"The Zutz" is Still Active on Wall Street
America is resembling the old Soviet Union more and more as times goes on. Isn't it amazing how unanimous conventional wisdom is, not only on views about world events and the economy, but also on exactly what is deemed to be newsworthy and hence given coverage? We may not have an official "Provda," but the results are the same. Our government puts out information that is instantly puppeted on every radio and TV station in the world. We are being told what to think about and how to think about it, and most Americans could seemingly care less as long as their standard of living doesn't decline.
Actually, the origin of America's controlled press was explained as early as 1917 by Congressman Oscar Callaway. He told how American corporate interests headed by J.P. Morgan arranged to buy the top 25 newspapers in America in order to control the news content. The account of how the ruling elite-the same family interests who still rig the gold and silver prices today, and with near certainty also intervene in the U.S. equity markets-have managed to win the mind control game in America is provided in James Purloff's well-documented book titled, "The Shadows of Power." If you really want to know who the power behind the American throne is, you need to read this book, as well as "The Creature from Jekyll Island," by G. Edward Griffin. Given the history of how the ruling elite have managed to gain and retain control of the American "spin machine," the evidence provided by GATA that the gold and silver markets are rigged should come as no surprise to those who have taken the time to read well-documented accounts of what the richest families in America and Europe have been up to behind the American political scene.
Friday's jobs number was being built up as the last economic statistic we would need to prove that the Federal Reserve had managed to conquer all economic problems by printing endless amounts of money. Numbers like 125,000 to 200,000 new jobs were being touted on the nation's airwaves. Then suddenly, on Friday morning when the nonfarm payroll state of only 21,000 new jobs was released, the equity market suddenly tanked. Bonds rallied sharply and gold and silver rose dramatically. Those were all normal reactions to this bit of devastating economic news. However, the equity market began to defy the laws of gravity once again by actually posting a modest gain on the day. This dramatic turnaround of equities, even as the other markets responded normally to this news, led my friend and St. Louis money manager, Wistar Holt, to send me the following e-mail message:
"Let there be NO DOUBT about the manipulation in this equity market!!!!!!!!!!!!!!!!!!!!!!!!!" GATA has talked about how the Fed involves itself in pumping money into a couple of key, well-connected Wall Street banks whenever a major decline begins to unfold in stocks. The Wall Street banks then go out and take long positions in the futures markets to break the fall and thus retain CONfidence of the people. I have little doubt this has been going on now for quite some time, most likely since the 1987 crash. During those bleak days the Fed came in and guaranteed banks who lent money to the specialist firms for stocks when there were absolutely no buyers for America's strongest companies.
Unfortunately, this kind of action on the part of government distorts markets and hinders them from performing their work of efficiently allocating scarce resources. A lesson we were told as kids in the 1950s was if you tell one little white lie, it leads to another slightly bigger lie until the lie becomes a monster lie. And so the lies are getting bigger and bigger and bigger, and the market distortions and imbalances are getting bigger and bigger and bigger. But lies continue to abound in order to save politicians for the sake of re-election efforts and for the sake of Wall Street executives' bonus payments. Richard Russell used to refer to the sudden and mysterious intervention in the equity markets to keep stocks from falling off a cliff as "the Great Zutz." Once again, it looks as though the Zutz has paid a visit to Wall and Broad Streets.
On March 1, 2003, Austrian economist Kurt Richebacher noted in a piece he wrote titled, "Vindication for the Fed?" that the lack of jobs in America is really telling us that there is no recovery at all. Moreover, he notes that the U.S. government is fudging the inflation statistics so badly that productivity numbers appear to be much better than they actually are. This productivity fib, along with enormous amounts of newly-created credit money being pumped into the U.S. economy, is leading to a more and more overvalued equity market. Were the inflation numbers more in line with the true numbers, which Richebacher believes are actually considerably higher, Mr. Greenspan would not be able to crow about those numbers as a basis for justifying such high equity prices.
In the end, the truth will be known. If the economy is growing as well as we are being told it is, then one would expect federal tax revenues to grow dramatically as well, and that the number of jobs would actually begin to rise more in line with other "recoveries." In fact, the job picture is the worst of any so-called recovery since the 1930s. That, I believe, legitimately leaves room to wonder if President Bush will not go the way of Herbert Hoover, even as the U.S. economy faces the first Kondratieff winter since the 1930s.
Meanwhile, the Japanese are doing their part to keep the markets from adjusting to their natural equilibrium points as well. On February 27, Japan's Ministry of Finance announced that it and the Bank of Japan sold about 3.3 trillion yen ($31 billion) that month to purchase dollars in the foreign exchange market, boosting the year-to-date total to more than 10 trillion yen ($95 billion). This is already about half of the 20.4 trillion yen ($193 billion) sold into the FOREX market in all of 2003, which itself was three times the annual intervention figure for all of 2002. If this rate were to be insanely continued for all of 2004, it would mean buying dollars on the scale of almost $600 billion. Only God knows how much longer this game of defying the natural laws of markets can go on, but it will end. And when it does, America, which has been leveraging its future for the sake of living an orgy lifestyle today, will pay dearly.
