It could be said that wise counsel never grows out-dated, and many of the topics discussed in WCM's Bullion Market Insights are really timeless in scope.  Observations have been made on the Macro-environment in many instances, a perspective that can only change significantly over long periods of time.

May 10,  2004 Snippet:  Every Picture Has A Story.

Quit ringing your hands over the health of the silver bullion market!  The bull still lives even at $5.50 silver.  The bull still lives even at $5.18 silver.  The bull still lives even at $4.70 silver.  Silver got ahead of itself, thanks in no small part to the hot-money positions taken by highly leveraged hedge funds when it went exponential starting in February of this year and blew past $6.00 on its way past $8.00 in less than 120 days.  Any asset that goes exponential in price appreciation is headed for a significant correction, and silver has been no exception in 2004.  What has caused the waterfall decline in silver this year, with two major gaps in correcting price as shown on the graph below, is that the Leveraged Speculating Community so aptly dubbed by Doug Noland of Prudent Bear fame got its knickers around its knees in the magnitude of bets it had placed and the fact that all previously rallying markets (stocks, bonds, currencies, commodities) turned south virtually at the same time.  So when you get the Mother of All Margin Calls in your 20 to 1 leveraged Bond Market Bet and your Euro Market Bet in lock step, it is Katie-Bar-The-Door Time.  Remember when the Sage of Wexford said we were headed for a Liquidity Crunch of one genre or the other in the not-too-distant future?!  You have just witnessed the opening salvo in the rush to cash to cover shrinking equity positions (meaning the principal or non-leveraged portion of a leveraged portfolio in this instance).  Not that cash is great stuff when it is comprised of U.S. Dollars, but that is still the medium of exchange, for now, for paying off obligations of all manner in this country, in this case meeting margin calls by coughing up more principal.

I am more convinced today than just over two weeks ago that THE JIG IS UP.  The risk-free entry of speculators into highly leveraged positions using super-cheap play money with the implicit assertion that the Fed will protect the solvency of the players is now an ebbing tide in financial history.  Some giant hairballs are going to be coughed up by either Citibank, J.P. Morgan-Chase, Bank of America, Fannie Mae, Freddie Mac, or Goldman Sachs to just name a few.  It could well be some obscure trading company with obtuse initials like LTCM that loses $5 Trillion of play money in a few days or hours.  Even though Uncle Alan has stated that he will turn the screws ever so slowly to lessen the pain of the speculators undoubtedly still caught on the railroad tracks (he just got back from time travel circa 1991 at an Iraqi prison still run by a deranged despot where torture and death was inflicted on thousands of victims), the bond market is not dancing to the same slow rhythm.  The bond market, a global, multi-currency, 24-hour behemoth, is doing some rock n' roll gyrations as the Fed plays its usual tongue-in-cheek waltz music.  These rockers were once called the Bond Market Vigilantes.  Whatever they are called today, they do not believe the Fed, they do not believe the Government, they do not believe the inflation numbers, they do not believe the economic numbers, they do not believe the corporate profit numbers.  They are voting with their feet and getting out of longer-dated debt instruments and struggling to acquire cash at all costs, even if it means selling winning positions in commodities.

Remember too when the Sage predicted it would not be clear sailing up to the Election.  The financial markets, being of an international flavor, don't give a hoot about November 2nd, 2004.  They want to protect their butts now, when it is clear that intermediate trends have changed in the former darlings of the global financial markets.  Now the final graph in this erudite epistle should put to rest also the fact that the trend has not changed in gold either.  Investors are buying the dips with both hands as evidenced by WCM sales over the last three weeks (only clients with VISION need apply), and there is no more convincing sign of a true bull market than when investors buy the dips.  Confidence in physical assets outside of real estate is gaining, not losing momentum.  Buy when the weak hands are throwing in the towel due to lack of conviction and lack of staying power.  Buy with cash garnered from the sale of the previous financial darlings and that real estate that they are making a heck of a lot of these days; don't leverage your position and you will be able to not only sleep well, but also think clearly and logically during the daytime about the prospects for the bullion positions you possess.  Take an aspirin and see me in the morning.  Better yet, see me in the morning and buy a bullion bar!

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June 10, 2004:  Bubbles Have Sprung Leaks!

As the Complacent Investor adjusts his or her baseball cap to shield severely glazed-over eyes from the scorching June sun, he or she is more occupied with what bug repellent to put on than the state of the real economy and of the real financial system and its hyper-extended markets.  The earth has moved under this doe-like creature's feet and it is still unaware that major earth tremors have passed just below the surface of a magnitude never recorded before in 3000 years of human history.  Let's call it a 10.5 quake to be theatrical and a recent mini-series titled as such did not paint a pretty picture.  Just as the bug repellent will keep the nasties from bringing West Nile into the house, Sir Alan is elevated to the position of Savior when it comes to keeping this Mess of a State of Affairs (MSA) from becoming an issue that the Complacent Investor may have to warm a single brain cell upon.  As long as the Seer of Seers is guarding the gate, the Complacent Investor can continue to ponder the imponderables of how much money is to be made in stocks this year, whether one more re-financing of ethereal gains on the house is possible before the Election, and whether the SUV is going to send him or her to the poor house on the next visit to the pump.  These burning everyday issues are certainly more germane to the Person on the Street than the almost incomprehensible analysis of whether the pronouncements of "steady-ahead" being pumped out of Washington and Wall Street have even a scintilla of truth to them.

As the Sage of Wexford so accurately called in his astute April 1 proclamation that we had just witnessed the Tremor of the Millennium when intermediate and long-term interest rates began a march that will take them well past Waterloo, the landscape is a much different place today than on January 1, 2004.  Try not to awaken the person sitting next to you as you read these dewdrops aloud as they are likely a Complacent Investor, but Nostradamus Junior is going to give you some more heady food for thought.  There is a hissing sound gaining decibels just over the horizon.  If you stand still for a moment and concentrate, there is a good chance it is getting louder by the moment.  One just has to free his or her thoughts of the mundane distractions that are masking its presence.  By the time it is a roar, and the Mess of a State of Affairs becomes front cover for Time Magazine, it will be too late for the majority of Americans to take the protective measures that are necessary for retention of well-being and net worth.  Oh, they will try desperately to get liquid and pay off debt, but the assets that they will have available to convert to cash will have been greatly compromised by then.  Those assets that they hold so dear today, that are and have been promoted ad nauseum as the foolproof path to bountiful retirement, are naturally real estate, stocks, bonds, junk bonds, emerging market stocks & bonds, CD's, and even bank money markets.

We have just suffered through one of the most interventionist periods in U.S. financial and economic history, where the Federal Reserve, the U.S. Treasury, and the Federal Government have attempted to micro-manage the largest financial system and economy in the history of mankind.  The results are not pretty, and they will get uglier before the dust settles.  I never knew that the Chairman of the Board of the Federal Reserve was also the de facto Chairman of Corporate America.  How Sir Alan can imagine that his organization can steer this massive system in any direction with just a 25 to 50 basis point nudge of the steering wheel is beyond me.  By July 1st, the first fireworks to go off will be a 1.25% Federal Fund Rate, a 25% increase over current short-term financing rates so beloved and favorable to the now leaking Bubble of the Carry Trade addicted to borrowing very, very cheap short-term money and lending or applying it longer term at higher returns.  Mr. Magoo, and my contempt for this man grows by the day as visions of Dust Bowls and bread lines materialize in my modern-day imagination, is now trying to play the Village Crier and forewarn all of the naughty Leveraged Speculators like Fannie Mae and Freddie Mac to unwind their Low Rates Forever Positions.  But you can't have Trillions of Dollars of Notional Value of this stuff (a.k.a., Interest Rate Swap Derivatives) and expect by any reasonable assumption that the players are going to all get out of the theater at the same time without knocking down a wall or two, not to mention trampling one another.  Magoo is the man at the back of the theater, right next to the exit sniffing the fresh outdoor air of public access, that WHISPERS, not YELLS, F-I-R-E!  It doesn't matter one hoot how you deliver the message, there is still a fire in the theater and a great peril to all those present.

