Taylor On US Markets & Gold
Financial Markets
As I reviewed longer-term charts for some very key markets, it was easy to
detect several secular bull markets and at least two very important secular
bear markets. In examining the charts, where the following secular bull and
secular bear markets which I believe justify the continuation of our
existing Model Portfolio strategies:
Bull Markets
Commodities (CRB & Rogers Raw Materials Index Fund)
Oil
Natural Gas
Copper
Housing Stocks
Real Estate in general
Gold
Gold Stocks
Bear Markets
Stocks
U.S. Dollar
If you had invested in stocks in 1982 when almost no one else did, and held
them until now, you would have done quite well. But as we have demonstrated
In the past, you could have done far better if you had owned bonds most of
that time. That fact is clearly outlined in actual market data by Michael
B. O'Higgins in his book, "Beating the Dow With Bonds." Since the book was
published a few years back, I have continued to track this trading strategy
and its performance continues to amaze me. If you invested $1,000 in 1972
in the O'Higgins strategy of investing in either stocks or bonds, you could
have turned that $1,000 into $426,709 buy the end of 2003. That's not a
typo! By contrast, a $1,000 investment in the Dow in 1972 would have grown
to just $34,824 by the end of 2004.
Because of the logic and simplicity of the O'Higgins Model (which I hope to
discuss again soon), I would be tempted to base our Model Portfolio
entirely around that strategy were it not for one very, very important
consideration. The O'Higgins Model does not provide any protection against
systemic risk. What systemic risk or what system am I talking about? I'm
talking about the fiat monetary system, which for reasons we have discussed
at length in these weekly messages, is being stretched to the limits.
The symptoms of a stretched system are very apparent, it seems to me, from the list of secular bull markets and the list of secular bear markets noted above. Commodities, gold (which is money and not a commodity), as well as housing and real estate are investments outside of the fiat money system.
They can be and are affected by fiat money conditions, but they are
generally the kind of investments the establishment would really rather
that you not consider buying. That is especially true of gold because as
the best money ever known to man, it stands as a constant threat to fiat
money, which has in fact been created for the benefit of the ruling elite
at the expense of the common man. That is true, as we have said many times,
because it enables the ruling elite to gain wealth, consolidate power, and
take our democratic republic away. If you doubt that process is not well
advanced in America, Read "Confessions of an Economic Hit Man" by Perkins.
Bond Market Is Key
With the exception of gold, and possibly oil and natural gas, all of the
bull markets noted above require below equilibrium interest rates to remain
in tact. The most important market of all as far as the U.S. economy is
concerned (and hence the U.S. markets and commodity markets) is the housing market. When interest rates rise, it is hard to envision what will keep the U.S. economy from falling off the bubbly cliff the Fed has hoisted it upon. As a Northern Trust Company Economic Research Department report dated December 16 noted, even with a very small 39 basis point rise in mortgage rates, housing affordability in the U.S. plunged by 9%. That same report noted how neither foreign direct investment nor U.S. corporations are investing in plant and equipment in the U.S. because they apparently see very unrewarding returns on investment. In other words, no matter what you hear on Kudlow and Cramer, the outlook for the U.S. economy going forward is not good. Pressure on the job markets are likely to result, which along with rising interest rates should pose some real problems for the American housing market in 2005. Could this be the tipping point into the Kondratieff winter. Your editor believes rising interest rates in 2005 are likely to lead to big problems for the U.S. economy.
With respect to the unbelievably strong bond market, my good friend and
money manager Wistar Holt responded to a remark I made to him with the
following email response: You're right Jay, the bonds defy all logic. " My
oversimplified answer is that I don't see any way that bonds won't weaken
this year. Perhaps significantly! Either Japan, China, or other foreign
private or govt. purchasers will retreat, or inflation will rise
significantly, or the economy will turn down, affecting corporate debt.
One of these consequences is very likely." Be sure to check out Wistar's
company, Holt-Shepad Capital at www.holtshapard.com
NASDAQ 100
S&P 500
DOW JONES INDUSTRIALS
The equity markets are also suggesting problems may lie ahead. Despite the
greatest fiscal and monetary stimulus in history, U.S. stocks are a long,
long way from even coming close to their old highs in 2000. That is
especially true with high tech stocks, as evidenced by the decline in the
NASDAQ and, to a lesser extent, in the S&P 500. True, the Dow has come
within about 900 points of its old highs, but overall, in the aggregate,
equities values are far, far below where they were, in spite of super low
interest rates and a large number of companies buying back their shares
because they don't see any good investment opportunities.
