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Taylor on us Markets & Gold

June 25, 2002

This is a BIG bear market!

"This is a BIG bear market, but it's a bear market 99% of the populace doesn't understand. They don't understand it because they're reading the newspaper and watching CNBC. And the newspapers and CNBC don't have a clue. The media continues to be centered on quarterly corporate earnings and "the recovery," but that's not "where it's happening." (Richard Russell - Richard's Remarks - 6/21/02)

To that we say, Amen! Amen! Amen! Amen! The media does not have a clue how deep and how far this market and this economy is going to sink because they have all been indoctrinated by the Kenynesians and Monetarists, who almost completely dominate the economic indoctrination process in our universities. Only very few colleges and universities in America teach Austrian economics which does offer a framework with which to understand at least in part why the Keynesian and monetarist remedies - to simply continue to create more money out of thin air - cannot bail us out of our current malaise. It is also equally clear to me that with few exceptions, the economists who are frequently presented on TV do not think for themselves. They simply repeat their economic indoctrination and/or what their bosses want them to say to help them sell their products and look for no new answers outside of those provided by the Keynesian and Monetarist models.

Keynes and Friedman are the friends of our current monetary process that allows government to form an unholy alliance with banks and other corporations to organize and reallocate wealth from the middle class to themselves. From the establishment's viewpoint, Austrian economics is unwelcome because it would, through a free market process, challenge the right of our politicians and captains of industry to pass laws that confiscate wealth from those who produce it.

Of course, journalists could, if they were so inclined seek objective truth about why the market is not responding to monetary stimulus. But to question the established order may result in job loss, so they do not do that. I can tell you from personal experience, I left the large corporate banking scene in 1997 because I wanted to be free to say what I believed. At ING Barings and any other major corporation, there is no room for thinking outside of the self serving corporate box. So society is locked into the status quo because self interest of powerful control groups keep new solutions and ideas from being promoted among the populace.

So I quite ING in 1997 to devote full time to my passion which is to speak out in favor of the traditional American Constitutional values that I believe so strongly in. I am not alone of course in that endeavor. Any of the people who have devoted their time and energy to an independent search for truth are all the folks at GATA. My good friend Dr. Larry Parks is devoting his life to helping people understand how fiat money is doing exactly what Alan Greenspan said it would do in his 1966 article, namely destroy our economy and draw us into a dictatorship.

Many of the answers to our current malaise are found from within the Austrian economic framework, but the Austrians like gold are about as welcome among the American elite as a nun in a whore house. Austrians and honest money, which they support, enforce honesty and integrity on society. That our leaders want no part of honesty and integrity is obvious from reports of corporate scandal that is taking place day after day now in America.

But students of Austrian economics know that ultimately the power of markets are greater than the power of governments. Most of the people we interviewed in 1999 and later, hold to Austrian school leanings. So we do not think it is an accident that the likes of Knowing that, we have had a number of very perceptive economic forecasters, like Ian Gordon, David Tice, Dr. Larry Parks, Congressman Ron Paul, M.D., Dr. Ravi Batra, and Bill Murphy, have been so accurate in warning our subscribers that the end to the greatest stock market bubble in history was nearly over. What makes the doomsday forecasts of these gentlemen even more impressive is that they were predicting a market top at the very time the stock market was making new highs virtually every day and when American optimism was at its zenith.

Unfortunately for the future of the American democratic republic, both the monetarists and the Keynesians economic schools are Fabian socialist implants. How the Fabians were able to sneak anti-American ideologies into our body politic is a subject of future discussions in our newsletter. An interview with G. Edwin Griffin, most likely in our August newsletter should help to provide some insight into that topic. But for the purposes of our discussions, it is important to note that neither the monetarists nor the Keynesians think excessive amounts of debt are a problem from a macro economic perspective. They both believed that you could simply inflate your way out of debt. What they ignore is that the creation of money in a fractional reserve system requires debt to grow faster than income from a macro-economic perspective and that ultimately the demand side of the economy MUST be snuffed out as interest and principle on debt grow much faster than national income. This is the simplest explanation for the Kondratieff winter.


