Taylor On The Markets & Gold
Jay Taylor
FINANCIAL
Deflation Signals Are Getting Stronger
The very core of our Model Portfolio strategy is based on the premise that
we are nearing the end of the 60- to 70-year Kondratieff cycle, and as a
result, deflationary forces of over-indebtedness will overtake all attempts
by politicians and bankers to inflate us into prosperity. At the very core
of our deflationary belief is the rapidly escalating rise in debt relative
to national income. The notion that nations can defy the laws of economics
through their printing presses is absurd to the core. The need on the part
of U.S. monetary officials to print more and more money in an effort to
stave off deflation demonstrates the folly of that view. This is so because
in a fiat currency system, debt is the raw material from which money is
manufactured. And so any attempt to overcome the deflationary tendencies of debt will ultimately increase, not decrease, debt. Because this concept is
so important, we have chosen to publish the chart on your left once again.
Note the direction of debt in America (now $37 trillion) compared to GDP
(income). Every time Alan Greenspan and Ben Bernanke at the Federal Reserve fire up their helicopter money printing machines, the red line grows
steeper and steeper, while the blue line continues in its very modest
linear direction.
The enormous growth in debt relative to income in itself is deflationary.
In fact, as Ian Gordon has pointed out in his work on the Kondratieff
cycle, the reason deflation and not inflation is the outcome of enormous
growth in printing press money in the Kodnratieff winters is because a
threshold of debt is reached in which debt becomes so burdensome and
onerous that any attempts to inflate away the debt problem can no longer
work-not unlike an aircraft that is trying to lift more weight off the
ground than it is capable of lifting.
So what are some of the growing signs that deflation is winning the day?
- An enormously bearish stock market picture - Despite the most stimulative
fiscal and monetary policy in history, U.S. equities have not even come
close to their all-time highs reached in 2000. This is exactly what Ian
Gordon predicted when we first interviewed him in 1999. The top of the
market that would soon approach would not be equaled again in his lifetime.
(Ian was then about 57 years old). With the next leg down in the equity
market (which we believe will see the Dow and gold reach parity before the
bottom), we think deflationary pressures will become ever more obvious.
- Price inflation in the U.S. - While I believe inflation is much higher
than the government claims it to be, it is continuing on a long-term
downtrend from its highs that were reached at the peak of the Kondratieff
summer, which ended in 1980. Unlike that period of time, major disinflation
in manufacturing and finance exist which, for the time being, are enabling
Americans to buy the appearance of prosperity for a while longer, when in
fact they are digesting ever more lethal does of debt. As the number of
Americans unable to meet their debt obligations begins to grow
exponentially, it is my view that we will be in the unfortunate position of
seeing prices of everything, (perhaps even commodities) drop much more
dramatically than even during the 1930s.
- Bond rates decline even as oil prices surge - The bond market, which is
comprised of the most sophisticated investors in the world, is taking
interest rates to lower and lower levels, even as a key component of
inflation-namely oil and gas prices-rise. What this suggests to me is that
powerful deflationary forces such as global competition in manufacturing,
services, and finance are overwhelming inflationary forces in key commodities.
- Retail stocks are starting to decline markedly - The consumer represents
about 70% of the American economy. The entire world, to a greater or lesser extent depend on the U.S. consumer to keep digging himself into debt in order to buy the goods and services that keep the rest of the world's
economies growing. Retails stocks and recent consumer behavior and
attitudes suggest this mania may be coming to an end. If so we may well
start to see the unwinding implosion of the great American debt devil that
ushers in the Kondratieff winter freeze up.
- Tepid growth in the U.S. Money Supply - There have been some major
declines in the M-3 measure of money growth which may or may not be
indicating we are nearing the tipping point. Certainly measures of money
are getting more and more complicated and with the involvement of the
government support in the mortgage industry, M-3 may not be telling us as
much as it did at one time. I prefer to watch global U.S. dollar liquidity
which at this time is still growing at an amazingly high rate of around 20%
per annum. Yet what I find amazing is that despite this growth, except for
some commodity prices, inflation in the U.S. continues to rend lower from
its 1980 double digit highs. In fact, this is the measure I am watching
most closely because as during the Asian deflationary crisis, this measure
of liquidity actually turned negative 5% at one point. As the great debt
bubble begins to lose its air, we will see an actually decline in the money
supply not only M-3 but more importantly in global U.S. dollar liquidity at
which time, I expect the dollar will actually gain value, at least in terms
of what it will buy within the U.S.
