In other words, as the bubbles are being inflated, equity prices have less and less to do with underlying economic fundamentals. Rather, Wall Street speculators take all that hot money created out of nothing and pump it into stocks and commodities, sucking in unsuspecting retail investors only to set them up for the next big market crash.
While it may be easy to buy the sweet optimism of CNBC and Bloomberg, if we take even a casual look at reality, it is possible not to get lured in by the B wave correction in this horrendous bear market that began in earnest last fall following the Lehman Brothers initial decline. As Bert Dohmen said in his latest issue of The Wellington Letter (www.dohmencapital.com), "When credit expands, the economy must expand and the stock market must rise. When credit contracts, the opposite must happen. All economic numbers must follow credit."
Bert went on to say, "This simple theory is very reliable. You don't have to look at hundreds of economic statistics, or the deceptive numbers coming out of Washington. And you don't have to listen to a multitude of Ph.D. economists, who are overeducated and under-experienced in the real world. Just look at the availability of credit. "And for that, you go to the Fed of St. Louis Web site at http://research.stlouisfed.org/publications/usfd/. You look at the charts of 'commercial and industrial loans,' and 'bank loans' and of 'commercial paper.' They will tell you if indeed the economy is recovering or not. There can be no recovery without an expansion of credit."
So we took a look to see what the latest St. Louis Fed numbers were telling us in terms of bank loans and commercial paper. Bank loans are down from their Sept. 2009 highs by 11% to $7.35 trillion. Loans and leases are down 4.5% since then to $6.9 trillion. But the most telling in terms of fundamental economic weakness are commercial paper loans, which are down by 44% from approximately $225 billion to $125 billion. Perhaps it's because of their relatively small size that his number seldom gets reported. But it is the closest direct measure of underlying economic activity because it tracks borrowing by companies to fund their working capital needs and reflects underlying commercial transactions directly.
This is a depression and in our view justifies McHugh's vision of a cataclysmic nation changing event once the C wave gets underway. And so as stated in our weekly missives, we continue to suggest building cash and using it to buy up gold mining stocks at bargain basement prices in the first half of 2010.
As Bob Hoye, my guest last week on my radio show explained , (www.modavox.com/voiceamerica/vepisode.aspx?aid=40526) during the unwinding of major credit bubbles like this current one, (this is the sixth major bubble in the last 300 years!) the "real" price of gold rises dramatically and with it so do gold mining profits. Bob says these are long lasting events with gold mining bull markets lasting upward to 20 years!
I believe the odds are better than 50/50 that we will see a major decline in equities worse than last year. And, as was true last year, the real price of gold (what an ounce of gold will buy) will rise dramatically with the second major leg down in this major bear market that began with the Lehman Brothers collapse last September 12, 2008.
We hate to sell gold shares in a long-term secular bull market like the one we are in now because we could be wrong about our anticipated fall market crash. We are not selling all our positions, but rather suggest subscribers lighten up so we have plenty of fire power to buy gold shares on the cheap after the margin clerks force prices of gold shares (and everything else) down at the end of this year and in the early days of 2010.
August 20, 2009
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com