first majestic silver

Taylor On US Economy, Markets & Gold

June 11, 2002

We start where we always start and that is by asking the following general question. Do you get better value by being an owner of corporate America or a lender to Corporate America? We answer that question by looking at the S&P 500 Earnings Yield and then we compare that with the U.S. Ten year Treasury yield as outlined in Beating the Dow with Bonds, by Michael B. O'Higgins.

Despite another down week for the stock market, as of Friday's close, stocks remain extremely expensive compared to the 10-year U.S. Treasury. Thanks to we know the GAAP P/E was 43.2 at the end of the week. That translates into an Earnings Yield of 2.31% compared to a 10-year U.S. Treasury yield of 5.07% and a AAA Corporate bond yield of 6.85%. So generally speaking, stocks provide very poor value compared to bonds. So, generally speaking it makes more sense now to be a lender (bond holder) than an owners (equity holder).

As we pointed out in our March 2002 issue of J Taylor's Gold & Technology Stocks, this very simple analysis could have resulted in huge profits during the bull market of 2001 and 2002. And it is fascinating to note that from 1982 thorough the current time frame, you would not have owned a single share of stock on the basis of this question. By being out of stocks during the 1980's and 1990's and by using the change in the annual gold price to determine whether you should be on the long or short end of the yield curve, the O'Higgins strategy not only beat stocks (as measured by the Dow) but beat it by a huge margin. As we pointed out in our March 2002 issue, a $1,000 investment in the O'Higgins strategy in 1972 would have turned into $415,302 by the end of 2001 while the same amount invested in the DJIA would have grown to "only" $32,303! This is a remarkable but true story as documented in our March issue.

Lowering Interest Rates (Printing Money) Is No Longer Working

Since the Fed first began lowering interest rates (by increasing the supply of money by creating debt), the stock market has declined by 20%. Normally 18 months after the Fed relaxes its credit standards, the market is up 20%. The only time share prices have been down this long after the onset of Fed ease was 1930.

Why is printing money no longer resulting in higher stock prices? We think the market is telling us that things are not nearly as good as CNBC sales people want us to believe they are. Mr. Greenspan keeps talking about the absence of pricing power. He tries to paint this as a positive in the fight against inflation. But in fact, I believe it is frightening the "beejeebers" out of the Greenman. Why? Because Greenspan has been talking a great deal lately about a lack of pricing power which is a euphemism for deflation. Greenspan has been printing money like mad in an effort to inflate our way out of the trillons of debt the U.S. has taken on.

But as Ian Gordon, Ron Gilchrist and John Exter and others in the deflationist camp have all pointed out. At some point in time, as more and more money is printed, the process becomes deflationary. This is true for two reasons. First, in a fractional reserve fiat currency system, money is manufactured via the creation of debt. The second factor to consider is that over time, the growth of money must inevitably increase at an exponential rate of speed merely to keep income growth growing in a straight line. So what happens ultimately - toward the end of the 60+ year Kondratieff cycle is that debt becomes so burdensome that the demand side of the economy is robbed of its power because an ever increasing amount of income is siphoned out of the economy to pay principal and interest.

Look again at the chart published on page 5 of our June newsletter. Note that total debt in the U.S. which is now $32 TRILLION is growing exponentially while GDP (income) is growing in a straight line over time. So what happens when Greenspan lowers interest rates? He creates even more debt which in turn inevitably results in still more emasculation of the demand side of our economy. As we have said before, this is akin to a drug addict feeling the need to take heavier doses of heroin and increasing intervals, just to avoid withdrawal pains. Eventually the drug addict dies.

Of course the major media cannot fathom this issue, since they were neither taught to think on their own nor were they indoctrinated in anything except the narrow wisdom of Keynesian and monetarist thinking. They have been taught to think that if only the Fed prints enough money, all will be well. But in fact, the symptoms of our current malaise are not so dissimilar to those of the 1930's as most people think. During the 1930's the Fed also tried to print money very rapidly, but found ineffective. That is when the slogan "pushing on a string" was created to describe the ineffectiveness of the easy monetary policy at that time. The economy and stock market simply did not respond to money creation then just as it is not responding now. And, excess supplies of all manner of goods and services existed then just as oversupplies of so many goods and services abound today. Competitive currency devaluation's were also common then just as they are common today in an effort to export to the U.S. And now we are also beginning restrictive trade policies as was also true in the 1930's.

So now we are in a real fix, because avoidance of a global economic catastrophe depends on the maintenance of enormous market imbalances created during the Clinton years and to an extent before then too. But now the maintenance of those imbalances seems to be breaking down such that a global financial crisis may be in the offing. For example, one of the weakest links in the existing structure requires huge U.S. current account deficits to be plowed back into U.S. dollar investments. But why would foreigners do that since now the falsehoods upon which so much money poured into the U.S. capital markets are now being revealed. Alas, markets and truth can only be stretched so far. So, market distortions caused by a rigged gold market or untruthful accounting policies or a simple productivity falsehoods spouted by Greenspan are inevitably leading to a tearful ending. As foreigners stop recycling that $1.3 billion into the U.S. each day we look for a declining dollar, rising interest rates, declining equity prices and a huge change in investor psychology from euphoric to decimation. We have heard much talk about capitulation, but as Richard Russell observes, we have seen nothing close to capitulation yet in the U.S.

A "Killer Whale Market"

It is amazing how average folks continue to pour money into major stock indexes through their mutual funds and 401-k programs. I recall seeing this same thing happen when I was a young man at the end of the last bull market in stocks (the one that ended in 1968). Big money kept coming out of the market while "little folks" like myself continued to remain bullish and invest what ever we could get our hands on. Richard Russell traces this activity by watching among other things the direction of most actively traded stocks. The vast majority of really heavy volume stocks among the really big cap companies have now for many months been trending down on heavy volume. Thus, the big money is coming out while the little guy keeps pumping money in via his mutual funds.

