Taylor On US Markets & Gold
Financial Markets
It's been a few years since we have experienced the kind of difficulties we
are now going through. The only sectors in our Model Portfolio that are
still positive are the iShares Lehman 20+ Yr. U.S. Treasuries (+1.46%) and
the Rogers Raw Materials Index Fund (+2.81%). Previously, our inflation
hedges were helping offset the decline in the gold shares. Now our energy
sector is down 15% and the Rogers Raw Materials Fund gains have all but
evaporated to a mere 2.81% gain.
Where we are really getting hammered is in the junior gold sector. The
seniors, which we have a 17% allocation, are down 6.33% year-to-date, while
the exploration stocks, which we have allocated 21% of our portfolio, are
down a whopping 23.81%.
Clearly, the American people are getting jerked around by all manner of
market manipulation. In fact, the only thing that strikes me about the Gold
Anti-Trust Action Committee, started by my friends Bill Murphy and Chris
Powell, is that gold is about the only market policy makers deny
intervening (manipulating) in on an ongoing basis. I suppose their denial
has nothing to do with what is true, but rather what that revelation would
mean to market psychology if CNBC were to discuss Federal Reserve
intervention to keep the gold price down. Following this commentary is a
summary by Richard Russell, published on May 19, in which he outlined how
Alan Greenspan's fraudulent monetary policy has put us in the deep doo-doo
we Americans and the global economy find us in.
On the surface things look fine, but look a little deeper and you can see
abundant signs of an unbalanced global economy that in my view can only
result in a devastating deflationary depression. Once again, I will touch
on the reasons I think deflation and not inflation will be the death of us
in the not-too-distant future. But of course the basic reason I am so
convinced we are heading over a deflationary cliff is that the only
"solution" the Fed has for "fixing" any problem of illiquidity is to add
still more illiquidity in the form of more debt money. Enough on the topic
except to publish the following chart one more time, which shows debt
growing exponentially while income grows in a very boring straight line.
Ultimately, a threshold will be met when this whole monetary inflation is
thrown into reverse. It will happen when no one is creditworthy and when
banks finally understand they will loose everything if they keep making
loans.
Is This A Housing Bubble or What?
The following information regarding the California housing market was
passed through to me on the Internet by one of Bill Flekenstein's subscribers:
"Turning to the real-estate mania chronicles department, a reader who is
knowledgeable in the mortgage arena forwarded a nice data-collection
summary of the lunacy taking place in house financing. I would like to pass
it along as is, and I encourage everyone to read this a couple of times.
"Here are some more stunning stats!
"(1) 2001: 2% of CA loans IO [interest-only]. 2004: 49% (people just
stretching and stretching to get into a home).
"(2) 70% of refis are now 'cash-out refi' (draining savings).
"(3) Total equity takeout, meaning cash-out refi and HELOC [home-equity
line of credit], on homes in 2004 accounted for 77% of total U.S.
consumption.
"(4) 2004: 20% of payment option MTG's [mortgages] were NegAM'ing [negative
amortization]. Currently, 40% are NegAM'ing. God help them when px's
[prices] stabilize or GO DOWN!
"(5) WAMU's [Washington Mutual] new product, 40-yr. MTG, no biggie, but
they are going to allow you to do 100% financing, 80/20 HELOC, and further
allow you to do pay option on the 1st, i.e. NegAM/IO. Yikes!
"(6) Almost 30% of 2004 MTG's were second/vaca/investment property."
*************************************
Richard Russell Nails Greenspan's Legacy
May 19, 2005 -- How one bad mistake can lead to a series of bad mistakes.
In late-1996 Alan ("Bubbles") Greenspan grew worried about the surging
stock market, and he announced his famous warning of "irrational
exuberance." Good move, but then the unexpected occurred. Instead of
tightening credit and raising stock margins, Greenspan reversed himself and
bought the whole productivity and " the fabulous new world of tech" story.
The fact is that Greenspan turned extremely bullish. Bad mistake.
The result was that between 1996 and 2000 we witnessed the greatest
speculative stock market bubble in history. Stocks went to levels of
overvaluation never seen before. Next-- trouble. Starting in 2000 we
experienced the initial bear market collapse, a smash which wiped out more
than 70 percent of the value of the Nasdaq between 2000 and 2002.
Belatedly realizing his ghastly mistake and fearing that the US would
follow Japan down the deflationary path, Greenspan drove short rates down
to 45-year lows of one percent, while opening the money-supply spigots. The
theory here was that the Fed could control inflation but would be almost
helpless if deflation took over.
Again, Greenspan waited too long. Between 2002 and 2005 stocks rose again
to bubble valuations. At the same time, the great American public switched
from stocks to real estate amid the flood of cheap money. Asked if real
estate was in a bubble, Greenspan admitted that in some areas real estate
did seem bubble-like, but on the whole he did not see real estate
throughout the nation as being in a bubble.
All the while Greenspan was moving up short rates in "measured"
quarter-point increases. As I write today, short rates are three times what
they were at their recent one percent low.
But what's this? Already, with short rates at only 3 percent (the Fed is
still "giving money away" at below the inflation rate) the red flags are
flying. Today's Bloomberg states that economists are warning that the Fed
and European central banks may have to curb rate increases because the $1
trillion hedge fund industry may not be able to take any more than say a
3.5% Fed Funds rate. And already there is evidence of some huge losses in
various hedge funds. See article at the end of this site.
And so it goes. Now Greenspan has placed the US in a super-leveraged
position with housing in the US in a state comparable to where the Nasdaq
was in 2000. Yesterday it was announced that consumer prices in April were
up 0.5% (at a rate of better than 6% annualized) but "core inflation" was
flat. Since the Fed appear to pay most attention to core inflation, all is
well in Alan Greenspan's fantasy world. One thing is clear -- the Fed
doesn't worry about inflation because the Fed can halt inflation with
interest rates. But the Fed is mortally afraid of deflation, since the
Japanese example shows that deflation can take on a life of its own.
May 21, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
Email this Article to a Friend 
Printer Friendly Version