Ian Gordon of Kondratieff wave fame, has said the path of the U.S. economy into the immediate future can be compared to either the Great Depression of the 1930's or the Japanese depression of the 1990's. So far, Alan Greenspan has been pumping up the money supply so vigorously that Milton Friedman has argued any repeat of the 1930's will most certainly be avoided. In a "Wall Street Journal article some months ago, Mr. Friedman suggested that Japan had in fact dodged the bullet of the 1930's because they too had engaged in a more permissive monetary policy than the Fed during the 1930's.

Japan may have avoided a sharp economic decline like that of the U.S. in the 1930's, but it has not avoided a depression. Constant printing of money and other forms of government intervention has not solved Japan's problems, but in fact have only delayed the final day of reckoning. And the Japanese economy has gotten worse constantly since its decline following its stock market peak in 1989. Come to think of it, given the interventionist mentality of our times, it may not be surprising if the U.S. economy of this Kondratieff winter took more the shape of the Japanese malaise than that of the 1930's.

The spinners in the U.S. (which is almost everyone on main stream TV) are constantly making the case that prosperity and presumably a return to a bull market in stocks is just around the corner. That is the same refrain provided by the Hoover administration following the 1929 stock market crash. And it had been the same line the Japanese have been touting for many years now too. The problem, the "corner" has continued to move away from the Japanese just as it did from Hoover's Republicans and as it is continuing to do for current forecasters in the U.S.

"The Economist" draws parallels between Japan & U.S. Decline

In the June 15th issue of "The Economist," an excellent article appeared which pointed out how closely the U.S. downturn is following the path of the Japanese decline, which started 13 years ago and is continuing to this day. The author of the article noted that conventional wisdom now is that the economies of the U.S. and Japan have taken divergent paths since their bubbles burst. Talking heads are touting the line that thanks to resilient consumer spending, America is positioned to enjoy robust growth this year and next. Meanwhile these same people express continued hopelessness for Japan.

In fact, according to the "The Economist," the U.S. economy is looking very much like that of Japan at this juncture following the peak of the Nikkei bubble. Consider the following:

  • In the two years from December 1989, Japan's stock market fell by 40%, slightly more than the 33% fall in the S&P 500, but much less than the NASDAQ decline.
  • Economists and stock promoters in the U.S. point to the turn around in our economy. But in fact, Japan's economy held up during the first two years of its decline as well. GDP growth did not turn negative until 1992.
  • Capital spending slowed sharply, just as it has in the U.S.
  • Consumer spending continued to boom, just as it has in the U.S.
  • Property prices continued to rise strongly for two years after the stock market tumbled. And in America today, house prices continue to rise and by so doing, bolster consumer spending.
  • U.S. economists like to point to productivity growth as a guarantee of a growing economy. Yet, productivity growth was just about as strong in Japan during the 1990-91 time frame as it is now in the U.S. economy.
  • Americans like to criticize the Bank of Japan for not easing monetary policy quickly enough. But according to "The Economist," that charge may be unfair because the deflationary pressures faced by Japan actually did not take place until the mid 1990's. And as HSBC Chief Economist Stephen King says, both the Fed and the Bank of Japan began cutting interest rates beginning during the 3rd quarter of sub-trend economic growth.
  • At least until recently, the U.S. liked to elevate itself by looking at it thinks is inferior accounting and regulatory climates in Japan and virtually all other countries. We liked to suggest that Japan's problems were related in part to crooked accounting practices. But in light of day after day reports of accounting dishonesty in America, we seem to be very close to the Japanese in this respect as well.

Why Can't we Just Ignore the Debts?

A subscriber wrote and asked the following: "Since the banks create money out of nothing-why can't they just ignore the debts?"

