Taylor on us Markets & Gold

Major Financial Markets Summary

September 17, 2002

Popped Bubbles Expose Lies

"What is truth? For the multitude, that which it continually reads and hears. A forlorn little drop may settle somewhere and collect grounds on which to determine "the truth" - but what it obtains is just 'its' truth. The other, the public truth of the moment, which alone matters for effects and successes in the fact-world, is today a product of the Press. What the Press will is truth. Its commanders evoke, transform, interchange truths. Three weeks of press-work, and the 'truth' is acknowledged by everybody.

"With the political press is bound up the need of universal school-education, which in the Classical world was completely lacking. In this demand there is an element - quite unconscious - of desiring to shepherd the masses, as the object of party politics, into the newspaper's power-area. The idealist of the early democracy regarded popular education, without arriere pensee, as enlightenment pure and simple, and even today one finds here and there weak heads that become enthusiastic on the Freedom of the Press - but it is precisely this that smoothes the path for the coming Caesars of the world-press. Those who have learnt to read succumb to their power, and the visionary self-determined of the Late democracy becomes a thorough-going determination of the people by the powers whom the printed word obeys."

Those words were written by one of the greatest historians of the last century, namely Osweld Spengler in his classic work, "The Decline of the West," published in 1926. Obviously Spengler was not one of those historians that the elitists were able to buy and then reform. Otherwise he would not be warning us about the dictatorial power of the elite to define truth according to their needs as G. Edward Griffin discussed in his speech published in our September 12th, newsletter.

What has struck me as a person who tries to practice the Christian faith is how our elite have so cleverly and clandestinely redefined 'truth' so differently from the Judeo-Christian values upon which America and our Constitution was originally based. Our Founding Fathers understood that man was bound by a contract with God and that as long as he obeyed that contract, Americans could, indeed they would naturally then live as a free people. There would be no need for a police state to enforce contracts since men were obliged to obey God's order which was to tell the truth - to live up to the terms of your contract. And so Americans were free and with that freedom came economic freedom and with economic freedom came creativity and a magnificent standard of living. Never before in history had mankind ever been so free and so prosperous. But now, as that contract with God is increasingly broken by Americans, as surely as day follows night, America is losing its freedom and that is having dire consequences for our economic well being as well.

I could go on and on with examples of how breaking the 10 Commandments leads to man's inhumanity to man. And I could explain how those hurtful acts lead government to act in a most parasitic manner in taking more of our national income for non-productive activities. Not only that, but our government is constantly passing more laws and policing more of its citizens in a manner that is destroying freedom and creativity. Yet we should understand that government's action is a reaction to the injuries caused by Americans toward one another as increasing numbers of our people ignore the covenant between God and man which to the extent obeyed means treating one another honestly and fairly.

Greenspan Becomes an Accomplice Theft & the Big Lie

I always liked Alan Greenspan in his earlier years in part because he always espoused free market economics. Despite his actions to the contrary, he still believes in the great benefits of fee market economics. We can only think he has shunned those values for the sake of adulation. In creating more money out of thin air than any other Fed Reserve chairman in history, we believe he succumbed to this evil for two reasons, those being adulation of the power elite and for the sake of career advancement and adulation as Fed Chairman. He certainly has been successful in gaining praise from a society that seems to be ignorant with respect to the problems that the Greenspan's easy money bubble is about to create.

On the basis of Alan Greenspan's conversation with Congressman Ron Paul, in February 2001, we know he holds the to the views espoused in his 1966 essay titled "Gold & Economic Freedom" in which he noted that the demise of gold and enhancement of fiat money was for the purpose of wealth confiscation by the elite. And that Greenspan has failed to stand up and fight for what he knows is right fits with Ayn Rand's observation that "Alan is such a social climber."

I remain convinced that Alan Greenspan started out with noble intentions of being a good and responsible Fed Chairman. And indeed, at least when it didn't cause too many problems, he stood up for free market policies. But when doing so became problematic for his career, there is very strong evidence that Mr. Greenspan put his own career ahead of what he knew in his hear was in the best interest of the American people.

