The U.S. Economy & U.S. Markets

January 7, 2002

The money being pumped into the economy has to go somewhere so why not stocks? Where else will those with an abundance of money put it? I remember years ago arguing with a petroleum engineer I used to set next to when I worked at ING Barings. My friend Alan made a very good point. With all the money sloshing around in the economy stocks have to keep going up no matter how overvalued they were because in his words, "there is no place else to put your money."

That was very true of course for the investment banking folks I worked with. Most of them would be in the top 10% if not to 5% of all wage earners in America. Their marginal propensity to consume was very low. So as the money kept pouring in - which it does for bankers who are positioned as close as anyone to our fiat "printing presses" the road to wealth was endless. But now, the problem is that with the prospects of the music stopping, and when the party looking as if it is almost over, the prospects for major pain and suffering in the withdrawal process keeps Mr. Greenspan pumping money into the economy.

However, as discussed in the next segment of this hotline, that cannot go on much longer. The laws of economics will eventually prevail. Our overvalued dollar, which as Marshall Auerback pointed out last week, is misallocating global capital away from places where it is most needed into the greedy hands of Wall Street, is leading the global economy to the edge of the abyss. With this past week's ride up in stocks, the S&P 500 Earnings Yield is now a paltry 2.41% of which only $1.33% was represented by dividends.

Now one might think the S&P 500 is cheaper now that this index has lost 10% over the past 52 weeks. But cheap they are not. The index declined by 10.7% over this time frame, but last year at this time at this time, the S&P 500's earnings yield was 4.14% compared to 2.41% now. Yet the talking heads on CNBC which are provide nothing more than paid infomercials on behalf of Wall Street continue to promote the notion that stocks are cheap. What a lie! Unfortunately, most Americans are eager to believe they too can get rich from the stock market casino, which has become nothing more than a gigantic national pastime. Unfortunately, as with traditional gambling casinos, the "house" ends up the winner while the customers end up losing. What lies ahead for Americans will be nothing short of utter devastation when the laws of nature cause truth to prevail and Wall Street insiders walk away with all the chips?

CNBC DISINFORMATION & BUBBLE WISHES

If the only source of financial information available was CNBC, you would get the impression that a recovery of the U.S. economy is a sure thing and that it is only a matter of a short while before the stock market is booming to higher and higher levels again. In other words, people are looking forward to another bubble. One reason this is so is because the decline from the prior tops has not been sufficiently painful to cause people to change their mindset about the market. We have never seen any real capitulation in the market that typically marks the end of a decline. And the reason why the market has not yet crashed sufficiently to allow for a long abiding new bull market is because Greenspan keeps pumping Wall Street's heroin (money) into the market. Greenspan is a smart man, so he may know the damage he is doing, but most Americans do not. In fact, every time Mr. Greenspan lowers interest rates, he is increasing total American indebtedness. And that's a problem as we point out in our lead article in our January 2002 issue. We hope to take that letter to press early next week.

Last week my good friend Ian Gordon pointed me to the following web site which illustrates why the constant money pumping exercise of Mr. Greenspan is inevitably leading the American economy toward its fatal demise. http://mwhodges.home.att.net/hodges.htm. If you care at all about your economic future, I urge you to visit this site. One of the charts which will be in the next letter includes a chart that clearly demonstrates the fact that total indebtedness in America is growing now at a near exponential rate of speed, while GDP is growing very slowly. Indeed it is now contracting as we are in a recession. In my view, it is only a matter of time before the American economic life support system is strangled by this burden of debt.

Meanwhile, to foster the lie that the dollar is better than gold, Mr. Greenspan and the other defendants in Reginal Howe's lawsuit, now before a Boston district court, continue to manipulate the gold markets through leasing and we suspect also gold swaps via the Exchange Stabalization Fund, which are the exclusive domain on the President & Secretary of the Treasury. But as we send our gold out of our central bank, it is eagerly being purchased at these bargain basement prices by countries like Russia, Japan, China and India are reportedly huge buyers of gold. These countries are in fact behaving very wisely because, unfortunately, it cannot be too much longer before the U.S. financial system crashes down upon us and the dollar becomes worth far less than now. Better for them that they begin selling dollar for gold now.

