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.

November 25, 2004:  TURKEYS COMING HOME TO ROOST.

As the unelected (and under-appreciated!) Paul Revere of the Tangible Asset World, I find it my solemn duty to cry out the alarm that the Red Coats Are Coming.  NO, make that, FINANCIAL TURMOIL IS COMING!  There must be some Puritan blood in these aging veins that I would sit here in front of the computer warden on a holiday and type out these words of sustenance for the hungry American investor.  There must be something better that I could be doing, like maybe having some fun on a 4 to 6 mile hike through the beautiful Virginia countryside, but duty calls.  Plus it is so gray and blustery outside today, I may just stuff myself as is tradition and work on the incremental pounds over the coming weekend.  To the task at hand .........................

I personally am a little tired of discussing the importance of the U.S. Dollar to the stability of the U.S. financial system and economy, but please be gracious in this holiday season and hear me out.  Take a look at the chart below and tell me that all is well in the land of $7 Trillion Federal Debt and $54 Trillion Future Federal Liabilities!:

If I were Alan Greenspan, I would be a little concerned about the rapidity of the downward slope in this Reserve Medium of Exchange.  It appears that we could reach and blow through the 80 level on the Dollar Index before all of the leftovers are consumed from the frig.  I think a bell has truly rung, well before I ring the warning bell to the village inhabitants herein that keeping their minds closed to the reality of the global financial scene unfolding before them will not serve them well. 

THE WORLD IS LOSING FAITH IN THE UNITED STATES' ABILITY AND WILLINGNESS TO MAINTAIN FISCAL AND ECONOMIC DISCIPLINE AND NOT TO DEVALUE ITS NEW AND OUTSTANDING DEBT.

Now, there are two ways a country can effectively diminish the value of its obligations in the hands of lenders to lessen the eventual burden on its citizenry AND KEEP THE ELECTED RASCALS IN OFFICE:  1.)  An outright repudiation of the willingness (or means) to repay either the principal, the interest, or both on its indebtedness in a timely manner,  AND/OR 2.)  A covert or overt set of policies and actions that will depreciate the currency that the debt is denominated in to the extent that servicing and repayment costs are diminished over time. 

This latter strategy is the only alternative that the U.S. Government has at this time to attempt to turn the 200-pound Gorilla on its and its citizens' backs into a still annoying Chimpanzee.  Not that the current Dollar Collapse is the mastermind of shrewd minds at the Federal Reserve, the Treasury, and the White House, because it actually is just a desired effect that the currency markets, not any governmental body, has put into play based on deteriorating U.S. debt, financial, and economic fundamentals.  We would all like to think on this day of Thanksgiving that we are getting something for the Billions of dollars we dutifully send to Washington each year, but I am afraid once again that external forces, not over-paid internal ones, are making the bureaucrats look like they are actually earning their paychecks.  And I think we should start the season with both Presidential Candidates kicking back a few million dollars into the public coffers for the time they spent attempting to get the Top Dog Slot and not minding to the business of the nation.  Can you imagine how many meals, utility bills, articles of clothing, and shelters we could have provided for the impoverished and less fortunate in this country with $200 Million spent on a Presidential Election!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

WE AMERICANS TRULY LIVE IN AN ERA OF FINANCIAL ABSURDITIES AND WANTON EXCESSES ...... and at some point we will pay the price for our record-breaking profligacy.  There goes that Puritan genealogy again!

Not one currency trader is convinced that the United States truly seeks a Strong Dollar Policy at this point in its debt-crazed history.  Treasury Secretary Snow, a rather unimpressive keeper of the public till in my opinion, can barely keep a straight face when talking about currency debasement and prosperity.  He of all people knows that the U.S. has no choice with its current debt burden but to debase the Currency of the Realm and, in doing so, cheapen the value of all new and outstanding obligations and interest payments of the United States.  As Euro's continue to appreciate against the Greenback, for example, more and more Dollars can be created out of thin air to pay for each one of them; as the existing reserve currency for international trade, the U.S. has flooded the world with Dollars at will in order to live heavily dependent on newly-created debt.  It is hard to believe that any rational investor of public or private funds from overseas will continue indefinitely to invest in or receive in payment a currency that is progressively becoming less valuable in local currency terms.  At some junction, and we are seeing it now in the renewed steep decline of the Dollar, the foreign central banks and private overseas investors reduce their new purchases of dollar-denominated debt and U.S. assets.  That sea change is well underway based on every available statistic, and the dollars' value is rapidly reflecting its newfound evaluation by the marketplace.  A trend in place is more likely to be continued than to reverse, especially if the fundamentals underlying that asset continue to support the trend; as to the stock market, in opposition to current dollar and precious metals trends, the fundamentals are deteriorating while investors chase over-priced stocks.

THE TURKEYS ARE COMING HOME TO ROOST.

Without being the Harbinger of Doom that so many of us bullion investors are labeled, I think we are witnessing a global re-evaluation of the desirability of reinvesting export-generated Dollars in U.S. assets.  If Bill Gross of PIMCO fame is correct, and he usually is, we are destined to see higher interest rates as we enter 2005.  The Fed can no longer operate in isolation by continuing to keep U.S. interest rates at artificially low levels when foreign investors are loosing 1% to 3% on principal alone on an almost weekly basis.  The attractiveness of investing in U.S. Treasuries is greatly compromised by the total supply already existing in the global portfolio, the explosion of U.S. fiscal deficits and total indebtedness, and a currency that is guaranteeing negative total returns, in significant magnitude, within months of asset acquisition.  

Where will these redirected Dollars go?  I think Japan, Europe, China, Russia, and Southeast Asia will continue to re-cycle excess Dollars increasingly into Euros, gold, silver, and commodities, the latter either directly or via natural resource company purchases as shown in recent Canadian acquisitions by China.  Russia, under the ex-KGB officer who must still have his uniform in the closet, is discussing and probably implementing an oil-export program denominated in Euros instead of Dollars.  I can imagine both Russia and China, the former no longer a superpower and the later an emerging one, using the plight of the American borrower to strategic, economic, and political advantage.  As America's ability to economically influence the majority of the world diminishes with the inevitable debt reduction process and all-levels spending retrenchments in our not-so-distant future, the influence of these quasi-oligarchies will increase.  While all of our trading partners hold a not insignificant cache of wilting Dollars, they now realize that he who gets to the exit door first may lose the least.  All nations holding Dollar Reserves will lose with the 50% to 70% depreciation of the Dollar from the Year 2002 highs; even without outright selling of Treasuries or Dollar reserves, each central bank will experience a reduction in total reserves as the Reserve Currency of the world loses its value.

Without showing the charts for gold and silver, which are usually distorted due to a financial paper market run amuck at the metals exchanges, gold is on its way to $500 per ounce before Spring of 2005.  The critical $430 threshold has been convincingly surpassed, a level that held for some 16 years of the now extinct cyclical bear market for the precious metals.  As noted above, the world's central banks will be very cautious in continuing to sell their gold reserves.  Since there are few alternatives of any liquidity with equal value retention to replace the Dollar as a reserve asset, the late-to-the-party bankers will hold onto gold and even do the unthinkable of a year ago and actually acquire new gold reserves.  I made this bold statement 4 years ago, and it is very close to coming true today.  We will have the normal pullbacks along the way to higher and higher gold prices since the futures & options traders have to make a living too, but there is no question that the gold bull is prancing strongly up the hill.  Silver will surpass $8 per ounce by Christmas in my humble opinion, and go on another tear in early 2005 as it did in 2004 with the $10 per ounce level the next correction point.  Bold forecasts you say, but I am not that far off the mark for my 2004 forecasts of $500 gold and $7 silver.  Now we exceeded the silver target by a $1.30 or 18% margin and even after the gut-wrenching pullback starting in April (so common for the commodities!!!), we continue to be in the mid-$7 range and looking to go higher.  2004 SILVER FORECAST ........ WCM GETS AN A+++ and a trip to Buffalo in February.  2004 GOLD FORECAST ......... STAY TUNED!

Now, I guess I am wigging out on gold hitting $500 per ounce before year-end, but would you settle for $485, close enough for railroad work?!!  If the Dollar continues to melt into the abyss like it has been doing since the re-election of George W. (correlation with Big Spending and Fiscal Largess?!) ....... and a failure of the Fed to bump Fed Funds another 1/4% in December could cast the spell ...... then we could shoot to the $535 level before another normal correction, say in February of 2005.  Sounds an awful lot like a repeat of 2004's price activity, but there may be some seasonality to these puppies yet.  The eventual flight of dollars out of stocks into any place that shows promise is another wild card in the current flock of turkeys coming home to roost; higher interest rates will be a death knell for a debt-extended and debt-addicted economy as will eventually be forecast by stock prices.  The stock and bond markets have largely ignored the Dollar Meltdown to date, but history shows that this will not persist.  Perverse as it sounds, the Fed will really not be the bad guy in its nudging of short-term rates higher at this point, because the global bond market is going to play its hand in causing U.S. Treasuries to be marked down in price (and marked significantly up in yield) in the longer maturities of 5 years and out.  A classic case of too much supply in a new era of diminishing demand.  YOU GOT TO PAY ME MUCH MORE IN INTEREST IF YOU EXPECT ME TO INVEST IN DOLLAR DENOMINATED DEBT .......... makes perfect sense to me!

Let me put it in a nutshell as an appetizer to your Thanksgiving Feast:  SELL MOST STOCKS, AVOID BONDS, DOWNSIZE YOUR REAL ESTATE (HOUSE TRAILER?), PAY DOWN ALL DEBT, GATHER CASH ..... MAYBE IN SWISS FRANCS, AND BUY THE PRECIOUS METALS and other Portable Tangible Assets.

As far as Palladium and Platinum go, I think they will have one more spectacular run before the wheels come off the global economy beginning in mid-2005; China and India will probably continue to perk until 2006 due to the emergence of a sizeable middle-class.  As far as the GOLD ETF as a means to acquire gold, please read James Turk's recent article on custodial safekeeping of the ETF's purported physical gold holdings (fund prospectus says it's goal is merely to track the price of gold which can be done almost 100% with shaky paper contracts) at http://news.goldseek.com/JamesTurk/1101136353.php

HAVE A JOYOUS HOLIDAY SEASON.  AND GOD BLESS THE MEN AND WOMEN OF OUR ARMED SERVICES AND RELIEF ORGANIZATIONS THAT ARE WORKING TO MAKE THE WORLD A SAFER AND BETTER PLACE.  BLESS THE GOOD PEOPLE OF IRAQ.  THANK GOD THAT WE HAVE PEOPLE WHO WILL SERVE SO THAT WE MAY ENJOY THE COMFORTS OF OUR OWN HOMES THIS HOLIDAY OUT OF HARM'S WAY.  OUR GRATITUDE TO THEM, THESE BRAVE, UNSELFISH SOULS, NOW AS IN THE PAST, IS TOTAL AND ETERNAL.

News Flash from the Front (Wexford scores again!):

Gosh, I feel like a politician being right all the time!!!


Back to TOP

December 27, 2004:  T'was The Night Before .....

This post-Christmas title, and I will leave Christ in the picture since I don't give a hoot about being politically correct, conjures up visions of pleasant things yet to appear underneath the Yuletide tree, but regular readers know that I am seldom so cheery in my tidings of Christmas Yet To Come.  It is just that this classic poem's title is not only seasonally fitting, but very apropos to the environment investors are currently mesmerized within.  I know that most stock investors have visions of sugar plums of 10% plus 2004 and 2005 gains dancing in their heads, but I hate to be The Grinch That Stole Christmas with a blizzard of reality.  The phrase, "All quiet on the Western Front" comes to mind also, but appearances of tranquility in this electronic age can be most deceiving and the trappings of the season mask many well-developed rumblings below the tinsel.  That rather ugly, green Grinch is not even attempting to hide from view, but the celebrants chose not to pay him any heed.  It's that persistent, "Don't bother me with bad news" mentality of Americans today that inevitably will cost them dearly in the years ahead and cause their retirements to be semi-retirements with WalMart or Home Depot aprons and wage scales.

