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Taylor Hard Money Review

February 6, 2001

The high octane fuel pumped into the stock market in a panic attempt by the Fed to keep the U.S. economy from falling off a cliff, seemed to have already been mostly consumed by the end of this past week, judging by faltering stock prices on Friday.

I had the privilege of sharing a booth at the Cambridge House conference with Ian Gordon two weeks at on Vancouver, so he and I had a chance to talk about his views on the Kondratieff Wave. Ian reiterated his belief that we are on a parallel track with 1929 and its aftermath. Ian believes that the initial decline in stock prices that has taken place since the peak last March and the recent bounce back up to higher levels is nearly identical to the path of our equity markets following the initial plunge in October 1929.

With the bull market having lasted nearly two decades, the notion that stocks could still be facing a major decline from recent lows is unthinkable to a vast majority of Americans. Still, they have had their fingers burned a bit already, so when the next significant plunge arrives, there is likely to be far more fear, trepidation and capitulation among the masses than we have seen thus far. At some point when the masses become as irrationally depressed as they were irrationally exuberant during early 2000, stocks will may once again be worth investing in. However, with far more of America's masses invested in our newly found pastime, the stock market than ever before, when the crash and its aftermath finally arrives, it is likely to change the American political landscape far more than most can imagine. We can only hope and pray that some form of our democratic republic remains in tact.

Getting back to Ian's thoughts, he marveled at how weak the stock market was in light of massive amounts of new money and credit (debt) being funneled into the economy. He added that the weakness of the market as well as the economy only served to convince him the Kondratieff Winter is well underway.

An Inflationary or Deflationary Depression?

When I interviewed Dr. Ravi Batra in the August 5th, 1999 issue of "J Taylor's Gold & Environmental Stocks" newsletter, he suggested that following our stock market crash we will face rising prices in spite of declining economic activity. The reason? When investment returns plunge in America, the dollar will be dumped by global investors for other currencies and gold. The decline in the dollar would cause American goods and services to be extremely expensive compared to the bargain basement prices we enjoy now with an artificially high dollar valuation.

Indeed, the U.S. dollar, which has fallen about 8% so far this year, may be part of the reason we are beginning to see some early signs of stagflation. And, if the Fed continues to cut interest rates, it can be expected to make matters worse by leading to a weakening of the dollar which may make investing in the U.S. all the more unattractive relative to alternatives for foreigners. This will be true especially if as we expect, declining interest rates and an increasing money supply fails to stimulate growth in the U.S.

Underlying our belief that an easy money policy will not work is the fact that corporate and personal debt is skyrocketing in America. This is the flip side of the money creation coin and is the Achilles heel of a fiat currency system. Eventually, debt becomes so burdensome that economic strangulation occurs.

Moreover, as corporate profits disappoint, it will become clear that the "emperor has no clothes." Clinton employed a manipulated gold price, doctored productivity and inflation numbers and employed the greatest spin artists since the German Nazi campaign. This served to paint an unrealistically optimistic picture of the American economy which served to suck global wealth into the U.S. So, much, though certainly not all of the good times have been a charade. Overstating productivity gains and fudging inflation numbers combined with the effective short-term elimination of the one currency in the world that is not only superior to the dollar, but safe and honest too (it cannot be created out of thin air), the world has been manipulated for the political benefit of Mr. Clinton. Certainly Americans too have benefited from our strong dollar at least temporarily. But lies and distortions can only take you so far. We all know that eventually the piper must be paid and the amount of suffering to take place on the day of reckoning will bear a relationship to the amount of nonsense perpetrated by the Fed and the politicians.

If Ian Gordon is right about the start of the Kondratieff winter, that day of reckoning may now be upon us. I believe the truth will be revealed by corporate earnings reports as we go further. If indeed productivity and the American economy is everything the Clinton crowd cracked it up to be, then earnings should not disappoint in which event, we will not have much to worry about. But if plunging earnings reports continue that will signal the party is over and the distortions of the stock market during the Clinton years will be exposed. The unfortunate aspect to this is that President Bush is likely to bear the blame for this. That doesn't seem fair perhaps, but as I tell my 15-year old son, "life isn't fair."

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