Taylor On US Economy & Gold
Jay Taylor
Financial Markets
Wall Street cheerleading has been using its free infomercial media at CNBC
and CNN and other major media vehicles including what once were objective
papers like "Barron's" and the "Wall Street Journal" to suck billions of
dollars from unsuspecting common ordinary folks back into the stock market.
As a 57-year-old observer of markets, I have seen how the little guy gets
sucked into the tops of markets every time while smart, savvy big investors
are pulling their money out.
Richard Russell's "Big Money Breadth Index" has been suggesting another
such top is in, which would be totally consistent with Warren Buffett's
stance of staying out of stocks and letting cash build up.
And so Wall Street's infomercials have helped to suck in huge amounts of
money from the very people who suffered through the enormously painful
bloodletting process during the 2000 through 2002 time frame. People think
the bull market is back, not realizing that this is nothing more than a
gigantic bear market rally in a secular bear market that I continue to
believe will prove to be at least as destructive and severe as that of the
1930s. In January equity funds took in $40.7 billion in new money and
another estimated $30.5 billion in February.
We shouldn't blame average folks for falling prey to the establishment's
infomercials. On page A2 of Tuesday's "Wall Street Journal," there was an
article headed, "Confidence Surged Among Executives in First Quarter." The
article said, "Chief executives have not been so bullish about the economy
since the last quarter of 1983, when the index stood at 74." Who could
blame average folks for thinking its time to start allocating more of their
401-K back to stocks?
But look here! Thomson Financial reported that in March, insiders sold
$28.38 of their own stock for every $1 they bought! Reportedly, March was
the eleventh straight month in which insiders not only sold more stock than
they bought, but the ratio was also greater than 20 to 1 (sell/buy)! For
eleven months in a row, the sell/buy rate stood above the 20-1 ratio, which
is defined as "very bearish."
And then according to Richard Russell, David Coleman-who writes "Vickers
Weekly Insiders Report," which measures the number of sell-to-buy
transactions rather than the dollar amount of the buy and sell
sides-reported that in the past four months he has seen the
sales-to-purchases climb as high as 7 to 1. A neutral ratio is 2.25 to 1.
Coleman reportedly said, "We have never seen such an extreme negative report."
Do you see what I mean by the Wall Street spin machine? How could
executives be so supposedly confident and at the same time be selling
virtually everything they own?
Louis Navellier Says a Market Top Is In
Well-known market analyst Louis Navellier sent out the following e-mail
message last week as part of a promotional piece for his newsletter:
"The Next Wall Street Disaster
"It pains me to see people making the same mistakes all over again.
"How soon they forget how much pain was caused -- just a very short time
ago -- by throwing money blindly at the U.S. stock market.
"Now they're at it again. And they're about to be crushed by the next Wall
Street disaster. One that's highly predictable. Inevitable.
"HERE'S WHAT HAS CHANGED
Despite a strong economy, the leadership in the U.S. stock market is
becoming increasingly narrow.
"That may seem counter intuitive, so let me explain why.
"1. First, this new "bull market" is following a highly predictable
historical pattern.
"In the first year, 2003, a giddy euphoria took hold, as investors heaved a
collective sigh of relief after the long bear market. They dumped a lot of
cash into the market, much of it into speculative issues. That explains
the huge gains in many unprofitable tech stocks with lousy business prospects.
"But -- and this is critical -- the "easy money" has already been made.
"Already, our analysis shows much greater discipline on the part of the
"smart money." Many individual investors are still tossing money around
like it's 1999 all over again. But the big guys have gotten much more
selective.
"No more speculation for them. They're demanding extremely sound
fundamentals with the emphasis on rapid sales and earnings growth.
"2. And that leads me to my second key point: Earnings momentum is
actually beginning to decelerate.
"The reason is simple. After a modest recovery, year-to-year comparisons
are becoming increasingly difficult for the vast majority of companies.
When you're starting from rock-bottom, it's easy to show improvement. But
most companies are stumped about what to do for an encore."
Evidence the Party May Be Over!
There are a couple of fundamental factors I believe now threatening the
artificial growth imposed on us by the ruling elite. First of all, the fact
that economic growth has been stimulated by unprecedented fiscal and
monetary policy, which has served to deter natural economic excesses of the
Clinton years from being purged from the system, means that a firm
foundation for sustainable economic growth has not yet taken place. There
are no lasting ways to build long-term economic growth except to allow
market excesses to purge themselves from the economy. Once that takes
place, we can look for economic growth. This is one of the lessons of Ian
Gordon's Kondratieff wave study. Politicians try to prolong market
expansion but in so doing cause the economy to move further and further out of equilibrium until their efforts to manipulate the laws of nature snap
back at them with a vengeance. Whether we are at the tipping point this
month or next month or even a year or two from now, I don't know. But I
have to think, on the basis of Ian's excellent work, we are getting very
close.