- Signs of Commodity Price Declines? - There may even be signs that
commodity prices have peaked. Indeed the CRB has been in decline since
April of this year. And my friend Chuck Cohen sent the following email
message to me: "Jay: Have you seen the grains recently? Also, look at rice
and lumber. I think that copper could be next. The oil frenzy appears to be
masking the general weakness in commodities. Chuck
As for now, commodity inflation, especially in the energy sector remains a
reality which is why we continue to owns some energy stocks and the energy
heavy Rogers Raw Materials Index Fund. By the way, one stock I think you
should really keep your eyes on is International TME (OTBBB- ITME), for
reasons noted in our Corporate News & Views below. In anticipation of
continued commodity inflation until such as a time that deflationary forces
overwhelm continuing attempts to inflate the currency.
As I have said before, 2004 is a year of corrections in the markets. We expect a resumption of the major market trends which are: bear market in stocks, bear market in the dollar (relative to gold) and a bull market in gold to continue starting in 2005 with a resumption of those trends becoming more obvious before the end of 2004.
TRADER ROG'S CORNER
GOLD IS CRAWLING, WHILE THE DOW IS DANCING
As we report in after the daily and weekly gold closing, Crude Oil is over
$48.50 and headed for $50.00 resistance again; the Dow is up about 35
points; the NASDAQ is virtually flat at 2 points; and all this while CNBC
is reporting on the coming debacle at Fannie Mae. The news alleges these
executives manipulated the numbers to pump their bonuses. I would expect
this to get much worse, then be smoothed over to the best of the
authorities' ability, as we approach an election and some very fragile markets. Fannie Mae took a big stock hit Wednesday when the mess became
apparent, but the controllers are working overtime to smother the problem.
If Fannie Mae hits the dumpster, everything else goes with it. As they say,
"It's too big to fail."
Gold began with a nice little rally this morning, and then the PPT jumped
on it, giving gold lovers a major rise in blood pressure. Still, as I
busily draw on my weekly good chart, I see a major continuation triangle
with its extended apex closing about November 1, 2004. This scenario fits
nicely with our expectations as the price bars have got to jump over the
top or slide under it before November 1. Since we are quickly running out
of month, and next week traders will be balancing books for month end, I
would suggest our big event will now hit in October.
Within this much longer triangle is another rising up channel beginning
last June. This channel is fairly wide, about 12-15 points top to bottom
and moving along with a good upward slope. With a Bollinger Bands overlay,
this channel shows quite graphically that gold is rallying to the top band
and continues to want to stay that way. So, in spite of the PPT's best
efforts, gold marches up with each slapdown. I suspect the PPT is
permitting this gradual slope to makes things gradual for everybody. They
cannot risk a gap open break away, as it could easily get out of control
and then we all have some really big trouble.
So the gold traders and investors should keep calm, keep invested, and stay
out of gold futures to control risk. For those who know this futures game,
I would suggest you be very careful. Should gold hit a big rally break, and
they try to smother it, an over correction could easily run the stops, and
the contract holders would be in a real pickle and unable to escape.
With the smothers being put on gold, it likes to sit, resist, jump over,
but generally hang around $408.50. Our weekly close today is in this
neighborhood, stopping at $409.70. Next week should not be a real terrific
metals week as the monthly book re-balancing has just 4 days left. Expect
choppy, non-directive action and more waiting.
However, beginning with October 4, we could finally see some excitement.
It's still hard to tell for sure, but gold appears to be in a three-wave
beginning. If true, this is the big one we have been waiting for. Three
waves are the big moves traders love to jump on.
Our next group of overhead resistance points in order are: $415, $424-425,
and $429-main overhead resistance. After three closes over $429, we head
for $450, $475, $502, and $514. Our $502.00 is the primary stopping point,
but if broken, we go to $514 next.
