first majestic silver

Taylor on the Markets & Gold

April 22, 2002

The major equity indexes in America still remain historically overvalued, and thus should be avoided. At the end of last week, according to Decision, the S&P 500 GAAP earnings yield was 2.26% compared to the 10-yr. U.S. Treasury yield that was 5.20%. It makes more sense to buy U.S. Treasuries than the S&P 500, though we don't like U.S. Treasuries either because of the dollar's vulnerability. So, we remain confident in sector allocation for our Model Portfolio given our very bearish view with respect to financial assets and the dollar and our bullish views on gold. Here is why.

IBM 1st Quarter Earnings Shock Market Bulls

The news this past week of a 32% decline in first quarter 2002 profits for IBM was a shocker for the bulls. After conventional wisdom has held that the economy and corporate profits is turning around. But each quarter the turn around seems to be delayed a quarter longer. It is indeed reminiscent of accounts of the 1930's when Wall Street kept promising, "prosperity is right around the corner."

IBM reported that sales declined by 12% to 18.6 billion compared to expected revenues of $19.7 billion. As a result, the company's net profit declined to $1.19 billion, or 68 cents per share, from $1.75 billion or 98 cents per share last year.

Management blamed the decline in revenues and profits on deferred technology purchases. After the announcement, Joe Kernen, sporting America's #1 hairdo said something like, "well, eventually Corporate America is going to have to order new computers." That's an assumption Joe makes, but I'm wondering why in the world any company having trouble meeting profit margins and targets would aggressively buy computers now. The computer I'm using to write my weekly messages is about three years old. If I need to boost my memory or RAM a bit, that's easy and cheap to do. Why go out and buy another computer?

Underlying Joe Kernen's assumption is the productivity myth used by Mr. Greenspan and the Clinton administration to justify the money-printing orgy of the second half of the 1990's that is now starting to get us into big trouble. The assumption that a new chip that allows my computer to calculate a problem in two seconds rather than eight somehow makes me significantly more productive is highly questionable.

And why for goodness sake are profit margins under such stress if the tremendous growth in technology in the 1990's was truly going to boost productivity? The answer is that productivity gains were not nearly as great as we were led to believe and in many instances where productivity was enhanced, it merely led to enhanced competition such that profit margins had to suffer. An example that quickly comes to mind is That company isn't profitable (in fact has never earned penny one), but it sure has put profit margins at Barnes & Noble under stress so that the biggest bookseller in America is having a tough time earning a profit these days.

So now, when the rubber meets the road and when corporate executives really have to ask hard questions about their firm's productivity when it comes to capital spending, Corporations are simply not buying computers or any number of other high tech products labeled "New Economy" products a few years ago. The excuse Mr. Greenspan used for printing money hand over fist during the second half of the 1990's has now been exposed for the fraud it was.

With corporations becoming increasingly desperate to try to restore profit margins, we think the concerns expressed last week by Stephen Roach, that American workers are going to be asked to take pay cuts, is entirely valid. The news on Thursday that jobless claims were "unexpectedly" high, rising to a 19-year high lends credence to Mr. Roaches concerns. Certainly with China and other populous countries beginning to compete on the world markets, it was bound to be only a matter of time before American workers had to drop their wages or else lose their jobs.

But that brings me to a discussion I recently had with Dr. John Whitney of Itronics. John looked at several industries and drew the conclusion that it was not cheap Chinese labor that was causing our problem, but rather it was the artificially strong dollar. John noted that corporations in China were building new plant and equipment with low labor intensity, just as they would be built in the U.S. John's conclusion was that it is the artificially strong dollar that is killing the ability of Americans to compete on the world scene. Now with so much basic industry having closed their doors, is it any wonder America is running a bigger and bigger trade deficit every year? How else are we going to acquire all the luxuries we Americans have gotten used to consuming, but to buy them from overseas? But there is a problem looming over the horizon. When foreigners stop re-investing their trade surplus in America, and when the dollar collapse occurs, we will no longer be able to afford all the items we have become accustomed to having that were once upon a time manufactured in America.

Wall Street Corruption - The Fish Rots From the Head Down

The Attorney General of the State of New York has learned that analysts at Merrill Lynch believed the stocks they were touting were crappy propositions, but for the sake of generating revenues for the company, they said otherwise publicly and in their written reports. They knew they had to lie about their true beliefs if they wanted to keep their jobs during the explosive mania market of the late 1990's. So lie they did. In other words, they opted to engage in a form of deceit for personal gain. Most decent, God fearing, honorable people consider that kind of behavior immoral and sinful.

Today as I was reading about this story, it suddenly occurred to me that this is exactly the same behavior Alan Greenspan has now engaged in for many years. In 1966 when he wrote and article titled, "Gold & Economic Freedom" Mr. Greenspan noted that fiat money would lead to the destruction of our democratic republic. And he also suggested that fiat money, unlike gold would lead to economic upheaval. Yet, Mr. Greenspan, since taking over the Fed, has been the most prolific creator of fiat currency ever. Has he somehow come to change his mind about the destructive nature of fiat money since 1966?