In effect, we may look at the true terrorists against the American people as being our authorities who allowed our wealth to be blown away through the debasement of our currency. In fact, when the Kondratieff winter obliterates American wealth through debt repudiation and a collapse of the financial bubble, there will be little left on the balance sheet of the Fed upon which to rebuild but worthless paper denominated assets. Even if you believe that the gold reportedly on the Federal Reserve balances sheet is actually in the Federal Reserve system, (It most assuredly is not because gold lent out is not in the bank even though it is reported to be there), the U.S. now has less than 1% backing of its currency by gold, an asset money. The Euro on the other hand has a 15% or 20% gold backing plus the member nations all have much more gold in their own vaults.

So, the U.S. government is lending and swapping its gold out to other nations, while falsely reporting it as an asset on the Fed's balance sheet. And the American people are being encouraged by fraudulent voices, to sell gold, other nations are stocking up other nations may well be in a much stronger position to rebuild their monetary systems when the ravages of the impending Kondratieff winter wipe America's wealth out.

America's Fed is behaving very much like the "foolish man" in the biblical parable who built his house upon sand rather than a rock. When the Kondratieff winter winds blow, our financial house will not stand nor will there be a foundation upon which to rebuild. With gold or asset money of one kind or another (silver for example), you can rebuild a national balance sheet. But fiat currency or liability money won't serve us well when no one wants to any longer own dollars because the underlying debt, upon which the dollars were manufactured can no longer be paid.

In Russia, the people are being encouraged by their government to sell dollars and buy a gold coin minted by the government. And with war with Pakistan a distinct possibility, Indians and Pakistan citizens are increasing their already insatiable desire to own gold as a store of value. That tradition is in fact normal for all of the countries in that part of the world. China has threatened to turn dollars into gold all along if the U.S. doesn't grant it what it wants and there are reports that the Chinese have become big buyers of gold.

Ron Gilchrist talks about Japan and Gold

It was during the late 1970's that I bought my first gold stocks through a broker named Ron Gilchrist. I have in recent years come in contact with Ron again. I consider him a friend and one of only a few hard money orientated people who share the views of Ian Gordon and myself that:1) We are inexorably headed toward a debt induced collapse of our monetary system and 2) that when that happens, gold will be the best investment you can possibly make.

Yesterday, Ron called me to alert me to the following thoughts he sent to another friend. I pass this along to you because it is in line with my comments about Japan buying gold. Here is what Ron said.

"Lionel, latest is very academic for me. But would point out Stott's comments on Japan well made. In addition to Japan's banks failing and Yen plunging. It should be noted that Japan's gov't will cease insuring bank deposits to 100% effective at fiscal yearend April 1. Japanese have good reason to seek out store of value assets to protect them from bank failures and Yen depreciation. Since November gold sales in Japan have tripled and are currently at the highest level in a decade. Further incentive to Japanese savers to invest in gold is provided by the fact that gold trades in Japan tax-free. The government eliminated capital gains taxes on gold about four years ago. Potential impact on gold price is significant as Japanese are the world's biggest savers. Their national savings rate has jumped from 8% in 1989 (the year their market bubble burst) to 13% currently. Its just possible that Japanese buying may be the reason gold trades above $300 this year. Japanese investors could not participate in the last gold bull market because gold did not become legal in Japan until 1983. Only now do Japanese have the incentives and the ability to aggressively accumulate gold. It should be very interesting to monitor Japans effect on the gold price this year."

Incidentally, Ron Gilchrist was a student of the famous deflationist central banker, John Exter. Ron has many letters and materials from Mr. Exter who was once a leading executive at Citibank and Ron's views about deflation, which I and Ian Gordon share, arose from his days as a pupil with Exter. Obviously, Mr. Exter's belief in honest money (i.e. asset money like gold rather than fiat or liability money) did not sit well with the slicksters at Citicorp who wished to apply the easy path to wealth confiscation via the printing presses. I am planning to do an interview with Ron Gilchrist in the February issue of our newsletter.

As both Ian Gordon and Ron Gilchrist point out, gold performs best during a deflationary depression because there is little if anything except gold that people will demand during those times. Will silver work during the coming depression? Ian Gordon is not as bullish as I am on this score. We will see what Ron has to say when we interview him on this score.

Gold is used in following industries: Jewelry, Financial, Electronics, Computers, Dentistry, Medicine, Awards, Aerospace and Glassmaking.

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