Very little attention seems to be given by the herd of Equity Reindeer to the goings on at Fannie Mae.  With the recent announcement of the forced resignations of the CEO and Chief Financial Officer of that liquidity machine granted quasi-Government backing, the spell is being cast for a recapitalization of this grossly under-capitalized repackager of residential mortgages.  Americans, most of them that do not read similar, out-of-the-mainstream publications such as Bullion Market Insights, are virtually oblivious to the pre-avalanche rumblings on the snow-laden ledge of credit-creation in this country.  The Real Estate Bubble is alive and well by all reasonable measures, but I was rather pleased to see Home Building Starts take a precipitous drop last month.  Could it be that these speculators in housing supply, home builders, were getting a chain-rattling vision of their own of Housing Demand Yet To Come?  There is no question that the supply of single-family homes has exploded in 2004; the number of days of sales sitting on lots has recently exceeded the rather telling 60-days plus in the majority of U.S. housing markets.  I look around my very rural setting here in the Shenandoah Valley, and I see no less than 5 major subdivisions within 2 miles in process in a market that barely had one under construction at any given time 3 years ago.  The modest abode that I paid cash for just two years ago has risen over 40% in this frothy time period, and if that does not suggest a speculative bubble, I also have a used Xmas tree to sell you.  But when you talk to the local realtors, subcontractors, and builders, there seems to be no doubt in their minds that the good times will go on, at higher and higher prices, as far as the transit can see.  The Washington regional market has historically been  a distortion of national trends, since the Biggest Spender on the Planet, the U.S. Government, is some 90 miles east of here, and always keeps the real estate party going a bit longer than nationally due to its bottomless money bag.  But land and home values have and do decline in this Federally Subsided Market!!!  That is why I built my last home during the bust years of 1991 and 1992 as the market had already begun to roll over!

Mortgages rates are going 200 to 300 basis points higher in 2005 to northward of 9.0% for a 30-year Conventional Mortgage, a real deal breaker level per most experienced realtors.  Now that I have awaken you from a Long Winter's Nap, I will present the very real facts of why that forecast has a greater than 50% probability as we get ready to bring in the new year.  For one, I think that delinquencies and foreclosures are going to take a leap upward by mid-2005 as the real health of the U.S. economy becomes more and more apparent even in the grossly-distorted government statistics.  I know for a fact that many of my neighbors have taken virtually every last penny of "paper equity" out of their bloated homes' prices to spend on new vehicles for every two-legged creature in the household, home over-improvements, very nice vacations, and gadgetry out the gazoo.  That is a national phenomenon that I think most of you have observed in your local neighborhoods also; hopefully, you have not observed it in your own household.  I would say that the mortgage refinance mother load is just about exhausted as evidenced by the 30% decline in refi activity in 2004.  I also think that home appreciation rates of 20% to 30% have peaked, and we will see much more modest home appreciation in 2005 of from 5% to 10% maximum and maybe not across-the-board in all markets.  So the moola is just not going to be there in the American home to tap for current consumption and to pay the tabs already rung up over the last 5 years of wayward spending; the proverbial "brick wall of equity tapping" is either already here or fast approaching.

I will get back to the very significant developments at Fannie Mae and their direct influence on the cost of mortgage money, but we have a potential in 2005 for the ten-year Treasury Note to easily spike upward by 150 to 200 basis points from today's 4.25% to over 6.00%.  Since the spread over the 10-year usually hovers around 150 to 200 basis points for mortgage money, this "risk-free money" pricing alone suggests a 30-year mortgage rate of 7.50% to 8.00%.  Commodity, health-related, housing, energy, and services inflation, not to mention State and local tax bills bloated by property re-assessments, will be persistently higher in 2005 than the 3.0% drivel put out by Washington.  I continue to feel that real-world inflation for us middle-class mortals is closer to 5% and 6% based on my own monthly repetitive expenditures than any "acceptable level of inflation" that the Federal Reserve lauds to exist.  And even as an economy starts to roll over into a new recession, which I think will begin to surface by August of 2005, prices can increase and stay stubbornly high as resellers unload inventory acquired at cycle-peak prices.  Price increases are not likely to moderate until 2006, so the inflation component to interest rates in 2005 will put upward pressure under rates (and a small fire under the omnipotent Fed).

The Federal Reserve will take the Fed Funds rate from today's 2.25% to 4.25% by 3rd Quarter, 2005, in its telegraphed campaign to gradually increase rates to attempt to continue to present the facade of "Inflation Fighter", attempt to attract foreign capital, and to give it headroom to begin easing again by 2006.  Not a guaranteed occurrence of 200 points out of FedLand, but a likely one since the rate increases are likely to be front-loaded in 2005 BEFORE THE BAD NEWS ON THE ECONOMY'S REAL HEALTH BECOMES APPARENT EVEN TO THOSE WITH ROSE-COLORED GLASSES.  With inflation hardly dead in any observer's eyes other than Saint Greenspan's, these moves will be needed just to slow the continued decline of the Dollar and hardly to stem or reverse it.  The spreads between the Dollar and leading competitors such as the Euro, Yen, Swiss Franc, Pound, Loonie, Aussie, and Kiwi will likely be maintained by those more prudent central banks, so St. Alan, who has been spreading cheer for some 4 years now, will literally be on a hamster wheel in trying to protect the Dollar.

This rate boosting influence, and possibly the most significant influence should we get into a crisis mode in the currency markets at some point in 2005, is the continued shunning and selling of U.S. Dollars by foreign investors.  I personally think we will have a Dollar Crisis in 2005 since there is really little the bureaucrats can do to re-instill confidence in a reserve currency that is barely worth the paper it is printed on.  Too many Dollars floating around in the world, with a new, epoch-sized reversal in absolute demand.  Ain't got to have Dollars in reserve if one can substitute Euros, Swiss Francs, gold or silver!  The German central banks announcement that it will greatly reduce its 2005 and beyond sales of gold tonnage once again proves the Sage of Wexford correct in his Nostradamus-like predictions of the future.  Since the Germans no longer have the strongest currency in Europe, the Mark, to bolster their reserve position, but the realistically compromised Euro, they see the writing on the wall vis a vis their U.S. Dollar holdings.  A depreciating asset by any measure.  Hence, as predicted on these pixel pages over two years ago, not only will European central bank gold sales diminish with time well below the reduced levels of Washington Agreement Renewed (WAR?), but eventually central banks will move back into a net acquisition mode due to an absolute scarcity of viable alternatives.  They have been masters of creating fiat currencies for the last hundred plus years, so they know quite well that they can become virtually worthless on a purchasing power basis.  Based on their track records, particularly the Bank of England, gold will probably be trading in the $600 zone before the light bulb twinkles.

With the re-election of George W. Bush, the Dollar has been beaten up as badly as a certain Swift Boat Captain.  As my nimble digits fly across the keyboard this frigid December day, the Dollar Index is trading only 3/4 of a Point from the 80 level that the Sage predicted would be hit before the leftovers left the Thanksgiving refrigerator.  Those would possibly be very stale leftovers by now, but you get the point.  The Dollar's devaluation is virtually accelerating as we close out the year, at a time when the repatriation of foreign earnings often provides a Santa Rally for the Dollar.  I guess few in WhoVille want to be showing a large dollar position into the New Year.  With this kind of re-pricing action, even in admittedly thin holiday markets the last 5 trading days, my predilection of a Dollar Crisis becomes more probable.  A single event or series of events that spook the already skittish currency traders around the world could knock another 10% to 15% off the Greenback in the shake of a reindeer's tail.  A major counter-trend rally would occur at that valley point, talked up by those still holding the bag, but that would be only another excellent point to exit the U.S. currency.

As for that stalwart corporate citizen, Fannie Mae, having done its civic duty the last 4 years by flooding the country with ultra-cheap mortgages to many credits that should still be renting, the now awake overseers are pulling up the reins on this runaway sled.  Now that the top echelon at that august agency have become multi-multi-millionaires by engaging in that well-accepted American pastime of cooking the books with fiscal spice, it is time to punish the offenders and the corporate body itself; a $25 Million severance parachute for Raines, the CEO (Chief Exaggeration Officer), seems a little excessive for a potential felon doesn't it?!!!.  Snatch and Grab on a grand corporate scale!  Although the cow is long out of the barn, it is time to set the barn on fire by forcing this money machine into retrenching its asset base by actually selling some mortgage holdings & reducing future purchases, beefing up its miniscule capital base via new paper, and reversing a mere $9 Billion in pixy profits into the losses they actually were.  So it will take around $5 Billion after taxes to just break even on this new venture and several $100 Billion in asset reduction to shrink the balance sheet.  Do I hear class action lawsuit by Fannie Mae shareholders?!!  What this will do to the cost and availability of mortgages in 2005, I can only guess direction, BUT IT WON'T BE POSITIVE FOR THE HOUSING MARKET AND THE ECONOMY AND THE STOCK MARKET, FELLOW MERRY MEN (AND WOMEN, to keep myself out of political hot water!).   

All of the above support higher precious metals prices into and throughout 2005.  Oh there will be the fits and starts as befits commodity assets, especially those so often harassed by the bored traders in the commodity pits, but Santa's Elves will be busy at work making sure your Christmas 2005 is a very, very Merry Christmas.  Or whatever holiday you celebrate this time of year, since I can't spell most of them, but you get the picture.  Happy Holidays, and may all your Christmas' be shiny bright.


Back to TOP

January 28, 2005:  Train Rumbling Down the Tracks

I can vaguely remember traveling aboard a passenger train in the early 50's leaving Highland Falls, New York, just outside of West Point to Grand Central Station in New York City virtually each and every weekend for well over a year.  My late father was stationed in Korea fighting the Communists as a newly-minted U.S. Military Academy Grad, and we fled the country-side for the warmth of the Czech enclave called Little Ferry in New Jersey each weekend to visit my grandparents, the Dolansky's.  Great little town to grow up in with everyone of Eastern European descent (only the police were Irish!), everyone knowing everyone, lots of laughter, and plates and plates of great food.  I even got a small glass of Budweiser with lunch, not uncommon for European children.  If life were only so pleasant and simple now.  I can still hear the clatter of the train as it went dutifully down the tracks winding along the Hudson River to our destination.

If we were to view the physics of this mode of transportation, we could rightfully assume that an object in motion will stay in motion until friction, the massive steel wheels on the polished steel track, gradually slows down the train once the throttle is pulled back.  I guess these trains were diesel burners, since I don't recall any soot flying by the window, and I can still hear the screeching of the massive wheels as we braked coming into Union Station or West Point.  The engineer could have coasted to a stop in those days, but staying on time was equally important then as now.  The reality of friction once a throttle is pulled back slowly stopping an even speeding train is an analogy that can readily be applied to the U.S. economy and financial system in 2005.

There are many components of friction being applied to the U.S. economy today, the most publicized of which is the New Rate Tightening Cycle of the Federal Reserve.  Since the Sage is known for going out on a limb (or rail spur in this analogy), I am going to lay on the tracks and say that the next tightening move by the slow-behind-the-wheel Fed will be a 50 basis point shot across the speculators' cow-catcher.  What better way for a Central Bank that has lost the credit management discipline of Paul Volcker, flooded the world with depression-era priced dollars, and created more bubbles than a washing machine to ATTEMPT TO REGAIN A MODICUM OF DOLLAR-HOLDERS' CONFIDENCE?!!  Maybe the Dollar's recent dead-cat bounce has telegraphed this vision of the Sage or maybe it just reflects the continued Catch 22 recycling of America's ballooning Trade Deficit by dollar-laden Asian central banks.  But I think, as I said last month, that the Fed will surprise both the masses and the speculators with the alacrity and magnitude of interest rate tightening in the First Half of 2005.  Since everyone but the conductor states that the U.S. economy is vibrant, productivity-fed, and growing strongly, who could fault the Fed for just throwing back the lever a tad quicker and in greater amplitude?!!  Just targeting a neutral Fed Funds rate in the 4% plus range, a mere 175 basis points from today, is hardly the stuff of standing on the brakes by the Chief Engineer, Sir Alan.  Plus, the Eliminator of Moral Hazard in the Financial Markets, Mr. Greenspan, is probably being interviewed by DoubleDay for his memoirs, and he knows that a Speeding Credit Train can easily go off the tracks by a pebble or slight irregularity on the tracks.  That pebble has Interest Rate Swap written all over it, but the Fed has sounded the whistle for everyone to get off the tracks for months now, caveat emptor; this almost unprecedented forewarning bespeaks volumes as to "measured pace" not necessarily being so "measured".

