Taylor On The Markets & Gold
Jay Taylor
Financial Markets
NEVER MORE SURE OF A DEFLATIONARY DEPRESSION
In our monthly newsletter that is scheduled to go to press early next week (hopefully Monday, October 11), I have used approximately 8 pages to make a case for deflation, and why I think the arguments that hyperinflation will come first are wrong. But let me just say very quickly in this week's message that I have never been more convinced that we are heading toward a devastating deflationary depression than I am now. And never have I been more convinced in the legitimacy of Ian Gordon's argument that inflation cannot become the dominant problem now because we are in that period of the Kondratieff cycle when extreme indebtedness weights the demand side of the economy so thoroughly that deflationary forces grow stronger and stronger, much as the pull
gets stronger and stronger as you ride a boat down the river toward Niagara Falls. At some point, that force becomes so great that no matter how large the engine is on your boat, you cannot overcome the pull of the water going over the falls. That point of no return in the Kondratieff cycle, as Ian Gordon points out, is the 60- to 70-
year-long cycle peak in the equity markets.
Richard Russell in "Richard's Remarks" dated October 8, 2004, helps paint a picture of the enormous forces that are now sucking us into a depression. Here is what Richard said this past Friday:
"Perspective -- On January 14, 2000, the D-J Industrial Average topped out at 11722.98. Following the end of the great bull market and the top-out of every major stock index, the Fed moved all-out in a frantic effort to thwart the bear. Short interest rates were reduced 13 times while the money supply was ballooned. The collapse of short rates allowed for an active 'carry trade,' in which financial institutions borrowed at low short rates
and took on longer-term securities with much higher yields. Thus, the banks and the financials were reliquefied.
"Almost five years have now elapsed since the great bull market breathed its last back in January 2000. And what have we got for all the Fed's frantic manipulations? Today the Dow was trading in the 10055 area, down roughly 1665 points below its January 2000 peak.
"But that's the 'good news.' The bad news is that the economic health of the US is now endangered by $53 trillion in debts and liabilities -- and it all starts to come due in four years when the first of the baby boomers begin to retire.
"Just as depressing, the average household's personal debt is now $84,454 while the average households share of the government's debt, including Social Security and Medicare, is an astounding $473,456 (statistics from USA Today). This means that there are going to be some serious cuts for retirees in the years ahead; it also means that taxes will have to be raised. Or, of course, there's always the politician's preferred way, which, of course, is -- inflation.
"But the kind of inflation that's 'needed' would drive interest rate through the roof. So I don't think inflating away our debt will be the answer. Dow Theorists are well aware that the third phase of this bear market has not been eliminated - it's simply been held off.
"My personal opinion is that it's debt and unsustainable liabilities that will finally drive this bear market down to undreamed of lows -- with the Dow finally ending in the 'below 3000' area.
"Next, let's turn to the current stock market. There's a lot of confusion about what's going on in the market. A lot of the confusion and annoyance comes from one phenomenon -- not many people are making money in the market here in 2004. Question -- what's the reason for that?
"My answer is that the market has been tracing out a very difficult and dangerous pattern. The pattern, as I've talked about endlessly, is the longest period of divergence and non-confirmations in stock market history. Below we see a daily chart of the Dow superimposed upon a daily chart of the Transports. The Dow is trading below its 200-day moving average, and it's even below its recent September 7 peak of 1031.16. Thus, the Dow appears to be carving out a fourth peak here in October.
"Meanwhile, the rising Transportation Average looks as though it's exhausted. Note that RSI for Transports just moved into the overbought zone at 70, after which the Transports have fallen back. Then yesterday both the Dow and the Transports were hit hard.
"The big question now, from a Dow Theory standpoint, is whether the two Averages can hold above their September lows. I'd say that from President Bush's election chances, the two Averages had better hold above their September lows, at least until election time."
Deflationary Depression - More Sure Than Ever
I recall when George Bush snuck into the White House after the contentious Florida elections; Ian Gordon and I both thought he would be sorry he won. Ian opined that he thought George Bush would become the next Herbert Hoover because with the peak in stocks in 2000, we had just entered the first Kondratieff winter since the Great Depression. Indeed, at the time of the next election, Bush will have had the worst job creation Administration since Herbert Hoover.
Falling Interest Rates During Equity Bull Market Point to a Deflationary Depression
I think it is also important to note that Richard Russell is very concerned about the non confirmation of the Dow with what has been, until now, a constantly rising Transportation average. The veteran market analyst said he has never ever seen such a long non-confirmation period and, as such, he implies this could be sending some
very ominous signals, as far as equities are concerned.
Meanwhile, gold and commodities continue to perform very well. The $64 trillion question is how long, in light of growing deflationary pressures, will commodities perform so well. What we do not want is to be left holding commodities when deflationary forces overwhelm the last abilities of central banks to inflate. Because when
deflation overcomes inflationary forces, high-priced commodities (yes, even energy) will be driven down, down, down. For now, we are sticking with energy and the Rogers Raw Materials Index Fund because commodities are the best game in tow for now. Ironically, rising commodity prices add to rather than take away from the deflationary threat given the huge debt load of America. But we want to keep a close watch on "Dr. Copper" as well as our Global U.S. Dollar Liquidity statistics for hints of when deflation is gaining the upper hand so we can exit before the crash of inflation hedges. We don't know when it will be time to bail out of commodities, but we realize that unless we are ready to do so, it could be extremely costly.