I expect things to really slow in the rally as we approach $502. Profiteers
will be aching to exit, and the gold futures option holders had better be
thinking of selling positions around $480. If you try to ride to 502, you
may not be able to get out fast enough.
Next week we begin to see more quarterly corporate reports. Many of these
reporting corporate officers would rather be on vacation or disappear than
sit in front of the cameras and shareholders tap dancing around their lousy
numbers, which are surely coming. Soon the Dow and Nazz will be smothered,
while gold and silver are doing the dancing. Keep your dancing shoes on, as
you cannot dance at this metals party if you are out of the market. Keep
invested. Keep the faith. Your turn is coming.
The Dow Jones Industrial Average has tried to break through overhead
resistance three times since it started its toppy two-step, downward slide.
Technical analysis says an upward breakthrough usually occurs on the third
or fourth try. Well, guess what; we've seen three failed tries on a
downward sloping chart. Can it break through on the fourth? I say no. Three
strikes and you are out.
The eminent Dow theorist, Richard Russell, was wondering out loud this week
as to why the Dow and Transports have diverged for over seven months. He
said he had not ever witnessed this phenomenon. One of his readers
suggested the transport guys were busy hauling in goodies from Asia and
exporting empty containers. I would add the railroads are short of cars as
the increased need was not expected, and it takes some time to build new
rolling stock. Further, in Canada, the railroads are overwhelmed by hauling
raw materials to the Western ports for shipment to China at a very
accelerated pace. Ports are backed up for weeks. Their next big problem
will be harvest hauling next month, with not nearly enough rail cars to go
around, carrying time valued cargo-food products.
I would suggest that rare, seven month divergence is a product of the
Plunge Protection Team diving into the S&P's at propitious moments,
slamming any sell off. Chicago pit traders are seething, as the "normal"
flow of bid/ask has been severely interrupted. Logic has not prevailed, and
it's costing the locals some real bucks. Buying a nice chunk of S&P's in
the face of an imminent failure has helped the Dow turn around, base and
return to small rallies, saving the day. But only temporarily.
Gold has experienced just the opposite. Whenever the U.S. dollar acts
terminal and gold rises over the "permitted amount," the PPT hammers the
market with gold sell-offs, creating a gold trading range, and avoiding a
ten or twenty point gold rally runaway. To complete the scam, the U.S.
dollar has been protected by Asia's buying T-Bills and Bonds in huge
volumes. Our printing press directors in Washington are helping this game
along as well.
There you have it: Prop the S&P's and Dow, sell the gold, and prop the
dollar. This fiscal foolishness is winding the economic coil ever tighter,
and merely postponing the final day of reckoning. That big day, I would
suggest, is coming sooner rather than later.
We have long lists of reasons as to why an implosion is imminent. One that
reared its ugly head this week was Fannie Mae. Bad news about creative
numbers, coupled with a shaky real estate market, scared some into a
sell-off. This baby is so large it probably exceeds the total annual GDP of
most nations in the world. The WSJ reported smarter consumers smell a top, and are exiting their McMansions for something reasonable, paid for, and located in more conservative living areas.
The bond traders didn't cooperate either, as they went opposite the
conventional thinking, and traded toward higher interest rates. Keep in
mind the bond traders and currency traders not only understand where things
are going, but they trade in that direction and ignore the herd. These
sectors will be the major factor in fixing this major market
mal-adjustment. No PPT help is possible here.
So what happens next? Dow and NASDAQ go down, bonds go up in price and down in yield, real estate cracks, and the sheeple just stand there waiting to
commit fiscal suicide, going over the cliff in one large herd. This waiting
and standing there, doing nothing in the face of disaster, is creating the
large market pause (inside trading days) we see today. This ends very soon,
just as a market mistake dumps over the markets, creates a cascade of
selling, and panicking the sheeple to run over the selling cliff.
Buy gold, gold stocks, and options, get out of debt, and sell the Dow and
NASDAQ. If you are stuck in a retirement plan and cannot exit, try to buy
some put options or leaps to offset the losses that are certainly coming
your way. Until Next Friday Until next time, this is Trader Rog.
NOTE: Traders Tracks, which lays out Trader Rog's top trading picks are
outlined toward the end of this weekly message.
September 26, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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