Okay, that is one bubble leaking air (Bond Market, Credit, and Liquidity Bubble), and the hole is going to get bigger and bigger with each 25 basis point increase in short-term interest rates.  I will bet you the provisional Government of Iraq that increases will be 25 basis points at a minimum and Fed Funds will be 2.00% by Christmas, election or no election.  You know why I am so sure there will be 100 basis points thrown on the fire of speculation:  INFLATION IS RUNNING CLOSER TO 5% OR 6% PER ANNUM AND MR. MAGOO KNOWS IT!  Plus, the equilibrium level that puts short-term rates on a more normal steep-yield-curve footing historically with intermediate rates (now headed for 5%) is 3% for Fed Funds, not 2%.  Mr. Magoo will still be the Grinch That Lost Christmas and will still be way behind the tightening curve in the eyes of the Bond Market Vigilantes who will continue to push up the 10-year Treasury Note yields as every hint of higher Producer and Consumer Prices is wrestled out of Washington.  Happy Holidays! Heck, even the village idiot can tell when he pays his or her bills or goes shopping that monthly expenses have gone up much more than 2.5% since this time last year.  Get out your checkbooks and do your own calculations.
  
Now I get to finally prick a hole in the Real Estate Bubble (the monkey finally typed a word!), and watch the number of days of sales in inventory of new homes continue to the highest level ever recorded.  We are looking at 5 to 6 months of inventory waiting to be sold on a regular basis now.  My, my.  See what happens when today's marginal homebuyer gets knocked out of the box by a 100 basis point increase in mortgage rates in 60 days, even to a still cheap 6.10%.  And, of course, everyone that can swing a hammer is already doing so on that last parcel of land ordained to be perfect for development by the local Planning Commission, 50% of whose members have interests in the building industries.  Most real estate professionals will tell you that the fur really starts to fly when mortgages hit 8.0% and I think we will be there, partially due to the awakening of the Bond Vigilantes, by Spring of 2004.  In my humble estimation, oil prices are going to go to $50 per barrel well before they ever go to $30 which we likely will never see again.  Energy prices may be just one major component to the inflation mix, but world demand is so skewed by Chinese and Indian demand today, not to mention the real threat of supply disruption due to terrorism, that the recent pullback due to OPEC jawboning (a page from Magoo?) will be short-lived and shallow by most measures.  Homes are going to take longer and longer to sell with the New Interest Rate Regime.  Not only will it be the ability of potential buyers who are increasingly already credit burdened to qualify for still cheap loans that will stagnate the housing market, but the supply competition for any single dwelling due to overbuilding is becoming another negative factor for sellers.  It was inevitable, but the day of reckoning is finally here.  Too bad many front door keys are going to get mailed to the lenders as in Houston, circa 1981 to 1985.

Can anyone imagine a Federal official endorsing the use of variable rate mortgages for first-time and existing home owners to make residential home purchases??  So desperate is the Fed to keep the Ponzi Scheme Economy going without a deflationary implosion of debt and over-leveraged assets that they stooped to this inexcusable level of breach of public trust.  Members of the Federal Reserve can partially take credit for the 50% level of new originations for home mortgages now being of the ticking time bomb type, variable rate.  These financial liabilities, once the teaser rate of say 3.63% receives its first rate and payment adjustment, will put homeowners into further negative monthly cash flow.  Do you think that real estate taxes, utilities, and monthly maintenance expenses are going to subside in the months ahead?!!  A double whammy is in store for these ill-advised souls.  Hiiissssssssssssssssssssssssssss.

Still with his ear cocked to pick up other hissing noises, the Sage notices that stocks have gone basically nowhere in 2004.  If you think a 2.6% total return on the S&P 500 since January 1 is sufficient to compensate for the risk of being exposed to a 20% plus loss, then you may want to run for office.  We have a Broadening Distribution Top in stocks, says Richard Russell, Warren Buffet, Sir John Templeton, and George Soros just to drop a few names.  As interest rates continue their relentless climb back to sanity, the valuation models on future corporate earnings are going to put stocks at higher and higher valuation discrepancies, a condition an already overpriced market can ill afford.  I won't belabor this point, but a President Election Year in the New Millennium is no guarantee of positive returns in stocks.

So in my estimation without taking off my shoes to count, that is 3 Bubbles leaking air.  Leaks in Debt, Housing, and Stocks.  There is also a leak in the Gold Carry Trade and the Silver Shorts Control on Comex that is more difficult to discern, but unquestionably in process.  I know everyone is still queasy from the recent pullbacks in the precious metals, and ready to throw in the towel at the very time they should be buying with both hands, but this bull market still has legs that can and will win the Marathon.  Physical demand for both gold and silver is excellent, and you can't maintain a campaign of shorting a commodity in the futures and options pits if the ability to cover diminishes day by day.  As prices begin to recover with more and more evidence of Dollar fatality, resurgent inflation, oil pipeline disruptions, and geopolitical quasi-chaos, the risk to leveraged speculators to continue to short a dwindling available supply of deliverable gold and silver rises exponentially.  We may not like the hedge funds for what they have done to our precious holdings over the last several months, but they are usually not stupid and are motivated to make money, not lose their shirts or their Lexus's (Lexi?).   I will bet that the Plunge Protection Team has been present in the S&P 500 futures pits over the last 2 weeks just as the stock market appeared ready to head for the toilet, and the most recent double-test of the lows in both gold and silver are another effort by the paper-hangers to shake out the longs in the bullion market.  May happen to the Long Paper bullion traders who were stupid enough to leverage their bullion positions, but has not and is not going to happen to the thousands and thousands of investors who have bought and continue to buy gold and silver at bargain-basement prices.  Remember that old beaten up axiom of Dollar Cost Averaging?!

Put it into practice at today's depressed bullion prices.  Buying the dips always takes conviction, but hasn't inflation always been a tonic to the precious metals.  Now that deflation has been postponed for another year, isn't it strange that the metals haven't done better over the last month?  They will, just have a little conviction and fortitude.  Gold and Silver always have gained in a declining Purchasing Power environment.  We are almost at the end of this consolidation period for the metals, and with the Mess of a State of Affairs now on a global basis, I think the next move up will be very sudden and of a magnitude that will surprise most.  Just stay the course, and say after me, "THE FUNDAMENTALS FOR OWNING GOLD AND SILVER ARE IMPROVING BY THE DAY."



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July 5,  2004:  Foxhole Shovels Still Cheap.

Since I have already consumed an inordinate amount of barbeque and hot dogs over the last several days, I felt it would be healthier for me to sit down at the electronic keyboard and dwell on the world as I see it through my often cynical investment eyeballs.  People seldom follow timely advise if at the time of propagation the intended recipient feels no urgency to take a different than current approach in his or her affairs.  That is the moment we are currently in for the majority of investors.  I have heard of the term, Muddle Through Economy, and were I to believe that such a static environment is possible, then I might assign it to the current U.S. and global economy.  But even Sir Alan, the purveyor of All Clear Ahead Monetary Pronouncements (ACAMP, a fitting summertime moniker), knows by his greater than usual frequency of tranquilizing (?) bleatings, there is massive stress below the public's self-adopted short-range radar.  Since that time 30 years ago when Americans forgot how to save with hard cash for those worldly goods they so coveted, the attention span of a Yankee investor and his/her patience for results have shrunk to the interval of a TV commercial.  If this investor or should we say more appropriately, "speculator", not find gains by the minute in a current position, then it is time to move to another venue.  As any doctor who frequently examines eventual cancer patients knows, all can seem perfectly normal via the standard battery of tests, save that one secondary lab result that nags at something amiss.  And it is only the truly great physicians that pursue more understanding of that one-in-twenty aberrant result to eventually provide the patient with a cushion of time and treatments that stave off a deadly outcome.  As in medicine, it is never prudent to assume that all is well within an investment landscape just because the outward manifestations of health are their usual, visible selves.  And it is not my pleasure or purpose in life to constantly see and report the threats below the surface of our economic and financial landscape today.  I am generally a pretty jovial fellow as my family and business associates well know, but I am also a realist seasoned in the vicissitudes of the unexpected.  I have found the greatest successes in investing have resulted in doing extensive analysis and research into the generally accepted assumptions regarding the key influences to the investment landscape.