What stands out in my mind was his 180 degree turn after his "irrational exuberance" speech in 1996. Up until the Mexican crisis in 1994-95, Mr. Greenspan had done a remarkably good job in reducing the growth in the U.S. money supply to levels consistent with the long term growth of real and honest money, namely gold. Indeed his tight money policy at the turn of the decade cost George Bush senior the election in 1992 which paved the way for a more interventionist Administration in Washington. Greenspan's reduction of the money supply was consistent with his views about fiat money and how it is used to enhance the dictatorial powers of the state and undermine a sound economy. But his excuse for not being true to his beliefs has always been that his views were in the minority at the Fed.

Greenspan's monetary policy appeared to be responsible up until about 1994 when the Mexican crisis began to unfold. It was then that the gold price had to be manipulated by the Fed and the Exchange Stabalization Fund so that the Fed could begin creating mountains of money out of thin air so as to ensure the world's economy did not implode with the Mexican crisis. If this was not the original seed of our existing financial bubble world, it provided a gigantic amount of nutrition to fuel its acceleration.

IRRATIONAL EXUBERANCE & THE GREENSPAN SELLOUT

The last glimpse of honesty and integrity I detected from the Fed Chairman came in December 1966 when he called the 6000 Dow "Irrationally Exuberant." But when his remarks sank the market, the boys on Wall Street and in Washington were not very happy and they let Mr. Greenspan know that in no uncertain terms. So much for the so called independent Federal Reserve Bank. Truth be known, the Fed and politicians and major banking interests which in turn are controlled by the folks in G. Edward Griffin's May 7th, speech, love to have money created out of thin air because these are the elements of society that get first dibs on new money creation. It represents a claim against wealth that is being created in the heartland by honest Americans. But it allows politicians to engage in vote getting spending programs and for bankers and CEO's to slip a goodly percentage of the newly created money into their own coffers. No sir, Mr. Greenspan. We don't want to hear any of that irrational exuberance stuff. Stop that now if you want to keep your job!

And so we heard no more about irrational exuberance coming from the lips of Mr. Greenspan, not even as the market skyrocketed straight upward during the Clinton years. Instead we heard him talk about a "new paradigm,: the "New Economy," and a "productivity miracle." So with Greenspan pumping and dumping Americans bought the 'truth' which was well broadcast by our newspapers, TV and radio. Oswald Spengler was right. Facts heard often enough are deemed to be true by the masses. And so it was as Wall Street and Washington gave fed Americans the 'truth' about stocks during the 1990's.

Bailouts and Bubbles

So under enormous political pressure, Mr. Greenspan began to listen to his bosses. He aided and abetted the gold rigging scheme of the Clinton Administration by sending a signal to the markets that they could and should continue borrowing gold at around 1% from the Fed and sell it into the markets to use this as a cheap source of funding. He assured the banks that they did not need to worry about a rising price of gold, because "central banks stand ready to lease gold in increasing quantities should the price begin to rise." And having helped to drive the price of gold down, he could get the Reagan supply side advocates like Larry Kudlow to say every day on CNBC that there exists a dollar SHORTAGE and that we need MORE money creation as evidenced by a declining gold price. What seems to have been lost on nearly everyone is that money in a fractional reserve system is created by way of debt and debt at some point in time becomes a major and increasingly great drag on economic growth in the economy.

Kudlow and scores of other media operatives continued to define 'truth' for the American people and having been given the definition of truth by the elite, the American populace behaved in the prescribed manner. And as PIMCO CEO Bill Gross pointed out in his excellent article "Investment Outlook" published last week, (www.pimco.com) Wall Street has "hoodwinked" America into believing a lie about stocks, namely that you cannot lose if you buy and hold equities for the long term.