The Tipping Point
When we interviewed the Prudent Bear's Marshall Auerback last November, he and his colleague Doug Noland are watching the housing market and
secondarily the equity market for signs of a tipping point for the economy
and as a result from the dominance of inflationary to deflationary
pressures. That makes sense to your editor because no free market sector in the U.S. economy is more important in keeping the U.S. economy alive than
housing. As suggested above, any major rise in interest rates are likely to
prick the housing bubble. Since mortgage rates are priced off of the 10
Year U.S. Treasury bond, that is one market along with the 30-year Treasury that we will be watching intently in 2005.
Nearly everyone who is anyone, including Pimco's Bill Gross, tells us the
bear market must now be underway. Yet, as I look at the 30-year U.S.
Treasury Bond, what I see is a continuing bull market in bonds that started
back in 1982. Where is the evidence here that the bull market in bonds is
over? True, private capital has ceased flowing into the U.S. to any great
degree in recent weeks, so that the sustaining power of this market appears
to be coming from the likes of Japan and China who use their trade surplus
with the U.S. to invest in the U.S. markets. And the Japanese are said to
be printing yen and then converting them into dollars with which they buy
U.S. Treasury instruments. But the question in my mind is what will stop
this trend from continuing for quite a while longer? With Japanese interest
rates so low, Japanese institutions can borrow money at around 1.5%, sell
the yen and invest in U.S. Treasuries yielding 4% or 5%. That yen carry
trade combined with beggar-thy-neighbor foreign currency dynamics very much alive, seem to be very much in place at least for the moment. In other
words, I'm suggesting the bond bull market might just continue longer than
most of the experts believe, thus allowing the U.S. debt markets to
continue defying gravity.
When might this scandalous market intervention end? To answer that question I believe you have to look to another key market, this one being the
dollar, which is very much in a bear market as chart on the left clearly
shows. As we end the year, the Dollar Index is approaching the key 0.80
support level. It closed the year at 80.81. If it were to fall below that
level, we could see a major washout in the buck. If that happened, would
the Japanese and Chinese begin to cry uncle? Would they begin to demand a
revision or restructuring of the world's monetary system? Might they begin
to suggest we return to a fixed rate regime backed by gold, given that they
have been encouraging their citizens to buy as much gold as foolish Western
central bankers sell to them at extremely cheap prices? Since Washington
and other western central banks have generally sold off a major portion of
their gold, most likely to countries that are increasingly hostile toward
the U.S. and since the west as stated everything they have on fiat money,
it is my contention that the Fed will not hesitate to hike interest rates
dramatically if that is what it takes to keep the dollar from slipping away
from reserve currency status. And in my view, given the enormous deficits
being run by a saving short America that requires something like $2 billion
per day to keep the current party going, a dramatic rise in interest rates
may be the only thing that keeps the dollar as the world's reserve currency
which in turn is a requisite for the U.S. to continue its position as the
lone super power in the world.
But wouldn't a policy of rising rates lead to major problems for the U.S.
economy as noted above? It certainly would. In fact, given various bubbles
and enormous indebtedness of America to Americans and more importantly
Americans to foreigners, a dramatic rise in interest rates are likely to
trigger us into the Kondratieff winter. But let me put it to you this way.
Do you think our policy makers care more about its citizens or about the
U.S. retaining dominant power in he world? The dollar must not be allowed
to slump toward worthlessness, at least not immediately. At some point,
perhaps at 0.80 on the index it will be defended at all costs, even a major
depression! If you take a more positive outlook with respect to our policy
makers, then you are entitled to a different view point. But if you believe
as I do that the real power forces behind the U.S. government do not give a
rats behind about you and me and that our government is bombing the
daylights out of foreign countries for the benefit of the ruling elite, as
outlined in "Confessions of an Economic Hit Man" then you may agree with
me. Besides, your editor is old enough to vividly recall the last time
interest rates were hiked to the moon to defend our fiat currency system.
That was in 1980 by Paul Volcker at the Fed. Sure inflation was said to be
high then but there was also considerable worry then that we could tip over
into a depression. And in fact the recession that followed was the deepest
since the Great Depression. This time it will be much worse because our
indebtedness is so much greater. Thus the debt repudiation process, which
causes folks to off everything but the most essential goods and services
for sale, will be extremely painful. I believe this may result in the
dollar not only surviving, but thriving. As Bob Hoy has pointed out, the
lead currency always gets stronger in a major post bubble environment.