One of the signals along the track that will flash a green or red light for the speeding train will be large ticket, relatively illiquid asset sales, such as our bloated real estate market.  We have not yet begun to see the back-up in Ten Year Treasuries and Mortgages as I have been predicting, but it is just a matter of time; a carload full of patience is required for successful investing in the New Millennium.  Maintaining the status quo appears to be one of the tenets of Government.  It is unlikely that we will see the classic Inverted Yield Curve in the U.S. prior the the 3rd Quarter, 2005 Recession's visibility, since the intermediate-term market is going to more rapidly bid up note yields and bid down prices due to:

1.) the high potential for Dollar-to-domestic currency translation losses by foreign bondholders, to include Asian Central Banks
2.) continuing inflation creep even in the massaged BLS numbers toward 5% plus with oil, healthcare, drugs, raw materials, food and taxes upwardly sticky in 2005
3.) disintermediation or liquidity problems in the secondary mortgage market due to Fannie Mae's and Freddie Mac's asset retrenchments and 
4.) loss of faith in U.S. creditworthiness due to exponential war costs and rebuilding, unfunded future U.S. liabilities in Medicare, Medicaid, & Social Security, and new social program initiatives put forth by the Bush administration and Pork Galore by Congress
5.) AND the reallocation of foreign currency reserves into Euros and Gold by major Central Banks such as China, Japan, Euroland, Indonesia, Russia, etc., in an attempt to reduce Total Dollar Exposure.  The Fed has awoken to the reality that higher, or let's say POSITIVE!, real interest rates are needed to stem this tide.

That is a carload full of reasons for higher intermediate and long-term rates in this country this year, and as the U.S. stock market continues its Secular Bear Market first begun in 2000, foreign investment flows into U.S. assets denominated in dollars will ebb further.  Although I have not seen the final number yet, January, 2005 might become the first January in decades where net investment inflows into equity mutual funds was a negative number, i.e., an outflow.  Not a vote of confidence by investors in U.S. stocks, by any means.  In fact, investors are voting with their feet and cutting their exposures to equities as evidenced below. 

A look at the graph above shows accelerated deterioration in the S&P since the start of the year, even as the Dollar provided relief for foreign investors with its tired looking mini-rally.  The On Balance Volume and MACD oscillator are decidedly bearish, and I expect selling to pick up in the First Quarter as investors realize that the best news on stocks is behind them.  Risk-to-reward is not favorable for U.S. stock market investors (P.E. of 21 and yield of 1.7%!), with many players still 30% to 40% underwater from the March, 2000 highs.  Corporate governance issues continue to make headlines, even if less widely covered now in the media, as Merck, a classic recession-resistant healthcare company, today comes under full S.E.C. investigation.  Grave issues with the efficacy of reported financial numbers from Corporate America continue even if investors in 2003 and 2004 chose to ignore their existence.  The Fed of late has alluded directly to end-of-cycle merger and acquisition activity as another sign of current excess speculation in financial assets due to outlier credit and liquidity conditions (that the Fed has helped to create!), and the pulls on the lever to slow the financial market train through interest rate policy will first show up in lower stock prices.  The financing costs, whether debt or equity, will be less favorable to participants in deals going forward.  But the magnitude (SBC buying AT&T and P&G buying Gillette) and numbers of mega-deals harken back to the days of the failed AOL and Time-Warner merger and merger-mania in InternetLand.  History indeed repeats itself for those who fail to heed its lessons.

A quick pull of 50 basis points next week may allow the Dollar Index to hit 86 as the top of its range in this move, but I think it will be a very brief reflex rally as a 2.75% Fed Funds rate is still about 100 basis points below officially-reported U.S. inflation (BLS version only!).  From my pedestrian experience, I would say this upcoming rate would be still 200 to 300 basis point behind Man-On-The-Street Inflation.  In currency investing, it is all about real rates of return on money, and there is nothing appealing about a still negative rate on U.S. Dollars at the short end.  I am convinced that a surprise 50 point tightening by the Fed will cause some carry-trade or derivative speculator of magnitude to be caught with his knickers down.  Easy money is addictive, and all the warning whistles and flashing crossing lights from the Fed may have gone unheeded by cheap money speculators literally playing on the railroad tracks of leverage.  We will see shortly.

Gold and silver are doing just fine.  In fact, we are closer to the end of this consolidation period than the beginning of any further retrenchment.  Investors will wait until we clear $435 on gold and $7 on silver again, but I expect the action to be fast and furious once we do.  I am not a proponent of investors buying any ETF in the metals, since I trust very few to hold my bullion for me and even fewer to tell me where it is; plus, the memories of Arthur Andersen's transgressions are still fresh.  Paper or Physical???  Promise to Pay or Bird In The Hand?  But the growth of the StreetTrack fund is an indication that the switch light at the junction for tangible, non-financial assets is green, and billions of dollars are finding their way into gold and silver, as the Sage has so correctly predicted over the years since 1998.  I opened a Precious Metals IRA in 1997, ahead of my time, but confident that the bull run in stocks that began in August, 1982 was over, and non-traditional assets where necessary to build a retirement nest egg.  I am also not a believer in owning precious metals stocks as long as corporate executives are motivated by stock-option/ stock performance tied compensation.  The Bre-X fiasco is still very fresh in my mind.  Non-dollar denominated cash as about 30% percentage of total cash (yeah, U.S. Treasury Bills for now for 70%), bullion, and other tangible assets are my preferences hands down for 2005 and likely up to 2013.  AND GET RID OF THAT DEBT OVERHANG!!!  I would sell my $100k in two years appreciated house if I could get my partner to think luxury RV bus on 20 wooded acres in the boonies!

So as the train rumbles down the track, the engineer has clearly signaled to all in his path that he is pulling back on the throttle.  Due to neglect over the years in track maintenance (total systemic debt accumulation), the engineer knows that the current speed of the train (excessive credit creation) is a recipe for impending disaster to the crew and passengers on the train.  The speculator at the station (Wall Street) expects the train to proceed as normal, without a single delivery delay (unmatched trade).  The train vibrates threateningly as it moves forward; the conductor (he who has learned from the vicissitudes of the markets) is looking warily outside the window of the caboose.  The conductor knows that he must jump before the train can come to a stop since a derailment (financial accident) is more possible than ever in his decades of experience.  The freight train on the opposite track is the Bullion Express, still gathering steam and still only at 5 mph, and he readies himself for a safe landing onboard.  He will only be okay (financially secure) if he jumps in time.  Jumping from a still speeding train may be the safest thing he can do.

Moscow News Friday, February 4, 2005 Russia's central bank said on Friday it had begun targeting the ruble's nominal exchange rate against the euro as well as the dollar, the Reuters news agency reports. The shift is meant to bring currency policy more in line with trade flows. The Bank of Russia said in a statement it had begun targeting a dual currency basket -- made up of 90 U.S. cents and 10 euro cents -- as of Feb. 1 and would gradually raise the weighting of euros. "Increases of the weighting of the euro in the twin currency basket, to a level appropriate for the task of exchange rate policy, will take place step-by-step as market players adapt," the statement said….

From the illustrious Bill Murphy of GATA fame, Friday, Feb. 4th: http://www.gold-eagle.com/editorials_05/murphy020505.html This IMF gold sales saga has created an unusual situation amongst commentators. Three significant bullion banks, UBS, Royal Bank of Canada, and HSBC have now published analyses concluding that IMF gold sales (as opposed to market-benign revaluation) are impractical for reasons derived from the IMF Constitution and irrational from the point of view of debt relief. All three are making bullish noises: UBS: "We believe that selling gold for debt relief of poor countries makes no sense, as it is neither practicable nor necessary…we expect the market to snap back once revaluation and its implications are accepted by the market." HSBC: "…we doubt that anything material has changed in the bullion market to justify such huge swings in the long gold/short dollar positions and look at current price levels as an increasingly attractive buying opportunity" RBC: "We feel the market has overreacted to Brown’s comments, and that gold is oversold… gold’s current weakness presents a good buying opportunity." DON'T BE DISCOURAGED, BILL!  IT IS ALWAYS DARKEST BEFORE THE DAWN.  Markets turn when people least expect them to.  THE PRECIOUS METALS ARE UNDER ACCUMULATION, a necessary ingredient for the upcoming surge higher.  Sage of Wexford, after breakfast, Sunday, Feb. 6th.

Excess supply always leads to lower prices, and demand can not absorb the housing supply overhang due to lack of growth in personal net income, not to mention bulging debt service outflows.

Back to TOP




February 26, 2005:  Can Greenspan Exit Gracefully??

When one is in the Public Domain, he or she should expect to receive their fair share on criticism from the Unheralded Masses; it comes with the generous salary and benefits as well as the territory.  Many of us more laissez fare types would say of Central Bankers, paraphrasing the Hippocratic Oath, "Do No Harm".  History always has a way of shedding light upon the foibles and accomplishments of those pulling the Levers of Power, and recent revelations about former Secretary of the Treasury, Robert Rubin's involvement in raiding the Social Security Trust Fund to circumvent the U.S. Debt Ceiling mandated by Congress is a case in point.  Rubin appeared of the same mold as Sir Alan in his repeated willingness to virtually eliminate Moral Hazard in the financial markets by making the Government and governmental entities the Lender of First Resort during global financial crises.  Must keep the highly leveraged and vulnerable Financial Ponzi Scheme going at all costs, even to the detriment of the long-term viability of the entire financial system.  AS LONG AS IT DOESN'T COLLAPSE ON MY WATCH is the placard found hidden in the offices of these manipulators of the Supply & (hence!) Demand of Credit.  As we head toward the Federal Reserve Chairman's mandatory retirement on January 31, 2006, it almost seems that he is becoming increasingly vocal with increased public statements so that he may go on record as having warned the world about global financial system imbalances before, A.) the crapola hits the fan, or B.) he permanently hits the golf links.  I don't want to get into the behavior a cornered animal exhibits when threatened with demise, but there is a hint of distress in his more-vocal-than-usual behavior.  Equally strange, he is often speaking with clarity that does not require translation by an Oxford scholar.

I am not giving Chairman Greenspan a pass on the plethora of absurd statements that only a failing Econ 101 student would buy, such as only being able to recognize a bubble in hindsight, or that the Current Account Deficit merely depicts the superiority of America's more efficient utilization of capital, or that the financial markets are a wonderful, self-regulating, all-omnipotent force that has managed to internally adjust to every egregious financial imbalance since he took the reins in 1987.  Greenspan has been the Master of Convoluted Reasoning, at least in public, these last 13 years.  As history will show, he has probably been wearing a Depends undergarment this entire time, and these purportedly calming statements of "All Is Well On The American Economic and Financial Front" were primarily attempts to keep the passengers from rushing the lifeboats.  The Captain of the Titanic could not have yelled "man the lifeboats" the minute he hit the giant iceberg, so Captains of the Ship of State must maintain an aura of calm even as the bulkheads collapse and the sea comes rushing in.  But, in the meantime, the poor trusting citizens of the realm are mislead into believing that they can continue to operate in an imprudent manner and spend almost without limit that which they do not earn or save.  Kind of like those that continued to waltz in the Titanic's ballroom as the music played on (and the ship slowly sank).

Ever since 1996, when now "Sir" Alan warned timidly of possible "irrational exuberance" in the U.S. stock market, a psychology has developed in the American investor that is truly a sign of our times.  We are a hurried lot, attempting to cram a multitude of personal and professional tasks into a single day, and thus "doing a lot of things" to meet diverse demands on our time, but inherently "doing few things well".  This severe compromise of attainment ranges from educating Johnny, to instilling manners, ethics, and integrity in our children, to public civility and manners, especially behind the wheel and the shopping cart, and even to that bastion of modern times, to understanding the vicissitudes of the investment landscape.  We as a nation no longer have the luxury of time.  Time to properly raise children, time to be polite to our fellows, time to contemplate the long-term view, or time to do our investment homework.  And because of this severe limitation on a scarce natural resource, TIME, we are also in a big hurry to get results.  If it ain't a winning strategy in the next 60 days, chuck it and shove the money someplace else.  Who cares if the most successful investors throughout the millennia were almost always long-term visionaries and had the conviction and fortitude to ride the rising and falling tides of an investment choice.  