The Most Basic of Economic Lies - Fiat Money

But most basic and destructive of all is the lie about paper or fiat money. Repeated often enough, our people have become hoodwinked into believing that the dollar is better than gold as money, because we have been told that under a fiat money regime, major economic problems can always be avoided by printing more money. That would of course be especially true with such a talented man as Greenspan available to run the show. We have been gullible enough to believe that mankind is smart enough to orchestrate just the right monetary policy to steer the economy through optimum growth by magically lowering interest rates (which means creating money from nothing) and that by so doing, bailouts can occur indefinitely without consequence.

We have telling you almost weekly how the practice of mountains of money creation out of nothing is in fact leading America toward deflation because debt is increasingly suffocating economic growth in this post bubble late stage of the Kondratieff winter. And with the economy in decline even as debt grows, this is a process that is beginning to feed on itself so that a process of ultimate economic suffocation is underway. So the elite can give us a definition of 'truth' and if told often enough the public believes it. But the elite cannot defy or overcome the laws of God our Creator. Pure and simple with respect to deflation what we have here at work is simple arithmetic. Debt is being crated at an ever increasing rate of speed and that rate of speed is much greater and is growing exponentially while income, from which to service that debt is growing in a linear fashion if at all. Arithmetic laws are laws of the universe. Neither Keynes nor Friedman, nor Alan Greenspan have the power to revoke those laws though they may almost think they have.

STOCKS REMAIN HUGELY OVERVALUED

I believe objective truth about our markets is starting to sink in to the American people. I think they are just starting to understand that they are not going to get their money back any time soon from the devastating stock market losses since the peak in March 2000. Not that they believe the market is going much lower. Wall Street continues to convince most people that "this is just about it." After all, long bull markets die hard because the bullishness that was created over the past 20 years runs deep and most people still buy the idea that you cant lose over the longer term. But I cannot emphasize enough the importance of reading the essay by Bill Gross at www.pimco.com which demonstrates that over periods of 20 to 40 years, stocks can be one of the worst places to invest your money. What is absolutely necessary for investors to gain a real return in stocks of about 6.7% is to purchase stocks near their lows, not near their highs.

So how expensive are stock now? At the end of this past week, the S&P500 P/E ratio was a still extremely high 36.70 times. That equates into an EARNINGS YIELD of only 2.72% of which only about 1.70% is comprised of dividends and the remaining 1.02% of highly suspect retained earnings. In general, now is not the time to be buying stocks. Generally speaking, NOW IS NOT THE TIME TO BUY STOCKS!

Nor is there any strong evidence that the economy will suddenly begin to improve so that rising earnings might justify current or higher stock prices. One headline that caught my attention last week was from an article summarizing the negative views of CEOs, published at www.cfo.com. Wall Street purveyors of 'truth' have, since the market started its decline in March of 2000, tried to sell the idea that they know better than the CEO's what the prospects for business are. The CEOs have been quite negative post Y2K while Wall Street kept touting one optimistic sales pitch after another, ignoring the very people who are closest to the real markets for goods and services in America and around the globe. Since the CEOs are directly responsible for how their companies react to market conditions, wouldn't you think they would know better than some Wall Street analyst sitting behind his desk what is really going on in the markets. Arrogantly and out of greed equity analysts have simply refused to accept objective truth from the CEO, choosing instead their own self serving version of truth.

So, our general view of the financial markets and gold have not changed. We remain bullish on gold and bearish on financial markets which prompts us to leave our Model Portfolio unchanged. At the end of last week we were up 47.37% since January 1, 2002. That compares favorably to the S&P 500 which has declined 22.5% so far this year.

GOLD

One of the points Richard Russell makes very frequently is that in the early stages of a primary market trend, movement is slow in the direction of that trend. In described the current gold market as "plodding, tedious, erratic. Up one day, down the next, sudden swoons, but all the while making slow upside progress."

