Taylor on us Economy, Markets & Gold

February 5, 2002

Before a self-righteous Congress tears Enron apart for its accounting lies, our elected officials should not forget that they are among the biggest liars of all. Through its unconstitutional alliance with the Federal Reserve bank, it is every bit as guilty as Congress of using deceptive accounting techniques in an attempt to fool the American people, who in fact they are supposed to be serving, not deceiving and robbing. Yet when they authorize Mr. Greenspan to lower interest rates by printing money, they engage as an accomplice with the banking establishment to rob productive American citizens of the wealth their working hands and minds create.

When the Fed leases or swaps gold, it does not employ GAAP accounting, which would require it to change its gold asset to a lease or swapped asset. Rather it continues to report the leased or swapped gold as if it continues to rest in its coffers under its own legal ownership, thus deceiving the market into thinking the Fed's balance sheet is stronger than it in fact is.

How Badly have the Corporations Been Deceiving Us?

How can we fool the people into buying our stock? How can we keep those stock prices up so we can exercise our warrants and get rich. Those are the questions management teams of major corporations have been asking over the past several years. One answer is by giving investors pro-forma numbers rather than GAAP numbers (Generally Accepted Accounting Principles)

As Richard Russell reported (his source was Internet Wire via Comtex) that for the first three quarters of 2001, the one hundred companies that make up the NASDAQ 100 reported $82.3 billion in combined losses to the Securities and Exchange Commission (SEC). For the same period, these companies reported $19.2 billion in combined profits to shareholders via headline, "pro-forma" earnings reports - a difference of $101.4 billion or over $1 billion per company.

And guess which number CNBC reports? They simply play back the headline number. So companies found out that if they use pro-forma numbers they can suck the public into their shares. What a racket. But don't forget, our "leaders" continue to encourage this kind of deception when they print money out of thin air. Nothing in our whole land is a bigger and more deceiving lie than that.

By What Rational Can One Justify Buying Stocks Now?

With PE ratios being higher than ever before, stocks have already priced in a return to very robust growth in the economy and corporate earnings. Any tepid or even normal economic recovery and profits recovery would leave stocks still overpriced. But as Dr. Kurt Richebacher recently noted, there is very little reason to be optimistic about the U.S. economy. Here are Dr. Richebacher's words quoted in the Richebacher letter dated January 2002.

"Manifestly, the economic and financial excesses that have built up in the U.S. economy during the past four to five boom years are the worst in history. The last time the U.S. economy experienced protracted weakness was from 1989 to 1993. Taking the actual credit expansion as a measure of excess, we note that during the second half of the 1980's, total credit (private non-financial and financial) in the U.S. had increased $3.4 trillion. In the second half of the 1990's, it expanded by more than $9 trillion.

"What is still normal in an economy with such an insane credit explosion? We presume, nothing. Looking only at the most obvious and the most spectacular, unsustainable imbalances is more than shocking, it is frightening: grossly overvalued equities, near-zero personal savings, the monstrous trade deficit, steeply rising trillions of foreign debts, a hugely overvalued dollar, badly weakened corporate balance sheets, the lowest corporate profitability in the whole postwar period, and a financial system that is founded on the most fantastic leverage.

"This is a virtual Pandora's box of interrelated and interdependent bubbles, and the one thing that is keeping all these bubbles afloat is the illusion of an imminent V-shaped recovery and blind faith in the magic of Mr. Greenspan.

"Who or what demand component could possibly lead the predicted U.S. economic recovery? Rising capital spending by debt-laden corporations confronted with collapsing profits? Or higher spending by the debt-laden consumer confronted with huge wealth losses in the stock market, rising employment and stagnating or shrinking disposable income? Nobody can say for sure what exactly is going to happen; yet one thing is beyond any doubt: the V-shaped U.S. economic recovery is impossible."

IAN GORDON'S KONDRATIEFF WINTER VIEW FOR 2002

I picked up a copy of Ian Gordon's Long Wave Analyst at the Vancouver Investment Conference. On the front page of his latest letter was the following summary of where Ian believes our economy is at this time.

"The Kondratieff Cycle has now entered winter, which portends a deflationary depression and a devastating bear market in stocks. Winter started the day following the peak in stock prices, which was January 14th, 2000, when the Dow Jones Industrial Average made its autumn bull market high at 11750 points. The great autumn bull market started on August 12, 1982 when the DJIA bottomed, following its end of summer bear market, at 777 points. It was the same story during the third Kondratieff cycle. The winter deflationary depression started on September 4, 1929, after the DJIA peaked at 381 points on the previous day. The third Kondratieff bull market started after a summer ending bear market fell to 64 points in August 1921.

