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Taylor on us Markets & Gold

July 23, 2002


Peering Into a Bottomless Pit

The S&P 500 GAAP PE Ratio declined to from 39.7 times last week to 36.7 times as of the close of business on 7/19/02. Still, this price to earnings ratio remains exceptionally high by all historical standards. Remember that over the longer term, the mean PE ratio for US Stocks is around 16. Half of the time stocks trades above 16 times and ½ of the time they trade below 16 times. I would like to make the following points about the decline of the S&P 500 Ratio to bring this week's activities into a proper perspective from a long term viewpoint.

  • Despite last week's decline, obviously stocks remain extremely expensive compared to their norm with the current P/E ratio for the S&P 500 far above the mean P/E ratio of 16 times.
  • Unfortunately, the P/E ratio came down from 39.7 times last week, to 36.7 times at the end of this week, because of a decline in equity prices, not because of an increase in earnings.

We would not be so gloomy about this still high P/E ratio, if we could believe the prospects for the U.S. economy going forward were as sound as Mr. Greenspan suggests they are. We think Greenspan was telling lawmakers what they wanted to hear more than anything else last week in order to intoxicate and pacify the public. But any objective thinking person, who really examines Greenspans record can no longer take this man seriously.

For the sake of praise and adoration, Mr. Greenspan has sold his free market beliefs down the river in favor of collectivist confiscation orchestrated by the excessive money creation during his stay at the Fed. This is the man who did not have the courage of his intellectual convictions, which he voiced in his "irrational exuberance" speech of 1996. This is a man who said he didn't know if we were in a bubble even as the NASDAQ was approaching 5000 and selling at the most astounding multiples in history. This is the man who justified excessively promiscuous money growth on the basis of supposedly great levels of productivity when there was significant evidence productivity gains had more to do with Enron like accounting than actual real productivity.

So unfortunately, Alan Greenspan cannot be taken seriously any longer. He may seem like a nice man, but the enormous money creation during the second half of his tenure at the Fed has led us into the biggest bubble and now the start of what very well may be the biggest collapse in history! Alan Greenspan was to our economy and our currency what a permissive father is to his son when the father fails to punish his growing for anti-social behavior. Such lack of response to the training required by the son is the antithesis of a kind and loving father. And now, like a rotten spoiled child whose anti-social behavior winds him up in prison, America is beginning to reap the unpleasant rewards of a most anti-social monetary policy. The boom may have been fun while it lasted, but like so many lies we humans seek to live, it brings with it terrible consequences, the likes of which I fear we are only now just beginning to learn about.

Aside from a lack of credibility on Greenspan's part, there are other reasons why I believe Alan Greenspan is wrong in predicting a turn around in the economy. First of all, the stock market, which is a leading indicator is saying otherwise. And no matter how smart you think Mr. Greenspan is, no one person is smarter than the market. The market is suggesting that things are not looking very good in the future. It is not too difficult to think why that may be true. In summary here are three reasons why I think things are looking dismal for the economy.

1. Profit margins are poor and getting worse. Global oversupplies related to excessive creation of money out of thin air coupled with extremely undervalued currencies lead to unfair currency valuations. China's currency for example is pegged to the U.S. dollar at an extremely undervalued rate and thus allowing that country to put Americans out of business for reasons that have nothing at all to do with comparative advantages. These factors are resulting in extremely poor corporate profit margins which in turn are leading to a depressed capital goods sector and even more importantly to the loss of jobs. (Regarding the unfair currency valuation for China, Dr. John Whintey of Itronics Inc. has noted products coming into the U.S. where a grossly undervalued Chinese currency is the only answer to Chinese competitive advantages)

2. The loss of jobs and the prospect for more job losses combined with huge losses in the stock market, offset only partly by the current housing bubble, is leading to reduced consumer confidence. One of the most remarkable charts I pulled up last week was that of the Morgan Stanley Consumer index. This index of stocks is plummeting straight down over a cliff and is well below its 200-day moving average. When the consumer stops spending, it is hard to imagine how that lost demand can be made up. Add a depressed consumer goods sector to a depressed capital goods sector and there isn't much left to the U.S. Economy.

