Ominous Signs Emerge

January 11, 2001

Some very significant danger signs are now becoming more obvious in the U.S. economy. Manufacturing has now joined mining as two industries already in a recession. The vast majority of dot com companies are or will become history and the telecom industry is in deep do. There is reason to believe weakness in the high-tech sector may be with us for some time to come as corporations are clearly cutting back on their purchases of high tech related capital expenditures and almost any other capital expenditure. Indeed as reported in next week's "Barron's", in a page 17 article titled, "Telecom Tightrope", the Telecom industry is threatening to topple the U.S. economy just as oil did in the 1970's and real estate did in the 1980's. Apparently, in their quest to build the Internet infrastructure, the telecom companies have borrowed more than $332 billion over the past three years. As a result, bandwidth prices have declined by 50% last year and are expected to decline by another 40% this year! With all that debt and plunging revenues, how could this not become a problem?

INFLATION & MAL INVESTMENTS GALORE

But while heaps of money printed by Mr. Greenspan were being misallocated into the Internet infrastructure, the old industry was being neglected in no small part because of a heavy handed anti-capitalist sentiment of the Clinton Administration, which in fact sometimes seems to have more in common with Marxist ideology than free market capitalism.

The electric power situation in California is a huge concern not only to California citizens but it should be on the minds of all Americans because it is a huge problem for all of us. Indeed, Alan Greenspan was sufficiently concerned to meat with representatives from the two big California utility companies last week. Some analysts believe the fearful picture he saw in California was what forced his hand to apply a does of shock treatment to the stock market on Wednesday in the form of an unexpected 50 basis point rate cut. And, perhaps in a related announcement, rumors persisted that Bank of America is having some huge derivative problems. Bank of America denied any derivative problems existed, but so did Long Term Capital deny it had problems, then "WHAMMO" all of a sudden the global economy faced the prospects of a meltdown.

The markets were also roiled by the woefully inadequate rate increases granted by California politicians last week. According to Merrill Lynch and others who have a vested interest in the California utility firms, the rates were not any where nearly sufficient to allow these companies to remain solvent. According to CNBC, prior to the rate increases, one of the major California utilities was losing $1 million per hour!

As we understand the problem, California deregulated the power industry - sort of, but the government still controls rates charged to customers and it also has not permitted the companies to enter into long term natural gas purchase contracts so that it can lock in prices into the future. This being the case, the companies have extremely high prices now with the price of natural gas rising dramatically. As natural gas prices skyrocketed, the utilities and their shareholders have been forced to eat the losses. These companies now are staring bankruptcy in the face.

Longer term, what has really led to an increase in natural gas prices, in addition to surging demand for energy from Al Gore's "Internet invention" has been regulation from the Clinton/Gore administration that forced utility companies around the U.S. to equip themselves only for natural gas as a source of energy rather than to remain equipped to alternate between alternative fuels such as natural gas, coal, oil and even nuclear power, depending on costs. Making the whole problem worse is the fact that natural gas pipelines were not designed with the thought in mind that they would be depended on to exclusively supply power companies.

THE DERIVATIVE MIRAGE ADDS GREATLY TO SYSTEMIC RISK

Writing in this week's "Credit Bubble Bulletin" column at www.prudentbear.com, Doug Noland discusses how the financial industry has ignored the fact that the huge amounts of derivatives issues over the past few years has convinced the credit markets that they are safe, when in fact the creation of these artificial hedge mechanisms really serve to make the system as a whole much more risky.

Mr. Noland stated the following:

"But now history's greatest financial bubble encompasses the entire U.S. credit system and hopelessly speculative stock market. It has truly become leverage on leverage, speculation on speculation, piling risk on risk - the proverbial "house of cards." And after years of endemic financial excess, the highly maladjusted U.S. economy has developed into history's greatest bubble economy, and the ramifications of this fact should definitely not be dismissed. This is not like 1987, not like 1990, and not 1998; this is a once in a lifetime bubble economy and will be anything but easily managed by Fed rate moves.

'There will surely be no quick fix, no "soft-landing" and certainly no painless recovery. For one, the recovery process will begin only from much lower levels of consumption. The usual Fed "medicine" of stimulating spending by lowering rates is specifically counterproductive for this bubble. The problem today is definitely not a lack of consumption the exact opposite. We are dealing with extreme structural distortions, both financial and economic. The public is completely oblivious, and policymakers stunningly unprepared. This is, most regrettably, the worst-case scenario developing right in front of our eyes.