I mention this investment psychology of today because Greenspan knew his audience; he knew what made it tick.  He knew that the vast majority of American investors would take his sometimes preposterous statements at face value not only because his was a voice of authority, but his audience did not have the time or the predisposition to dissect the entrails of his opaque verse.
THE AMERICAN PUBLIC AND PUBLIC OFFICIALS HAVE TAKEN GREENSPAN'S EXPOSITIONS AT FACE VALUE FOR THE LAST 13 PLUS YEARS!  Why?  Because even when their gut told them that something was terribly amiss with the economy and/or the financial markets and/or the currency of the realm, the members of the audience preferred to take the mental short-cut and maintain safety in numbers with the thundering masses.  We may well call this period the Era of Mass Acceptance (EMA).  As long as you were making money in tech or dot.com stocks in February, 2000, why should you ponder the seething inconsistencies in earnings growth versus company valuations?!!  For an American investor since 1987, it has been easier to believe Alan Greenspan that to attempt to contradict his persistent proclamations of everything being on a solid footing.  The Chairman played his audience like a Stradivarius violin, since he unfortunately became more enamored with the constant applause than the notes he was playing.  Bearers of bad tidings seem to have few friends; the backslappers are the life of the party. 

Now to the question, oh loyal readers, as to whether Sir Alan Greenspan, much heralded Chairman of the American Federal Reserve, can exit the stage gracefully to continued applause.  Let's look at how he is setting the stage for his exit, forgive the pun.

I don't think the man lacks intelligence.  I just think he has been caught up in his own persona, in his own notoriety, to the detriment of his mission.  He now has the vision of statues being pulled down in the public squares of leaders who failed to lead or served mainly themselves.  When we all utter our last breaths, the one eternity we know for certain is that of our legacy, our memory in the hearts and minds of men.  This is the legacy year for Alan Greenspan.  Since Americans' memories can be short, Sir Alan feels that if he can at least "appear" to be steering the Ship of State in a prudent and skillful manner as he passes the helm to another, then his legacy will not suffer too badly.  He has donned the Inflation Fighter of First Resort hat in the past year, and now stands firmly ready to bring U.S. short-term interest rates into a "prudent", "neutral" stance.  He is at the wheel.  He is minding a slow and steady course of higher interest rates to wring out the excesses of financial speculation, to stymie over-borrowing at the governmental and consumer levels, and to defend the sorry Dollar by attempting to provide positive real interest rates to our foreign benefactors. 

He has virtually sent written notices to members of the "Carry Trade" that the easy money has been made by borrowing short and lending long with 20 to 1 plus leverage.  The guaranteed spreads are disappearing for the Carry Trade as the yield curve flattens between short and long term interest rates.  Any players who get caught long the bond market as Steady At the Helm Greenspan notches rates higher for the next 5 to 7 FOMC meetings throughout 2005, have only themselves to blame for staggering losses due to imprudent leverage and unmatched derivatives.  Fed Funds are headed for 4% to 4.5% before the Chairman retires.  Should we get into a Dollar Crisis, which has a greater than 50% probability in 2005, then rates will increase faster and higher than forecast; we could be at a 5% Fed Funds rate by January, 2006.  The Maestro has rung the warning bell for almost a year now.  It would take a major financial crisis, which can never be ruled out in today's situation, to move Captain Greenspan off course.  This is his last chance to regain some of the credibility that he has lost in the minds of seasoned investors, and he will be determined to give it his last go.  Recessions can be difficult to identify even when they are right under our noses, and given the shortcoming of our national reporting methodologies via the BLS, it may be early 2006 before the recessionary flag is hoisted.  He can only hope.  But knowing the power of legacy and one's place in history to such an exalted public official such as Alan Greenspan, interest rates are going up in 2005 faster and higher than the average member of the audience expects.

Alan Greenspan is like a man playing hop-scotch in a minefield.  He will do every thing possible to exit the Federal Reserve in a graceful manner, i.e., such that he acted in good faith up until his final minutes in office.  Now that the Reserve Bank of South Korea has joined Russia in publicly declaring a holiday on endless purchases of U.S. Treasuries to launder exporters' crummy Dollars to forestall currency appreciation, there is another giant wave building in Southeast Asia.  It is the re-allocation of Dollar balances into other fungible assets, but out of Dollars.  A Dollar panic or selling panic may well be on the mariner's horizon this year, and Sir Alan knows it.  The only tool Sir Alan has at his disposal aside from actually purchasing U.S. debt in the open market to absorb a foreign buyers' strike IS TO AGGRESSIVELY RAISE U.S. INTEREST RATES.  Since the Chairman has droned on and on about the overall resiliency of the U.S. economy for the last 5 years, he has already set the stage for acting in a manner that may appear anti-expansionary.  He has told us that the U.S. economy can take just about any bullet shot at it, and he may even believe that himself.  However, Fed Funds at 6% in the next 11 months would be a death knell for the over-leveraged U.S. economy and financial system.  It is, however, not out of the realm of possibilities as we are in uncharted waters now.

Wexford News Flash:

GOLD AND SILVER HAVE BROKEN OUT TO THE UPSIDE.  There are many forces at work that do not want these alternative stores of wealth to begin to be preferred over fiat currencies.  Fiat currencies, no matter what the country of origin, have historically been very poor substitutes for the monetary standards of value across the ages, gold and silver.  I have said this before, in fact years ago, and I will reiterate it here:  Before the end of this decade, all of the central banks of the world will be on a conscious, if not frantic, campaign to acquire large quantities of both gold and silver in an attempt to re-instill confidence in their currencies via their reserve positions.  You can rest assured that China, India, Russia, Korea, Indonesia, and other astute developing countries are acquiring, not liquidating, tonnes of these two precious metals, gold predominately at this juncture.  The developed world is at the wrong end of this trade, but they will get religion in the error of their ways before 2007.  Technical analysis of the precious metals is gravely compromised today by the subterfuge performed by futures short sales in both gold and silver.  Remember that futures traders need volatility to make money, so don't be alarmed at the zig-zag pattern to higher prices.  It has always been the history of precious metals trading to given investors an upset stomach on occasion.  Take a Dramamine and strap yourself in. 

Call it a gut feeling or more reassuringly "experience", but I feel we are on the verge of a sizeable 10% to 20% move in both silver and gold.  And palladium may be a sleeper in the platinum group.  Investor negativism is just perfect for such a move, with many traders abandoning the metals as we entered 2005.  The "chartists" are finding all kinds of reasons to recommend sales of the metals, but futures traders are technicians as well.  They can paint the tape so to speak to shake out the weak hands in a heartbeat.  DON'T BE ONE OF THOSE WEAK HANDS.

Back to TOP

March 25, 2005:  U.S. Regulators Will Eventually Be Without Any Credibility.

As an often patriotic American, I am deeply saddened by the current state of affairs in our once great country.  "Frustrated" and "angered" come to mind also.  I think strongly that as time progresses into 2006 and 2007, Americans will have come to the majority opinion that our Government, undeniably at the Federal level, is no longer looking out primarily for the best interests of the average American as is their mandate in a true democracy.  It is painfully apparent at this sad juncture in our otherwise generally illustrious history that those in power and those with the means to influence those in power are currently the major beneficiaries of disproportionate benefits from the coffers and actions of Big Government.  And no one can deny that we do not have Big Government today, painted by a Republican, Democrat, or Whatever brush, equal blame on both sides of the Aisle and beyond.  That the President and Congress would get involved in the right of a State court to adjudicate a State's Right issue is just another sad example of Ego & Politics over the Rule of Law.  Power corrupts, and Absolute Power Corrupts Absolutely.  Or something like that.

But the event that provided me with the subject matter for this periodic update is the market reaction to the obtuse wording of the Fed's March 24th pontification regarding the course of U.S. interest rates.  All markets sold off after it was interpreted by traders that the all-knowing Fed saw increasing signs of inflation and pricing power in the U.S. economy.  As Gomer Pyle used to say on television, "Golllllllieeeeee"!  Hit me with a spoon and call me stupid, but I thought even the shoeshine boy at the corner of Wall & Broad knew that Morsel of the Obvious:  American prices are rising at virtually every level.  Well, as I said last month, Sir Alan only has a limited number of months, I count 10 with my gloves off, to try to get it right.  It is Legacy Protection Time at the Fed, and after allowing THE MOST EGREGIOUS BALLOONING OF CREDIT AND SPECULATIVE ASSET PRICES MANKIND HAS EVER SEEN, the now-got-religion Fed is trying to slowly (fat chance!!!!) deflate the bubble called the U.S. economy and financial system.  If the consequences for the long-term health of our country weren't so ruinous, I would be flippant and say these guys really have chutzpa as some of my Israeli diamond brokers would say; some of their terms are pure Yiddish to me, but I am learning the vernacular.  

Since we have been able to view some of the past Minutes of Federal Reserve Meetings recorded just prior to the pricking of the Stock Market Bubble #1 in early 2000, we now know without a doubt that Sir Alan and his Merry Monetarists of the U.S. Federal Reserve speak out of both sides of their convoluted mouths and seem to have no conscious at making repeated misstatements of What They Knew and When They Knew It.  A PRIME EXAMPLE OF U.S. OFFICIALS AT THE HIGHEST LEVEL LYING TO THE AMERICAN PUBLIC!!!  The minutes are replete with conversations concerning the then peaking Stock Market Bubble #1 (we are now experiencing the peaking of Stock Market Bubble #2 as my nimble digits fly across the keyboard!), and the risk to the economy and financial system of such runaway speculation driven partially by excessive liquidity and cheap money.  And poor forecast-challenged Alan has said repeatedly since that you can only recognize an asset bubble in hindsight!  Pure, unmitigated prevarication of the highest order.  Another example of accepted and persistent behavior at the Governmental level in America in 2005.

So on this past Tuesday, the Fed came out and finally admitted that we have inflation after a one-year delay and the precious metals took it on the chin.  HOW THE HECK CAN WE HAVE IRREFUTABLE SIGNS OF ACCELERATING INFLATION AND THE PRECIOUS METALS SELL OFF???!!!  What we have here in River City, Ladies and Gentlemen, is bullion market manipulation, pure and simple.  Now I have been an unsung supporter of GATA since its incubation in 1997, but this is more than just the Central Bank- Bullion Bank Cabal piling on here.  I do think there was some trading on behalf of the Exchange Stabilization Fund this week by futures drones for the U.S. Treasury and Federal Reserve Bank of New York since the Dollar is hanging on the Precarious Ledge of Confidence (PLC), but as Jim Sinclair of www.jsmineset.com fame noted, it was just another example of overt insider manipulation via hitting the "speculative" long positions of the hedge and tech funds to the detriment of mining companies, miners, stockholders, and retail bullion investors.  The privileged, monied few being once again allowed to operate at the expense of the average retail investor while the Nymex/Comex and CFTC look the other way in order not to interrupt the resultant stream of fee income this practice periodically generates.  This week's event was a prime example of the paper hangers in the futures market moving the physical or cash market in gold and silver FOR THE SHORT-TERM and without one iota of changes to the fundamental strength underlying both metals at this date.

Now since we are unquestionably in a secular bull market for both gold and silver since 2001 without any break in the long-term trend lines (look for yourself!), we of faith know that this interim market manipulation is merely a bump in the road to much higher prices for these once monetary metals and not a reversal of trend.  And how do I know that with certainty???

THE CURRENCIES OF THE WORLD ARE DOOMED TO ACCELERATED AND PERSISTENT DEVALUATION IN A FUTILE ATTEMPT TO BUOY DOMESTIC ECONOMIES GOING FORWARD.  BEGGAR THY NEIGHBOR A LA PRE-WORLD WAR I, BUT ON A MUCH GRANDER SCALE.