3. Excessive Debt Loads for private and public sectors alike now threaten America with national bankruptcy. What really puts the U.S. at risk for a Kondratieff winter experience that may be even worse than that of the 1930's is the excessive amount of debt or leverage in the U.S. economy. In fact, excessive debt is what results when politicians and bankers refuse to succumb to the discipline of a gold backed currency. And this excessive debt GUARANTEES the system will ultimately collapse into a debt purging national bankruptcy. Because fiat or liability money is good only if others are able to make good on their debt obligations, when a sufficient number of companies become insolvent, the dominoes will begin to fall. At this point, the system can no longer be reflated through the normal fractional reserve system. This I believe is what we are beginning to see in America. An unprecidented 11 rate cuts has been unable to stimualte higher stock prices and now the evidence of a double dip recession (perhaps it will be more like a dip and a plunge) is beginning to appear as Stephen Roach has been predicting. Not since the 1930s have two or more successive rate cuts failed to result in higher stock prices one year later.

With respect to the consumer, Stephen Roach talked last week about an overextended housing market, a major debt overhang from the 1990's binge and a still dangerously permissive monetary policy geared to keeping the housing bubble inflated. Stephen fears that the consumer, being overextended may very well pull in his horns now that the stock market is finally beginning to deflate.

Roach noted the work of a behavioral psychologist named Amos Tversky, who's studies indicate that as long as investors feel they are playing with the "house money" they tend not to be frightened out of the market. But when they start to lose the money they put into the market, panic quickly evolves. We may now be approaching that time when the average Joe begins to panic out of the market and when the much sought after capitulation arrives. But what is true about capitulation is that when it arrives no one will be wondering if we have yet experienced it because "no one" will any longer wish to own stocks.

In looking at the charts, what is really disconcerting is that in almost every case there is no support level anywhere close to the current levels to which equity prices have plunged. Recall that Mr. Greenspan told us that Wall Street was irrationally exuberant, back on December 6, 1996, when the Dow was at 6437 or about 1600 points above Friday's close. And as I glance at a monthly chart of the Dow going back to 1980, there isn't any technical support at all until you get slightly under 4000 and not any real long-term support at all until you get to around 2000. Below 1000 there is very significant long-term support. And, according to Ian Gordon, that about where we are ultimately headed in this Kondratieff winter. I sincerely mean it when I say, "God, help us."


What If Anything Is Bullish These Days?

I just signed up for the, which provides a huge number of charts on all kinds of markets. What is astonishingly clear, even to a non-chartist like myself is that almost EVERYTHING is plunging in value and every major index and sector group except for the XAU (gold and silver index) is not only heading lower, but has broken below the 200-day moving average. This looks like a huge, catastrophic in paper value to me - yes even after the trillions of dollars that have already gone up in smoke.

The only markets I could find that look positive are the following:

  • Gold
  • Silver
  • Gold & Silver stocks (XAU)
  • Most if not all major currencies vis-à-vis he dollar.
  • The CRB (Commodities)
  • U.S. Interest Rates

The current price of all of these markets are above their 200-day moving average leaving them in solidly bullish territory. Everything else (all major indices) have plunged below their 200-day moving averages which places them in very bullish territory.

Seldom has Gold Shone More Brightly than Now!

Gold is a very unique commodity in many ways. It is much more than a commodity. It is also in fact money, whether the establishment thieves recognize it as such or not. But gold is also a most valuable investment because it, more than any other asset is negatively correlated with equities and bonds and in many instances with other tangibles such as real estate. It has exactly the optimum characteristics for optimizing returns and reducing risks as quantified mathematically in Markowitz Portfolio models.

Yet, as I pointed out in my February 13, 2001 issue in an article titled, "Wall Street's Biggest Crime is Disguising Systemic Risk," our policy makers work very hard at keeping that fact from public view. I suspect this is true because Wall Street intuitively knows that if people begin to place their wealth in gold, they will no longer buy the paper products they seek to sell and by so doing perpetuate the legalized counterfeiting operation of the Federal Reserve Bank.

Not that Wall Street people are any worse or better than anyone else. They just don't think about what they are doing when they make loans and increase the money supply with the push of a few computer keystrokes. They merely puppet the refrain handed to them in their undergraduate and MBA studies by the socialist John Maynard Keynes, namely that gold is a barbaric relic and that anyone who suggests gold should be reinstated as money is stupid or so hopelessly eccentric that they should simply be ignored. Trust me. Having worked for major banks in New York, I know how it feels to be a closet gold bug.