Who would have thought that the Great Economic Recovery of 2004 would turn into a firecracker that fizzled, much to the dismay and consternation of the celebrants lighting the fuse.  Both Sir Alan and George W. fall into this failed group, having struck the last match in a heady wind of massing financial storm clouds after 4 years of attempting to lift the Economic Rocket skyward.  Any pulse of economic health, just ask the workers who make the engine run, is a function of the REAL STATE OF EMPLOYMENT, not the pabulum fed to the masses day in and day out.  Not only has "NEW" job numbers been woefully absent during this "recovery", but the quality of said "NEW" jobs has been of lower quality pay and longevity than presented in official reports.  As the Sage forecast early in the year, the perceived economic recovery that the stock market was throwing another party for beginning in March, 2003, would turn out to be a grave disappointment to one and to all.  How do you grow an economy with debt-based stimulants when the prior debt burden of historic magnitude in 2000 was never worked down to a manageable level that could provide the launch pad for the additional debt historically required to fuel lift-off?  The U.S. economy has been force-fed a steady diet of fiscal and monetary stimuli in the predominant form of Super Cheap Credit with a side-order of Tax Cuts for over 1400 days now, but the already obese and bloated diner (Joe and Josephine Six-Pack) could do little more than burp and twitch, much less rise smartly from the plateau they were firmly seated upon.  Kind of like one of those Alice-In-Wonderland Blobs so entertaining in the Star Wars movies that seemed to be all mouth and Jell-O-like mass.  Folks, this critter we call the 2004 U.S. Economy ain't got no legs, also known as consumer spending power, because its over-eating of I.O.U.'s has caused its mobility or flexibility so expounded upon by Greenspan to become seriously restricted, not expanded.  Mixing metaphors, the consumer is glued to his seat with debt.

Notice that I don't bore you with regurgitated statistics in most of these rantings these days, since I don't have a clue as to what numbers are real anymore ("inflation" come to mind?!!).  Some may be close to reality, but others are most likely way off the mark, some purposely so.  I would rather deal in relativity in an Einsteinian fashion, and rely on magnitudes that are normal from historical experience versus those that break the scales like our present patient, the economy.  So we have a failing recovery (all content is instantaneously copyrighted at WCM!), which must generate above-trend income gains if it is to service a debt-bloated populace in a rising interest rate / sinking (stinking?) job quality environment.  One doesn't need supercomputer driven econometric models to figure this one out today.  Just basic bean-counting of cash-in versus cash-out.  And the "outs" have it more and more by the day.  And I am not talking home equity Cash Outs here, which were fun while they lasted.  Who cares if you have zero equity in your residence based upon pie-in-the-sky appraisals, as long as you have a great vacation this year and next, and can park three SUV's in your 2-CAR garage.  Who could resist Free Money like that, anyway?!!!

So the logical question becomes, HOW HIGH WILL INTEREST RATES GO IF THE ECONOMIC ROCKET IS SPUTTERING ON THE LAUNCH PAD?  "Not as high as they should go at the short end", is the answer.

Sir Alan has painted himself into a corner.  While he has given the Carry Trade more than fair warning as no central banker has ever done before that short-term rates will be miserly raised in the months ahead, he must raise interest rates sufficiently to cling to his already extremely tenuous position of Inflation Fighter of Last Resort.  It is now unlikely that Federal Funds will make it to the 3% level by this time next year as I forecast previously; it will be all show and little "mo" with the Fed, since they are in the perfectly dire economic strait dubbed "STAGFLATION" during the illustrious Carter years.  A flat to declining economy with rising inflation.  Now, India and China are not going to stop growing dead in their tracks just because the U.S. consumer is gorged on goodies and debt.  They have more than enough consumers domestically, a couple of Billion, I think, to initially take up any slack caused by a sagging U.S. economy.  Easy credit economies have a way of surprising to the upside in both degree and longevity of expansion, as we have just witnessed here in the United (?) States.  But the demand for raw materials, e.g., commodities, in both India and China still continues to grow albeit at a slower than previous pace, and price pressures in oil, gas, iron, coal, steel, zinc, and so forth are not going to subside very much beyond the multi-month pullback (normal corrective price behavior) that has occurred over the last 3 months.  I still feel the commodity boom will last several more years, and $50 oil may be right around the corner, especially if the energy-piggy West has a hard winter.  Export consumption overseas for these growing giants is going to be replaced progressively by domestic consumption.  A monumental shift in markets, write this one down, that is so clearly depicted by the Chinese balance of trade registering a deficit in the latest report versus the never-ending surplus of decades gone by.  For example, the Chinese are not importing the last available cold-rolled ton of steel for fabrication into WalMart microwaves, but for fabrication into GreatWall Mart microwaves, appliances for the Chinese people who can increasingly afford more luxuries in their often pedestrian lives.   The Chinese are going to swap their deflating U.S. Dollars for Real Goods, and they have more than adequate Dollar reserves and national savings to fund many years of rising domestic consumption amidst softening American export markets.

So the Dollar rally is over also, but you probably already have observed this.  Interest rate differentials, adjusted for local inflation, in favor of the Euro, NZ Dollar, Aussie, Yen, and Swiss Franc are going to widen as those countries' central banks have the foresight to continue to notch interest rates higher and faster than U.S. rates to quell their own debt-based speculative markets.  Stable and sound monetary policies beget stable and sound economies.  The Fed under Sir Alan has tied its own hands behind its collective backs, and has to balance putting the economy back to sleep with NORMAL short-to-long interest rate slopes or just letting the Dollar continue to cave in.  Rest assured that the Greenspan Fed, as it has done for over a decade now, will chose to sacrifice the currency of the land versus the prospect of a deflationary spiral ignited by a NORMAL tightening of short-term rates.  Theoretically, if Fed Funds is at 1.25% and inflation is at 3.35%, then 10-year Notes should be around 4.60% which is about where they are trading today.  This is the inflation premium, 3.35% that the marketplace, not Sir Alan, has built into intermediate, mortgage-setting interest rates.  Now that is nicely higher than the official 2.6% CPI crapola touted by Washington, and as either inflation continues higher than expected, not necessarily surging, but at a stubbornly higher level as is quite probable, intermediate interest rates will be pushed higher regardless of what Sir Alan does.  Some would say that a 4.60% 10-year rate is suggesting a 2% year-end Fed Funds rate coupled with the reported 2.6% Official CPI inflation rate, but I think the inflation premium is the driving force here and not any "perceived" future action of the Federal Reserve.

The world knows that Greenspan is bluffing about setting rates back into a normally sloped yield curve versus the 400 plus basis point Mt. Everest of slope we currently have between short and long-term rates.  Such a steep yield curve is typical of periods of extreme monetary and credit looseness, and this is exactly the case in July, 2004.  It is a flat to inverted yield curve where short-term rates are higher than long-term rates that signifies monetary tightening, and we are over 400 basis points from that condition.  The floodgates are still open by any measure vis a vis the Fed AND the Secondary Credit Market dominated by the GSE's which will be coughing up giant hairball revisions to earnings befor the year is over.  I expect one major financial organization to reach insolvency before the gifts go under the Christmas tree.  The Fed has effectively lost control of attempting to set interest rates.  The Greenspan Fed has already lost credibility in the global credit and currency markets, and the result will be a sagging dollar and firming interest rates brought forth by market forces, not government edict.  So no matter how Lilliputian the scared-out-of-their-knickers Fed rate increases are, the GLOBAL CREDIT MARKET is going to price money at progressively higher rates in an attempt to maintain control of inflation and speculation within overseas economies and financial systems.  Something our Fed has utterly failed to do since 1994.

Soooooooooooooo ............................ how could any bullion investor be worried about the future price prospects for the Precious Metals with a sagging Dollar, gradual or precipitous, higher to rising inflation, and conditions which are poison to virtually every traditional investment market??!!##  We have already seen in 2004 that even a modestly growing U.S. economy can experience an acceleration in inflation, since we energy-hoggish and import- crazed Americans compete for these goodies on a global level and not in isolation.  We are not going to be the Engine of Growth that we have historically been to the world going forward.  Once the default of U.S. debt obligations at the GSE, corporate, and consumer levels starts to register off the charts within the next 5 years due to a now unavoidable recession/ potential depression in the U.S. which should manifest itself within the next 12 months, the global financial community is going to register their displeasure by liquidating U.S. holdings (or at a minimum, go on a buyer's strike), charging higher interest rates and terms to effect international trade, and shifting investment/ currency reserves to more favorable regions such as Southeast Asia, India, and China.  We are now sliding down the slippery slope that U.S. officials at all levels have been peppering with easy credit cinders and rock salt for years now, but to no avail in the long run as history has shown time and time and time again.