Once you recognize that paper money, i.e., currencies, and especially the Reserve Currency Status of the U.S. Dollar are headed for complete re-evaluation in the years ahead, you will need no other reason for holding gold and silver bullion.

Some would say that the trading pit action this past week in bullion is simply the free market at work, but I beg to differ.  I will wager that we have now entered a situation in gold similar to silver were the supply of available gold bullion to cover commercial and Cabal short positions is lacking by a factor of 2 to 1.  In other words, there is only physical gold readily available for physical coverage at the LBMA or Comex TO COVER 50% OF THE CURRENT SHORTS IN GOLD.  I don't have any handy statistical data to currently back this statement (since transparency doesn't exist in most quasi-governmental reporting these days anyway) but the world demand for gold in relation to new supply in 2004 operated at a deficit position for the second or third year running. And I am sure that U.S. and European Central Bank gold reserve reporting is grossly overstated knowing the inaccuracies perpetuated at virtually all governmental levels today.  Given the damage the 4-year Bull Market in Gold has done to the Cabal's gold borrowers who sold the gold the moment they had legal possession, the gold that the Central Banks have lent is gone and unlikely to ever be repaid.  I am not the first to make this latter statement, but I think history will prove it correct by 2007 and beyond. 

So my conclusion is that the exchanges, particularly the Comex under the purposely-blind-gaze of the CFTC due to inherent conflicts of interest with respect to the paid-for political influence enjoyed by major traders and their concomitant trading fees, are once again ignoring the establishment of futures positions well in excess of the ability of the contract writers to ever cover same, the UP-UNTIL-NOW perpetual Ponzi scheme of bullion futures.  A review of the gold having been purchased by the Gold ETF in New York since inception further supports my view that physical gold bullion is coming off the market in ever increasing amounts, not to mention recent gold bullion sales data coming out of India and China.  As the Sage has prognosticated almost to the point of being woodpeckerish (new word!), a financial accident is just around the corner that will catch many easy-money shorts with their bullion covers down.  Always remember that gold or silver in your hand is always more accessible and verifiable than Paper Gold or Paper Silver, a promissory note to pay or deliver, nothing more.  Paper Metals are subject to all of the uncertainties of default, fraud, and embezzlement as that General Motors bond that you are holding at just 450 basis points above a comparable Treasury.  As goes General Motors, so goes the economy?

Looking at real estate in the Southeastern Michigan area for a relative, I am amazed at the degree of over-building and subsequent continuing softness in residential prices with Days-On-Market reaching 270 in many cases.  Who would have thought that both General Motors and Ford would be headed for junk bond status at the same time?  Based on under-funded pension and healthcare liabilities alone, these two behemoths of American industry are treading on very shaky financial ground as their finance operations experience profit-shrinkage with rising interest rates and car sales continue to be taken by foreign competitors.  How many Billions of dollars of interest-rate swaps are these two former giants exposed to, and could some form of cash crunch be just around the corner for one or both of them?  Another example of an accident waiting to happen in Financial Land when a company can no longer remain profitable in its traditional (manufacturing) business, and it then exposes itself to untold risk in financial engineering via credit instruments worth Billions and Billions of dollars that were issued to attempt to remain profitable overall AND to ride the GREENSPAN CREDIT TSUNAMI.

If GE Credit does in fact put constraints on GM's credit facilities, to include some of its suppliers, the domino effect could start there and careen throughout the U.S. financial system.  Stay tuned.  Where there is smoke, there is fire.  Credit spreads in the global bond market are finally starting to attempt to reflect Credit Risk Reality (CRR), and the harsh reality of today's global bond markets is that the risk of default from many issuers is growing with each rumble of financial and economic frailty like General Motors.

Since I hardly ever pass up an opportunity to cast dispersions on the U.S. stock market's prospects, let me reiterate my opinion that equity investors continue to live on hope and greed, with virtually no fear of the fundamental shortcomings of the 2005 stock market.  Having been a Registered Investment Advisor since 1985, I have always been impressed with the professionalism and command of regulations of members of the Securities & Exchange Commission, the SEC.  In my professional opinion, they stand head and shoulders above virtually any other governmental agency that I have had direct experience with in my 30 years plus of business dealings.  My observations here about the state of financial reporting for listed companies does not reflect upon the capability, willingness, or efforts of the SEC to achieve its mandate to enforce U.S. securities regulations, but rather the agency's lack of budgetary resources and pure manpower to police an industry that is definitely operating outside the margin of legality in this country.  In 25 words or less, the quarterly and annual reports to investors from U.S. companies is fraught with so many inaccuracies and half-truths as to be practically worthless for making intelligent investment decisions on the sale and purchase of the firms' listed stocks.  History will prove this statement correct for the vast majority of U.S. companies reporting, but by then, recalcitrant U.S. invesors will have lost another major chunk of their retirement nesteggs.

History has already proven that investors' memories are indeed short when it comes to the fiascos know as Enron and WorldCom.  Since many of today's investors do not take the time or have the expertise to attempt to analyze periodic financial reports, one could erroneously assume that technical or momentum-based investing is an adequate substitute for fundamental analysis.  However, as times get progressively worse in an economy continuing to spend beyond its means and about to suffer inflation plus interest rate shock, more and more re-statements of earnings will be forthcoming as regulators belatedly force the issue and corporate executives choose a near-chaotic time to flush the bad numbers out the corporate toilet.  THE JAILS AREN'T BIG ENOUGH TO HOLD US ALL is the mantra.  Since the use of financial engineering has propagated an environment of subterfuge with off-the-books recording of massive liabilities as an every-day practice, only 20-year veterans of the FASB will have the knowledge to begin to unwind the real state of many convoluted accounting practices in America today.  Under current accounting practices that take more than an aggressive stance for income and balance sheet accounting (can you say, "Fudged Results"!), it is virtually impossible for any investor to know with any degree of certainty what the financial health IS of a given company.

Americans will likely blame the SEC along with Corporate Boardrooms, but the initial and primary responsibility to practice conservative and consistent accounting in financial reporting rests with the Corporate Boardroom.  Everyone Else Is Doing It, driven largely by compensation considerations, will eventually be an inadequate defense for those corporate executives who have misled investors into buying their company's stock when they themselves are selling "insider shares" in record numbers.  The problem for the eventually enraged populace is that the misrepresentations are so widespread and difficult to unravel that we will have to annex Siberia to incarcerate all the transgressors, the unprecedented number of violators of U.S. securities regulations.  An S&P at 500 from today's 1200 level will be the ultimate trigger for investors to seek restitution and revenge.  Enough said.

No one ever said investing in gold and silver was going to be easy, OR that the Powers That Are are going to give up their seats of power, privilege, and access without a fight.  However, history shows time and again that those who fail to perform their fiduciary duties and overtly mislead the masses decade after decade end up at the Guillotine of History.  Their heads will be spared in this metaphor, but their legacies or even their freedom will not.  And neither will be their positions of power.  A New Democracy is in our future.  We just individually have to retain the resources to be a proactive part of it as it unfolds.  In 2010, we will say without qualification, "WE LIVE IN INTERESTING TIMES".  We could say that this minute, but we really haven't seen anything yet.


Back to TOP

April 25, 2005:  Chinese Force Sir Alan To Get Religion.


Talk about a mind-twisting title!  How could those Red Commies in the Far East force anyone to get religion when the official state line is that religion is anti-State and anti-Chinese.  But since we have had news out of Rome on a daily basis for the last six weeks, I thought I would give Beijing a shot at grabbing the ecumenical high-ground, if it exists.  I do hope the new Pope does a whale of a job for the rest of us unblessed, but not being Catholic, ENOUGH ALREADY!  Of course, you would have to be from Mars to think that the Chinese would for one minute do anything that was not in their best interests ( a page from American history? ), but the Chinese are going to force Sir Alan Greenspan, our fearless embracer of every bubble and financial excess capable of being, to do his fricking job.  Sorry about the slip into my profane English heritage, but I need an air-sickness bag every time this guy takes the microphone and emits a deluge of Reversed History to suit the Fed's current mismanagement du jour.  But our suppliers of just about every cheap U.S. good imaginable, the Chinese, are going to be forced to do something that forces Sir Alan, kicking and screaming to all who will still listen, to do something in turn.  No guarantees, as the Fed Government can't even guarantee that you will live comfortably in retirement, but this is the landscape I see unfolding as these dewdrops of wisdom pour forth.

Now, I do not profess to be an expert in the currency markets (I heard that!), but I do read more than the average Bear since I work almost 6 days per week while the rest of you are chasing that little white ball.  And some of the best minds in that fiat paper business (Everbank's Chuck Butler is weighty in this field) are beginning to surmise that the Chinese may revalue the Renminbi sooner rather than later as many factors work to force their hand.  I am not sure that the threat of protectionist measures spewing from the mouths of U.S. CongressKnuckleHeads ( CPH's) is going to cause the Chinese to shake in their Italian boots, but political effects can always be cumulative in this modern day.  The Chinese have flooded America with textiles in 2005, and the roar has gone up from what few Americans are still doggedly employed in that sector of America's decimated manufacturing base.  But pick a manufacturing sector that is suffering badly at the hands of the Chinese, maybe steel comes to mind, and you can bet that that jurisdictions' representatives in Washington and state capitals have gotten a piece of their displeasure at mounting job losses.  With an artificially undervalued domestic currency, the Chinese are actually exacerbating their own domestic inflation situation since a devalued or undervalued currency causes import inflation to be higher than it otherwise would be.  

Since the Chinese have one of the most voracious appetites for raw materials the world has ever seen, as they progress from an 1880's standard of living in many regions of their vast country, inflation in China has been growing also, especially with the current fixed peg to the dollar.  I have seen numbers as high as 8% for Sino-Inflation.  With a rough translation equation of One Crippled U.S. Dollar per 8 Renminbi, that $55 per barrel oil price equates to 440 Renminbi.  With a revaluation to say 7 Renminbi per dollar, the domestic price for a barrel of black crude drops to 385 Renminbi, a 12.5% price break after breaking the peg with the Dollar.  And with 9.5% GDP growth in the First Quarter of 2005, one can hardly say that the slowdown threat posed by Chinese officials in early 2004 ever really came to fruition.  Oh, every guru except the Sage called for a Hard Landing in China, but with a growing middle class, internal, domestic demand eventually took up the slack from a slowdown in export growth to overseas WalMarts.  A slowdown from 11% growth to 9.5% economic growth really ain't much of a slowdown, especially when the U.S. is literally struggling to muster 3.5% GDP growth!!!  Since the Chinese have had mixed results with monetary tightening to date (as has Confucius Greenspan!), the revaluation of the Renminbi is a logical tool in their arsenal of economic arrows to fight inflation without putting their troubled state banking entities into liquidation with hawkish interest rate tightening.  An appreciation of a country's currency also has the effect of lowering the market required interest rate needed to attract foreign deposits, partially due to the favorable inflation effect achieved.  While a reduction in rates is highly stimulative in a debt-crazed country like the U.S., I am not so sure that the net effect in China, a nation of world-class savers who still believe in passbooks, will not be economically restrictive from an interest income standpoint.  

The Chinese seem to have as much control over monetary policy's effect on the short-term economy as Alan Greenspan does in the U.S.  There are too many alternative means in the financial markets today to circumvent the traditional role that a central bank plays in maintaining "sound monetary policy".  And, of course, we have to assume the Central Bankers know what "sound monetary policy" is in the first place, and Sir Alan has had temporary memory loss since his December, 1996 "irrational exuberance" emission.

I am sure I am going to miss some very cogent arguments for the Chinese to revalue the Yuan or Renminbi sooner rather than later (May, June, July!!), but you see the main arguments.  If the Chinese truly feel their blossoming economy is risking overheating that has been sparked by an export sector selling artificially cheaper goods to the U.S., EuroLand, and Japan, then a revaluation increases export prices just enough to slacken foreign demand.  Now I know it is unfathomable that the Chinese would ever wish to reduce demand for their sometimes well-made products, but the alternative of a ruinous credit/liquidity bubble a la the U.S., surging domestic inflation, and the seething potential for 30% U.S. tariffs on a menu of Made in China items are all even less palatable.   Surging prices in China affect everyone; under-employment or unemployment in a nation of Billions only affects a 100 million or so Chinese.  Politicians do love to play the odds.