Does Anyone Care What Caused the Bubble?

The Greenspan hearings were an embarrassment, especially as far as the Senate's behavior was concerned. The Senators seemed to be competing with one another to see who could give the Chairman the most praise. By their questions about what to do about accounting problems and dishonesty among corporate executives, the Senators and to a lesser extent the members of the House, seemed to accept the financial bubble as something that no one was responsible for. They focused on what kind of laws they should pass to punish those who were practicing the art of "spinning" financial numbers. Apparently, the politicians wish to retain a monopoly on that art.

But I heard none of the elected officials from either law making body ask WHY did we have the bubble in the first place except for one - Dr. Ron Paul, Republican from Texas. And we will give credit also to Bernie Sanders for hitting Greenspan between the eyes on the issue of a growing concentration of wealth to the upper 1% at the expense of lower and middle class people. For sure, we may not agree with Bernie about how to fix that problem, but at least he, unlike most of his colleagues, facing that reality.

The "brown nosing" that went on in the senate chambers was incredible! These silly fools were falling all over themselves to out do one another in heaping praise and adulation on Mr. Greenspan despite the fact that he has done more to debase our currency and lead it to its ultimate destruction than any other Fed Chairman in our history. As Congressman Paul pointed out, Greenspan increased the U.S. money supply (M-3) by $4.3 trillion dollars to approximately $8.2 trillion now. In other words, in 15 years at the Fed, Mr. Greenspan was responsible for creating out thin air, more money than was created through the first 211 years of our republic! And most of that increase came since he complied with the Clinton Administration to rig the gold price so as to be able to bail out the world without starting with Mexico, without immediately destroying our currency. Unfortunately for President Bush, that has been left to happen on the current President's watch.

In his allotted time this past week, Congressman Paul, a member of the House Finance Committee, pointed out that the dollar is now in big trouble thanks to the seemingly indiscriminate creation of money by Greenspan. Congressman Paul pointed out that it defies the most basic laws of supply and demand to think you can create an endless supply of any commodity without its price eventually collapsing toward zero.

So how can all these lawmakers heap so much praise on a man who has done so much to ensure the likely destruction of the global reserve currency? Again, the behavior of the senators was especially incredible in light of the trillions of dollars of wealth that has vanished from the accounts of American citizens since March 2000. It is also incredible when you consider the fact that the Fed itself has been worrying about the prospects of the U.S. entering into a Japanese like decade long deflation and with good reason. What has Greenspan done to warrant such adulation? The global economy is on the verge of collapse in no small way because of his permissive monetary policies.

Greenspan is pumping up the money supply, but just as was true in the early 30's nothing is happening. And we are seeing signs of beggar-thy-neighbor currency devaluation as well as restrictive trade measures pop up, not to mention the fact that the stock market has not responded to 11 rate cuts. In fact not since the Great Depression did as few as two successive rate cuts fail to stimulate higher stock prices within one year. The massive cut in rates has not only failed to stimulate stock prices, but there are signs that the economy may well be stalling out, with the first growth being little more than inventory replenishment.


It was time for Alan Greenspan to make another public relations appearance for the Federal Reserve Bank. The purpose or which is to try to convince Americans that the quasi-private Federal Reserve Bank is a friend of our democratic republic and there to serve the needs of average Americans. Most of the exchanges were very superficial and were used as a means for politicians to try to curry favor with their voters by praising Alan Greenspan whom the American public apparently still hold in high esteem. The only really important discussion in my veiw - abbreviated as it was - was the following exchange between the Honorable Ron Paul, M.D. and Alan Greenspan.

Dr. Paul: "Welcome Chairman Greenspan. I've listened carefully to your testimony but I get the sense I may be listening to the Chairman of the Board of Central Economic planning rather than the chairman of a board that has been entrusted with protecting the value of the dollar.

"I have for quite a few years now expressed concern about the value of the dollar which I think we neglect here in the Congress, here in the committee and I do not think that the Federal Reserve has done a good job in protecting the value of the dollar. And it seems that maybe others are coming around to this viewpoint because I see that the head of the IMF this week, Mr. Koehler has expressed a concern and made a suggestion that all the central bankers of the world need to lay plans in the near future to possibly prop up the dollar. So others have this same concern.

