"Glorious Revolution" on the Horizon

July 29, 2000

By all standards, credit creation is the backbone of any bull market, and liquidity (i.e., trading volume) is the lifeblood. Both are interrelated and without the two no sustained bull market is possible.

 

In the early spring of 1929 the Federal Reserve, after having let the faucets of money creation flow freely, began to tighten its credit creation while simultaneously raising interest rates. By March, certain key money establishment insiders began taking the hint and sold out their holdings in the stock market. By March, Bernard Baruch sold out. In June, Joseph Kennedy was out. On an on down the line, the insiders were bailing out in the spring and summer of 1929, even as the market continued to soar to ever more vertiginous heights. The great speculator Jesse Livermore (who was not an "insider") couldn't see what was coming until the last minute, when, only a couple of weeks before the crash, he bailed out, too. What was it that enabled these men to see the danger that lay ahead? Clearly, it was their knowledge of the Fed's tight money policy.

Flash forward 71 years later to the present day: A similar scenario is playing itself out. The Fed, after several years of allowing liquidity to flow forth in a mad torrent of credit creation, is slamming on the brakes once again. Interest rates have been rising since last summer, and money supply rate of change (the true measure for credit creation, as opposed to money supply growth, per se) is slowing.

The figures for the adjusted monetary base (currency and coinage, plus deposits to Fed banks) has slowed horrendously in the last six months-even to the point of crashing. The numbers for the M3 money supply itself (the lifeblood of our economy and financial system) show a similar, though less pronounced, slowdown when viewed from a rate of change perspective. And the chart showing bank credit rate of change-the most important short-term measure of systemic liquidity-is fluctuating violently. After a fairly steep upward trend extending from 1997 to late 1999, bank credit has been first dropping precipitously, only toretrace its decline in a violent, see-saw manner over the past few months. This is obviously a signal of a change of trend that is taking place as the banks act and over-react to changes in Fed monetary policy and money supply, unable to maintain a smooth flow of credit to the ever-changing financial conditions of our present economic environment.

True enough, the latest statistics showing consumer credit continue to balloon, reflecting a willingness among bankers to extend ever-more credit to finance the out-of-control U.S. consumption binge. But this is merely a mirage to mask what is underneath the surface of the facade of economic prosperity. Quite clearly, the U.S. consumer (a ubiquitous term we have come to loathe) is being positioned for the coming financial collapse.

Many investors point to the seemingly strong performance of the tech stocks, arguing that such strength precludes the possibility of a major equities market collapse. But a serious examination of the technical condition of the market yields the following conclusion: The NASDAQ is obviously being used as a cover for the distribution campaign that began in January. In examining certain key NASDAQ stocks, it appears evident that even they have been dumped by the insiders. This present distribution campaign is unlike any other that has preceded it-including 1929. One could argue that it must be this way since too many people are sophisticated enough to be able to recognize the classical signs of distribution-too many people are familiar with at least a cursory knowledge of technical analysis. Therefore, to undertake a successful distribution campaign, the insiders must be discreet. We no longer look at upside/downside volume ratios, momentum, money flow, etc., because these measures clearly have no meaning when the insiders are no longer playing the game. Such technical indicators only work when a sufficient market position is taken by the institutionals, insiders, etc., and the evidence is mounting that they are no longer on the playing field.

"But," the skeptics protest, "we are presently in the sweet spot of the well-known 'Presidential Cycle,' which should guarantee a bullish end to Year 2000." That we are at the tail end of the Presidential Cycle we cannot deny.

Yet we would argue that this time will truly be different, if for no other reason than because too many people think "it can't happen in an election year." The insiders are piling out by virtue of the fact that 1) NYSE and NASDAQ trading volume have diminished considerably from their respective dynamic phases earlier this year; 2) money supply growth is contracting, which sends a major signal to the insiders to head for the exits; and 3) several well-known insiders have as much as admitted they have significantly limited their exposure to stocks and have built substantial cash positions, including precious metals positions (e.g., Soros, Buffett). E.M. Stanton, American secretary of war during the Civil War, wrote in his memoirs that "it takes four years to destroy a country." His axiom was in reference to physical war, yet it also applies to the financial markets. The Clinton Administration/Greenspan duo have in the past four years laid the foundation for the destruction of our financial system in the very near future.

What does all of this translate into? Simply this: the 18-year-old U.S. economic boom-and the global economic boom, by extension-is in transition. When the financial manipulators and market makers are satisfied with their new positions, the curtain will drop, the bull will die, and the real "New Economy" will emerge in its place, whatever it may be.

