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1929 to 1932 - Then & Now $3,500 Gold ??

June 19, 2001

In his magnificent May 2001 issue of "The Long Wave Analyst", Ian Gordon quoted John Kenneth Galbraith and Richard Russell that sets the stage for the news of a rapidly deteriorating global economy now in progress.

In the introduction to his book, "The Great Crash 1929", John Kenneth Galbraith wrote, "These speculative episodes have occurred at intervals throughout history, and the length of the interval is perhaps roughly related to the time that it takes for men to forget what happened before. The useful task of the historian is to keep the memory green."

Then in his March 29th, Richard Russell wrote, "I think I'm fairly unemotional and clinical when it comes to the stock market. Yes, I do have a conservative bent, but that comes from my background of growing up in the Great Depression. But as wife, Faye has often told me, 'Richard, get over it - that was 70 years ago, times have changed.'

"All the above notwithstanding, I want to tell you something and it comes strictly from my guts and its nothing I can prove. I get a really bad feeling about what is happening and what lies ahead."

Rate Cuts are not Working

The talking heads on CNBC and FNN are dumbfounded. "Don't fight the Fed" they said earlier in the year, noting statistics that showed how virtually every times the fed has lowered interest rates, it was followed by a reviving economy and higher stock prices.

The trouble is, these pundits only applied data to the post World War II era and not to the time leading up to the 1929 crash and the Great Depression in its aftermath which time frames are more akin to the economic condition we find ourselves in today. These high priced stock sales men and sales women have failed to understand what historian Ian Gordon and a hand full of others analysts understand and that is that we are now exactly at the same point on the Kondratieff cycle as we were in the immediate months following the 1929 stock market crash. It should be well understood by most readers of this newsletter that those who followed the advice of David Tice, Ian Gordon and other bears have done hugely better than those who followed the insanely wealthy stock sales people like the Abby Joseph Cohen's of this world.

Why do people fail to consider the possibility that "ancient" history will repeat itself in a general way, or that laws of nature are not subject to the whims and wishes of man or to humanistic endeavors, including running the printing presses? At least in part the denial of laws pertaining to economics has to do with man's desire to defy God and to live outside of the laws of his creation so that man can be free to do as he or she desires in defiance of God and the laws of his Creation. This in itself is an anti-God religion which in fact is taught in our public schools. It is called "Humanism." So it is with economics as with all other areas of our lives. We arrive at the false conclusion that "this time it is different", or that we are not constrained by the laws of nature and we do so out of wishful thinking rather than out of a true observation of the world as it really is.

On a more innocent level, a great deal of unwillingness to believe what happened to our economy 60 or 70 years ago still applies today is simply an honest misunderstanding based on a lack of experience. So it is that few people today are able to determine that we are on almost the identical path in the 1998-2001 time frame as we were in the 1927-29 period.

Consider the following quote also taken from Ian Gordon's May 2001 issue of the "Long Wave Analyst." As you read this quote, see if you can determine whether it was said in the 1929-1932 period or in the 1998-2001 time frame.

"Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade."

Because of the comments with respect to the bond market you may have correctly gathered that this comment was made in the 1927-1929 time frame. But actually almost all other points are exactly what we are hearing now. There was supreme confidence in the ability of the Fed to bail us out of our miseries during the 1929-32 period just as there is today in Alan Greenspan's ability. Yet the Fed did not and could not alter the path of American economics. For reasons I have discussed repeatedly, many if not most of the same dynamics are at work currently which will negate the ability of the Fed to stimulate economic growth by running the printing presses.

Like the week ending 6/9/01, Headlines of this past week illustrate that things are continuing to decline not only in the U.S. but globally. And there is growing indications that hostility between trading partners is on the rise, not unlike what occurred during the 1930's. Last week we heard President Bush talk about protecting U.S. steel from foreign competition while failing to mention the real cause of this problem for the U.S. is the ridiculously strong dollar.