Governments, as they may, attempt to control outcomes repeatedly with less than overwhelming success.  And it appears that the more the non-private sector of an economy attempts to dictate results, the more uncertain and less positive the eventual results become.  We are now at the phase of market-driven results.  They will not be pretty for the average American, because the average American has not taken the necessary steps to pay down debt, reduce exposure to price-extended markets, both real and financial, and undertake the research necessary to uncover alternative investments that historically have held their value through the worst of times.  And although I should still be in a gracious, holiday mood, I must say that the biggest fireworks are yet to come within the U.S. economy and financial system.  Will $400 gold, $6 silver, and $210 palladium be expensive or cheap within the next 5 years?

Expand your time horizons.  Expand your repertoire.  Practice Business-As-Usual at your own risk.  Grab a still cheap shovel and start digging.  These prices won't last.  most investors only gather the confidence to invest in non-traditional assets after the majority of investors have already piled in and prices have been bid firmly higher.


P.S. CAN YOU SAY, B-R-E-A-K-O-U-T?!!

The Sage has advised clients and readers that once the momentum starts to gain in the precious metals' recovery from the recent price correction, that higher price levels will be exceeded very rapidly.  Why?  Because the fissures are now starting to show in stocks, bonds, real estate, and all manner of financial markets around the globe simultaneously with rising oil prices, a rising terrorist threat, rising inflation, sagging confidence, and a once-again sinking Dollar.  THE PLANETS HAVE ALIGNED ONCE AGAIN.

If you have ever tried to shoot a rapidly moving target, the longer you wait to pull the trigger, the greater the chance you are going to lose your opportunity.

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August 3, 2004:  EXPECT THE UNEXPECTED.

As I sit behind the wireless keyboard of my built-from-scratch computer, the sun is shining and the breeze is a'blowing in the beautiful Shenandoah Valley of Virginia.  This is the image, in one form of serenity or the other, that most investors have of the environment around them this Third Day of August, 2004 A.D.  Granted, we just got "new" intelligence that originated back in 2001 that pretty much tells us the obvious, that our enemies who profess to be "Good Muslims" are going to attempt to strike "high-profile", "soft" targets in the United States.  Why would they strike insignificant targets?  This bunch of criminals and suicidal maniacs hiding falsely behind the Koran work the press and the media like a Presidential candidate, and want maximum global coverage to be able to show to the suppressed masses of the world how they are making the world's only superpower, the hedonistic, profligate, capitalistic piggish America, afraid to go to work in the morning.  They forget that we have over 200 years of democracy under our belts when they have nary a minute, and have fought more than one major conflict over these centuries to preserve our and others freedom.  We unquestionably have major faults as a citizenry and nation right now, but one of them is not the abandonment of human dignity and liberty.  These bums have and will cost us more American lives and money as time progresses, but I am certain they will never break our will.  Others much more powerful than 50,000 barbaric Jihadists around the world have tried and failed, and these born-again fundamentals will also.  It will be a long road, but we and what allies we have left have been on it before.  World domination is a very tired old theme that has ended up in the trash heap of history going back to the days of Alexander The Great.  Osama the Great he isn't.

Just don't like scumbags threatening me or mine.  Although we are in the Desert of Hell called Iraq right now, with many of our young men and women at risk, we are taking the fight to the enemy.  Those insurgents we kill today in Iraq and around the world will not be able to fly a plane into an office building tomorrow.  They think we are weak.  In warfare, the biggest mistake an enemy can make is to underestimate his opponent.

This entire discussion is relevant to the economy and investment landscape as we head toward the November election.  As shown in Spain, the terrorists will attempt to disrupt and influence the American elections.  I think this is a 100% certainty.  They would like to get rid of President Bush, who has cost their leaders and foot soldiers dearly to date.  However, I think a major terrorist event in the U.S. prior to the elections will have the opposite effect.  Spain was not at war on the scale of America when dozens were killed while riding the trains; they had a minimal number of troops in Iraq.  Popular or unpopular as a war, the Iraq Campaign has over 100,000 American troops in harm's way, and Americans are prudent enough not to want to risk one serviceperson's life by abruptly and significantly changing the command strategy solely from the political side.  This is not a political message.  It is the reason I think Kerry has not gained measurably in the polls since the Democratic Convention.  Any way, I do not want the terrorists to obtain new followers by showing that they influenced the election of an American President.  Bush has his flaws, but is "Hope really on the way"???  My late father spent 3 years in Vietnam as a Green Beret, 82nd Airborne, not 4 fricking months in-country.

See what happens when you get an ezine for free!!

The bottom line is that we are in for some very rough sledding in the months ahead.  Events will occur that are not only disturbing for a society that generally does not have to fear for its personal safety, but these events will disrupt the economy and the financial markets.  As the Sage of Wexford told you quarters ago, the current economic "recovery" is fizzling, and consumers, having just bought that 14 miles per gallon humongous SUV, are cutting back on spending as they pull away from the pump.  This was bound to happen to an overleveraged economy.  The debt assumption rubber band has been stretched to the limit, and its snapping will sting more than one variety of lender and borrower alike.  Sure the home purchase frenzy continues, although there are signs of saturation and topping, but would you want to be the one holding the paper on these recently-purchased properties??!  Home affordability, as I have said before, will stall the Great Home Acquisition Circus faster than rising interest rates alone will.  Net income growth has been conspicuously absent during this economic BOUNCE, and as home prices have continued to go through the roof, the ability of current debtors to pile more monthly debt service on has been greatly compromised.  Oh, the financial intermediaries have been more than creative with structuring mortgage finance to shove money at the least qualified borrowers, but this form of loose credit will come back to bite them as delinquencies and eventually outright defaults.  And when those "bought-at-the-top" houses increasingly go on the market, what do you think that will do for prices in your neighborhood??!

That deterioration in real estate prices and markets will unfold relatively slowly, in my opinion, unless Fannie or Freddie get caught with their interest-rate swap knickers down.  That is an event, however, that I think will eventually happen to the GSE's, and the disruption in the secondary mortgage market will be colossal, of epic proportions requiring another Uncle Sam bail-out and restructuring.  A restructuring that will take away the IMPLIED semi-Government guarantee for future originations that will make home financing much more selective in its borrowers and, generally, less available and affordable.  Another arrow in the heart of home prices.  But in other markets, particularly the financial markets, I think we are at a crossroads where events are going to happen fast and furiously.

American investors are a generally spoiled lot right now, having been rescued from a 4th consecutive year of losses in 2003 by historic Fed credit largess and the Government's rapid-fire tax cuts.  The punchbowl has been taken away by a new credit tightening cycle from the Federal Reserve, even if a "measured" one, a necessity when commodity prices stay stubbornly high due to emerging country demand and oil hangs solidly above $44 per barrel and pointed higher.  Plus the Dollar is teetering precariously on the edge and higher U.S. rates can at least attempt to make the inevitable devaluation more palatable to foreigners soooooooo over-exposed to the Reserve Currency.  The Fed is vainly trying to regain credibility after being an irresponsible central bank for the last 7 years, but few global investors are buying the Fed's new shtick.  While the Fed and the Treasury can still attempt to keep the system liquid by monetarizing the debt partially by purchasing open-market Treasuries and intervening in the stock & currency markets, money created out of thin air has a cumulatively negative effect on interest rates and the Dollar.  We have just begun to see the effects of years of excessive monetary and credit expansion in the United States.  It goes by the name of INFLATION.  The River Boat Gambler, Sir Alan, has played his last good hand.  It is all bluffs at this point in the game.  Stock investors are about to rush the exits as the markets head further down in August after having put in the right should of a classic head-and-shoulder formation.

So if you have a vacation planned this month, and many Americans do, bring your laptop with you to peek back at reality in between dips in the great blue sea.  You will be glad you did.  Always have your cell phone with you with the number of your broker (stock, bond, real estate, and bullion), programmed in to make speed dialing possible.  You may need every second.  The financial landscape looks much like it did in August of 1990, at the beginning of that mini-bear market, but the condition our condition is in is much, much, much worse in the summer of 2004.  Our economy and financial system have never been so leveraged.  And you know what happens when you get a margin call ...... panic selling!  Saddam invaded Kuwait that summer, and spiked oil into the mid-$30 per barrel zone.  Today, we have plenty of potential events emanating from the Middle East or Middle America to provide the trigger for even more volatile conditions.  If you have not planned ahead, lightened up big time on your equity and bond portfolios, raised some cash, and bought asset protection, put on your thinking cap before putting on your swim trunks.  Otherwise, you may not be able to afford a vacation next year!