"You have in your testimony expressed concern about the greed factor which obviously is there. And you implied that this has come out from the excessive capitalization/excessive valuations, which may be true. But I believe where you have come up short is in failing to explain why we have financial bubbles. I think when you have fiat money and excessive credit you create financial bubbles and you also undermine the value of the dollar and now we are facing that consequence. We see the disintegration of some of these markets. At the same time we have potential real depreciation of the value of our dollar. And we have pursued rampant inflation of the money supply. Since you have been Chairman of the Federal Reserve we have literally created $4.7 trillion worth of new money in M-3. Even in this last year with this tremendous burst of inflation of the money supply has gone up since last January over $1 trillion. You can't have anything but lower value of that unit of account if you keep printing and creating new money.

"Now I would like to bring us back to sound money. And I would like to quote an eminent economist by the name of Alan Greenspan who gives me some credibility on what I am interested in. A time ago you said, 'In the absence of the gold standard there is no way to protect savings from the confiscation through inflation. There is no safe store of value without gold. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process that stands as a protector of property rights.'"

Congressman Paul then added the he strongly believed this statement by Greenspan taken from a 1966 article that was included in an article he had written titled, "Gold & Economic Freedom" was true. Congressman Paul continued,

"But gold has always had to be undermined if fiat money is to work and there has to be an illusion of trust for paper to work. And I think this has been happening for thousands of years. At one time the kings clipped coins. Then they debased the metals. Then we learned how to print money. Even as recently as the 1960's for us to perpetuate a myth about our monetary system, we dumped 2/3 of our gold, or 500 million ounces of gold at $35 per ounce in order to try to convince people to trust the money. And even today, there is a fair amount of trading by central banks, the dumping of hundreds of tonnes of gold, loaning of gold for the sole purpose that this indicator of gold does not discredit the paper money and I think there is a definite concerted effort to do that.

"My questions are two fold relating to gold. One, I have been trying to desperately to find out the total amount of gold either dumped and sold on to the markets by all the central banks of the world or loaned by the central banks of the world. And this is in hundreds and hundreds of tons. But those figures are not available to me. Maybe you can help me find this. I think it would be important to know since all central banks still deal with and hold gold whether they are dumping, or loaning or buying for that matter.

"But along this line, I have a bill that would say that our government, our Treasury could not deal in gold and could not be involved in the gold market unless the Congress knows about it. Now that to me seems like such a reasonable approach and reasonable request. But they say they don't use it (gold) so we don't need the bill. But if they are not trading in gold, what would be the harm in the Congress knowing about handling and dealing about this asset, gold?"

"GREENSPAN: Well first of all, neither we nor the Treasury trade gold. And my impression is that were we to do so, we would announce it. It is certain the case that others do. There are data published monthly or quarterly which shows the reported gold holdings of central banks throughout the world, so you do know who holds what. The actual trading data, ah, I don't think is available though the London gold exchange does show what its volume numbers are. And periodically, individual central banks do indicate when they are planning to sell gold. But they all report what they own. So it may well be the case that you can't find specific transactions. I think what you can find is the net result of those transactions and they are published. But so far as the United States is concerned, we don't do it."

End Dr. Paul/Chairman Greenspan Dialog



Before Mr. Greenspan could answer the second of Congressman Paul's questions, the one having to do with his proposed legislation forcing accountability on the U.S. Treasury, the House Committee Chairman cut Greenspan off with the "Gentlemen's time is expired" message.

But in fact Greenspan is wrong even in the one question he did answer. It is not true that you can tell how much gold has been sold by the balance sheets of central banks. For starters, the central banks lie about their assets. They report gold that is lent out as if it was still on their balance sheets. So there is no way of knowing how much gold has hit the market. And so there is no way of knowing how much gold must ultimately purchased off of the market by borrowers like Goldman Sachs, J.P. Morgan Chase, etc. so that it can be returned back to the central bank balance sheets where the central banks say it still exists.