A number of other headlines underscore our growing conviction that Ian Grodon has been "spot on" in his predictions that we are entering a Kondratieff Winter. Some of the headlines we spotted last week were the following:

"Structural Weakness Strains Steel Industry" - Financial Times - 6/12/01

"Hard-Landing Alert Sounded for US Economy" - Financial Times - 6/12/01

"Weakness Spreading in US Economy Says Fed" - Financial Times - 6/12/01

"Nokia Warning Dents Hopes of Early Telecoms Rebound" - Financial Times -6/13/01

"Reliance Files for Bankruptcy" - Financial Times 6/13/01

"GE Ready to Pull Out of Honewell Takeover" - Financial Times - 6/15/01

"US Venture Capital Funds See First-Quarter losses hit 30%" - Financial Times 6/15/01

"Nortel to Cut 10,000 More Jobs, Have $19.2 Billion Loss." - - 6/ 15/01

"U.S. Consumer Prices Rise to 0.4%; Core Rate Rises 0.1%"- - 6/15/01

The Spreading Gloom

On the Friday June 15 the following article titled "The Spreading Gloom" appearing in the "International Herald Tribune" paints a picture of rapidly declining economic temperatures as the Kondratieff winter approaches.

"Japan Feels the Brunt of Economic Woes, But Pressure Increases on Europe and U.S.

"FRANKFURT The economic gloom weighing on the world's financial markets deepened Thursday after reports from Japan, Europe and the United States suggested a further downhill drift.

"In Japan, where the situation is grimmest, the government warned that the nation already may have lapsed into its fourth recession in a decade.

"The European Central Bank, which until now had kept a guardedly upbeat tone, on Thursday cautioned that the troubled "international environment" might deliver a bigger blow to Europe's economy than previously expected.

"The reports came a day after the Federal Reserve Board in Washington, denting some of the recent optimism about a quick recovery, said the U.S. economy was barely growing and was suffering from broad-based weakness across many industrial sectors.

"Taken together, the reports increased unease among investors worldwide. In late trading, stocks were sharply lower on Wall Street, and in Europe, prices were generally down between 1 percent and 2 percent.

"It cannot be excluded that the international environment could develop less favorably than assumed," the European Central Bank warned.

"The ECB downgraded its outlook for growth in the 12 nations that have adopted a single currency, even as it raised its inflation forecast.

"The twin problems of slowing output and rising prices have painted the bank into a corner. Despite criticism from some economists that a restrictive credit policy has contributed to the slowdown, the ECB now has little flexibility to lower interest rates because of the worrisome surge in inflation.

"Euro-zone growth should fall to between 2.2 percent and 2.8 percent this year, the ECB said, lower than the 2.6 percent to 3.6 percent range it predicted in December. Even at the lower end of the new projections, the ECB remains more optimistic than private economists, who expect growth of about 2 percent. Last year, the region grew at the brisk rate of 3.4 percent.

"In Tokyo, the government released its own monthly report for June, which concluded that "the economy is deteriorating." "Although we have yet to be able to arrive at a conclusion, there is a strong possibility that the economy has entered a recession," said Haruhito Arai, a government economist.

"Japan, the world's No. 2 economy, was last in recession only two years ago. This week it reported that its gross domestic product contracted by 0.2 percent in the first three months of the year.

"I would expect the April-June figure to worsen," said Finance Minister Masajuro Shiokawa. With two consecutive quarters of declining output, Japan would again meet the technical definition of a recession.

"Although politicians renewed their calls for the Bank of Japan to do something to rescue the economy, the bank essentially exhausted the limits of traditional monetary instruments when it lowered interest rates to almost nothing in March.

"With interest rates at zero, it's like printing money," said Michael Dicks, chief European economist in London at Lehman Brothers.

"But even that has not worked. The country's woes are compounded by a deeply troubled banking system still burdened by massive problem loans that discourage new lending. Corporate bankruptcies, meanwhile, surged in May to their highest level this year, according to Teikoku Databank Ltd.

"Rebuffing Japanese politicians' pleas for new steps to add liquidity to the economy, Masaru Hayami, the Bank of Japan governor, said, "We are not in a situation where we must add new policy measures."

