first majestic silver

The Dollar Decline and its Effects

June 20, 2002

Concurrent with the bear market in stocks is a rapidly developing bear market in the U.S. dollar index and a slowly deteriorating economy. This potent 1-2-3 combination will make its effects known greatly this year, especially in the August-November timeframe. On the flip side of this bearish development, gold and silver will resume their bull markets later this summer and based on the configuration of trading cycles, will see their most dynamic upward movement of the year during this same August-November timeframe.

MZM money supply has declined drastically in recent weeks on a rate of change basis. In fact, the money supply figures haven't fallen this hard, this fast in quite some time. The last time this happened was back in 2000 a few months before the 120-week master trading cycle bottomed. Typically, the Fed cuts back on money supply 4-6 months ahead of a major cycle bottom like the 120-week. Lo and behold, the next major series of dominant trading cycles bottom in October-November of this year and the Fed has ensured the decline in stocks will be a furious one with their ill-timed change in monetary policy. This, coupled with the decline of the dollar, will ensure that stock prices and other areas of the economy are hit hard as the year wears on.

Speaking of cycles, it is interesting to note that when last the dominant interim cycle bottomed last year it coincided with the terrorist attacks in New York and Washington. Once again, the latest cycle bottom has been accompanied with news of terrorist attacks in the Middle East and rumblings of future attacks in America, including from the mouths of U.S. officials. It is amazing to note the remarkable similarity in mass psychology that repeats with each important cycle bottom. We'll have one final cluster of time cycle bottoms later in the year and if the recent past is any guide (it always is) we'll see the worst display of terrorism yet in the fall.

Considerable damage has been inflicted to America's capital markets in the past year and this damage will only accelerate under the influence of the falling cycles between now and 2004. The "strong dollar" policy has given way to a policy of supporting the equities market at all costs and this will prove a disastrous effort as all attempts at holding it up will eventually fail. As with every other war the U.S. has found in the past 30 years, the present "War on Terrorism" along with the war against the cycles will prove to be unwinnable as the feds once again fail to accomplish the stated objective.

Another reason why wealth is being destroyed in the U.S. has more to do with wealth transference rather than wealth destruction. An astounding proportion of America's dollars goes to build up the vast economies of foreign countries like Red China. A dollar spent at America's largest retail outlet, Wal-Mart, is actually a dollar donated to the Asian economies since almost all of Wal-Mart's products are made by overseas production and labor. The same applied to virtually every major store and retail outlet in America. Trying to find a product embossed with the "Made in the U.S.A." label is like trying to find a needle in a haystack. Most of them say "Made in China." This proves beyond any shadow of a doubt that America is no longer an industrial nation and that China is the up-and-coming world's super power.

It will only be a matter of time until China, along with Russia, reigns supreme as a financial (as well as military) power. America is already being made to bow the knee to China's export market and our economy is being destroyed piecemeal because of it.

Among stock sectors that are most vulnerable to a major decline in prices this year are the major bank stocks, the insurance sector, and the brokerage stocks. Heavy damage will be inflicted to the major players in each of these institutions in coming months as fundamental and cyclical events conspire to unravel the excessive leverage in each of these industries. Particularly hard hit will be the insurance sector.

Shortly after the events of September 11 we wrote, "As evidenced by the precipitous decline and increased downside momentum of prices in the weeks leading up to the Sept. 11 attacks, someone (presumably the terrorists) knew in advance of what was coming and of its implications to both the insurance sector and the broad market and were heavily shorting stocks in sensitive industries (read property insurance). This can be easily observed by noticing the chart for insurance stocks. This also suggests that perhaps those devastating events were timed to coincide with an important series of cycle bottoms--most notably the 40-week cycle--which occurred in the same timeframe as the bombing. If true, this means that next year when the much bigger and more powerful cycles start turning down hard there could be other terrorist events to coincide with them and augment their impact. A glance at any number of major insurance companies leads us to conclude that someone is expecting just that. Many of these major insurers are under heavy liquidation, or are currently building up short interest and approaching important cycle channel reversal points--all pointing to early 2002 as the turn date.

"It is very important for those with large insurance holdings to check into the financial soundness of their insurer(s). What are their current assets/liabilities? Do they possess the financial viability to process a heavy volume of claims in the event of another catastrophe like Sept. 11? Are the insiders shorting their own stock? Most importantly, what does the chart/tape reveal about the overall financial position of this stock? These are questions all insurance holders should be asking right now." This analysis still holds true and the charts of any number of insurance equities look terrible. There is considerable downside potential in the insurers in 2002.

Market analyst Michael Jenkins makes an interesting observation concerning the dollar/stock market/economic situation that bears repeating. "The U.S. Dollar is starting its historic collapse that will result in the next global panic, and the extreme overvaluation levels currently seen will get even more extreme once proper accounting standards start to get applied over the next six months." He adds, "The VIX volatility index is hitting record lows every week and the complacency level is about as high as it gets. Investors are still buying brokerage stocks in the face of news that could potentially bankrupt most of them and will undoubtedly decimate their earnings for the next five years. Any weakness in the GDP or a double dip Frecession would cause major loss of capital."

The worst has yet to be seen in the stock market/dollar/economic bear market, but the best is yet to come in the gold and silver bull.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.


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