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"Enjoying the Party and Getting Home Safely"

January 11, 2000

The headline in my January 2000 issue, which is scheduled to go to press this coming Monday is " Enjoying the Party and Getting Home Safely". I have become convinced that as long as it is humanly possible, Alan Greenspan and the Clinton Administration will keep the stock market mania alive. Sure there may be some rotation out of certain stocks and into others, but I believe the powers that be are in fact doing all they can to "con" the American people into keeping their savings in the stock market. This is why I no longer believe a move to Dow 36,000 is absurd and why I think it might happen quicker than most people believe. I believe avoiding protracted declines in the stock market as well as retarding bull markets in gold is all part of the same plan of our policymakers. And because of this manipulation with the free market process, I think investors are right to assume the bull market will continue perhaps for quite some time to come. To let the market fall to levels consistent with our historial experience would require at least a 50% decline in stocks and I think that such a decline is viewed by our politicians and policy makers as simply too horrible to allow it to happen. Let me explain why I believe this to be true.


During the 1987 crash, I was a corporate lending officer at the New York branch of a large Australian based commercial bank. One of my friends at that time was ahead of the group that lent money to brokers and investment banking firms. As reported by the "Wall Street Journal" and also confirmed by my friend, on that fateful day in October of 1987, there were no bids for the strongest and most credit-worthy corporations in America like IBM and General Motors. You might wonder how such a thing could happen to blue chip companies that trade on the NYSE. After all, the NYSE has a system of specialists who are always supposed to be there to make an orderly market by buying stocks when there are more sellers than buyers and to sell stock when there are more buyers than sellers. The system in fact worked well when panic gripped the nation following President Kennedy's assassination. But it did not work during the crash of 1987 for the simple reason that the specialists ran out of money at a lightening rate of speed.

Now this is where my friend and other bankers like him played a role in restoring confidence in the stock market back in 1987. When the specialist firms ran out of money, bankers were asked to lend as much money as required to the brokerage firms that acted as specialists on the floor of the NYSE. But the bankers were not stupid. Why would they lend money to the specialists firms when there was no guarantee that the stock meltdown would not continue? In that event, the brokers would soon run out of money and would be unable to repay the banks and at some point the banks themselves could be in trouble. There was one and only one solution and that was to get the Fed and/or the U.S. Treasury to guarantee the loans made by the banks to the brokerage firms. And from my understanding, that is what happened in 1987. Other reforms were also put in place like restrictions on programmed trading, but essentially, the Fed began to "print" as much money as necessary to "fix" the system.

In my view, this was a major turning point in the history of freedom and free markets in America. This interference in the market place could be easily rationalized in the minds of the Fed and our Federal government on the grounds that our national security was at stake. But I think this action set in motion a process of government interference in the market that is severely distorting economic reality and will eventually lead to what Dr.Ravi Batra has referred to as "The Crash of the Millennium". Eventually it will catch up with us, but the party could go on for quite a long time yet which is why, this year I am placing a greater emphasis on technology and stocks in general.


Yet, the game of confidence management by pumping up stock prices may in fact be a process that is sewing the seeds of our destruction. Last week Ian Gordon told me of a conversation he recently had with a Swiss bank economist he frequently speaks to. This economist suggested in effect that Alan Greenspan is now held hostage by the enormously overvalued stock market. How could that be? Well, Ian's economist friend noted that the U.S. Stock market is now worth some $16 TRILLION. However, the narrowest and most liquid measure of the U.S. money supply, namely M-1 is "only" $1.1 TRILLION! So guess what might happen with a mere 10% "correction" in the stock market? In the minds of Americans, they think a sum of $1.6 TRILLION as disappeared or gone to "money heaven", although in fact the market value represented by the latest stock prices never actually existed. But to keep the population confident in the system, it is very important that the stock market bounce back quickly any time a sniff of disaster is sensed, like that experienced this past Tuesday when the Dow declined by over 300 points. So what I believe is happening is what one Fed Reserve governor said should happen at times of stock market panics. He said that the Fed should step in and buy the futures indices at the moment a panic develops. By so doing, arbitrageur could be counted on to buy the stocks underlying the indices, thus ensuring total confidence is not lost.


Of course, Wall Street does not care to know about or even think about the possibility of the markets being rigged any more than it wanted to know that President Clinton obstructed justice and perjured himself. The reaction I get from educated and informed people on Wall Street is, "Well even if you are right, what's wrong with this manipulation"? The Street is happy that confidence is high and that they can keep selling the myth that the party will last forever because that allows them to keep the commissions, IPO fees and bonus money rolling in.

Now I believe that this management of confidence by our government is also related to what appears to be going on in the gold markets, as per allegations from Bill Murphy and others. Actually, we should not be surprised by these allegations, because manipulation of gold in order to keep people satisfied with fiat currency has been going on for a long time. Roosevelt tricked people into giving up their gold in the 1930's. Johnson tried to smack gold down and out of the hearts and minds of people in the late 1960's. Nixon agreed to have the U.S. default on its obligation to pay gold in exchange for paper money in 1971. So I do not find it hard to believe that Alan Greenspan was doing anything but continuing this confidence managing process when he said last year that Central banks stand ready to lease gold in increasing amounts, should its price begin to rise. Bear in mind that the view is widely sold to the public, that declining gold prices indicates everything is under control while gold rising in value is treated as a warning of some danger signals in the economy. Now imagine what would happen if, every day the price of gold were to jump $10 or $15 per ounce and gold stocks, were flashed on CNBC as the biggest winners of the day. As happened in the 1970's investors would begin flocking to gold and gold stocks. The policy makers do not want this process to even get started. Thus, to hold this confidence game in check, not only must stocks quickly turn around after sharp declines, but the price of gold must also be kept from any significant rises. Failure to keep gold in check and stocks from continuing in a free fall could ultimately result in paper assets zero value while gold rose to infinity.


For those of us who have prepared by positioning ourselves in gold and gold stocks this may not be a problem or at least not as big a problem as for 99% of the American population who does not own gold. The flight from paper assets to gold would also be a huge problem for policy makers. Why so? Because if that were to happen the establishment would loose its ability to create money out of thin air and thereby maintain its control over our political and economic system. Thus the stakes are high so the status quo will be retained as long as possible and at all costs. I have no doubt that our policy makers will one day loose control and that day could be sooner than we think because it appears to me that Greenspan is loosing control of tings because of the stock market mania. But on the other hand the existing boom in stocks could go on for quite some time too. That is why we have headed our January issue with the title, "Enjoying the Party and Getting Home Safely". We have a strategy for accomplishing both goals, which you will read in your January issue which is going to press this coming Monday.

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