Trade Barriers Abound
In this election year we are hearing rising cries about imposing barriers against imported goods and against corporations that outsource work and in the process lay off high-priced American workers. But a less-recognized form of protectionism comes in the form of currency devaluations. Not since the 1930s have we seen this kind of cheating by country after country in an effort to gain an unfair advantage over other countries in the international trade arena. Underlying this are the same dynamics as were caused during the 1930s, albeit on a much smaller scale. The world is faced with excessive supplies of a host of goods and services, which are pushing profit margins down. These oversupplies were caused by the excessive creation of money out of thin air by fiat currency regimes of every nation, especially the U.S., and the dollarization of the global economy.
And, in my view, the end result of all this will be a similar or perhaps a greater deflationary depression than we suffered through in the 1930s. I believe this to be true because the raw material of fiat money is debt, and debt is deflationary. The Fed's Bernanke can talk big about dropping money from helicopters, but when he does that, he cannot get away from the fact that ours is a double-entry fiat money bookkeeping system and that the paper he drops from helicopters, unlike gold mined from the ground, has ZERO INTRINSIC VALUE! And so as the debt, which is growing much, much faster than GDP, finally becomes unserviceable, there will be a mad scramble for dollars.
As Richard Russell points out, the world is very, very short on the dollar. If you are in debt and own no cash, you have a major dollar-short position. As the true reality of our economy painted by Mr. Richebacher comes into focus, there will be at some point a scramble for dollars as declining incomes will necessitate the sale of nonessential items in order to get dollars from which to meet life's daily requirements. Thus, as Dave Morgan pointed out in my March interview with him, people will be faced with tough decisions about whether to pay their health insurance or buy groceries. The unwinding of this extremely high leveraged economy is what the debt repudiation process that Ian Gordon describes is all about. The liquidation of nonessential assets to purchase essential assets will result in an enormous drop in the prices of all kinds of goods and services. When that happens, cash and/or gold will be king. Unlike the 1930s, cash which is no longer backed by gold may not be king, because as a liability money, it may not be accepted in the markets as a medium of exchange. Gold and very possibly silver, however, which are asset money, are likely to evolve as acceptable mediums of exchange when confidence is lost in paper money.
What are the most important ways for you to prepare for the upcoming economic trials and tribulations? (1) Stay out of debt, (2) hold some cash in the form of currency notes (paper dollars), and (3) own gold and silver in the form of coins as well as gold and silver equities. Holding cash in the form of dollars when they pay virtually no interest does seem painful, but not nearly as painful as holding stocks when the next phase of the bear market continues and holding non-corporate bonds when they default.
In what form should we hold cash? Should we hold dollars or foreign currency? Those are questions I hope to address more in the near future. At present, I am continuing to anticipate more dollar weakness as the weakness of the U.S. economy continues to emerge. Thus, I suggest continued holdings of the Prudent Global Income Fund, which is comprised of a mix of foreign currencies and gold.
In our Model Portfolio we are also suggesting that you continue holding gold and silver, and gold and silver shares. We also continue to think our "essential" technology stocks make sense because their proprietary technologies should enable them to produce life's essentials at lower costs than their competitors, and therefore be in a position to survive while higher-cost producers become insolvent.
For now we will continue to hold our inflation hedges in the form of energy stocks and The Rogers Raw Materials Index Fund. A dramatically weakening U.S. and global economy would give us reason to examine the continued holding of these inflation hedges. But for now, as the following chart reveals, these two sectors are the best performers in our Model Portfolio so far into 2004.
GOLD
For those who suggest that gold has risen as far as it can because of extreme bullishness in the market, the following information from www.decisionpoint.com suggests otherwise.
One of the indicators tracked by DecisionPoint is the Cumulative Net Cash Flow into each Rydex mutual fund. The total dollar value of assets in each fund is known each day. As such, the amount the assets should change based upon the percentage change of the Net Asset Value (NAV) can be calculated. The difference between this and the actual amount of change is the net cash flow. Decision Point keeps a cumulative total of this daily net change. On its Web site, available to paid subscribers only, DecisionPoint.com reports the following observation about the behavior of the precious metals mutual funds at the end of 2003. By the way, I find this service to be most valuable in keeping me up to date on the trends in a host of major markets and indexes, and the fees charged for this service are very reasonable. Go to www.decisionpoint.com for more information. "On the chart above is the price chart of the Rydex Precious Metals Fund, and at the bottom of the chart is the Cumulative Net Cash Flow index. We can see that it normally rises and falls along with the price index, but an unusual thing happened at the end of the year. As prices rose into a second top (circled), CNFL actually continued down into a low. This fund doesn't necessarily reflect activity in the entire market, but this action infers that money was being taken out of gold stocks, even as prices moved higher. This is hardly a recipe for maintaining an up trend, and a breakdown in gold stocks was soon upon us.