"Unhappily the majority of investors have still not come to terms with the fact that we are now in the largest bear market of the Kondratieff cycle. It is a once in a lifetime experience, which will devastate those investors, who fail to recognize that fact. Stock prices are projected to go much lower. If prices repeat the experience of 1929-1932, the best expectation for the Dow Jones Industrial Average is a bottom at 1300 points.

"As much as stock prices are expected to fall to considerably lower levels, the price of gold and gold equities are projected to go much higher, just as they did between 1929 and 1936. The price of Homestake Mining shares appreciated 1000% during the period and that happened with only a 63% move in the price of gold (from $20.67 an ounce to $35.00 an ounce, because the U.S. was on a quasi gold standard system). Consider this! Everyone talks about the great bull market between 1921 and 1929 as a mania, much as they now discuss our most recent stock market experience. But the 1921-1929 bull market saw an appreciation in share prices of 500%, whereas the price appreciation for gold shares between 1929 and 1936 was double that. So where was the real mania? It was not so much a mania, but a huge desire on the part of almost everyone to own gold, because the value of all paper assets had collapsed.

"Anyone who wants to understand how things are likely to unfold has only to understand the Japanese experience. Japan has been in her Kondratieff winter for more than 12 years, following the peak of the Nikkei on December 28, 1989, at almost 39,000. The bear market has seen stock prices fall almost 75%. The Japanese banking system is bankrupt.

"The year 2002 is likely to be the year when prices reflect reality. That is, the reality that this is a deflationary depression brought about by an overwhelming level of debt."

What are some of Ian's projections for 2002? He sees the Dow reaching a low during the year of 5000 by September or October. The gold price he believes will rise upward to $500 where it will be stopped this year, but not subsequent years. The U.S. dollar will likely rise into February/March and then will start a decline that will take the index to 104 or lower. U.S. Long Term Bonds are likely to appreciate with the rise in the dollar into February/March and start a major decline to 88 or lower. Commodities; the CRB index is already looking fragile and is likely to fall along with US equities to 171 or lower.

Consumers are starting to forsake Stocks

What might finally trigger the cataclysmic decline in stocks that Ian foresees? One sign I think is already on the horizon. The big money has been coming out of stocks I would argue starting in 1999 and judging by some of the biggest stocks now trading below long term support lines, one must conclude this process is continuing. It has seemed like the smart money has been allowing the market to rise and then it smartly and constantly scrapes money off the table from the unsuspecting public.

But now public sentiment does appear to be turning negative in a fairly dramatic manner. According to Bill Russell this past week, during 2001, money flowing into equity mutual funds was a mere $32.3 billion or in 2001, a 90% drop from the $309 billion inflow in 2000. Then in December of 2001 the net inflow was just $3 billion compared to $15.3 billion in November.

As I recall at the end of the 1960's bull market, it was the unsuspecting pubic that was left holding the bag when the market collapsed. Of course that will not have included an independent group of investors who subscribe to J Taylor's Gold & Technology Stocks because we have been warning of a bear market before the market began its topping pattern in 1999. And so far our Model Portfolio has been serving our subscribers well. Last year we gained 7.59% and so far this year, our Model portfolio is up 10.70% vs. a 2.25% loss for the S&P 500. Gold shares are already up 32%, Energy is up 30.7%, Technology up 6.9%.

GOLD

Gold finished strong again this week with its N.Y. spot price surging significantly higher than where it opened on Friday. This is certainly an anomaly because in something like 92% of the time the gold market manipulators have been able to push gold lower at the close than where it opened in New York. The XAU was also very strong this week. It finished at 62.78, above its 50-day moving average.

How can it be that gold, that barbaric relic is rising once again? The investment world, which has been brainwashed into thinking that gold is no longer relevant to anything in the "real" world can't figure out what is going on. This week in our gold commentary, we are simply posting the following article written by Thom Calandra of CBS.MarketWatch.com and published on 2/1/02.

SAN FRANCISCO -- As the world's economic leaders meet in New York, professionals wonder whether gold's steady price rise this week is the first crack in the global currencies dam.

