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).

"(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."

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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