The Economy, Equities & Gold

November 27, 2001

Douglas Cliggit of J.P. MORGAN Dampens CNBC's Enthusiasm

On Tuesday of this past week, Douglas Cliggit, Chief equity strategist from J.P. Morgan Chase provided at least a little reason to hope CNBC has not entirely enslaved itself to the Wall Street "prostitution ring." Frankly the constant mantra of hype and selective bullish focus by CNBC makes me so sick to my stomach, that I have to mute the volume throughout the day or turn it off entirely. It is my strongly held view that the one sided bullish reporting of CNBC and other major media institutions is immoral because it serves to suck average Americans into the greatest state sponsored theft ever! Print the money. Suck them in. Print the money suck them. That's the con game Wall Street and our politicians have been playing at the expense of the American public for many years now.

Mean time, one can argue that the smart money began coming off the table as early as 1999. A glance at the Dow shows that was when a gigantic topping pattern began. It was also during 1999 when market internals began to weaken considerably so that more stocks lost ground on the NYSE than increased in value. The behavior of our markets is becoming more and more like that of a gambling casino and much behaving as an honest mechanism for trading assets that contain intrinsic value derived from real honest earnings and cash flows paid out in dividends. Like a casino, the stock market is controlled by the house which uses any manner of deceit to get you to plunk down your hard earned money to go another round. In this case the "house" is owned and run by the Politicians, Alan Greenspan and the banks who own him and the Federal Reserve. They are the privileged insiders who are tipped off first about major policy changes like the discontinuation of the 30-year bond. And as we know all too well, they are the folks who get to borrow gold at sweetheart rates of interest, sell it short and then have their behinds protected by the clandestine sale of still more gold that rightfully belongs to Americans as a backing of the dollar.

So the politicians and Wall Street casino insiders, aided and abetted by their crony capitalist friends in the Media (who are now owned by the same folks who run the casino) provide just enough payoff to continue suckering the little guy back into the market as they bail out. This is usually the way it is at the top of major bull markets. The smart money comes out while the little guy continues to believe trends of the past will continue indefinitely into the future. He is the sucker. He is the looser, but the real dynamics behind this behavior must be hidden from the masses at all costs. So Reginald Howe's law suit does not get carried by the establishment press, even though it is arguably of profound significance not only on the basis of market outcomes but on some basic Constitutional issues. Sorry, average American, you lose because you are not part of the house. That belongs to the Wall Street elite.

AS FOR J.P. MORGAN - GIVE CREDIT WHERE CREDIT IS DUE

No banking firm in America is more a part of the growing unholy alliance in America between big banks and government than J.P. Morgan. And given this banks obvious role in the gold manipulation scam, yours truly is not a big fan of J.P. Morgan Chase, though I do have a high regard and admiration for this classy institution and many brilliant financial pros.

Douglas Cliggit, Chief Equity Strategist at J.P. Morgan Chase is one of those classy guys who deserves a word of praise. This past Tuesday I was at least mildly encouraging as Mr. Cliggit injected at least a little logic and realism into the otherwise insanely bullish environment at CNBC. While most talking heads on this national TV network have been arguing that we are ready for a resumption of the bull market, Mr. Cliggit suggested that is unlikely. He suggested that over the long run, you might reasonably expect equity returns in the high single digits. But given returns far above normal over the past few years, he suggested it is possible there will be very little in the way of returns over the next two or three years. And he quite properly pointed out that he could not find a time in history when a bull market began with low interest rates and such high Price Earnings multiples.

Actually, Mr. Cliggit may have been accommodating the ragging bulls on CNBC at least a little by suggesting we may need to wait only a couple of years before we make money again in equities. Notable investment pros like Warren Buffett and Sir John Templeton are warning that over the next ten years you might not make anything in stocks.

Of course readers of J Taylor's Gold & Technology Stocks have known this for quite some time, which is one reason why investors are willing to pay $123 per year to read our newsletter while they could get dozens of "experts" on CNBC for free. I guess it goes to show you that you indeed do get what you pay for!

Getting Close to the 1/2 Rule

Thanks to the constant reminder from our much admired and truly independent Guru, Richard Russell, we continue to watch the 1/2 rule very closely. What we are talking about is the 1/2 point between the Dow's all time High and its post September 21st, low of 8,235. That half way point happens to be 9,978. The rule states that a close above that level would leave open the possibility that the Dow might challenge its all time high. However, failure to penetrate through the 1/2 level would at the close of this past week we stood at 9,959. We came within two points of the 1/2 marker early last week. A failure to rise and hold above the 9,978 mark would likely lead to a retest and possible decline below the March 21st low.

S&P Earnings yield at the end of the week was a measly 3.20% vs. 4.01% last year at this time. Only 1.36% of those earnings are being paid out in dividends. Meanwhile, the 10-year Treasury yield increased last week to 5.05% as U.S. interest rates began to climb significantly.

Talk of the Gold Standard

Earlier this year, Mr. Greenspan, in effect admitted to Congressman Ron Paul that he still believes we should be on a gold standard. Yet, he became one of the most significant cogs in the anti-free market machine of the Clinton crowd. Not only did he cranked up the printing presses at a record pace over the past few years, but he also became a significant participant in rigging the gold price. Who could send a louder signal to the "gold carry trade" crowd that Mr. Greenspan sent by his now infamous message twice in 1998 to the U.S. Congress that "central banks stand ready to lease gold in increasing quantities should the price rise."