In a daily note, UBS Warburg's precious metals team said Friday, "Gold remains strangely supported despite the strength in the U.S. dollar. Although there has been news of good buying out of bank-distressed Japan, the reported quantities are not enough to explain the precious metal's recent resilience. We suspect that one or more large buying programs have been executed since the start of the year."

Gold's climb to $284 an ounce may not seem so hot to stock-market investors. Yet the gain from $278.50 just five days ago has brought gold-mining shares in North America to their highest point in eight months, as measured by both the HSBC North American Gold Index and the Philadelphia Gold & Silver Index. Both indexes on Friday continued to rise.

The metal's $5.50 gain, through Friday morning (02/01/02), also is boosting mining shares in Australia, Canada, and South Africa, where ailing currencies against the dollar are magnifying companies' operating profit margins. The gains have been strongest in Australia, where takeover fever is sweeping small and large mining companies. In Toronto, the stock market's gold mining companies as a group have risen more than 50 percent in the past 12 months.

As for bullion itself, the gains in the metal during a time of dollar strength, usually a downer for gold, prompt the question of who is buying -- and why.

Ken Landon, a Deutsche Banc analyst in Tokyo, explains that a rising gold price almost always indicates depreciating currencies, regardless of exchange rates. In the past 12 months, the yen, he says in a report, has fallen 21 percent against gold. The euro has lost 15 percent of its value against gold. The dollar is off by 6 percent.

Landon's report is making the rounds in Asia. His view is one that may come to haunt investors in coming weeks. "The rising price of gold in all the major currencies indicates that investors have been losing confidence in the monetary policies of Japan, Europe, and the United States, in that order of concern," he says.

A foreign exchange analyst, Landon says the Federal Reserve, whose policies are increasingly inconsequential to consumers and investors, and American lawmakers are to blame, on this side of the globe, anyway.

"It was the Fed's rate hikes that caused an inverted yield curve, which was an infallible signal of the subsequent recession," Landon says about the central bankers' series of interest rate hikes that totaled 175 basis-points. The rising rates came to an end in mid-2000 as Federal Reserve governors tried to put the brakes on a surging stock market. The interest-rate hikes were followed by 13 interest rate cuts at the Federal Reserve.

The Deutsche Banc analyst also points to the Justice Department's campaign against Microsoft and the U.S. Senate's majority of "anti-free market Democrats" as red flags for investors, Finally, "Enron became a political issue in Washington, which increases the chance that the government will mount a new regulatory assault against business." Landon says gold is the only refuge for investors who seek to avoid currencies that are attached to economic and witch-hunt policies.

Gold rush in Japan

Reports that Japanese consumers are rushing to buy gold, first reported here more than a week ago, might explain part of gold's recent gains. Japanese investors bought about 10 tons of gold bars and coins in January, or double the monthly average from last year, according to the World Gold Council. The Japanese, who have a history of hoarding metals such as platinum and gold, are wary of an end later this year to full government guarantees on Japanese bank deposits.

Some precious metals analysts say that's no reason for gold's resilience. Such buying by consumers, they say, is a mere blip in the daily flows of gold, which is also lent out by central banks and bullion banks eager to earn a tiny interest rate on their holdings.

Andy Smith, a Mitsui Global Precious Metals analyst in London, tells me today it is almost always the mining companies who are responsible for large purchases and sales of gold. Many gold mining companies hedge their books by selling some of their production forward to lock in slightly higher prices, thus creating a need to buy gold in the futures markets.

"The finger in the air should normally point to miners," says Smith, whose price-range forecast for gold this year is $265 to $355 an ounce.

Smith said in the fourth quarter of last year alone, net buying by just two large gold miners, South Africa's Anglogold Ltd. and Australia's Normandy Mining , amounted to more than 90 tons. That was close to the 110 tons of gold that futures speculators were net short on the COMEX exchange in New York.

Smith is curious, like everyone, about gold's stiff upper lip this past week. "Miners buying, speculators selling -- I think they call this unstable equilibrium," he says from London. Hard to think of a flimsier foundation for any price rally than miners, long 40,000 tons of reserves underground, adding to their long position."

The UBS Warburg folks are pragmatic. "The lack of selling ... confirms that the risks in gold remain heavily weighted towards a move higher," they said today.

The 1849 Gold Rush sped up California's admission to the Union as the 31st state in that year.

Gold Eagle twitter                Like Gold Eagle on Facebook