Taylor on Stocks & Gold

July 16, 2001

Don't Get Suckered Back Into Stocks!

As pointed out in recent weeks, most of the biggest rallies in stock prices have taken place during major bear markets. This is true because after so many years of bull markets, emotionally if not intellectually, people do not believe bear markets can exist. But we are in fact in a major bear market and that is not even close to its end. Forget all this talk about stock prices rising by 10% to 20% this year. As Richard Russell pointed out recently, bull markets do not start when stocks are overvalued. They start when no one wants to buy them and when they are dirt cheap.

How overvalued are stocks? This weekend, the S&P 500 PE ratio was at 26.75 which equates to an earnings yield (retained earns + dividends/share price) of 3.74%. The long term average returns for stocks is somewhere around 7.5% or about 13 times earnings. As Richard Russell recently pointed out when the Dow trades at around 22 times, which is about where it is now, the average return is approximately 5%. Yet, Americans have not yet begun to fathom equity returns of just 5%.

With the American consumer more over extended than at any time in history, and with the U.S. now consuming more than it is saving, the direction of things should be fairly obvious. The American consumer which accounts for 67% of total spending cannot keep spending as he has been. When he slows down, the American economy is headed south. Which leads me back to stock prices. With the economy plunging and unemployment rising, capital spending will continue to decline and so will corporate profits. And as earnings continue to decline, stock prices must decline further simply to retain the existing overvaluations. But at some point, as folks begin to understand that nothing like the old returns are in the cards, the ultimate decline in stock prices will get underway. Indeed we believe Ian Gordon's projection of a 90% plunge in stock prices from their March 2000 top remains a reasonable target for those of us in the bearish camp. That would equate to the 1929-1932 decline.

No, you won't hear that on CNBC because it would kill their advertising revenues not to mention their ratings. But from all I can see, there is little doubt that our economy and markets are headed much further south. Look out below!

Stimulation & Bailouts Won't Always Work

In our July issue which we are mailing out today, we noted the work of Dr. Antel E. Fekete, a mathematics professor and economist who explained why continued interest rate cuts by Mr. Greenspan cannot work but in fact are counterproductive. This too is completely contrary to conventional wisdom but it should not appear so strange because it can be documented that this has clearly been true at times in the past. This was true during the 1929-1930 period for example when attempts to stimulate growth by printing money did not work. Nor has doing so been effective in Japan where money and debt has been created at unprecedented levels. Yet Japan has been in a decade long depression.

Last week the Bank of Japan said it would not ease monetary policy in an attempt to stimulate the Japanese economy. And the Bush Administration which is a much more pro-free market administration than the Clinton boys, said last week that it will not bail out Argentina. But politics aside, it could be that policy makers around the globe are finally realizing that intervention after intervention (monetary and otherwise) while temporarily soothing, are in fact leading to greater and greater instability.

Gold Fraud and the Great Stock Market Bubble

- Comments from GATA's Bill Murphy

Bill Murphy who heads up the Gold Anti Trust Action Committee discussed this week how the gold manipulation policies of our government are perpetuating the great stock market bubble. It now seems more likely than ever that the U.S. may be dishording the American stockpile of gold, despite their denials. It seems obvious to this observer that the U.S. Treasury is desperately pulling all the cards out of the deck in an effort to fool the American people about what they are doing with America's gold that is supposed to provide stability for our currency and economy.

Things Are Falling Apart

"The bottom line is things are falling apart in the economic world and there are numerous factors giving rise to gold demand such as the exploding money supply in the U.S. and the financial crisis in Latin America. In addition, Wall Street has been harping that the U.S. consumer has held up spending and must continue to do so for there to be an economic recovery in America because consumer activity is 67% of the GDP.

"The stock market can rally all it wants into La-La land in the short term, but the news on the consumer front is worsening. Jobless claims were the highest this week in the U.S. in 9 years while the retail sales and chain store sales figures were weaker than anticipated. Consumer debt in the U.S. remains at historically high and dangerous levels.

"The pressure on the Fed to lower rates is going to accelerate as the stock market turns lower. Lower rates in the U.S. will be gold positive in and of itself, as well as it will most certainly start to begin to put pressure on the dollar.

"And that is where the dilemma lies for The Gold Cartel, which includes the U.S. Treasury and The Fed. The "strong dollar" policy of the U.S. is going to come back to haunt our government. By the way, whatever happened to the U.S. "free market" policies?