On June 7th, Richard Russell, who is the best independent market analyst I know ( ) had the following comments regarding the current market:

"I call this market "killing them softly." Stock after stock group after group gets killed. And still nobody seems to be frightened. This bear is sly, the bear is merciless.

All the pros are praying for a "final wipeout, a capitulation that will end this phase of the bear market." And we never get it. We just get erosion, erosion and more erosion.

Frankly, I'm amazed that this market doesn't "wash out" on the downside with say a series of 90% down days. But it never happens. The averages just slip lower and lower, with never the long-awaited "clean out" on the downside. "You know something, I think the bear is playing with us. I think he's having fun. I just saw a nature film and it shows a killer whale catching a seal. The killer whale didn't kill the seal. It swam with the seal to about a hundred yards off shore, and then let the seal go. The seal would dash off and the killer whale would catch it, throw it up in the air, and then let the poor seal dash off again. Again the killer whale would grab the seal and toss it. This continued for about twenty minutes until finally the killer whale mercifully killed the seal. That, I'm afraid, is what this market action reminds me of.


As I was getting ready to complete this message, I happened to glance at the conclusion of a lengthy report on the economy by Austrian economist Dr. Kurt Richebacher. Without having had the benefit to read much of the substance of the letter here was Dr. Richebacher's conclusion for his June 2002 issue:

"Measured in real GDP growth, this has been the U.S. economy's mildest recession in the whole postwar period. Yet it was the worst recession since the Great Depression of the 1930's measured in profit performance. Thee can be no doubt which of the two aggregates matters most: profits.

"Considering the immense economic and financial imbalances that have accumulated during the past boom years in the U.S. economy, there can be no doubt they will draw the U.S. economy inexorably into a Japanese style protracted recession."

Sadly, Richebacher's views agree with those of Ian Gordon's Kondratieff winter views. It is unfortunate, but given our belief this is the reality we face we are continuing to hold fast to our Model Portfolio which was discussed briefly in our June 2002 monthly newsletter. We like gold and gold stocks, a short position against the dollar and the U.S. equity markets and some very special high-tech and energy stocks. As of this past Friday, our Model Portfolio was up 56.89% since Jan 1, 2002


Gold closed this week in New York at $324.40. As such it remains in a very bullish posture as it remains slightly above its 21- year bear market downtrend line and above its 50-day moving average ($308.69) and its 200-day moving average of $289.65.


This past week I received an email from a nearly hysterical new gold investor. He was scared to death by Wednesday's $6 or $7 decline in gold. For those of us who have sat through this 21-year bear market in gold, this decline was indeed nothing to get too excited about. But the reaction of this new gold investor illustrates the psychology of a new bull market. In the early stages of a bull market, especially after such a long bear market as we have suffered through, it is very difficult to "feel" that anything on the upside will last long. Thus, with the least bit of hesitation, a transfer from weak to stronger hands takes place. This is very constructive market action and should be welcomed by gold bulls.

$330 Resistance Level Holds - Sinclair & Schultz Explain

Remember last week we talked about some of the establishment gold analysts suggesting gold was not likely to rise above $330 and that people should begin to think about taking profits in gold and gold shares. So $330 is indeed proving to be a fairly strong resistance level.

James Sinclair and Harry Schultz had an interesting perspective on this past week's market. Writing at, they suggested that $330 was a perfect place for gold to have peaked temporarily as it represented resistance levels formed in 1998, 1999 and 2000.

But did the selling on Wednesday come from the Gold Cartel? Sinclair and Schultz think not. Rather they think it came from a hedge fund or two that are actually bullish on gold. However, the theory put forward by Sinclair and Schultz was that these hedge funds which they call the "Major Bulls" were merely shaking the trees or taking some profits at this time. According to this line of reasoning, these heavy hitter funds know that if gold rises too rapidly now, it will invite central bank opposition.

Areas to watch according to Sinclair and Schultz? If gold holds above $317.36 (the Fibonocci 50%), then the full bull market is on right now and right here. "If it falls down to the $303 to $305 support level, the gold bull market is still on but with ease and determination, not excitement and fury."

In our June 2002 monthly newsletter which went to press on Friday, I noted that a war is taking place right now between the proponents of individualism and those of collectivism. I noted that the real importance with respect to the rigging of the gold price is not so much whether or not we make a profit in gold mining stocks, important as that may be to our readers. What is really at issue now is whether our God given rights to be free individuals can survive the onslaught of collectivism, which is the real reason the Federal Reserve was created.

That the Federal Reserve may in fact be undercutting rather than defending the interests of Americans may seem to be a shocking allegation to most. But if you read Alan Greenspan's 1966 article, "Gold & Economic Freedom," you see that our beloved Fed Chairman himself has in effect said that. And lest you think Mr. Greenspan must have had a change of heart, let us remind you once more that as recently as February 2001, he told Congressman Ron Paul that he continues to believe everything he wrote in that 1966 article. Incidentally, for those of you who may not have read our June 2002 issue, we have published Mr. Greenspan's 1966 article. Its contents are indeed shocking, coming from the man who has created more money out of thin air than anyone else in the history of the world!

So given that we are "at war" internally in the U.S. over the very issue of whether we will remain a free country or whether we will go the way of a collectivist dictatorship, it is important that: 1) we know which side we are on and 2) assuming we want to be on the side of freedom, we need to know who those are on the other side that are trying to undermine freedom. We have to start by understanding who are adversaries are so that we can understand the games they are playing. In that way we will be better inoculated against the pernicious lies aimed at manipulating us into holding paper money so they can continue to rob us.

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.
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