume another
name when subscribing to newsletters or they have a staff person do the
same. Of course, I know that Congressman Ron Paul's staff members and Ron Paul himself reads at least some of writings. But Ron Paul is already in
the Choir. What is surprising and encouraging is that more and more
mainstream folks are getting the word thanks to organizations like GATA and its army of which I am proud to say I am a member.
The word is getting out to the masses albeit very slowly so far. "The early
bird gets the worm." In this case, the early bird gets the gold. And since
gold is real money while paper is liability money, when this house of cards
comes tumbling down. Those who own gold shares and gold itself will be in a
great position enhance their wealth.
September 8, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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