"There is a 17.7 trillion dollar interest rate derivative position at J.P. Morgan Chase. Their derivative position in relation to assets is very close to that of Long Term Capital Management when it blew up. J.P. Morgan is the bank most favored by our government and it is a bank, not a hedge fund. It is hard to conceive positions of this size are not guaranteed in some way by the U.S. Government - just as it is as hard not to believe that their massive gold derivative position is also guaranteed in part. That is to say that if the U.S. Government has guaranteed much of the derivative positions at J.P. Morgan/Chase, the risk is not what it appears to be at all TO THE BANK. A certain amount of the risk has most likely been transferred to the U.S. GOVERNMENT. (Editor's Comments: And ultimately to the well being of American Citizens)

"One of the most likely scenarios for the manipulation of the gold market is one put forth by Mike Bolser who contends gold must be pacified to foster the "strong dollar" policy in order to keep the huge Morgan/Chase (U.S. Government) derivative position from blowing up and causing a financial crises. Mike's theory is that the government is using the float on this position to manipulate the markets. Something like when you purchase a stock from a broker, you have 3 days to get your payment to him. The difference in time is the float. The float on 17.7 trillion dollars is quite a bit of chump change to throw around.

"The details of this sort of operation are quite complicated, but it is very understandable what Mike is driving at. With this kind of operation, the management and calming of the price of gold is critical.

"The problem the cabal has is with the physical gold market. Unlike the other paper markets, they need physical gold to continue this scheme. (They can print paper but is not so easily produced) In addition to the surging demand from the Middle-East, China and now Europe, Indian demand has taken a dramatic turn for the better.

"Sources close to the Café tell me that most ALL the bullion dealers have orders from India between $265 and $266. They are enormous. It is the feeling of the sources that any price dips in this area will be short lived. With this in mind, the risk to the downside is $2 and the upside is unlimited. Pretty fair risk to reward ratio.

"The other comment passed to me today from a bullion dealer was most intriguing and that is 'the central banks are drawing a line in the sand up to $275 and the physical market is taking them on.' What does this mean - as in Alan Greenspan's "central banks stand ready to lease gold in increasing quantity should the price rise" infamous line? He sure nailed that one 3 years ago. How did he know that then?

"This brings us to what our camp knows. As a result of Senators, Congressmen and individuals all over the world querying the Secretary of the U.S. Treasury about the meaning of the reclassification of 1700 tonnes of Gold Bullion Reserve at West Point to Custodial Gold Bullion, the Treasury has further reclassified both categories as "Deep Storage Gold."

"Our tactics have clearly worked and we have them trying to dodge bullets.The serious issue for all Americans is what is the U.S. Treasury doing with America's gold? Under the Washington Agreement, the Europeans are limited to what gold they can sell and their leasing of gold is limited to that as of the signing of the agreement.

"To hold the price of gold down, The Gold Cartel must come up with 1500 tonnes of gold per year (or so) to meet the supply/demand deficit. The Washington Agreement is nearly two years old. There are few sources that could be supplying 1100 tonnes (1500 minus the 400 tonnes the ECB can sell under the agreement) of gold for this long a time. The IMF and the US come to mind.

"Since the GATA camp discovered that 1700 tonnes of Gold Bullion Reserve was reclassified as "Custodial Gold Bullion," one has to be very suspicious of a covert US gold swapping operation. After all, we already know that the Fed's Mattingly referred to "the gold swaps" in the 1995 Fed minutes.

"Hard as it is to fathom, the U.S. might be disposing of its gold in a secretive, unconstitutional manner in order to preserve the ongoing financial market manipulation scheme. It is most likely that they are so far into the scheme that they do not know how to unravel it.

"What other explanation can there be for "central banks" to be so aggressive to keep gold below $275 per ounce? Years ago it was $295 to $300 per ounce. They have to know what this kind of activity is doing to the sub-Saharan African economies. These are very ruthless people - pardon me, gutless, snobby sheep is more like it.

"The point of all of this is that you are going to make a fortune soon in the gold arena, unless the U.S. gets away with their plans to defraud America's citizens and sell our gold. And I mean sell because there is no way the U.S. can get it back without paying 3 to 10 times more than what they lent it out for. Who pays for the difference?

"If the U.S. plans to deep storage gold and sell thousands of more tonnes of gold over the next few years, they can continue the fraud. Your investments in the gold arena will go nowhere. We must not let them get away with it."

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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