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TRADER ROG'S CORNER
TRADER ROG'S CORNER-MAJOR MARKETS ADJUST IN OCTOBER AFTER WEEKS OF NON-TRENDING CHOPPY ACTION
"Teach a parrot the terms 'supply' and 'demand,' and you've got an economist." -Thomas Carlyle
Stocks and bonds are topping and rolling over for a slide, and precious metals are rallying with silver leading the way up. The big story is oil, which shows no indication of stopping its shooting star rally, heading for $60.00 per barrel. We have been waiting for more clarity on the weekly charts of the main market drivers: stocks, bonds, metals, energy, and the dollar. While the dollar is not quite certain as yet, the others show me
enough for strong ideas carrying us through year-end.
The Dow has topped and has tried three times to break overhead resistance and failed. The weekly chart is saying we go down in a C-wave correction to 9815 support. Below this level, with a mini-crash, I see 8250-8400 support. This downtrend has been in effect since 2000 with a completed relief rally. The smaller, more recent downtrend is moving faster, telling me a big breakdown is imminent soon. Today is Thursday, October 7,
2004, and tomorrow we will get a suspect jobs report, designed to prop this market up with the S&Ps. Metals futures traders would be smart to not have open long positions in front of the jobs report. You just know what's coming. Metals stocks and option holders-hold on.
The S&P monthly chart shows a quite visible C wave down, headed toward 800 support. The Nasdaq monthly chart is similar to the S&P, but will deliver a more
shallow dip correction, as they have already had their big crash. I see Nasdaq 1,000 support. Look at the S&P 100 chart ($OEX) and it has already rolled over into a C wave down.
The 30-year bonds have been in a long rally trend since 1982, and have formed a head-and-shoulders top, and are now rolling over and dropping down to main support at
103.00. This will take some time, barring a geopolitical event. Key point: The Asian buyers are not selling much, but they are not buying either. During a big ten-year
auction this week, the Japanese didn't buy, but just sat and watched. Asian buying is waning. Keep this in the back of your mind.
Our gold monthly chart shows a rally trend with a huge double bottom in 1999-2001, and subsequent rally. The distinctive cup and handle formation from 1996
through the present is a major indicator, with the handle mostly formed. Rallies after the handle formations are normally very aggressive. Please note the buying over
the $415.00 dotted red resistance line. Also, see the dotted red resistance line at 502 gold (top of chart), which is our fall goal. Especially note that the rally has
two segments. The first is a shallower uptrend line, and in the second portion, the support line becomes steeper as we accelerate up faster.
The Philadelphia Gold and Silver Index's weekly chart (XAU) has been in a rally since 2001. Since 2003, the support base for the rally is steeper, showing more
extreme buying and interest. The chart has formed a top, finished an a-b-c correction, charged sideways for a spell, and is beginning a three-wave up out of a
continuation triangle for breakout. This bodes well for gold and silver stocks to make a very strong move. The companion monthly XAU chart is slower, and consequently the bars are still inside the continuation triangle, but still headed for a topping breakout.
The U.S. Dollar monthly chart shows that we are headed toward a semifinal support of 80.00. It is behaving like it's trying to move up in a B wave after chopping sideways. No certainty here as yet. The companion USDX end-of-day chart clearly shows three failed tries for a breakout rally. The 88.00 level is a key to determine if we head to 90 and breakout, or fail again after the third try up, and move toward 85. My best guess says more chop, then collapse to 85, then 80. Below 80 we are in big trouble.
In Summary
Precious metals stocks will rally this month and perhaps a little into November. We have an excellent chance for explosive moves in gold and silver next week. Our goal of $502 December 1, 2004, gold remains intact with our silver goal of $9.795. A mini stock market crash is a distinct possibility. Futures are dangerous right now. There is concern that the recent double top in gold indicates more sell-off. I say no, not for now. The Dow, Nasdaq, and other global stock exchanges will decline to new recent lows.
Energy products including crude oil, heating oil, gasoline, propane, and electricity will all become much more expensive. Prices are going to new record highs. Food prices are going up, and wholesale grains, while cheaper now, will increase in price dramatically next summer.
The metals should sell off on profit taking in November. The other stock markets will recover a little and rise and chop through January 2005. Metals will rally again in late January and February. Silver is acting like it will move faster than gold. Considering the thin volume compared to gold, look for faster and more erratic silver moves, both up and down. Buy gold, silver, and energy stocks.
Sell the Dow, Nasdaq, and most other "mainline investments." Many smart traders are out of the bond market and like the Canadian dollar and Swiss franc. The election nonsense is working to stall some of these market moves. However, it cannot prevent them. No matter who is elected, the markets will go their own way. Bond and currency traders have the power. They alone determine market direction. -Trader Rog
October 12, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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