Since all of the dead bodies in accountancy land have not even begun to float to the surface of public view (we have just seen the old cartoons to the olden-day movie), steel yourself for a giant hairball of illiquidity, loss or restated earnings to be coughed up by one of our largest financial institutions.  The carry-trade that Sir Alan has pandered to in giving more advance warning than a V-2 rocket over London has hardly unwound the majority of its borrow short-term and lend/buy long-term 20-to-1 leveraged positions.  Should interest rates spike during an oil run to $50, a major terrorist attack Stateside, or a swoon in the Dollar, then many of the play-on-the-railroad-tracks speculators subsidized by Sir Alan for the last 4 years are going to be squeezed in the exit doors.  Greed has clouded many a trader's judgment over the annals of history.  It is about to have done so again.

EXPECT THE UNEXPECTED.  Having studied meteorology, I must say that the atmospheric variables in the economy and financial system are ripe for a STORM OF THE MILLENNIUM.  Get to high ground and make sure your financial larder is well stocked.  One thing about gold, silver, palladium, platinum, and colored diamonds  ........ they don't spoil with time.  Hope had better be on the way!  Heck, hold the hope and give me the H-E-L-P.


$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

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August 28, 2004:  Aesop's Fable Circa 2004.

Leverage is playing a very prominent role in U.S. society today.  By borrowing now and paying later, the American Consumer is able to enjoy many more niceties of life than his or her income would normally support.  And since the growth or gains in per capita income have been less than 3% per annum since the turn of the New Century, spending increases of 4% to 5% per annum have been sustained by borrowed funds.  I am not sure when patience and prudence went out the window in this country, probably it occurred over many years after the Vietnam War, but hardly a person that you speak with today is saving for a major capital expenditure.  When credit cards have teaser rates of zero percent for a year, retailers offer one-year installment sales with no interest, and equity in homes can be extracted almost at will, why suffer by doing without today when you can have it all NOW.  Since the most watched and listened to media sources rarely broach this topic, most Americans are unaware of the historic condition of American finances.  With housing absorbing 35% to 40% of disposable incomes, the highest percentage ever, even with almost-record-low interest rates for mortgages at a cheap 5.8% currently, Americans has chosen to spend virtually all of their incomes and more to live in the highest styles possible.  The amount set aside for savings is currently running around 2% of disposable income, a paltry amount when compared with 5% to 8% at the turn of the 20th Century.

In those olden days, and we often yearn for those seemingly simpler times, there was even a moral judgment made against those who spent too freely.  We cannot assign that same stigma today.  Not only because we would be totally ignored, but because there are so many holes in the moral fiber of our populace that one knows hardly where to begin chastising, if he or she had the innate right to do so.  And the wise guidance of elders seems to fall on deaf ears today anyway; it is amazing that the imbeciles of the Baby Boom generation where able to raise children at all based on the lack of respect for their capabilities that they receive from their offspring and their neighbors' offspring.  The ancient fable from Aesop about the grasshopper and the ant preparing for the rigors of winter comes to mind regarding thrift, and still rings apropos in this so modern of times.  The ant just wasn't going to fritter away the summer, something in his genes I think, and he labored day and night to build a larder to see him through the cold days of winter when food and shelter would be scarce.  It was a buffer that prepared him for both the expected and the unexpected.  Not sure if the grasshopper perished in the fable, but I don't think they had a Debtors' Prison for Insects in those days.  Nor do we have a debtors' prison for bankrupt debtors today, with the ranks of this class of two-legged grasshoppers or locust swelling annually into the millions and millions.  When one has abundant company in a misdeed, it just doesn't seem to be so offensive to both the offenders and even the non-offending two-legged ants.  (Germany during WWII would fall into this camp.)  Safety in numbers, so to speak.  And it was the offended ones, the creditors left with big write-offs, that lured the poor, unsuspecting grasshopper into the throes of financial frivolity in the first place, right?!  Those creditors should have known better.  It's their own fault that they made a poor bet on a jumpy, can't-sit-still grasshopper.

Okay, don't get out the bug spray.  But since most Americans are leveraged to the hilt today, with total credit market debt as a percent of GDP at 299%, higher than the 270% in 1929, there seems to be little warnings and certainly no outcry, that the Walls of Financial Jericho, the U.S.A., are going to come crashing down.  This level of complacency in the status quo of the time is the rule and not the exception during major turning points in history.  The rule at seminal, life-changing events for a nation and a society.  And you and I, fellow ants and soon-to-be-converted grasshoppers, are so fortunate to be alive in these most interesting and momentous of times.  Here is my salient question to the man or woman on the street today:  If you lost 5% of your gross income today, could you still meet all of your current financial obligations?  I will bet bad money, U.S. Dollars, that the majority, if honest with themselves, would answer NO.  Most financial experts, an oxymoron if there every was one, used to advise consumers to have 6 months of expenses in cash set aside to meet unexpected contingencies.  A prudent course of action that put financial survival at a much higher probability than exists across our country today.  Since we Americans are looking at less than 1.5% money market rates of return and a currency that is buying less and less per unit of what the rest of the world is bent on selling us, why would we want to forgo any current consumption with such a draconian decision?!!  Wouldn't we want to get rid of this soon to be worth less currency and buy as many material goods with it before the prices of those goods get even higher?  Gosh, that argument almost makes some sense.  Except when you analyze what the American Grasshopper is spending his or her money on.  

Just read today that the average new home price has increased 48% since July, 1998, a 6.75% annual compound rate that represents almost 3 times the inflation rate during this 6-year period.  Historically, home prices have paralleled the overall rate of inflation, and were it not for super cheap money and extremely lax lending standards on the part of lenders, this rate of price increase would not have occurred.  Americans continue to purchase the most expensive housing ever offered at near-record rates, but their lack of income growth is causing the Affordability Index to deteriorate to the point where fewer and fewer prospects have the financial wherewithal to meet even a 6% mortgage amortization schedule.  In California today, it takes an average of $464,000 to acquire the American dream.  The nationwide inventory of unsold new homes has now increased to a 3-month plus supply, a 15% plus increase over July, 2003 levels, while the number of new homes sold is actually down 2% from a year ago.  The top in housing may finally be here; common sense would suggest so, but there hasn't been that commodity present in real estate over the last 3 years.  Case in point:  Does it make sense to pay $300,000 for a 2,100 square foot house of average construction on a 15,000 sq. ft. lot located 70 miles from a major city?  And this same property sold for $185,000 just 3 years ago, a 62% increase or tax on prospective homebuyers.  The spottiness of the U.S. economy throughout this summer is unlikely to correct itself going forward given the marked imbalances present in this country between manufacturing, retail, financial services, and government, coupled with negligible job growth and negligible income gains.  Americans are simply overpaying for housing today, and will not realize their mistake until the market has plateau'ed further and the inevitable price decline takes hold.  Anyone who thinks real estate is a buy at these levels should have purchased a lakeside condo in Broward County, Florida like I did in 1981 and then sold the unit for a 25% loss in 1991.  Can't lose money in real estate?!!  A top is a top is a top is a top.  Now say after me, Grasshopper:  "When you overpay, you will rue the day."

This is the most blatant mistake that I see Americans making today in how they spend their money, but certainly they are overpaying for other assets as well.  With the S&P 500 at 23 time earnings, there is not a seasoned professional alive who can call this a cheap level for equities when the historic average P/E has been 14 to 11 times.  The action in the stock market throughout 2004, with a net loss to stock investors year-to-date, has been the classic topping and distribution action that textbooks write about prior to a resumption of trend.  We are still in a bear market, and all of the rationalizations about interest rates, inflation, retiring Baby Boomers, growth in corporate profits, and lack of alternatives change nothing as to investors' willingness and ability to push prices higher at these levels.  The market is a giant voting machine, and the rolling over of stock prices as we head into Fall tells it all.  The smart money and corporate insiders are selling with both hands, while the unshaven mutual fund neophytes continue to pour after-tax dollars into overpriced equities.  Will these grasshoppers ever learn.