Now, let's look at what this does for the Precious Metals Investor since that is what you hired me to discourse every month.  Since a revaluation via appreciation in the Renminbi is versus the Dollar, and let's say for round numbers sake the move is to 7 Renminbi per U.S. Dollar, then the Dollar is likely to experience a rather sudden depreciation of close to 10%.  The Asian currencies in Thailand, Korea, Malaysia, and Japan will also appreciate versus the Dollar since they peg their currencies to the Renminbi to remain competitive in and outside the region.  Now there will be some noise in the process since not all currencies will appreciate to the same degree as the Asian currencies, just the end result is the same:  THE DOLLAR IS GOING TO EXPERIENCE A SUDDEN DECLINE IN VALUE AGAINST VIRTUALLY ALL CURRENCIES, which is likely to be unannounced, not flagged ahead of time by the instigating Chinese.  While I am more and more of the opinion that the strong inverse relationship of gold/silver to the Dollar is going to weaken with time as global financial conditions worsen, the Chinese revaluation upward of the Renminbi will be the catalyst to take Gold above $500 per ounce and Silver above $9 per ounce.  Not that we need such an earth-moving event to break the $450 threshold for gold and $7.50 threshold for silver, since I think that volatility is increasing in all asset markets, and investors see increasing uncertainty with increasing price volatility.  Acute and growing uncertainty has been a sufficient motivator for PM investors in the past.

Now what is the reaction of Sir Alan, awoken by exogenous events to the necessity to raise U.S. interest rates to attempt to stem a panic sell-off in the Currency of the Land, the U.S. Dollar?  We get, lucky us, two or more back-to-back increases in interest rates of 50 basis points at and in-between at least two near-term meetings of the FOMC.  I can hear the cry go up from the crowd that pigs will fly first, but I think the Fed, led by behind-the-inflation-curve Sir Alan, will have no choice but to truly create POSITIVE REAL INTEREST RATES IN THE UNITED STATES.  I kind of chuckle to myself when financial writers say that we finally have positive real rates with a Fed Funds of 2.75%, but they are falling into the Wall Street Trap of using only the core rate of inflation running at 2.6% to make this misconception.  Food and energy are going to be with us for a very long time to come, I hope, so shift gears to REALITY INFLATION OF 3.6% MINIMUM and 5% plus closer to the truth.  Food and energy are not going to get cheaper going forward as the calorie intake of the world improves and oil will poke its head above $60 per barrel even as the seasonal demand cycle unfolds.  Higher oil prices have had a direct impact on higher food prices as combines still run on hydrocarbons and trains/planes/trucks do also in order to get the often refrigerated products into our hot little hands.  That open refrigerated bin at the supermarket costs more to operate also.  Fed Funds are going to be over 4.5% before the leaves start coming off the trees, THANK YOU VERY MUCH, CHINA.  If you can't beat the U.S. militarily, just hit US in the old financial pocket, a tactic the Chinese will use more than once in the decades ahead.  And this sudden move is also likely to ignite the Derivatives Timebomb that I can hear ticking like the clock in the crocodile in Peter Pan as U.S. interest rates UNEXPECTEDLY surge, with the subsequent Financial Accident of the Century possibly being set off in a still-too-leveraged and too-long Derivatives World.

The reason that the Gold/Dollar link is going to weaken, with the precious metals on their own path to higher and higher prices regardless of the near-term direction of the Dollar is this:  In supporting the Dollar Down, Gold Up argument, we are implicitly stating that gold has historically been the most-favored substitute for a failed currency, in this case, the Dollar.  What we have seen with the Dollar's 30% plus decline since 2002 is the substitution of other currencies such as the Euro, Yen, NZ Dollar, Aussie Dollar, and Swiss Franc for the Dollar; demand for the Dollar has fallen while demand for competing currencies has risen, along with gold and silver.  But as the world comes to the realization that we have been sitting at the edge of the financial system precipice for the last 5 years and are now sliding into a systemic failure, gold and silver will be the preferred hard currencies of choice above all competing currencies.  So it will not matter whether the Dollar has an interim rally as it has in 2005, since a major psychological shift is coming in the perceived value of fiat currencies in general and their ability TO RETAIN VALUE OVER TIME.  A currency is a mere promissory note, only as good as the ability of the issuer to pay face value, with no interest.  There is not one currency on the planet that is not beset by flaws due to the shortsighted/ vested interest maneuvering by internal government officials.  Currencies are also dependent on the soundness of the domestic economies and financial systems that they represent.   As the world slides into the next severe recession that I am predicting will surface before Christmas of 2005, the ability of over-reaching governments to pull their nation's head above the pack will be greatly compromised by the GLOBALIZATION OF ECONOMIC AND FINANCIAL RISK IN THE NEW MILLENNIUM.  We are so tied together from economic and financial points today, that as the U.S. rolls over into a demand-shrinking/ debt- retracement recession, so will the rest of the world.

So Gold & Silver will not only become a direct substitute for the sinking Dollar, they will once again become Stores of Wealth against All Currencies.  Physical or Hard Money will be sought after in lieu of Paper or Fiat Money.  It has happened throughout history, and it is happening again, slowly unfolding before us.  Just look at the behavior of citizens in the 1997 Asian Contagion to realize that human preference for the Precious Metals amidst collapsing currency values is alive and very well in these so modern of times.  Confucius says, "The more things change, the more they stay the same."  Confucius also says, Sir Alan, "He who dances around the truth, is likely to stub his toe."  Are Greenspan's shoes made in China?!!!



Back to TOP

May 25, 2005:  The Buck Stops Here.


I don't set out to create a "conundrum" in the selection of a monthly title for my ranting's, but we live in a world of multiplexing, multitasking, anyway, so why not!  Now for those of you just wanting me to cut to the chase each month, I apologize in advance.  Since few people around me care to listen to my constant bleating (after a shrill 8 years!) that the world as we know it is coming to an abrupt end, I revel in the fact that I have a captive audience out there in the ether dubbed the "internet" and readers must put up with the potatoes along with the meat.  So sit back, and just go along for the experience.

I don't know about you, but I get really annoyed when every homo sapiens that has carelessly offended me, failed to do the job that I paid them for, or outright cost me time and/or money CANNOT MUSTER UP ANY GREATER COMPENSATION FOR THEIR TRANSGRESSION THAN, "I'M SORRY".  I know it is polite to apologize for one's misdeeds to our fellow men and women, but other than displaying one's fine upbringing, WHAT DOES AN APOLOGY, AFTER THE FACT, REALLY ACCOMPLISH?!!!  As a nation, if we spent less time apologizing and more time attending to what we should be doing in the first place, we would have more of a chance to get it right the first time.  If your neighbor backs over your beloved cat of some 7 years, and the first thing out of his mouth is, "I'm so sorry", will this heartfelt phrase erase the tire marks on the carcass of the feline?!  Me thinks not, unless one belongs to some religious school of thought that words truly can heal wounds.  We have become a Nation of Apologists whose Sorry utterances often seem more obligatory/convenient than genuinely attrite.

This entire tendency to attempt to mitigate and neutralize all degrees of wrongdoing by mere apology is another reflection of the Era of Shunned Responsibility that now permeates American culture.  No one seems to take responsibility for anything these days, except those feats that are unquestionably in the positive vein and tend to put lucre in the pocket of the doer.  It is as if the old tradition of bronzing baby shoes has been displaced by a New Era tradition of giving the youngster Tap Shoes that he or she can tap dance through life in.  These magic shoes must be perpetually adjustable to the rate of growth of the wearer's foot, because in Public Life in TapDance America, we see our "trusted officials" never without them.  It is a true shame that this once very popular art form has been morphed into a Vaudeville Act more similar to a Greek Tragedy than the precursor to Fred Astaire.  I frankly would much rather watch old clips of Fred and Ginger gliding effortlessly across the screen than have to stomach the soft-shoe of Officialdom where you can't even see their feet moving.

This brings us back to the title above (before you start throwing the potatoes!).  And although I do feel that the 2005 Dead Cat Dollar Bounce is just about over, I am not saying that today was the absolute interim high in "The Buck Stops Here".  Since all of you know that I am going to recommend the purchase of the ultimate hedge against global uncertainty, gold & silver, by the time the ink dries on this message, I will just do it here and be done with it.  But fellow Americans, lend me your ears.  When you look in the mirror in the morning to greet the day, you have just seen the recipient of the halting Buck.  At some point in the not-so-distant future, you will literally have stamped on your forehead the title of this missive, "The Buck Stops Here!".

Without consciously being redundant, I truly believe we are headed for very difficult times in the United States.  I'M SORRY if I am beginning to bore some readers out there (see even the Sage falls into this apologetic trap!), but I have actually taken very conscious steps in my life over the last 5 years to be in a position to weather the storm JUST OVER THE HORIZON in the best possible manner I can conceive.  I am on my way to being totally debt-free by early 2006, having paid cash for the mere cottage that I purchased on Halloween, 2002.  And of course, I thought the real estate market was near its high at that point, and cannot claim genius in the 54% appreciation over this subsequent 31-month holding period.  But if I worked in the financial media or in Washington, you can bet your bottom dollar that I would be crowing to the world what a genius I was!  In fact ...... DRUM ROLL PLEASE, the capital gains alone in the 3 homes I have sold since 1991 would allow me to pay cash for a $300,000 plus home in Colorado that I am eyeing to get further away from the Bull Crap of the East, a.k.a. Washington, D.C.  Is this a great country or what!!!!!!!   And who says we have a real estate bubble when a mere mortal such as the Sage can reap such ill-gotten gains?!   I have accumulated a sizeable position in precious metals, not just because I can buy it wholesale, but because I truly believe in its future value as a store of wealth.  Can't tell you exactly how much because you need a CIA Level 6 Security Grade for that info.  The Sage puts his money where his mouth is!  My cash positions are in Treasury Only Money Markets, since there will be plenty of time to switch to Swiss Francs or Norwegian Kroner before the U.S. defaults on the majority of its debts, which it eventually will do within the next 10 years.  Plus I am a firm believer that all currencies are fatally flawed as stores of wealth since they can be created endlessly out of thin air at the whim of government drones, and it is truly a field of lesser evils in staying in cash, regardless of current yield, which is still negative, thank you Sir Alan.  And I have take sizeable positions in U.S. rare coins and fancy colored diamonds which are admittedly not as liquid as the above, but my crystal ball gets a little foggy with all of the heavy breathing on it.  Just trying to cover all of the bases in tangible assets that history shows are still significantly undervalued in relation to financial assets and U.S. real estate.

So when I look in the mirror in 2007, I will still have today's title stuck on my forehead, but I will know that I have followed the advice of those most-assuredly wiser than I and done all that I could to avoid the financial abyss.  Whether you and I deserve it or not, and aside from the fact that we will have had nothing to do with the eventual Sorry State of Affairs (SSA) except for having not thrown all the bums out in Washington, here is the landscape I see unfolding before us in the very near future:

1.  Near-Term Inflationary Period that eventually becomes Deflationary.

This is the true conundrum out in the real world, but there is no doubt in most non-government experts' minds that inflation is currently running at 5% to 6% per annum in the U.S., especially with housing being accurately reflected via the Cost to Own.  Excluding Food and Energy is an exercise in distortion, so the Core Rate of Inflation's direction is key via published numbers and the trend is clearly up.  Now I have previously forecast a recession being recognized by the Fall of 2005, and one asks how can we continue to inflate while the engine of growth in the world slows down.  We will not inflate in financial assets and residential real estate as we have since 2003, but the developing world's demand for commodities, especially oil, will keep upward pressure on prices well into 2007.  I am not convinced that net oil demand will not decline until sometime into 2008, as the global recession takes hold everywhere, but remember that Peak Oil has already been reached and reserves are declining year by year undoubtedly faster than demand is well into the future.   So the commodity bull has a ways to go, don't be fooled into thinking otherwise.  World population has growth much faster than new production for decades now in virtually every raw material we need to live the good life.