Maybe the credit bubble can't be infinite after all. Bank of America reports: "However, taking some of the shine off consumer profits, nonperforming consumer-finance loans soared a disturbing 116% from year-earlier levels, to $826 million. Another concern is that total nonperforming loans rose 30% to $3.69 billion, fast outpacing 10% loan growth. Most of the problems are in commercial loans, where nonperformers jumped to $1.54 billion, a 42% rise from 1999's second quarter. The bank's loan-loss reserve is now equivalent to 175% of nonperforming assets, down from 231% in the second quarter of last year, underlining the bank's more relaxed stance towards future credit problems." Simply stated, America's lending institutions are riding the fine edge of disaster.

Another point worth pointing out is that the "smart money" insiders and market makers have been heavy sellers of stocks in recent months and have been rapidly shedding their net long positions in the stock market.

Commercials are heavier in cash than any time since Sept./Oct. 1998. Can this portend anything less than a brewing crisis on the horizon?

The great Russian scientist and inventor Nikola Tesla developed in the 1930s the principle of resonance. Simply stated, this scientific concept postulated that a dramatic change in any given material body may be evinced by creating harmonic resonation which alter the body's molecular structure, consummating in a collapse of the body. In describing the principle of resonance, Tesla often used the analogy of a wine glass and a swing. A wine glass that is broken by a violin's note is shattered because the vibrations of the air that are produced by the violin happen to be of the same frequency as the vibrations of the glass.

A person in a swing may weigh two hundred pounds and a weak boy pushing it may weigh but fifty and may push but a pound. Yet if he times his pushes to coincide with the turn of the swing from him, and keeps adding a pound each time, he will eventually have to stop to avoid hurling the occupant of the swing out into space.

"The principle cannot fail," Tesla would say. "It is necessary only to keep adding a little force at the right time." [Source: Tesla: Man Out of Time, by Margaret Cheney, pg.57,.Dell Publishing, 1981] Tesla believed the earth itself could hypothetically be "split open like an apple" by applying the principle of mechanical resonance. To do this, all that would be required would be to identify a major fault line in the earth's crust and detonate several hundred tons of dynamite deep into this fault.

The resulting boom and vibration from this explosion would travel to the earth's core, where it would bounce back toward the surface. Tesla postulated that another perfectly timed explosion just before the echo reached the surface would send back the vibration with an even greater force to the earth's core. This process would be repeated several times, with each explosion providing greater and greater force, until finally, when the explosive echo was finally allowed to reach the earth's surface, the entire planet would split apart, unable to withstand the enormous resonance of the gather explosive force.

While Tesla acknowledged that this hypothesis could never be practically implemented (due to the impossibility of being able to perfectly time the explosions), this idea was nevertheless transferred to the monetary realm by the world's bankers and governments, mainly in the form of inflation.

Today's central bankers and global financiers believe that by applying massive infusions of money and credit to the markets at exactly the times needed, financial crisis can always be avoided. This explains the concerted actions of the Federal Reserve and the large multinational corporations over the past few years. Beginning with 1987, the Fed, by lowering interest rates and increasing the M3 money supply; the banks, by increasing bank credit and lowering the prime rate; and the multinationals, by initiating massive stock buy-backs, have all conspired to prevent major stock market collapses and money panics at the critical moment. This process was repeated in 1997, 1998, and, to a lesser extent, last year.

What these entities fail to realize, however, is that in pumping huge amounts of new money and credit into the financial system, they are creating an ever-growing resonance, which at some point will simply overpower everything and everybody standing in its way. And much like Tesla's conception of the earth splitting apart like an apple, the world's economic system will also fall apart at the seams. And like Tesla's conception of the exploding earth, this experiment in fiat money creation is a planned event on the part of the world's "financial scientists," which they know full well will result in a meltdown of the world's financial markets. All of this is part and parcel of the age-old communistic scheme for creating a one-world global economy and is in keeping with the Marxist doctrine of the coming "Glorious Revolution," which communists the world over anticipate for the new millennium next year (2001).

Expounding on this theme, well-known financial consultant Harry Schultz, in his book Panics and Crashes and How to Make Money Out of Them, writes: "Marx predicted that capitalism would ultimately destroy itself, that business cycles would get longer and be more explosive, until there would arrive a sort of Armageddon when the final crash would dissolve the world into 'glorious revolution.'" He adds, "One cannot set up a new form of government without first destroying the old one; the best way to do this is to destroy the economic foundations of the country." Are the Federal Reserve and the World Bank, et al, trying to collapse the world's major economies (including ours) in order to facilitate the creation of a new, one-world government and economy?

Already, several respected and widely-known financiers have expressed their belief that the semblance of economic prosperity that exists in most Western countries is purely illusory and destined to end shortly. Men such as George Soros, Warren Buffett, Bill Gates, and many others, have been greatly limiting their exposure to equities and increasing their cash holdings, including the addition of substantial precious metals positions to their portfolios. When such insiders take cover from the coming storm, does not wisdom dictate we must follow suit?

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.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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