It is indeed true that after a long bear market, like the 22-year ordeal us gold bugs suffered through, there is an enormous amount of skepticism. But that skepticism does seem to be slowly wearing away, evidenced by the following CNBC poll conducted mid day this past Wednesday. The question posed to CNBC viewers was the following:

"In times of crisis, are you inclined to invest in gold?" of the 1,127 respondents, 57% said yes and 43% said no. I would imagine that a poll like this is not really a very accurate reading of the market as a whole because those folks who bothered making the effort to answer most likely have strong feelings one way or another. But still, a 57% positive response to a question in the middle of the day at CNBC indicates to me that minds are slowly changing in favor of gold, notwithstanding all the manipulation day in and day out by our policy makers to knock the yellow metal down.

As part of that segment, two very bullish views were presented on gold by Jean-Marie Eveillard who manages the First Eagle SoGen Gold Fund and by Don Murphy, a technical analyst with Merrill Lynch.

Following was a very interesting exchange between CNBC's Bill Griffeth and his two guests.

Griffeth " So it would take a crisis for you to invest in gold. Fundamentally are you saying you just don't like it based on the supply and demand around the world?"

Evilliard: "No we are already investing in gold."

Griffeth: "I understand that but I'm saying the reason you invest in gold though is for crisis purposes rather than for purely fundamental reasons of supply and demand of the precious metal."

Evellard: "Oh yes, supply and demand can help but you know gold would really go up, not just in a crisis. Was Enron a crisis? Was the bursting of the bubble a crisis? Depends on what the meaning of the word (crisis) is.

Griffeth: "Walter what are the charts telling you these days?"

Murphy: "My view is that I like it as an investment. I can't overstate how constructive I am toward commodities in general and that includes gold. I'm inclined to think that for what ever reason you want to attach to it, gold is making a secular low, a buy of a generation if you will, sort of the opposite of what happened in 1980.

Griffeth: "When we hit $800 an ounce. You are saying that the correction from that peak is over?"

Murphy: "If it is not over its in the 9th inning. You know, one of those things. I think you have to treat any pull back along the way as part of a bottoming process that will ultimately lead to a multi-year advance.

Griffeth: "With a projected price of?"

Murphy. "To be conservative, I'm going to say $450 to $550, but my thought is that if it is strong as I think it can be - again we are talking about in a secular sense here, that we could go back and challenge the levels we saw in 1980-81 ($800/oz)."

Griffeth: "So roughly a 50% gain is what you are looking for?

Murphy: "A minimum - yup."

Griffeth: "Jean-Marie, what about, for so many years when the U.S. was on the gold standard and going even further back in history, gold could be used as a currency. There was a reason fundamentally to want to invest in that as the currency of last resort in times of crisis. We are in a different world today. We have electronic money and other fundamentals that are in place in this global economy. Does gold truly hold the same weight that it did many generations ago?"

Evilliard: "Bill, only Central Bankers pretend otherwise. (snickers). The mere fact that the gold window was closed by then President Nixon in 1971 does not mean that over the past 30 years gold has stopped being money. It just has stopped being money as defined by Central Bankers. But it still is the substitute currency in case of monetary disorder."

Bill Griffeth seemed to be startled by this answer as he uncharacteristically stuttered around a bit in a loss of words. Clearly the notion that people are starting to buy gold now because of any hint of "monetary disorder" shook this mild mannered establishment cheerleader up. He was really trying to guide the answers he wanted from his guests by asserting the establishment line that fiat money is much better for the economy than that old barbaric relic. Any notion to the contrary is certainly something these boys are not accustomed to hearing. But Griffeth got an ear full from Eveillard on that issue.

He also got an ear full from Walter Murphy. Here again, Griffeth tried to guide his answer to "about a 50%" rise while Murphy was trying to say what he really believed, namely that gold could take out the old high of $850 recorded on January 1980. Lucky for Griffeth, he had newsbreaks to allow him to shorten what appeared to be a very uncomfortable subject for him. My advice to Mr. Griffeth and is colleagues at CNBC is they had better brush up on gold and what it is all about. If they do not, they are going to have many more embarrassing moments as Bill Griffeth had this past Wednesday.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.