One more factor I think adds to the probability that the U.S. will engage
in a tight monetary policy in 2005 is the Presidential cycle. We heard a
lot last year about how stock markets go up in election years. However,
what we are not hearing now is how the markets and the economy often do
poorly in the first year or two of a new Presidential term. Politically,
the idea is to serve up tough economic medicine after the election so the
economy can be orchestrated up again as we approach the next election.
Yet, major forces of inertia will try to keep the global trade and debt
imbalances in place until we reach a breaking point. In other words, I
would not be surprised if commodity markets remain reasonably strong, at
least in the early part of 2005. But I also want to keep an eye out for
clues as to when the next great economic tsunami is about to heap death and
destruction on our current dollar-driven global fiat currency regime. For
reasons noted above and more, I continue to believe as much, if not more
than ever, in Ian Gordon's Kondratieff wave thesis, and that given huge and
growing debt levels by America, as our economy is clearly in decline, we
will end up in a deflationary collapse akin to or worse than that of the
1930s. In other words, I am anticipating a systemic or government-induced
breakdown of our inflationary environment. When that happens, commodities
will collapse in value, and all the discussion about shortages will-at
least for a time-be forgotten. But because gold is a monetary metal
superior in every way to the dollar, there is likely also to be a continued
demand for gold, especially from countries that are increasingly hostile
toward the U.S. as those countries seek to compete against the U.S. Many of
these countries, most notably China and Russia, have I believe have been
laying the ground work for gold as money based on their pro-gold ownership
policies which contrast sharply with the constant anti-gold rhetoric the
western countries bombard their citizens with.
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TRADER ROG'S CORNER
Current Market Indicators and Chart Tracks
as of Monday, December 27, 2004
The U.S. dollar daily price bar broke down hard. .81 support was violated
and closed at .8072. The PMO is down. Market controllers are desperate to
keep the dollar above .8000. I expect closes below .8000, but small
recoveries to help keep it in the .8000 to .8250 trading range for awhile.
Three closes below .8000 will cause a drop to .7700. MAIN DIRECTION IS DOWN.
Gold had an up bar on the daily chart to 445.00 with a +3.50 for the day.
429 is main support and 440 is intermediate support. Resistance is 455-458.
The PMO was weak, but the three averages were all exceeded.
MAIN DIRECTION IS SIDE TO UP. WE COULD SEE A PULL BACK DURING THE FIRST TWO WEEKS OF JANUARY. AFTER THIS, THE MAIN DIRECTION IS UP FOR AT LEAST 60 DAYS IN THE NEXT RALLY. MAIN DIRECTION FOR 3-5 YEARS IS UP.
XAU Index daily trend is up. The price bar had an up close, but the PMO was
weak. However, it is going positive. Watch out for a disconnect between
gold and silver stocks and the bullion prices. The stocks can rise with the
bullion either on a slow or no rise. This can fool people. The monthly XAU
prices are pushing to the top of a pennant formation. This channel top was
hit twice. Number three should be the breakout. THE MAIN DIRECTION WILL BE UP, BUT ONLY AFTER WE CAN SEE MORE CHART INFORMATION. THIS ONE IS VERY TRICKY.
Silver will follow gold, but some silver stocks will run faster than gold
stocks. This is silver's time to shine from January 15 through the end of
March. Watch for a sell off in April/May through mid August, with a choppy
middle time period. The late summer rally begins in August 2005. Silver is
going to surprise many traders.
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GOLD SHARE REVIEW-A Personal Note from Your Editor
With this issue, we have now reviewed most of the 65 gold stocks on our
list. We will have additional comments in our next issue on a few of the
stocks we have not yet reviewed, and we will be looking to gradually reduce
the number of companies on our list through sales recommendations. I have
not made a decision yet about which stocks will be sold but will do so
after these issues recover some from a horrendous tax selling season toward the end of 2004. Actually, tax selling was especially brutal on the gold shares last year because most of them were in losing positions. That factor combined with a poor performance of the shares relative to the performance of gold bullion means 2005 should be a catch-up year for gold stocks. I am anticipating a very strong year for gold shares, which along with a return of the bear market in equities, should result in a good year for our Model Portfolio in 2005.
January 2, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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