NOTE HOW THE 50-DAY MOVING AVERAGE HAS JUST CROSSED THE 200-DAY MOVING AVERAGE ON THE DOWNSIDE AND ON SIGNIFICANTLY DECLINING VOLUME.  We could say that everyone is on vacation in August, but today's daily trading volumes are well below those of even August, 2003.  The internals to the U.S. stock market are deteriorating day by day.  The tattered bulls have little conviction at this junction, and the series of lower highs and lower lows portends a more pronounced decline is in the cards to shake out the over-confident retail investors who are heavily invested in the stock market.  The Bear Market counter-trend rally that began in late March, 2003, is coming to a close, and the next down leg to the March, 2000 Bear Market of the Century is unfolding before many a grasshoppers' unbelieving eyes.  Market consolidations in bull markets seldom last for 3 quarters on declining volume.

Gold and silver are just consolidating in preparation for their next major advances to $500 gold and $10 silver.

I think that these are going to be the next resting places prior to the next major consolidation in the two precious metals. Sounds preposterous doesn't it, but the same Grasshoppers that will spend 260 times earnings for the NASDAQ at the 2000 top and watch it go down 70% in value in less than 2 years seem to get weak knees when gold moves 15% down and silver moves 30% down from recent multi-year highs.  Now say after me, Grasshopper:  COMMODITIES CAN BE REALLY VOLATILE.  This ain't no 10% per annum CD fellow insects, so try to be patient and have some conviction.  Investing is a long-term proposition, so shift your mindset toward the distant horizon and don't attempt to pay the monthly mortgage with your precious metals gains.

Note how the 50-day is poised or has crossed the 200-day MA's to the upside.  This is just one indication that the technical picture for the metals is improving, not deteriorating like the stock market.  I have used futures prices here since the paper market continues to wag the cash or spot dog, but I see nothing in these charts to make me think that the bull market in the metals is over.  Based on what I see in the world around me, fellow Ants, I see a corrected market that is poised to go much higher.  I can't tell you the exact minute that this will happen, but global physical demand for both gold and silver is increasing by the day, certainly in booming Southeast Asia, India, and China.  Even the World Gold Council will tell you this.

As the little whipper-snappers head back to class dragging their trouser bottoms 3 inches below their shoes, which we will assume they are wearing, you can almost anticipate the chill in the air.  THE FALL IS IN THE AIR.  And the diminutive Ant is just going about his frugal and industrious ways, stockpiling all that he may need in the months and quarters ahead when the cold winds of reality start blowing again.   While he can't eat or drink it, he has been reading Bullion Market Insights for the last 4 years, and has begun to drag ounces of gold and silver below ground.  While the grasshopper eats his way through a pile of Dollars on a daily basis, the ant knows that they have a foul odor and are likely to rot away to nothing on their very own.  Plus, eating through the image of a dead president is not appealing to the ant.  The ant has little use for that which is not durable like his work ethic and frugality.  The ant will survive in good stead.  The grasshopper will go the way of the 2004 cicada. 


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September 28, 2004:  Weird behavior in financial markets signalS distress.

I am not convinced that the Powers That Are will be able to keep everything glued together prior to the Presidential Election, Plunge Protection Team, Exchange Stabilization Fund, Federal Open Market Committee or not.  Just because Sir Alan and the very Democratic-spending-like Bush Administration have kept the economy afloat with still-very-low interest rates and a barrage of tax cuts does not mean that there are more rabbits left in the proverbial hat of government-created liquidity to pull out any more.  We are dealing with global markets today, and most overseas exchanges don't give a hoot how many days it is before the American elections; plus, the currency and bond markets are so massive that there is not enough manipulative tea in China to affect prices for more than a few minutes during the 24-hour global trading day.  Regardless of what happens during the upcoming debates, Bush will likely win re-election.  Kerry is a man without a definitive cause (except to replace Bush)  or a clear, consistent message.  However, I just read a piece where the Democrats should consider themselves lucky that Kerry has run such an incompetent campaign, especially in light of significant American employment problems, surging Twin Deficits, the potential of a U.S. military draft, and an economy and stock market sputtering into November 2nd.   The America that the next President inherits is faced with such massive geo-political, economic, and financial system problems that he who is left holding the bag when the UNAVOIDABLE IMPLOSION occurs will see his party banished for decades.  Of course, us lowly citizens who must be lucky to get our shoes on the right foot each morning will be more disposed to throw all the bums out and start afresh with true structural reforms to the system, but don't tell the Pachyderms and the Jack-Asses!

Remember that I have sounded the warning cries like a Village Idiot for the last several years about the inherent dangers to the balance sheet explosions of Freddie Mac and Fannie Mae?!!  Not only are these gargantuan liquidity generators grossly undercapitalized with equity at a drop-in-the-bucket of 2% of Assets or less, but we are now beginning to see some of the bodies hidden in the Swamp of Creative Accounting float to the surface of regulatory and citizen scrutiny.  I knew it, I knew it, I knew it.  If an entity is forced to increase capitalization on the asset side of the ledger, how does it continue to package residential mortgages for secondary market sale at the current level of massive liquidity creation without proportionately ballooning the liability side of its balance sheet?  Those GNMA notes that foreign central banks have been slurping down with their export-driven excess U.S. dollars, like they wouldn't be available the next day!, are going to have to be cut back if Fannie is going to build up its pure equity account of Retained Earnings.  If volume of production is going to have to take a not insignificant hit to re-capitalize the company since floating more common stock in today's environment is not a likely alternative to generate the tens of $Billions needed for equity capital enhancement, then the spreads on GNMA paper over Treasuries are going to have to increase to maintain profitability.  Liquidity in the former sea of mortgage finance is going to slacken at just the time when Home Affordability at the settlement table is having an effect on buyers in many residential markets around the country, aka Sticker Shock.  

With 10-year Treasury rates taking an unexpected dip as of late due primarily, as far as I can figure out without implicating the Federal Reserve in systemic liquidity maintenance per prior pronouncements to buy Treasuries to affect intermediate rates, to foreign central bank Dollar recycling of an $500 Current Account Deficit, expect the best news on mortgage rates to now be behind us with the GSE sequential confessions.  The marketplace has no choice but to demand a repricing of GSE paper due to a loss of confidence in the ability of the issuer to honestly and consistently report financial results and even to meet its obligations directly without Government Bailout during adverse market conditions (i.e., a sudden and/or rapid change in rates up or down).  And the only way the U.S. Government can bail out any of the GSE's is to print more Dollars since the Federal piggie bank is basically broken, the value of which seems inevitably headed for another 20% devaluation in the shake of a G-8, G-9, or G-10 bureaucrat's tux tail.  Beggar Thy Neighbor with U.S. Dollar Devaluation is one of the less painful ways out for the world's central banks, regardless of what it does to their local Euro or Yen balance sheets, since the American Growth Engine is sputtering badly and China's is progressively getting a speed governor installed.  This is a prime example of the financial system distress I have been writing about for years.  That mortgage-backed paper that you thought was so risk-free with an attractive yield doesn't look so attractive anymore, especially since they can only be converted into Dollars which aren't worth the paper they are printed on.  Repricing GSE paper in the secondary market means repricing paper in the primary mortgage market for Joe and Josephine Six-Pack, particularly if Fannie Mae is forced to cut back on production volume to shrink its bloated balance sheet!  THE LIQUIDITY CRUNCH IS HERE!

Actually, it took extensive governmental audits to uncover the goo-covered fraudulent GSE accounting, and most whistle-blowers were given the internal brush off which cements any conscious investors' viewpoint that the corporate structure is still rife with corruption and self-serving actions on a scale that will make the Enron elite look like choirboys.  Please take note that hedge position losses have been hidden on the books to prevent a loss of confidence in Fannie Mae as the March swing in interest rates must have caught these smug derivatives traders with their pants down.  There have been several times over the last 3 years that debt market prices and, hence, yields have swung dramatically in one direction or the other, and I can bet you Raines' next slush fund bonus (Webster's needs to redefine the terms, "THEFT, THIEF, CON ARTIST, etc."!!!) that major, major derivatives losses were generated but did not flow to the quarterly bottom lines.  Hey, how are corporate officers going to live like kings if they are held accountable like the rest of us commoners?!!  The executives and Board members should all be fired before their next bloated paychecks, but we will see if government overseers and regulators have gotten true religion in cleaning up corporate governance.