One of the most ominous events that has taken place over the past couple of
weeks in the U.S. economy has been the surge in interest rates. What we see
in the charts below is that interest rates in the 5-year, 10-year and
30-year U.S. Treasuries have surged above their 20-day, 50-day and 200-day moving averages, and all three are threatening to move above their
downtrend line that started last August.
Published with permission of www.decisionpoint.com
In an effort to fight deflation, the Fed's high speed money creating
helicopter, operated by Fed official Bernanke, is continuing to whirr away,
which is serving to keep short-term rates below all the long-term moving
averages. Remember the Fed has the most control on short-term rates but as you move out on the yield curve it has less and less control.
Your editor has noted that there are "good" reasons and "bad" reasons for
interest rates rising. A "good" reason would be if we had sustained
economic growth that simply resulted in competition for capital. A "bad"
reason would be if foreigners stopped buying U.S. Treasuries because of
their concern about the viability of the U.S. dollar and the U.S. economy.
It is impossible to measure why things do what they do in the aggregate
because there is always a dynamic mix of instantaneous factors playing
themselves out in the economy that makes econometrics such a ridiculous
endeavor. Conceptually, however, we know that there are limits to the
amount of wealth foreigners will be willing to pump into the U.S., and
there has been talk and some evidence that Japan may be slowing up its
purchase of U.S. Treasuries. Also, with the debt addiction of the U.S.
growing at such a rapid pace, there may come a time when a simple
flattening of demand for U.S. Treasures begins to cause interest rates to
rise. But what ever the reason for interest rates rising, what we know is
that any dramatic rise in interest rates is bound to kill the housing
industry in the U.S. which, along with consumer spending for another big
ticket item-namely, automobiles-has been keeping the U.S. economy from
going through the correction it should have gone through years ago.
Published with permission from www.decisionpoint.com
The equity markets discount the future so the charts above may also be
suggesting a top for the U.S. economy, even as the government's rear view
mirror numbers-suspect as they are-suggest we are having dramatic economic growth. Note the plunge in Wal-Mart's stock near its 200-day moving average, which is true of the Retail Holders Index as well.
Then, take a look at the following chart of the Real Estate Index below.
This is the same kind of picture we see in the retail side. I do not think
it is an accident that the two mainstays of the U.S. economy, namely,
retail and real estate, are turning down at the same time interest rates
are on the rise. We need to keep in mind that rising interest rates are
likely to be extremely problematic to the U.S. economy because of our
overdose on intoxicating debt that has been spewed out by Bernanke's
helicopter machine over the past few years in defiance of the natural laws
of economics.
Published with permission of www.decisionpoint.com
GOLD
Published with permission of www.decisionpoint.com
As noted above, the equity markets are a leading indicator of future market
conditions. As the charts above show, gold shares as measured by the Amex
Gold Bugs Index have not been nearly as strong as gold over the past month.
Could this be suggesting some trouble ahead for gold and gold bullion? I
think the answer is "yes"; it could be suggesting a stalling out for gold
in the near term. I also believe that as we enter a period of time when
stock prices begin to plunge, gold shares could also have some rough going
in the process. However, I believe any such weakness should be used to your
advantage to accumulate more gold and gold shares.
A story on April 9, on the Internet in a publication called "Gulf News,"
talked about how the United Arab Emirates sold all its gold. Why so?
According to the article, "The move nearly five months ago was the latest
in a series of sales of gold reserves by the Central Bank as part of a
strategy intended to diversify its investment portfolio, make more profits,
and offset any decline in return from low interest rates."
Here are some more quotes from this article:
"It was a wise and clever investment move by the Central Bank because
prices are now at one of their highest levels," Ihsan bu Hulaiga, Saudi
economist, told Gulf News.
"As you know, gold no longer has an important economic value for any
country because the trend now is that the central banks prefer diverse and
sophisticated investment instruments, which could be more flexible than
gold….what is important now is the economic performance of any country and
its reserves of hard currency."
Question: if that is true, then why are Asian central banks buying gold?
The article went on to say, "The UAE was among 10 Arab countries that have
maintained high gold reserves despite a recent decision by European central
banks to start selling 500 tonnes of their gold every year provided the
total amount does not exceed 2,500 tonnes until 2009.
"At the end of last year, the combined Arab gold reserves were estimated at around 20 million ounces, of which 9.2 million ounces were controlled by
Lebanon alone.