"Similar activity was evident in a number of Rydex bull and sector funds preceding the recent market correction, so I have to say this is proving to be a valuable sentiment tool." --Carl Swenlin "CAVEAT: Charts featured in Chart Spotlite are intended as examples of how to use technical analysis, not as trading recommendations."
Given the large extraction of money from the mutual funds at the end of 2003, the continued strength of the gold stocks is all the more impressive. That suggests that any notion that the gold share markets were/are afflicted by extreme optimism and thus due for a major decline is nonsense. It is true that in the Canadian cities, where investors are knowledgeable about the mining industry, a level of enthusiasm that I have not seen in years does exist. The last Cambridge House show in Vancouver in January where I spoke was a fascinating experience. Talking before a workshop standing-room-only crowd, not for just one hour as scheduled but for nearly two hours, was an invigorating experience. I'm not sure that the Canadians understand just how big this gold bull market will get. But at least they are excited about gold and gold share investments. That is for sure.
A stark contrast however exists in New York and on Wall Street. The reality of where Americans are with respect to gold and gold mine investment is virtually unchanged from the bottom of the gold bear market. Some Wall Street momentum players no doubt piled into the gold shares toward the end of 2003 and used them to enhance returns. But they view gold's rise so far as a nonevent. It is almost as true now as it was when gold was selling at a mere $255 per ounce that less than 1% of Americans have any desire to own gold, and they remain completely ignorant about gold. As Dr. Larry Parks points out, not even most gold mining executives understand the product they produce, which explains why the World Gold Council could and still does follow the foolhardy policy of promoting gold as jewelry. Gold is not a commodity. It is money, no matter what Keynes and Friedman say. Sales of gold jewelry do not result in higher gold prices. To the contrary, the more gold sold in jewelry, the lower the price of gold falls.
The lack of desire to own gold and gold shares in America provides evidence that "Bubblemania," which is built upon the false premise that untold wealth can be achieved through the creation of fiat money out of thin air by central banks, remains alive and well in America. Only when that premise is finally exposed by the market for the lie it is by the general populace, will gold and gold shares have their true day in the sun. The chief of Spinmeisters, Alan Greenspan, can be counted on to keep us in the dark as long as possible. But there are growing signs his day of deceit may be nearing an end as global market imbalances spoken of by Stephen Roach and others continue to expand to limits which, as friend and engineer Dave Morgan (whom we interviewed in our March 2004 monthly issue) suggests, are reaching their physical limits.
Next Stop for Gold? $320 or $540?
Although the equity markets rallied last year, overall the markets have pretty much gone our way, evidenced by our strong Model Portfolio gains of 46% and 43% during 2002 and 2003, respectively. A major portion of those gains has resulted from our position in gold shares. We think we continue to have the bases pretty well covered, given our view that we remain in the early stages of equity and dollar bear markets and in the early stages of a bull market in gold. But market experiences suggest we should never take anything for granted.
In the March 1, 2004, issue of his "Chart Works" publication, Bob Hoye suggested to his clients that from a technical point of view, it is important that gold rise above $410 within 10 trading days, which would be by March 15. If gold does rise above that level and if it can take out the $431 level, we could be looking at $540 gold by August.
On the other hand, he also paints a worst-case scenario that would more likely challenge our investment strategy. He suggests that if gold fails to close above $410 by March 15, we could be looking at a much deeper correction. In that event, he thinks gold could fall as far as $320 and that this decline could last for the better part of a year and that it would coincide with a dollar rally within its longer term bear market.
On the other hand, Mr. Hoye noted in a speech given at the World Outlook Conference on February 7, "Selling the stock market now is technically equivalent to buying gold the week after the low of 103 in 1976." For those of you who may not have been around during those tumultuous days, gold rose to $850 by January 1980. So, even if the worst-case scenario comes to pass and we have an unnerving decline in the price of gold, our Model Portfolio would figure to be sheltered at least to a great extent by our Prudent Bear holdings. Moreover, if a dollar strength/gold weakness results from continued growth in the global economy, our commodity exposure in the Rogers Raw Materials Index Fund and the energy stocks should continue to perform very well.
Promoters of newsletter writers want us to present an image of invincibility with respect to market forecasts. But in fact, none of us knows for sure how far markets will go and exactly when they will go. I continue to hold the firm conviction that we remain in equity and dollar bear markets and a bull market in gold. But that is not to say that we might not see corrections in these markets that could last for much of the remainder of 2004 and perhaps a little beyond. But that is exactly why I am spending the time to establish a diverse Model Portfolio. Through diversification we can reduce risk and enhance returns over the longer term. Although we are sometimes fortunate to pick stocks that make big returns very quickly, we recognize that a mentality that seeks to get rich quick usually is a failing strategy because high risk frequently results in big-time losses. We believe the slow, steady, tortoise-like move is preferable to that of the hare.
March 8, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com