The 10-year Treasury is also signaling the next recession that will be upon us before the snow melts in the Rockies in 2005.   The Fed will get to 2% Fed Funds by year-end, and may consider increasing the interest rate buffer before March of next year so it can try to save the day again by cutting rates in the summer of 2005.  But of course, my bet is that it will be an exercise in futility by mid-2005 since the Debt Accumulation Wall (DAW!) has already been hit by the American Consumer and the derivatives web is beginning to come unraveled as we all knew it would.  I doubt seriously if we will ever get to an inverted yield curve prior to the upcoming 2005 Recession, since Sir Alan has one foot onto the retirement golf course; that would require another 8 Fed tightenings of 25 basis points at today's intermediate rates around 4%.  Oil gushing past $50 per barrel on its way to $60 or $70 is going to greatly assist in the process during a winter that may be as unkind as the past summer/fall has been to Floridians.  Any economist that thinks the rebuilding of Florida, which will see an exodus of inhabitants over the coming years due to the staggering 2004 loss of property, lives, and livelihoods, will stimulate national GDP had better reread Economics 101 on the price elasticity of demand.  Even the BLS will admit that as prices of a good or service rise significantly, the consumers attempt substitutions or curtail their purchases/usages of same.  The tragic events in Florida over the last 2 months are going to cause the prices of every building component, not to mention foodstuffs no longer available for harvest, to climb steadily in the months ahead.  Building materials prices were already setting records in 2004, partially due to Chinese competition for supplies, and now an outright shortage in plywood, insulation, cement, and dimensional lumber is probably inevitable.  I will wager that homeowner's insurance premiums in Florida (AND elsewhere) will skyrocket, as many insurers experience record losses that cannot be mollified by investment portfolio gains in stocks and bonds; I will also bet that insurers have derivatives losses from bond market volatility in 2004 that have yet to come to light, and that one or two major carriers are going to become insolvent/bankrupt.  Not a certainty, but a high probability.  Financial system distress is like a virus that can spread to many sectors rapidly.

As the yield curve flattens due to Current Account recycling AND Sir Alan FOMC treasury purchases just before the election (which I am convinced of upon further reflection and another cup of coffee), the Spread Game of Borrowing Short & Lending Long is getting squeezed like a retired Texas Air National Guard officer.  As the spread or differential between short-term interest rates and intermediate rates narrows, the risk to the Carry Trade in virtually every asset class that could be leveraged in the last decade increases exponentially.  Since extreme leverage of 20 to 1 has been employed in these up-until-now no-brainer positions, unexpected market moves in the Dollar, interest rates, or the stock market can put the equity capital of the hedgers at substantial risk in a matter of hours.  With rising oil prices hitting new nominal highs, who would have thought that 10-year interest rates could have declined in this environment?!!  This weird behavior in the financial markets is abnormal, and likely to catch many derivatives positions on the wrong side of these unusual markets.  With niggardly interest rate increases in the U.S. at a time when more prudent central banks in England, New Zealand, Canada, and Australia are attempting to reign in inflation expectations by pre-emptively raising rates and tempering excessive speculation in various local asset markets, the Dollar is currently more resilient than one would expect given the fundamentals.  Half-Trillion Dollar Federal Deficit and Current Account Deficit Twins, 1.75% short-term interest rates, under-reported inflation, epidemic financial corruption, stagnating economic growth, unpopular international policies, and an American Consumer and Governments laden with history-setting debt burdens should not be supporting the Greenback.  However, this is another example of weird behavior in the markets that is destined to fool even the most accomplished of traders.  Success breeds smugness, and smugness breeds imprudence.

What does this have to do with the price potential in gold and silver?  EVERYTHING. 

As I have said until even I am sick of hearing it, the precious metals have consolidated since April, and are poised to break-out in one direction or the other.  Given the above developments of weird behavior in the current financial markets and about 20 unlisted reasons, I believe we are at the cusp of the next major UPmove in gold and silver.  Once gold breaks $430 per ounce and silver nudges $7 per ounce, you will be able to hear the screams of pain coming from the trading pits at the Comex.  Markets do not operate by the calendar.  They operate by the influences of the day and the minute, and the hour is drawing near when the bull markets in all of the precious metals will be reconfirmed for all but the most-diehard bears to recognize.  Something big is in the wind.  Keep a strong cup of java handy so you don't blink.



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October 27, 2004:  VERY Green Pastures for Precious Metals Bull.

I get almost amused at the behavior of many of today's investors.  Very few of them have the conviction to invest in an asset at the early stages of a bull market, and they wait, and wait, and wait, until the picture of a golden bull appears on the cover of Time magazine.  A slight exaggeration, but I see investors waiting for specific price points (that are never hit!), for Comex open interest to be such-and-such, and for the development of an unquestionably bullish trend on the charts before committing.  Many of these same investors will plunk $5,000 to $10,000 down on a biotechnology or internet stock without any positive cashflow from operations, no successful history of product introductions, or no market niche or business plan that suggests a high probability of success.  Many investors, because maybe their neighbors or office cohorts used to make boatloads of money in stocks back in the Roaring 90's, think that the odds are still in their favor with stocks over virtually any other asset class.  This same extrapolation of Past Results into the infinite future is true of real estate, but I will try not to belabor any of these points today as I have beaten them to a pulp over the last 3 years.  A very small percentage of potential investors, I would say less than 3%, has made any commitment to the precious metals over the last 3 years, and yet gold has managed a 65% gain since 2002 and silver has managed a 44% gain since that same starting point.  NOT SHABBY FOR ASSETS THAT THE MAJORITY OF INVESTORS HAVE IGNORED TO DATE.

But since I make money by selling and buying precious metals, I have a financial ax to grind, so what I expound in these epistles is in self-interest and is to be discounted.  IF I DID NOT BELIEVE IN THE INVESTMENT BENEFITS OF OWNING PRECIOUS METALS IN THE FUTURE, I WOULD NOT BE SELLING THEM AND WOULD CERTAINLY NOT OWN THEM PERSONALLY IN AN AMOUNT BIGGER THAN A BREADBASKET.  If one reads my ezines from prior dates in 2004, they will see that I have been remarkably correct in my calls on not only the metals, but the stock market and the economy and the financial system in the majority of cases.  Not luck, but what 30 years of investing experience will do for you.  Okay, now that I have done my election campaign speech, let's move on.

The day will come when I will no longer have to attempt to convince investors that buying the precious metals at current levels could prove to be one of the best investments that they will ever make.  In fact, I do see a day coming when I will be telling more people to sell than to buy, but we are a long way off from that momentous occasion.  Currently, as a businessman who does not like being burned by citizens that renege on their commitments ..... and we have no shortage of such in American Society Today (AST), I no longer will lock a bid price on a buy-back from a new client until the product is delivered to one of my distributors.  Even with existing clients in good standing, without any history of late payments or irregularities in transactions, I am hesitant to lock prices on Bids to re-purchase until the goods are delivered.  In a bull market, which we are unquestionably in in my not-so-humble opinion, the price tomorrow is likely to be higher than the one today (by definition of a bull market!), and human nature being what it is in today's day and time, people seem to be able to rationalize why they can breach a contract at will if it serves them monetarily.  Investors continue to have too short of a time horizon for holding the metals, trying to time the squiggles of these commodities like a NASDAQ penny stock trader, and they end up selling just before another major move in the metals.  Buy and Hold.  Hold and Buy.

If it was good enough for the really smart investors in stocks beginning in August, 1981 and produced 1,000 percent gains up until March, 2000, why should it not be good for tangible, i.e., precious metals, investors?!!!  The cost to carry precious metals, regardless of what the financial-paper-generators out there tell you, is minimal, especially if you compare it to the cost to carry real estate.  Ma Ma Mea there ain't no comparison on that latter score.  While we all take pride in our place of residence, it often makes little sense to have kitchen countertops that are better than those of the French Aristocracy in a structure where virtually not a wall, ceiling, or door is plumb.  Or solid wood cabinets that only a cabinetmaker could tell were not veneer in the first place.  Or solid brass fixtures in a bathroom where spending too much time can actually reduce one's net worth.  Ah, the America of conspicuous consumption!