The Clinton intellectuals, who took charge, never saw a market they thought they couldn't improve through government intervention. They displayed an unprecedented score of arrogance and lack of understanding about the virtues of free markets. The Clinton economic generals showed their ignorance about one of the key factors that has made America great and has set us apart from dictatorships around the world. Most notable among this arrogant lot was Lawrence Summers, of Gibson's Paradox fame. He told the Clinton Administration that if the U.S. was going to be successful in bailing out the world, starting with Mexico, it had better find a way to rig the gold price. So rig they did as GATA has so aptly pointed out.

The gold price-rigging scam allowed the greatest stock market bubble in history to develop. It was at the very heart of the Clinton strong dollar policy and thus has led to a dollar that is now so overvalued that it is responsible for the death and destruction of mining, manufacturing and agricultural jobs in America. To be sure, we are now in a "beggar thy neighbor" state of affairs not unlike the 1930's when country after country sought to devalue their currencies in order to sell more goods and services. The deeper the decline, the more aggressive was the move to devalue.

INCREASING LIKLIHOOD THAT A DERIVATIVES RELATED FINANCIAL MARKET CRASH IS ON THE HORIZON

There are rumors circulating on the Internet that suggest J.P. Morgan Chase may be in some trouble given their exposure in general in the derivatives markets and more specifically to Enron which is on the verge of bankruptcy. The rating agencies have held Enron's debt at just one notch above junk bond status. If its debt rating were lowered, Enron would be forced to pay or refinance up to $3.9 billion in debt -effectively rendering Enron insolvent. Given all that, one unnamed rating agency official said last week that a move to lower Enron's debt rating could roil the entire debt markets and then added that it was "patriotic" to hold off on such a move.

In any event, Enron appears to be in big trouble and there is no doubt that J.P. Morgan Chase and Citigroup are major creditors in this company and most likely hold huge derivative positions with them. An Enron default, which appears more than possible, could set the global credit dominoes falling, especially if it shakes confidence on a larger scale.

Ian Gordon has persistently argued that even though he believes we are in the early stages of a depression, U.S. Treasury bonds will not be a good investment, at least not during the early years of the decline. Why? Because the U.S. is the world's largest debtor nation. And when foreign investors finally understand that they have been had with respect to the viability of their U.S. denominated investments, huge amount of capital will flee out of the U.S. at an extremely rapid pace. And when that happens, interest rates will rise dramatically in the U.S. even as the economy slides further downward. Could it be that the world markets are beginning to sense the emergence of major credit problems in the U.S.?

With the global economy slowing and the U.S. economy expected to be the locomotive that pulls the global economy out of the soup still very much in decline, bonds rates should be falling. Yet, last week they surged to levels even above those before the Bush folks announced they would discontinue the 30-year bond. Can there be any doubt that the sudden and rather shocking support by the Bush Administration to have Japan print Yen and then use those Yen to Buy U.S. Treasuries is a reflection that all is not well in the U.S. financial markets? Could it be that the dominoes may be about to fall starting with the bluest of the blue chips in America, namely J.P. Morgan. Before you dismiss that possibility, think back a year ago and ask yourself whether you would have expected then that a blue chip like Enron would be on the brink of bankruptcy in the near future.

When a financial system is so highly leveraged as is that of the U.S., systemic risk rises dramatically. The huge derivative banks, of which J.P. Morgan Chase is the largest, (with an estimated $20 trillion in notional amounts), may be the most vulnerable of all. This bank is of course in "the too big to fail" category of banks meaning that our tax-payers will be asked to bail them out when/if they are in trouble. But even governments - even powerful ones like the United States - have their bail out limitations. There is a limit to how much paper will be accepted in the global economies.

Deflation of the Bubble has Only Just Begun

Continued intervention by the U.S. and other governments means that despite the trillions of dollars of losses for U.S. investors to date, only a small amount of air has escaped from the U.S. bubble. Unfortunately we have not learned the lessons of the Japanese, namely that market intervention, while seeming to make things better, really only prolongs and exacerbates a problem in the longer run. And since we have failed to learn from the Japanese mistakes, (and our own errors in the 1920's and 1930's), we are doomed to follow Japan on the downside, just as we did on the way up when we inflated our own asset bubble. We have clearly entered a competitive foreign exchange regime beggar thy neighbor currency devaluation game not unlike that of the 1930's, with the U.S. bankers being happy to accept a higher value for the dollar in exchange for continued flow of capital into the U.S. But eventually all the manipulation in the world will no longer work because at some point, economic dislocations that result from such manipulations can no longer be sustained. Again, a case in point is the demise of American industry thanks to an already overvalued dollar. That is an effective tax on American industry that seems to be escaping the attention of the American people.

One last thought with regard to the manipulative strong dollar policy of orchestrated by the Clinton Administration. Despite continued manipulation of the gold markets by the usual suspects, gold remains in the $270's. That's a far cry from its normal equilibrium price which we believe would be well above $600 per ounce. But perhaps, with 1,700 tons of annual gold supply shortage (until now made up by central bank dishording) and an estimated 14,000 tones of gold sold short, the gold manipulation game may be nearing an end.

And if this manipulative ploy has no more "juice" left in it, in terms of conning the world into buying and increasingly overvalued dollar, that may be one more reason why the Bush Administration is encouraging the Bank of Japan to move toward a competitive devaluation of its currency. They say history has a way of repeating itself. That's right says Ian Gordon. About every 60 years or so we go through a very tough experience known as the Kondratieff winter.

I believe the signs are growing that we are now in the very early stages of a global deflationary decline. I agree with Richard Russell who sees the Chinese growing presence on the world commercial stage as a powerful deflationary force. I would combine that however, with the competitive currency devaluation schemes that the U.S. is now very much encouraging. All these moves are falling into place just as Ian Gordon predicted back in 1999.

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.