Taylor On US Markets & Gold
Financial Markets
Stocks Decline and Bond Markets Rise
With the stock market having its worst week in quite a few months, the bond
markets rallied strongly so that the 10-year Treasury closed with a yield
back down to 4.01%. We think there is a pretty good chance that the stock
market has seen its highs for the year and that the market may return to its primary bear trend after quite a natural rally from its lows thus far in the bear market.
According to Richard Russell, who we think is the only legitimate public
practitioner of the Dow Theory, the failure of the Dow to stay above 9504
(the halfway point between the all-time high of the Dow and its first leg
down in the bear market), suggests the odds favor a move to retest and most likely break through the old lows because, as Richard points out, we remain in a primary bear market. One of the most important reasons that the bottom of this bear market has not even come close to being reached is extremely overvalued equities. The S&P continues to sell in nose-bleed
territory-around 29 times earnings!
I believe when the next shoe drops on this bear market, real rather than
wished-for capitulation will become omnipresent in the equity markets. When
Dow 7250 is taken out on the downside like a hot knife through butter, how
many people will continue to believe Kudlow and Cramer? I don't care how
severely we have been brainwashed by the establishment, with 401-K's being
totally decimated, even sex-addicted, drug-imbibed, brain-dead Americans
will figure out they have been had. At that point, the paper con job by our
policy wonks will be over. That, I believe, is when confidence in the U.S.
financial system will be shattered. When confidence is lost, declining stocks will no longer result in a rising bond market. Why? Because when confidence in our markets and economy is shattered, foreign capital, which now funds 46% of our Federal debt, will exit America not unlike what happened in Argentina-another country that depended on the kindness of strangers to finance its deficit.
So, a key market we will be watching very closely is the dollar market, because that will give us a hint as to the level of confidence foreigners have in our economy. That is very, very important because credit from foreigners is to the American economy what the drug supplier is to a junkie.
The Dollar Index
When the supply is eventually interrupted because the junkie can't pay the
bill, the junkie becomes desperate as he faces extreme withdrawal pains and
the prospects of death. Likewise, when the U.S. is no longer able to pay
its debts and when the economy suffocates under this debt load and
mal-investment caused by excessive credit over the decades, we will face a
cascading debt default not unlike that of the 1930s.
Certainly rising interest rates would play havoc with a housing sector that
is leveraged up to its eyeballs. It will directly impact those poor souls who mortgaged their homes with floating rate mortgages. For those who didn't, the burden may be transferred to an over-leveraged derivatives sector. One way or another, rising interest rates are likely to be the death knell for the American economy and those rates are likely to begin rising in a pathological manner when foreign capital exits the U.S.
Housing Sector Reaching the Breaking Point?
Thanks to a plunging equity market this week, interest rates fell. But
according to Comstock Partners, Inc., the housing sector is reaching levels
that spell danger. For starters, existing home prices are now more than three times the median income. Historically, whenever this has happened,
housing prices have fallen sharply, shortly thereafter. Other troublesome
signs are extremely low equity-to-debt ratios and a substantial rise in
mortgage delinquencies. The delinquency rate for FHA mortgages rose sharply to 12.59%. Also, mortgage debt is rising now much faster than home prices.
GOLD
The Establishment Counterfeiters are Losing
The con artists who, by necessity, must deceive the public in order to
retain their monopoly over our banking system and money supply, slammed
their counterfeiting machine into overdrive last week after gold came
within a whisker of $400. For the time being, the establishment, which has
managed to pull off the greatest legal heist in the history of the world,
continues to win the psychological war against the majority of America's
"sheep." With several decades of disinformation in the universities about
the nature of money, our legalized system of theft, which is accommodated
via our fractional reserve banking system, has managed to make Americans
increasingly stupid about the real function of gold.
As Dr. Larry Parks has pointed out in his writings in the past (which you can read on his excellent Web site, www.fame.org), not even the World Gold
Council or, for that matter, most managers of our major gold mining firms
really understand gold. So isn't it ironic that communist nations like China and Russia are accumulating gold, even as policy makers in the West continue to live under the delusion that they can simply create wealth out of thin air, by printing it. A major disinformation campaign about gold, which gained momentum with Keynes and later the monetarists, has been firmly implanted in the hearts and minds of Americans so that at least 99% of our citizens are now so easily deceived about all that is taking shape in our financial system.
To be fair, there are at least two major gold companies I know of that
understand the product they sell. GoldCorp is one and IAMGOLD is another. The management of these firms know and boldly state, "Gold is money." And
both of these firms back up their statement by retaining some of their
earnings in gold rather than paper money, and of course they avoid short
sales.
Most of America's so-called professional financiers are totally ignorant
about gold. One example is my wife's former boss, a New York money manager. He is a very good and decent man, but he swallows Keynes, Friedman, the sell-out version of Alan Greenspan, and Kudlow and Cramer hook, line, and sinker, as well as all the other regular, paid, talking heads on CNBC. This man thinks Greenspan and other elite policy makers can be counted on to engineer prosperity by way of the printing press. Of course the vast majority of Americans thought the same thing in the first couple of years after the 1929 crash. But getting back to my wife's boss-this past week when Teresa had lunch with him, he told her that he was sure the recent rise in gold was simply a mania. He certainly was not going to buy gold. He is aggressively buying stocks. After all, what other logical place is there
to put your money?
A Little Profit-Taking "Breather" is Good
The sharp sell-off in gold last week resulted in a sharp sell-off in the
HUI, as can be seen in the above daily chart of this unhedged gold mining
share index. While I believe Bill Murphy is right when he says the gold
cartel was at work to orchestrate this move, the decline in the price of
gold and gold shares isn't all bad. For one thing, it gives us a better price at which to buy these assets. Moreover, markets need to inhale and
exhale. Clearly, gold and gold stocks were, from a technical point of view,
becoming over-bought. But this was the first time since July that the price
index had actually dropped below its 20-day and 50-day moving averages. The fund is still firmly in bullish territory, and I would expect after some
backing and filling in the charts, we should see another upward surge in
gold and gold shares.
Personally, the way the junior gold stocks were beginning to run up until
Thursday of this past week, I felt those markets did begin to display a
tinge of manic behavior. Yet in speaking to my fellow New Yorkers, I am
confident in betting my next newsletter subscription (123/380.20 = 0.32
oz/gold) that fewer than 1% of my fellow New Yorkers have even begun to
think about investing in gold. So this isn't a mania. The stock market may
still be in a mania, which is why it continues to sell at more than 30 times earnings.
If anything, gold remains in the early stages of a bull market, also known
as the accumulation phase when people cannot fathom the idea that we are in
a bull market. All they can remember is the 20-year bear market we just
finished, and then they project it indefinitely into the future, just as they continue to project a bull market for stocks going forward. I have now lived long enough to see this psychology play out several times. I remember clearly how hard the bull market psychology died years after the peak in 1980 at $850 even as the bull market in equities was just getting underway. Now gold is in the accumulation phase when fortunes will be made because of
the enormous leverage it has when assets are bought at such undervalued
levels. But I will leave you with this question. If such a small universe
of the investment community is investing in gold and gold shares, what will
happen to these assets when investing in gold becomes more fashionable than investing in stocks, as was true in 1980?
September 29, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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