The whole Federal Reserve and accounting schemes of most central banks are fraudulent and misleading. So while the politicians are so concerned about accounting at Enron and WorldCom, they seem not to notice how misleading their own accounting policies are. This kind of Enron like behavior from our ruling elite is exactly what I meant in my June issue when I said "The fish rots from the head down."

Also, we think Mr. Greenspan was parsing out words in a most Clintonesque fashion when he talked about the Fed or the Treasury not trading in gold. It was exactly the Exchange Stabilization Fund that is in question in Congressman Paul's bill. So technically, Greenspan may have been correct in saying the Fed and the Treasury doesn't sell or trade in gold. But what about the Exchange Stabilization Fund? Yes it is true that the fish rots from the head down and the most visible view of the head we have is Alan Greenspan. But then I forgot. It depends on what the meaning of the word "is" is. There are no absolute truths. Truth is what ever you wish it to be. Or at least that's what Wall Street wants us to think. And then we wonder why there is a loss of confidence on Wall Street!

I found it a bit curious that Alan Greenspan never was able to finish answering even the first of two questions from Dr. Paul. Nor did he even get to the second question having to do with what harm Congressman Paul's proposed legislation to require transparency on the gold markets would have.

Dr. Paul's law would simply require the Treasury to advise Congress when/if it trades in gold. For all the talk of transparency for the corporate world, why is our government trying to hide its activities in the gold? And if as it says, it is not dealing in gold, why should it care then if a law existed that would require them not even to seek approval from the American people (through Congress), but simply to inform Congress? Something doesn't add up with the government's resistance on this issue. Of course we are sure we know what is going on. We believe the government is in fact clandestinely trashing the gold price. They want to continue hiding that fact. Otherwise transparency would render their render their gold market interventions useless since then more than just a small portion of the market would come to realize that the true market value of gold is much higher. As the market came to understand that, the Fed and the ESF would be overwhelmed by market forces. Thus the resistance to Dr. Paul's bill.

Though Greenspan was not provided with an opportunity to properly answer Dr. Paul's questions because the chairman cut Greenspan off exactly at the 5 minute mark. But if he had wanted to answer the question badly enough he would have insisted on doing so. He was no doubt thankful he was given an excuse not to answer. In fact, my own Congressman, Joe Crawly from Queens N.Y., was afforded 7 ½ to 8 minutes of time. If Greenspan and Dr. Paul had another 2 minutes perhaps we really might have learned something about why the government is trying so desperately to hide its gold trading activities. Perhaps the fear of such a discovery and the discomfort felt by committee members on this very crucial topic is why Dr. Paul was given only 5 minutes.


"Respectable" Establishment Members now Touting Gold!

A couple of weeks ago, we talked about the top analyst from the Royal Bank of Canada who outlined why he believed the Gold Anti Trust Action Committee was correct in its allegations of gold price suppression by the U.S. government. This past week, the biggest of the big time market analysts, Barton Biggs predicted a gold price in the $500 to $1,000 range!

"With equity markets having fallen so sharply and the rally in high-grade bonds, our ten-year return study needs tinkering with. Nevertheless, nothing has happened that changes our long-term assumption that we are in for an extended period of mid-single-digit returns in both stocks and bonds. Large portfolios are going to have to be imaginative and unorthodox to beat 6% nominal in my opinion, and there will be bigger allocations to hedge funds, arbitrage strategies, real estate, emerging markets, and private equity. Whether all these asset classes work as advertised or the capital markets arbitrage out the excess returns is a horse of another color.

In that regard, a horse I have never believed in is gold, for all the conventional reasons, but now I am changing what's left of my mind. I think there is a plausible case that a professionally managed portfolio consisting of the metal itself and gold shares could realize returns of 15% real per annum in the difficult environment ahead."

Biggs summarized his comments with the following paragraph concerning a prospective price for gold.

"It certainly is possible that gold can return to its long-term equilibrium inflation price of $500 an ounce, or even take a run at its all-time high of close to $1,000. What would cause such an explosion? A steep decline in the equities market, higher inflation, or competitive devaluation of the major currencies. In a bleak world, gold could beat almost everything else."

We think gold will ultimately rise higher than $1,000 but to hear a highly respected analyst like Barton Biggs turn bullish on gold, that is big news! Indeed, the charts do suggest we are in the early stages of a huge bull market in gold.

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