"In the United States, the Federal Reserve Board has aggressively cut rates in an effort to stimulate the economy. And after the latest data, economists believe the central bank might be prepared this month to cut rates for the sixth time in a half year.

"The Fed gained latitude to lower interest rates from numbers released Thursday indicating that inflation remained in check in the United States. Producer prices rose 0.1 percent last month, the Labor "Department said; the core rate, which excludes volatile food and energy costs, rose 0.2 percent.

"The Fed's regular bulletin on regional economic conditions, issued Tuesday, cataloged weakness in virtually every sector, except drilling for oil and gas. 'Economic activity was little changed or decelerating,' the Fed said."

Is this report for real or is someone simply trying to hype reality in order to sell newspapers? Well consider this. According to the King Report, the eight months of decline in industrial production is the longest stretch since March-December 1982 which was a short but deep recession year. Also, industry operated at 77.4% of capacity in May which is the lowest since August 1983.

With our economy hitting the skids, look for Congress to push for a weaker dollar. The ability to fool around with currency rates under the existing floating rate regime is a clandestine means of obstructing free trade. No one cared that other countries were trashing their currencies in order to improve their sales to the U.S. or that the dollar was insanely overvalued as long as the stock market was booming and equity funding and capital investment kept the great American economic lie alive. Now that both the stock market and the American economy are falling apart what is poor President Bush to do? Being the world's largest debtor, how high will interest rates rise if a weak dollar policy is orchestrated by the U.S. in order to try to stimulate economic activity? How much money will the Fed have to print when foreigners begin selling dollars?

Perhaps the biggest question for our readers is the following. With Wall Street successfully selling the world on the notion that the dollar is better than gold, into which currency will wealth flow when that the "paper is better than gold" lie is finally understood to be false, by a world awash in dollars? Will it be the Euro or Yen or Swiss Frank, all of which have substantially more gold backing them than the dollar? Will it be gold itself or a combination of all these alternatives?

Short the Dollar via The Prudent Safe Harbor Fund

The last time the world lost a great amount of confidence in the dollar was during the latter part of the inflationary "summer" of the current Kondratieff Wave which took place during the 1970's and ended in 1980. The flight from the dollar then was into strongly gold backed currencies most notably the Deutsch Mark and Swiss Frank and of course into gold itself. The result? Gold rose from $35 per ounce to $850 per ounce! As we pointed out recently, the U.S. now has less than 1% backing of its currency with gold compared to 15% for the Euro + many of the European countries, most notably France, Germany and Italy have retained sizeable amounts of gold in their own national coffers. So when the inevitable collapse of the dollar arrives, I want to own Euros, which is why we have 25% of our Model Portfolio allocated to the PRUDENT SAFE HARBOR fund (OTC - PSAFX)

Bear in mind that the amount of paper money printed with which to buy gold was extremely small during the 1970's compared to 2001. For example in 1971 when Nixon debased the dollar by closing the gold window, M-3 measured just $744 Billion vs. $7.558 TRILLION as reported in this weeks "Barron's" when gold was selling at $42.65. As the American banking industry tried to inflate its way out of recession in the 1970's, M-3 Grew to $1.8 Trillion by 1980 when gold exploded to $850 per ounce. Today, confidence in the dollar remains high, but as that changes how high might the price of gold rise? Nothing is ever the same in economics, but to the extent the price of gold is driven by the amount of paper printed as confidence in paper is lost, a ratio of M-3 to Gold as it existed at gold's 1980 high would put the yellow metal at $3,531.75 based on the latest M-3 numbers. As the Fed tries to print our way out of trouble, M-3 may well grow to much higher levels.

Actually, the calculation of $3,500 gold during the coming Kondratieff winter is not inconsistent with the views of Ian Gordon who has come up with a similar value. And as Ian has illustrated, it is during the deflationary winters rather than the inflationary summers that the price of gold experiences its greatest bull run.

Are you ready?

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