A major financial accident is just around the corner.  Recent losses at hedge funds in the failed GM Stock/Bond straddle is just an example of what can go wrong and the $100's of Millions lost in a matter of hours.  With 20 to 1 leverage, not only in the financial system but in the way Americans finance their lives, a relatively minor event can have a major domino-effect throughout the system.  As the economy recedes into negative growth territory into 2006, companies such as General Motors with poor sales prospects, massive unfunded liabilities of some $400 Billion, and compromised credit standing will go into bankruptcy or teeter on the edge, bringing down many associated companies with it.  Many finance companies today that are offering Interest Only, No Money Down, NoDocs, Variable Rate, and Negative Amortization Mortgages are going to go bankrupt as the collateral for these ill-advised loans to many marginal homebuyers begins to sink with the inevitable rollover in the home market.  Remember that home equity is at its lowest point in history as Americans have continued to take cash out of their Residential ATM's, a.k.a., HOMES, to make up for negligible income growth for the last 7 years.  There is no equity cushion for these imprudent lenders.  Some signs in the Washington, D.C. area are starting to surface at buyer resistance to last year's 27% overall increase in prices, and it is taking longer to sell both existing and new homes.  Eventually, we can expect home DEPRECIATION of at least 30% from today's ridiculous levels where cracker-boxes are selling for $130 per square foot, finished space on 12,000 sq. ft. lots.  Unless we all become renters in the next few years, we are going to be lucky to break even on any recently purchased real estate, and some will experience losses as high as 50%.  Hard to imagine, but history proves that the probability of this event is much greater than 50% in today's runaway residential home marketplace.

While demand for raw materials will subside as the global recession takes a tighter and tighter grip on demand, financial assets will continue to DEFLATE, with the stock market leading the way well before Fall of 2005.  The stock market has been under distribution of shares for months now (the Smart Money getting out!), and has every sign of being in the process of its last intermediate counter-trend rally.  Remember that the stock market will forecast the next recession as it resumes its secular bear market begun in 2000.  Credit spreads will once again begin to reflect true risk in Junk Bonds and Emerging Market Debt as we enter the holiday season, as U.S. interest rates in general continue to rise REGARDLESS OF WHAT TRACK THE FEDERAL RESERVE IS ON.  Whether the Fed is tightening still or in neutral ready to try to send helicopter money over the land again, the global credit markets have and will continue to take monetary policy effectiveness out of the hands of the Federal Reserve.  With China and Japan already on a buyer's strike for U.S. Treasuries (and Norway selling them outright), you can rest assured that Intermediate to Long-Term U.S. rates are going higher by 2% to 3% before Spring of 2006.  The yield curve may never invert as many of us have forecast to date, since the Fed has little stomach for raising rates much beyond 4% where it will fallaciously declare that neutrality has been reached.  NEUTRALITY WOULD EASILY BE 100 BASIS POINTS HIGHER AT 5.0%.  But the credit markets are in disarray at this moment, so more turmoil via credit rating downgrades, interest rate shocks, sudden Dollar swoons, and potential geo-political events will have to be compensated for via higher rates.  Add in the near-term revaluation of the Renminbi, which will undoubtedly put an abrupt end to the 2005 Dollar Bounce, and Asian foreign banks in particular are going to demand much higher Treasury rates to continue to buy our sovereign debt.  There may come a time, as the Asian Region internally develops domestic demand, that U.S. debt is near to last on the treasurers' buying list.

U.S. interest rates will eventually roll over as the deflationary period unfolds via massive debt defaults.  The U.S. has added three times as much debt over the last 7 years as it has had income growth, so the odds of widespread debt defaults to include homeowners increase by the day that a rationalization of prices and rates is postponed.  The disappearance of Notes Receivable on the global balance sheet is clearly deflationary as was the Enron and WorldCom implosions, yet we haven't seen anything yet as to order of magnitude.  A deflation is inevitable given the Trillions of Dollars of U.S. debt at all levels that will not be repaid or serviced; Japan's experience will have just been the first shot fired in this over-leveraged world that has been kept afloat since 2002 by rampant reflation via credit growth.


2.  widespread unemployment along with pockets of civil unrest.

This is the toughest part of the equation to forecast, but recent trends in outsourcing of U.S. jobs, first manufacturing and increasingly service jobs, are well in place and likely to continue for some time since the gap in total labor costs, wages plus benefits, U.S. versus Asia and Eastern Europe, are so wide.  But any recession that we are now entering is unlikely to be mild if it is accompanied by Billions of Dollars of debt repudiation and default.  Not only are we losing jobs due to the rising skill levels of our Asian competitors, but an economy that has no buffer to assume additional debt to restart the economy after this "slowdown" is unlikely to recover only after a 24-month cycle.  Since electronic media is instantaneous, Americans will eventually get the idea to begin to not spend and to pay down debt and save, if they can, assuming they have retained their employment.  Retail spending to date in 2005 has not indicated a robust economy, and there is already antidotal evidence that the American consumer has just about leveraged to the hilt his or her last available asset, primarily the home.

One of the events that will make the developing economic slide more severe for Americans is the eroding status of the U.S. Dollar on foreign exchange markets.  We have been able to borrow up to $60 Billion PER MONTH from overseas investors and central banks in order to make up for our internal shortfall in savings so that we may continue to spend well beyond our means.  Once the U.S. Dollar resumes its inevitable slide into devaluation, imported goods, a category that we still have a ravenous appetite for, are going to continue to cost more and more.  Import inflation, as has the cost of energy over the last year, will eventually cause Americans to rethink their spending habits and concentrate more and more on the necessities and less and less on the luxuries, many of which are imported.  All those employed in the companies that handle foreign goods in the U.S. will see shrinking employment as import inflation causes demand deflation.  There is always greater price sensitivity during times of economic retrenchment.  Foreign central bank shunning of U.S. Treasury Debt will certainly cause 10-year and longer notes to carry more attractive interest rates for consumers as we enter 2006, who will possibly tie up their savings in more conservative and longer-dated investments.  Higher yields that are available for savings will take dollar for dollar out of the consumption economy.  The era of rampant excessive consumption by American is nearing an end.

We are somewhat of a spoiled lot, as can be evidenced by what compensation and benefit packages at both the blue collar and white collar levels of General Motors have done to the competitiveness of that once mammoth company.  The rancorous tone of the last Presidential Election is just a precursor to the political finger-pointing that is in store during the recessionary/depressionary years that I see ahead.  Eventually, a third political party will be born out of disgust for the failures of the Blue and the Red Parties, and a national effort will emerge to throw all of the bums out.  Of course, Rome will have already burnt almost to the ground before this radical step is taken, but history is a sound guide in determining the probability of such a dramatic event in a struggling democracy or republic or whatever we are now.  Politicians' first rule of thumb is that voters vote with their pocketbooks, and an empty  or moth-eaten pocketbook can create a mob.


3.  all americans will experience a decline in standard of living.

Since we have borrowed heavily from our own and our children's futures as a nation, we are all going to have to look in the mirror and assume some of the blame for what is unfolding.  THE BUCK STOPS HERE is already emblazoned on our individual foreheads, it is just a question of how alert we are to the conditions around us and what we have or will do to weather the impending storm.  None of us will come through this period unscathed.  I have not found a place to rent to avoid losing $100,000 to $150,000 in unrealized gains on my personal residence.  You may say that they are gains that I have not turned into cash yet, so what have I really lost.  I for one have not taken one penny of equity out of my home so I owe no one this money, but that is not the case with many Americans today.  I will feel poorer nonetheless when my house declines below its original cost, and I will adjust my spending whether it makes economic sense or not.  Perceptions of wealth or poverty do not have to be handed us by a gaggle of accountants.

The human suffering and civil unrest that I see ahead will also lower everyone's standard of living, for it is difficult to feel good about things when one is faced with a barrage of bad nightly news during dinner each evening.  It is very difficult to spend money freely or even for luxuries when there is financial suffering all around you.  I have been labeled a pessimist by many these last 8 years, but I prefer to label myself a Realist who studies the financial and economic worlds and develops strategies to mitigate, not avoid, the impending damage to one's mental and financial health.  None of us will be able to totally avoid the Financial Tsunami rising above us.  We can only hope that our holdings of precious metals and other non-financial tangible assets will assist us in weathering the stormy years ahead; we can only hope that our debt pay-downs will put us in better stead; we can only hope that reducing our exposure to real estate will provide us some relief that the roof over our heads does not become the lid to our financial coffins.  


THE BUCK STOPS HERE ...... accept it and get used to it.  The Era of Responsibility is Here.



Back to TOP

June 30, 2005:  Peering in the Portholes of the Titanic.

Before I launch into my monthly soothsaying, I want to make a very important point to current and prospective investors in the precious metals:

THROW TRADITIONAL TECHNICAL ANALYSIS OUT THE WINDOW AND CONCENTRATE ON THE FUNDAMENTALS.  If you fail to heed this admonition, you are either going to get shaken out of your position prematurely or fail to take advantage of temporarily depressed prices when they occur.  You can bet your last Dollar that the futures traders, especially the commercials, know every theory and trigger price point that is out there and they will use that knowledge to their advantage and your loss if you play their game of trading.  Eventually overwhelming global demand will take the ball out of their court; it always has in a bull market and it always will.  BE PATIENT.  A NOVEL CONCEPT BUT IT HAS WORKED VERY WELL FOR LEGENDS LIKE WARREN BUFFET, GEORGE SOROS, AND JOHN TEMPLETON.

Right now, too many investors are vainly attempting to read the entrails of the chicken through the squiggles on a chart known as technical analysis.  But regardless of how predictive the COT numbers and support lines have been in the past, remember always that we are dealing with relatively thin bullion markets and that insiders can and do use their influence with the exchanges to trade to solely their own benefit and to the detriment of most retail investors.  That these markets are still manipulated on an intra-day basis should come as no surprise to those of us who have observed them hourly for the last decade, and rest assured that if there was a magic TECHNICAL FORMULA for making money 70% of the time with bullion trading, that the holders of that elixir would rather face a firing squad that give up the secrets.  So be very skeptical of virtually all discussions of buy and sell points based upon technical analysis, because information on the internet travels with the speed of light and once a technique becomes known to just one other individual it can no longer be exploited by those that follow.

So technically, without drawing one dot on a chart, I can say with 100% certainty that the picture for both gold and silver is conducive to a continuation of the current mega-bull market and bullion prices are destined to go much, much higher sooner rather than later.  And how do I know?:

1.) Because you could cut the bullion pessimism out there with a knife right now and bull markets get reborn with this level of negative sentiment, not extinguished.
2.) A backing and filling market is more indicative of strength than weakness when new lows are not set intra-move.
3.) The U.S. does not have a monopoly on bullion demand as evidenced by surging Chinese and Indian demand and supportive currency translations.
4.) The state of our economy and financial system continue to deteriorate by the day as debt continues to grow exponentially and national income grows linearly.  GDP growth in the First Quarter, 2005, of 3.8% is not strong when one realizes that that vast majority of this advance was due to credit growth and an extension of already monumental debt on the part of American Consumers.
5.) Telltale signs are appearing that strongly suggest that the real estate bubble, the only cylinder still firing in our current economy, is starting to roll over.  I get this summation from first-hand experience in one of the hottest housing markets in the country, the Washington D.C. Metropolitan Area (WDM!).

As always, the Sage has pulled from his vast store of worldly knowledge to devise this month's title.  Truly artistic titles should be a play on words.  I recently rented a DVD entitled, "Ghosts of the Abyss", produced and directed by Cameron of the movie Titanic fame.  Regardless of the egomaniacal behavior of this Hollywood mogul in the past, I must say that he was rather humble in the narration of this deep-submersible documentary of the first internal investigation with tethered robots into the remains of the decaying  and sunken ocean liner Titanic.  It is rather eerie to behold such a once magnificent work of shipbuilding art that had broken stern from bow and lay defeated a mile down in the ocean.  But there is much that can be learned from peering into one of the portholes of a once mighty and proud vessel, and imagining what once happened in the individual spaces aboard and what could have been.  The documentary was quite cleverly done with super-imposed scenes of reconstructed pre-tragedy life with live actors in the various rooms and galleys as the submersibles and robots systematically probed the secrets of the broken ship.