Now for the meat, since I just threw the potatoes at you:

PERFECT CONDITIONS FOR A BULL MARKET IN THE PRECIOUS METALS

1. Collapsing Reserve Currency

Now this observation is as much a prediction, but the U.S. Dollar Index just broke the critical 87 level last week and it has been Katie Bar The Door time ever since.  An image will cement my case:

This is a significant technical breakdown for the Currency of the Realm and the Reserve Currency of the World.  The Dollar is now at the prior February, 2004 low, and recent statistics on Foreign Investment Flows into the U.S. show a declining trend which is only going to accelerate as foreigners continue to pullback on the purchases of U.S. Treasuries and direct investments in U.S. assets.  Regardless of all the hype on the U.S. being the best place in the world to invest, when you start losing principal due purely to currency translation in the amount of 10% to 20% per annum, it takes one heck of an investment choice to justify your initial decision.  Since the Yen and the Euro are flawed currencies in their own rights, due to not-insignificant economic and financial problems with the issuers, gold and silver become the Currencies of Last Resort.  Granted, many alternative currencies are appreciating versus the Dollar at this juncture, but so are gold and silver.  Watch this chart carefully in the days and months ahead.  It already is not a pretty picture, but is likely to get much worse before it plateaus.  And the vast majority of your assets are denominated in Dollars, aren't they?!!


2. Inflation Once Again Eroding Purchasing Power

Unless you don't eat or use energy, the government statistics on consumer prices are grossly understated.  Inflation is running 5% to 6% per annum at the consumer level, period (BLS stands for Blatantly Larcenous Statisticians).  Whereas forecasts of $60 per barrel oil would have been laughed at 6 months ago when everyone was laughing at calls for $50 per barrel oil, I think we will hit that level before February.  While I have not seen how thick the fur is on the Wooly Caterpillar that has a habit of attempting to cross 4-lane highways here in the Shenandoah (reminds me of a Google investor), I think we will have both a cooler and snowier winter than normal.  The odds favor it as do the jet streams.  Regardless, there is such a supply shortfall now in natural gas, propane, and heating oil, that consumers may stop feeding the family pet this winter to make ends meet.  Heating bills of $500 to $600 for the coldest months of December, January, and February will not be uncommon, especially for the proud new MacMansion owners that will get a cost-to-carry lesson they won't forget.  Gasoline prices are likely to be $2.50 per gallon by summer, and don't rule out near $3.00 per gallon prices by the Fall of 2005.  Subaru, thank you for my 27 mpg four-banger that still lets me get out in front of 18-wheelers without too many Hail Mary's.  Being an Episcopalian, we usually don't say Hail Mary's except during extreme duress, succumbing to our Catholic roots.

The input prices for virtually every product we buy are going up; it is just a question of time, not if, when producers of final goods raise prices to stem the profit margin squeeze which is substantial at this point (just review the 3rd Quarter profit statements!).  Food prices are off the charts, especially diary products and fresh produce, the latter partially thanks to the hurricane season.  China has slowed down to a meager 9% GDP growth, so don't expect this voracious consumer of all raw materials to cut you any slack via prices any time soon.  Building materials continue to go literally through the roof, setting new records, as Americans, for one, continue to buy homes at any price.  Kind of like buying technology stocks at any price?  Homes are taking longer to sell in most markets as sticker shock finally takes hold even with artificially cheap money but already debt-laden consumers, and builders start new homes convinced the trend will last forever.  Banks will eventually be offering a new home as a promotion for opening a new checking account, they will have so many repossessed homes in their foreclosure inventory.  A glut in housing is inevitable in 2005.  This monkey is eventually going to type a word!


3. Cracks in the Financial System Are Appearing

The average investor does not realize how significant the accounting and derivatives issues are at Fannie Mae.  Corporate culture is such a conspiracy against shareholders today that only the elite few corporate insiders at the very top know the true health of a corporate entity.  The treasury department is like a giant candy jar for corporate officers, and I have to wonder at times during the year-end budget reviews how many capital expenditures get postponed so that there will be adequate funds available for bonus largess.  Fannie Mae has operated under a quasi-governmental guarantee since inception, and should there ever be a bailout of this mammoth credit machine, taxpayers will view prior S&L and Resolution Trust bailouts as a drop in the bucket by comparison.  Fannie Mae has to shrink its balance sheet in order to increase its equity firewall, and that can only be done by either selling off assets, which if debt-oriented will firm interest rates, or by acquiring fewer residential mortgages directly from lenders or BOTH.  The politicians have such a consistent history of appearing on the scene of a disaster after-the-fact, but the U.S. Government, with deficits rising as far as the eye can see, cannot afford to finance another systemic bailout in the $500 Billion category.  The pressure will stay on Fannie Mae to re-capitalize, and the effect on interest rates will be to send them gradually higher.  And the effect on real estate will be to put some sanity back in home pricing.  Higher cost to carry equals lower bid to purchase.

The other salient fact about the Fannie Mae situation is that unreported losses stemmed from derivatives miscalculations.  As we have discussed over the years, the Derivative Time Bomb is a reality in the Trillions of Dollars, and we may have just seen the opening salvo in the war between financial instability and stability.  There is much more to the Fannie Mae derivatives problems than has come to public light, so stay tuned to this one also.

Bonds are still behaving oddly, if not perversely.  I just read that Treasuries were off this morning because oil prices had declined.  That is the World Turned Upside-Down if I have ever heard it.  Rising oil prices, since the first note was issued in ancient Babylon, have consistently been poison to bond prices and an elixir to higher bond yields since this pervasive ingredient to the inflation soup flavored virtually every aspect of costs of production and the consumer.  That bond investors would be buying bonds as oil rises because it means that the economy will soon falter and reduce demand for credit sounds like Presidential Campaign Logic (PCL).  Enjoy the low yields and interest costs while you can.  I don't think they will last due to the intermediate spurt in inflation in just about everything we consume (unless you are the BLS!), and the disintermediation of the international Treasury market as foreign central banks and foreign individuals find other avenues to launder their Export Dollars through.  Once again, the bond market is acting in direct opposition to history:  When the Dollar has declined in the past, the cost of money has increased since import prices would be directly affected (March, 1987!), pushing inflation higher.  The biggest threat to a bondholder is erosion of purchasing power over time via the ravages of inflation.  The bond market is totally perverse in its views on inflation at this time, brushing it off as a short-term phenomenon.  Default risk is also there for bondholders, and that may be another reason that foreigners will rethink the one-way Dollar play.  A gradual, conscious devaluation of a currency by a country, the United States in this instance, is tantamount to a gradual default on the purchasing power of the currency and the total value of its outstanding obligations.

4. The Bear Market in Stocks Is Resuming, Bonds & Real Estate To Follow

I have been at the investing "game" for a very long time, and there is little about the chart below that suggests either strength or the prospect for a new bull market just around the corner:  

There is the distinct possibility, as we have seen over the last several days, that certain forces will rally the stock market above the previous 2004 high around 1165 on the S&P 500, but it will be a bear trap.  Not that I would give George W. this level of influence, but it could be a pre-election gambit to convince some borderline voters that all is not as bad as the opposition has painted.  Even the Democratic opposition has not told the truth as to how bad things really are for fear of extradition.  For those in the know, it is not difficult for Goldman-Sachs or JP Morgan-Chase to purchase enough S&P 500 futures at any given moment to rally the market on the very short-term.  This type of program trading will sucker in the average retail investor who thinks it is off to the races again, and just as he piles in, the institutions will begin selling.  If you think the stock market is a level playing field, I have a bridge to sell you.  Toss in a contested election on November 2nd or a state-side terrorist attack on November 1st or 2nd, and you will have a reversal to the downside that will make Teresa Heinz look like a librarian (a real job?).  One last gasp to a dying bull is almost to be expected from a historical standpoint.  But the odds are against stock investors, and investing, in the end, is all about odds.

SO WHERE ARE ALL THOSE BILLIONS OF DOLLARS THAT WOULD HAVE GONE INTO STOCKS OR ARE COMING OUT OF STOCKS GOING TO GO?  BONDS? ........ ME THINKS NOT.   REAL ESTATE? ......... IF YOU LIKE BUYING HIGH.  CURRENCIES? ........... FIND ONE WITHOUT SERIOUS INTERNAL FLAWS.   CASH? ............. NEGATIVE REAL RATES OF RETURN AND GETTING MORE NEGATIVE.


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So there you have it, both meat and potatoes to serve up to the Precious Metals Bull.  Since bovines are vegetarians, I had better stick with the botanical metaphors.  The pastures around the PM Bull are indeed very green.  And indeed the price behavior in gold, just a hair away from breaching the important $430 level, and silver, back into the mid-seven dollar range in a flash, have reflected the greening of the pastoral landscape.  Prices always tell the final story on the fundamentals for an asset.  Bullion prices are literally screaming that the bull is back and pawing the ground to charge up the hill.  You can ride him, ........ or be trampled by him.


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