'Importantly, lower interest rates from the Federal Reserve will only exacerbate financial and economic distortions. We certainly see the possibility of catastrophic consequences in the interest rate and currency derivatives marketplace to lower interest rates. In the past, leading bulls have referred to the "Supertanker U.S. Economy." Well, there is some truth to this analogy, but it's the Exxon Valdez heading for the rocks. Granted, in the past the Fed was able to "reliquefy" and give new life to the bubble, but it won't work this time around. The system is literally "at the end of its rope," precariously left today with the financial sector locked in a self-destructing process of leveraging, the only means of sustaining this momentous bubble. I just can't come to see how this ends in any other way than disaster. I don't want to yell "fire" in a crowded theater and I am mindful of the seriousness of the current environment. But I will be honest about this: I don't like the looks of this one bit and am particularly worried about how this is developing."

And, if that wasn't enough on the pessimistic side, Lance Lewis, who writes the Market Summary for PrudentBear.com concluded his weekend commentary as follows:

KEEP YOUR HEMETS ON !

So, here we are back on the edge of a financial disaster again. It appears that yesterday was indeed a massive reversal day. The dollar reversed its rate cut gains entirely, and stocks took back ¾ of their gains. That basically means that the market threw Uncle Al's rate cut back in his face , i.e. - it got sold. Now, the market is saying: "what else do ya got, Uncle Al?" The answer to that question is "nada" except for more rate cuts, which think will only accelerate the panic. Monday's trading will be very important. The bulls need to wrestle back control and drive us higher very quickly, or they're in big trouble. It certainly looks like we're setting up for a gap down in the dollar and stocks and most likely the bond market as well on Monday. If that scenario plays out, next week could very well set records for downside moves in stocks. We'll find out next week, but in the meantime crash helmets remain on…

IAN GORDON - GREENSPAN'S HANDS ARE TIED

Ian phoned on Friday afternoon this past week to say he thinks there is little Mr. Greenspan can do to try to avert a cataclysmic decline in stocks and the economy now. In Ian's view, the most significant sign has been a weakening of the U.S. dollar. If Greenspan continues to reduce interest rates to shore up problems in the U.S. the dollar will tank.

DR. RAVI BATRA ALSO WEIGHS IN

On Wednesday morning, the day of the unexpected rate cut and traumatic recording setting day on the upside for stocks, Dr. Batra sent me an e-mail discussing his belief that the market and economy are now in crash mode. In the mean time, I sent him an e-mail to ask his permission to use his quotes in my January newsletter. He granted permission in a return e-mail after the market closed on Wednesday at which time he emphasized that the huge increase in stock prices that day did not cause him to change his mind in the least. Ravi thinks this is the beginning of the Crash, which he predicted in his most recent book, "The Crash of the Millennium."

GOLD

The manipulation of the gold markets is obviously continuing. The big question that remains is whether the Bush administration will continue to engage in the same illegal and deceptive acts as the Clinton Administration did. If it is smart, as soon as he takes office, Bush should tell the world that the problems we are beginning to face were caused because of market excess of the Clinton years and that those excesses were made worse by a money supply that has run out of control and also by a distortion of economic realty created by gold price manipulation through the office of the Treasury in the Clinton Administration. By so doing, Bush could protect himself politically for what is bound to be one of the deepest business contractions in 100 years and given the excesses, perhaps worse than that of the 1930's.

Will President Bush have the courage to expose this illegal act by the Clinton Administration? Now that the evidence clearly demonstrates that gold has been driven to artificially low levels by the Clinton/Greenspan/McDonough team of manipulators in conjunction with their crony capitalist friends at Chase, Morgan, Goldman Sachs and Deutsche Bank, the decision should be clear cut. Indeed the Republican power brokers have all this information in their hands so they are equipped with the knowledge to make the right decision.

Assuming Bush is able to get John Ashcroft approved as his Attorney General, we will quickly see whether he is as honest and upright as I and many Republicans believe him to be or whether the powerful forces that run this country, namely the Federal Reserve Bank, will show that the Republican party has just as much disdain for the law as did the Clinton Administration. This is important, not only as far as the gold markets are concerned, but whether our democratic republic can survive.

Gold is the world’s oldest and most known currency.

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