The reason this cannot be done is that our money supply is manufactured by debt. A company or person borrows the money and then immediately spends it for tangible and intangible items. To just ignore the debt by simply not repaying it, on a massive scale would simply trigger corporate and personal defaults in a chain reaction. In fact, when a bank makes a loan, about 95% of that loan is funded by the depositors of the bank or from inter-bank borrowings. Since only about 5% of the loan is made from the banks own equity, it doesn't take too many loan defaults to cause a bank to become insolvent. This is in fact one of the reasons our current banking system so vulnerable.

The perpetuation of the system as it now stands requires debtors to honor their obligations. Otherwise, their credit ratings will suffer and they will not be able to get new loans in the future. Thus, folks strive to repay personal and corporate loans. What will inevitably happen however in the future and what is happening increasingly right now is that folks are unable to repay their loans. The debt repudiation that Ian Gordon talks about in the Kondratieff winter will be an involuntary event that gets out of hand as one lender falls and thus causes another and another and another to fall like dominoes. It is the purging of the debt through this process that in theory sets the stage for the "spring time" of the next 60+-year Kondratieff cycle.


Spot gold closed in New York this week at $324.40. With this close being above the 50-day moving average of $312.70 and the 50-day moving average comfortably above the 200-day moving average of $292, gold remains comfortably in a bull market.

My good friend and technical analyst Chuck Cohen called at the end of the week as he frequently does to give me his take on the markets from a technical perspective. Chuck thinks we may be on the cusp of a huge move in both the equity markets and the gold market. Chuck may be right. As far as the equity market is concerned, the strongest index of all is beginning to look quite weak. With the Dow now at 9254.06, it was only 103 points above its 200-day moving average and the 50-day moving average is declining towards the 200-day average, which as Richard Russell pointed out indicates the Dow is accelerating downward.

Chuck is also worried that the housing market bubble may be ready to collapse. He points to Fannie May which is breaking support at $75. As far as gold goes, Chuck told me today that he thinks we could wake up a couple of weeks from now and see the junior gold shares having doubled from their current levels. He sees a huge amount of strength in the chart patterns of the juniors. One of his favorites is American Bonanza.


I love Richard Russell for his wonderful insights and wisdom on markets. It was not until recently, when he turned very bullish on gold, that I was a ware that this man understands gold as money as well as anyone of us proclaimed gold bugs. On Friday Richard provided an idea that I had not previously focused on. Richard rightly observed that the world is in a battle to export through currency devaluations. Mostly this has meant devalue currencies in relation to a continually stronger U.S. dollar which means that foreign imports are putting American companies out of business. This strong dollar policy was orchestrated by the Clinton Administration. It helped create the financial bubble that we are now beginning to pay for, but that's another topic. So thus far, competitive devaluations have come against the U.S. dollar. But now the U.S. currency is beginning to fall out of bed. In fact this the buck closed at a two-year low this past week. Now, with the dollar in declining against most all of the major currencies, countries are going to have to find other nations against which to "cheat" their way to export by devaluing their currencies. This impending chaos is the result of detaching currency values from a stable anchor like gold.

But the point that Mr. Russell makes is this. As these countries continue to devalue their currencies, the individual currencies will buy less and less gold. In other words, the price of gold is going to climb against the world's currencies as they continue to print more and more money to create more and more supply so that the value of their currencies go down so they can export more. It is a viscous, self-destructive cycle that is frightening when you stop to think about it.

Russell also observed as we have many times, that over time the ratio of the Dow to Gold comes back to a 1:1 relationship. What that mean for the price of gold is impossible to say. But some combination of rise in the price of gold and decline in the Dow will be required. Obviously with the price of gold at around $324.40, if gold did not rise, the Dow would have to decline from this week's close of 9254 to $324 or by about 96% from its current level. What would seem more likely to me is something like a $1,500 gold price and a 1500 Dow or even a $3,000 gold price and a 3000 Dow. But it is silly to speculate on that because only God knows. But history does argue for a 1:0 ratio. The last the gold approached parity was the Dow was in January 1980 when gold sold at $850.

With the U.S. heading into a major economic decline, all we can say is get out of the major stock indexes as fast as you can. We think Chuck Cohen is right and that the next leg of the bear market in stocks and a major rise in gold could be very near.

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