"The surge in gold prices lifted the value of the Arab reserves from only
$5.8 billion at the end of 2001 to $8.7 billion at the end of last year.
"Lebanon alone gained a staggering $1.1 billion of that increase and this
has maintained its position as having the highest ratio of gold to the
population in the world," said Henry Azzam, chief executive of the
Amman-based Jordanvest Bank.
"Central Bank figures, published in the latest official gazette, showed its
assets swelled to around Dh60.2 billion ($16.4 billion) at the end of
January from Dh54.5 billion ($14.85 billion) at the end of the previous
month. Maturity securities dived to around Dh5.7 billion ($1,55 billion)
from Dh11.2 billion ($3.05 billion) in the same period.
"But deposits with other banks jumped to nearly Dh52.2 billion ($14.2
billion) from Dh42.3 billion ($11.5 billion) despite a steep decline in
global interest rates.
"But the Central Bank has made clear in its investment strategy that it
favors diversification of its portfolio and this explains the change
through the year.
"As for its official financial reserves, the UAE had the third largest
reserves with the International Monetary Fund, standing at around $14.9
billion at the end of September, their highest level since the country was
created from seven emirates in 1971."
Clearly, this is a Western dominated publication that is mimicking the
views of the U.S. and British ruling elite. Most likely the author of this
article was writing the above out of sheer ignorance about gold as money
and why it has been and always will be money. So while the West and Western dominated power elite continue to sell gold, there are buyers ready, willing, and able to buy all that will be sold at bargain basement prices.
Can gold be manipulated considerably lower still? After all, according to
GATA, central banks may still have some 17,000 tons of gold left in their
coffers. That's a lot of gold to dump on the market. But remember this, at
least for now, one of the main conduits that was used to secretly dishoard
gold-thousands of tons of gold-and to thereby reduce its price to
ridiculously low levels, was the unholy alliance between the bluest of the
blue chip inside manipulators, namely, J.P. Morgan and Barrick Gold. At
least for now, thanks to the courageous efforts of Blanchard & Company,
Barrick has turned toward a dehedging policy. I hope to hear more from the
Blanchard people in the next week or two about how their trial is
proceeding in that federal New Orleans court. From what I hear, the defense is throwing every legal hurdle they can think of to keep discovery facts from coming out in the public.
Actions by countries like the UAE help keep the gold price artificially low
and thus give insiders like J.P. Morgan and Barrick a better chance to
hedge more of their gold. Barrick's hedge book is reportedly already $1.7
billion under water. What would $500 or $600 gold do to that book? What
kind of disclosure would that company and its bankers be forced to tell the
public if Barrick went under? So, news announcements like the one from the
UAE should not be surprising. The ruling elite are most likely putting on a
full court press on governments they control or have great influence over.
We may see more like this, which would keep the cap on gold for a while
longer. But remember that gold is so far below its equilibrium price
already (somewhere between $600 and $700 or higher), that it may be very,
very difficult to push the yellow metal much lower. Believe me, if they could do it, they would have kept gold from rising above $400 or even $300.
But as James Turk told me yesterday, "Jay, we are winning. The global
economic problems are simply too big for them to keep pushing gold lower."
For this vision of what is really going on in the gold market we thank
independent thinkers like Ian Gordon, Frank Veneroso, James Turk, Reginald
Howe, as well as Bill Murphy, Chris Powell, and an army of folks at GATA.
Certainly Richard Russell is to be thanked for his understanding and
willingness to discuss the dynamics of gold as money. Understanding the
underlying dynamics of gold allows us to avoid the shorter term propaganda
of the establishment, which is serving to keep most people far, far away
from gold. That means we have more time to accumulate both bullion and the
shares.
I think the establishment may be able to slow the upward move of gold
toward its equilibrium price somewhere in the $600 to $700 range. However,
because of global economic problems and the huge amount of paper money
being printed by the U.S., they are going to have a very difficult time
turning the price of gold south again. The UAE may look very stupid one
year from now having sold gold at $400 when it is selling at $500.
Meanwhile, these manipulative and propaganda ploys are giving other central
banks in countries experiencing surging wealth an opportunity to load up on
gold at bargain basement prices. We who understand all this should also be
taking advantage of this time to add gold to our own portfolios.
The following chart, which depicts the average monthly price of gold as
well as the 20-month and 40-month moving averages, demonstrates that the
gold bull market remains alive and well. In fact, with the average gold
price so far in April being $420.16, we have to go back to February 1990,
or more than 14 years, to find a higher monthly price. This rising monthly
average price, which remains above these very long-term moving averages,
suggests the powerful bull market in gold is very much alive and well.
April 12, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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