Absolutely not, according to Congressman Ron Paul, M.D. As we reported in this letter previously, in February of 2001, Dr. Paul asked Alan Greenspan to autograph a copy of his 1966 article, after Congressman Paul and other House Banking Committee members finished questioning the Chairman. While he was autographing the article for Congressman Paul, Dr. Paul asked Mr. Greenspan if he would change anything since he wrote it back in 1966. According to Dr. Paul, Mr. Greenspan then said, "No, I recently read this article and I would not change a word." In other words, Mr. Greenspan is knowingly engaging in behavior that he believes will lead to the destruction of the United States of America or at least the freedom that our Founding Fathers envisioned when they formed our great nation!

Dr. Larry Parks once asked Alan Greenspan why he is printing so much money when he knows it is so destructive. What was Greenspan's answer? He said he is just one member on the Fed Board and that his views are a minority. Since the majority rules, he debates and acts on behalf of his adversaries.

Now, how does this differ from the analyst at Merrill Lynch who lied through his teeth to convince people to throw their money away buying dot bomb stocks so Merrill Lynch and its officers could take down multi-million dollar bonuses at the end of the year? Is in not true that analysts who acted in this manner simply did what Alan Greenspan acknowledges he is doing, namely going along with the company line in order to advance his own career?

Objectivist scholar, philosopher and author Ayn Rand who was a personal friend of Alan Greenspan before she passed away once said that "Alan is such a social climber." Mr. Greenspan has been adored in the past for overseeing the biggest bubble and system of theft in history. He certainly did advance his career. And now we are starting to get a glimpse of how his unwillingness to remain loyal to his core beliefs has contributed to the pathology of our entire nation. True, if Greenspan fought for honest money instead of caving in for the sake of advancement, the Fed would have found another front man for their systemic process of theft. But Greenspan could have remained loyal to his true beliefs as others have, (like Congressman Ron Paul, for example) and his life would have contributed far more to the wealth of our great nation, than he has contributed given the path he has taken. That path has led us to such a high level of debt that we can now only hope and pray that God will save America from massive default and debt repudiation that appears to lie in our path.

Before these securities analysts are called out for their dishonest practice during the late 1990's, we had better asked the head of the system to explain why he has been so dishonest with respect to his true beliefs. As the Italians say, the fish rots from the head down. Unless things are cleaned up at the top starting with the Federal reserve, which in fact engages in legalized counterfeiting operation on a scale the likes of which the world has never before seen, other problems like those that surfaced at Merrill Lynch will continue forever.


Gold closed the week at 302.10 in New York. With spot gold above its 50-day moving average of $296.79 and with both the 50-day moving average and spot gold price above the 200-day moving average of $282.71, gold remains in a bullish posture. But there are a host of fundamental reasons to be bullish on gold as well.

Also, it should be noted that the XAU really took off yesterday. It finished up about 2.8% to approximately 72.2. This index of gold shares has constantly led bullion on the upside as it did again on Friday when gold actually declined a couple of bucks in New York. A good friend of mine, who is a very astute technical analyst, called to tell me he thinks gold is getting ready to really explode on the upside.

Rigged Gold is at the Heart of our Bubble Problems

As we and GATA have repeatedly pointed out, the overvalued U.S. dollar was orchestrated by the Clinton Administration and the Greenspan Fed in large part by: 1) planting the big lie with respect to productivity and 2) manipulating the gold price. But the boys on Wall Street insist on keeping the dollar strong so that they can continue to suck capital into a still grossly overpriced stock and bond market.

To ensure Wall Street's game of musical chairs continued indefinitely, or at least on Clinton's watch, in 1998 Greenspan sent out a signal not once but twice to all the gold bullion banks that they could continue to partake of cheap financing via the gold window. Furthermore, they were guaranteed they would never need to worry about a rising gold price because in Mr. Greenspan's words, "central banks stood ready to lease increasing amounts of gold should the price rise." And by Greenie repeatedly talking about productivity gains, he ensured that the CNBC talking puppet show would continue to the American version of totalitarian mind control aimed at a continuous flow of capital into the U.S. equity markets. This policy has been such a success that Hitler's propaganda experts would have been extremely impressed. We suspect that at least before the decline in the NASDAQ, 99.9% of America believed 100% in Mr. Greenspan's fairy tail.

But alas, as Frank Veneroso noted, a huge amount of net new gold has been leaving central bank treasuries year after year such that one of these days, Wall Street's game of musical chairs will sometime stop. That will happen when there is no more gold left or when a stampede into gold in the general market makes it impossible for the banks to sell gold, because of the loss of confidence that would result. We suspect the pathology of the global economy may now be approaching the point at which the amount of new gold that must be dishorded to keep the price from exploding up to and beyond Veneroso's $600 equilibrium price, will rise very dramatically. Indeed, given what is going on in Japan not to mention national unrest in the Middle East, we may well be approaching the breaking point now.

Japan's desire to trade-in worthless paper currency for gold would seem to be such a sign that the future of paper money is not very bright. Greenspan is hoping he can print his way out of the giant mess he created. But as history suggest, he or his successor will ultimately fail, and gold will prevail over the dollar because gold is in fact REAL money! Paper is pretend money.

The purity of gold is measured in carat weight.
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