At some point either 10 or 20 years from now, historians and survivors will be peering into the portholes of the wreckage once know as the United States economy and financial system.  You can be sure I am as waterlogged in diving to these low, dark depths in my epistles now for some seven years, but the passengers on the ship have not heard the warning bells yet, much less seen the iceberg ahead.  And if they have heard the warning cries, the vast majority continue to ignore them, preferring to party on in a sea of debt and excess consumption.

Let's start with the Porthole to the Captain's control room, the one currently driving the U.S.S. Titanic, Residential Real Estate.  Since I am in the process of finding new digs more out of the beaten path (and we are in a non-stop construction war zone right now), I am getting very good input from a multitude of real estate professionals, including settlement companies and appraisers.  And even though Captain Greenspan can shout from the watch tower to the gone-mad lending establishment until he keels over, some of the mortgage lenders are starting to feel the ocean spray as they go further out on the plank and (Blow Me Down!) actually tighten up some "standards".  Not restrictively so, yet, but they themselves are starting to feel queasy about the depths of credit and the crests of home prices that have surfaced just in 2005.  Low and behold credit scores, income/debt service ratios, LTV, are once again slowly coming back into vogue.  They themselves have looked through the Real Estate Porthole and see a lot of vacant staterooms in the future; meaning the keys have been mailed to the lender as the mortgage debt readily exceeds the swabbies' net equity in the palace.  That does not mean, yet, that the most creative loan structures ever known to man are not still allowing some of the most marginal borrowers ever known to man to not get a loan to move into that "gotta have it" dream home.  The term ARM does not necessarily mean a variable interest rate on the loan, but a varied payment over the life of the loan which indeed is fixed at origination date.  A graduated letting of the waters into the vessel such that drowning may indeed not occur until year 6 if other influences like unemployment and other truly variable rate debts don't drown the luxury-liner spender first.

Can you imagine that loans are being made without income verification and then based upon gross income and not net income?!!  As the creatures of the dark Deep are often scary to behold, since they have evolved without sunlight for so long, so are many of today's laxer than lax lending "standards".  BUT THERE IS AN EVER SO SLIGHT SHIFT IN THE CURRENTS.  These otherwise lax lenders have now given instructions (arm's length relationship between lenders and appraisers, ME THINKS NOT!) to their growing army of appraisers that replacement cost, and not Market Mania comps, may be more telling of the actual value of a residence in a super heated market.  And of course with the Chinese sucking up millions of cubic yards of concrete each year that could have gone into more over-priced slab-mounted huts in Florida, the price of construction has gone sky-high over the last 5 years.  In our swelling seas of WashingTon, new construction exceeds $120 per sq. ft. including the postage-stamp/ bloated land cost, while this same stat was a mere $80 less than a Half-Decade ago.  So new construction is acting as a price setting floor to the price of local real estate, AS LONG AS THE DAYS-ON-MARKET STAY BELOW 90.  At that magic level, the carrying cost of an unsold home is going to eat into the profit margin of a builder and he is going to reduce his price to move inventory out to make room for new dollars for additional tinder boxes.  Land acquisition costs have spiraled higher since 2002 in this modest neck of the woods where a 16,500 sq. ft. lot that cost $54,000 in June of 2002 now goes for $90,000 if a builder can find one.  So that $36,000 must be added to the price of the new home if the builder is going to continue to buy a new Corvette every year, and net margins for builders in this area have likely expanded as well as the feeding frenzy effect plays, ME TOO.  The $35,000 average profit per 2500 sq. ft. house is now likely in the $50,000 to $60,000 range.  But here is where the market has an opportunity to begin price rationalization, especially if the builders are high-volume, national builders.

And it is those national builders who are now, understandably, under-pricing local builders and even existing homes of comparable features.  Based on the lack of quality and attention to detail in most new construction today, some buyers are paying a premium for existing homes, since they know from experience that the first two to three years of ownership are often spent getting rid of the new home bugs.  But watch the high-volume, national builders in the months ahead and you are going to see sales incentives/upgrade offers coming back to residential real estate.  As appraisals in our area are starting to come in below contract price, making the contract null and void unless the seller adjusts price downward to keep the buyer, the pressure to cap or even reduce runaway pricing in the Washington, D.C. area has already begun.  AND this is one of the strongest housing market in the nation due to the Spender of First Resort being just down the road.  So look in the porthole of Residential Real Estate and these are the eerie images that may scare you:

IMAGE A:  More and more appraisals coming in below contract price so seller must reduce price or find new buyer; days on market expands.
IMAGE B:  Lenders, esp. with Fannie Mae and Freddie Mae not as willing or able to buy incremental originations in secondary market, are slowly tightening lending standards since 30% to 40% of new originations in many markets are to sub-prime borrowers.  WAKE UP CALL TO MORTGAGE INDUSTRY.
IMAGE C:  High-volume, national builders are once again becoming price setters and using their financial muscle in purchasing construction materials to allow them to cut selling prices while maintaining adequate margins buoyed by volume.
IMAGE D:  Potential buyers are beginning to be given less total financing, thus taking buyers out of the mid- to upper end of the market which always suffers first in a housing downturn.

Now I have been calling this top for over 3 years now, but I can see first-hand the pieces falling into place for a plateauing and then an inevitable downturn in the super-heated housing market on a national level.  Although I hate to disagree with one of the savviest bond managers in U.S. history, Bill Gross, I am convinced that the fundamental weaknesses of the U.S. Dollar with a Trade Deficit now approaching $700 Billion in 2005 that the 10-year note is going higher, not lower in yield in the months ahead.  Hedge fund arbitrage has kept the Dollar afloat out of the Cayman Islands to date this year, but the balance sheet of the U.S.S. Titanic is worsening by the day.  Asian central banks will continue to reduce their acquisition rates of U.S. Dollars, and the market of U.S. debt at the intermediate maturity of 10 years and longer will eventually only clear with much higher interest rates.  Eventually, U.S. mortgages will reflect this reality, and Alan Greenspan & Company know that they must deflate the housing bubble with gradual short-term increases if they are to attempt to avoid disaster Post-Greenspan.  They are too late, of course, but perception is everything when it comes to politics and the current U.S. Federal Reserve is as political a body as I have ever seen.  The Fed will not be able to reverse course any time soon, since to do so will be viewed as extremely inflationary for U.S. asset buyers and the Dollar will be punished mercilessly along with U.S. Treasuries.

The crew in the engine room of the U.S.S. Titanic is shoveling Credit Coal into the giant engine of U.S. growth as fast as they can in order to keep the ship moving forward.  However, an immovable object know as the Iceberg of Contraction lies dead ahead and the waters around the speeding vessel are starting to feel the chill.  The Iceberg for the U.S. economy and financial system can and will take many forms, but the most likely forms will be an irreversible credit contraction precipitated by a cresting housing market and/or a large financial intermediary failure that throws an already fragile Consumer Confidence overboard.  Captain Greenspan has waited too long to slow the vessel in known-to-be-dangerous waters, a Credit Bubble.  The momentum of easy money makes a systemic sinking unavoidable at this compass point.

If gold and silver are now showing bullish price behavior in Euros, Yen, Swiss Francs, and Sterling, don't you think foreign investors will increasingly react positively to these new-found investment channels?!!  The bullion market is not U.S.-centric.  Investors around the globe are seeing the same credit, fiscal, and asset excesses that we do, and they will opt out of gaining passage on the U.S.S. Titanic.  Hundreds of years of history proves that all fiat currencies are usually devalued out of existent.  The price of lifeboats is just about to go much higher.  Strap on your floatation devices.  The waters are going to be very chilly.

More portholes to peer through in upcoming editions.

Back to TOP



July 24, 2005:  CHINESE Water Torture.

As I predicted within these very pixels, the Chinese would eventually break their peg to the U.S. Dollar and allow the Renminbi to float.  Even the Lilliputian new range of 2.1% is significant in the fact that it is the beginning of a new currency regime in China, one that does not rely on the constant neutralization of export-gained Dollars via the purchase of U.S. assets, particularly U.S. Treasuries.  Whereas, I have seen several differing breakdowns of the basket of currencies that the Renminbi will float against, suffice it to say that the Dollar will retain only about a 30% or less weighting in the currency basket selected by China, with the equally flawed Euro taking second place.  It is significant that Malaysia is also allowing its currency to float since it is a major competitor and trading partner with China.  This will not be a static process at all in my opinion, the Chinese democratization of their domestic currency's trading.  I think over time the basket will have a less and less Western leaning and a more decidedly Asian leaning as a Euro-style common currency, at least for inter-regional trading, becomes more of a reality within the next ten years than academic speculation.  Most currency analysts see a very gradual appreciation of the Renminbi over the next two to three years of at least 10%, so we label this process this month, Chinese Water Torture.

The protectionist zealots in Congress, Schumer comes to mind, get some wind taken out of their Ever-Politicized-Agendas, and not surprisingly I can't recall hearing a peep out of the China-bashing crowd on Capitol Hill this past week.  This first step by the Chinese will decidedly be Lilliputian as regards its effect at reducing the ballooning U.S. Current Account/ Trade Deficit by making Chinese goods 2.1% more expensive, at least theoretically; however, it is widely believed that the overcapacity situation in China is of such far-reaching magnitude that Chinese producers will just absorb this currency translation negative by reducing already paper-thin profit margins.  Keeping Chinese workers employed is more important to the State in China than profit maximization at this juncture in their evolution.  When the geniuses on Capitol Hill see the Chinese buying less and less Treasury paper, they will realize that they didn't really understand what they were asking for in the first place.  But this lessened demand for U.S. debt  will take a few more months to become more obvious as 10-year Treasury Note continue their irregular march upward.  And China's other trading partners and regional competitors such as Singapore, Taiwan, and Korea will continue to do the same as their dependence on purchases of U.S. Dollars wane with the evolutions of their currency regimes also.

While this chart does not appear conclusive as to the direction of U.S. yields over the near-term, I am convinced that our previously Trading Partner Subsidized Interest Rates (TiPSIR's) ARE NOW A PHENOMENON OF THE PAST.  Sir Alan will lose his conundrum as to why longer term rates are not responding to Federal Reserve tightening.  At a minimum, the reduction of Dollar demand due to China and other Asian countries weaning themselves off of a sole dependence on the Dollar will eliminate the ceiling of 4.5% to U.S. intermediate yields over the last 2 years.  Once we breach the 4.6% level well before Fall of this year, I think all bets are off on the assertion of continued low 10-year rates (as in mortgages) in the U.S.  I know this is not the forecast of more astute bond traders such as Bill Gross of PIMCO fame, but I see a historical sea change developing with the Chinese revaluation as I have stated previously.  While inflationary pressures via higher Asian export prices in Dollars will also be evolutionary, it is one of the pressures being put on Sir Alan before he hits the links.

Sir Alan is being forced by actions such as the Chinese (also forecast here by the Sage, see what value you get for nada!) to telegraph well in advance AND pursue a tighter and tighter monetary policy in the U.S.  Three primary reasons exist for a much tighter monetary environment than the official and grossly understated 2.6% annual CPI rate would imply:

1.  The Eliminator of Moral Hazard in the financial markets has finally woken up to the humongous systemic risk that his re-liquefaction of every financial crisis since 1987 has created for American society.  He wants to squeeze some of the speculative fevor out of the housing market, bond market, stock market, derivatives market, hedge fund market, and fish market (just making sure you are still awake!) before he starts posing for bronze busts.

2.  He does the shopping in the Greenspan household and knows full well that inflation in these Disharmonious States is easily in the 6% to 8% range in 2005, and likely not to get better any time soon with India and China still chugging along at 7% plus GDP growth rates.  He doesn't buy the Housing Equivalent Rent machinations of the Bureau of Labored Statistics, and knows that rents are sure to adjust upward as housing prices have soared over the last 3 years.  He also knows that $60 per barrel oil is going to be with us for a very long time.

3.  He knows without a smidget of doubt that a Dollar Collapse would be catastrophic for a Debt Dependent U.S.  Granted, it did not take much genius to forecast a Dollar rally in 2005 after 3 years of continuous decline (and this is another reason the Sage knows he is not a genius!), but the winds have shifted and the fundamentals of Monumental Outstanding U.S. Liabilities (MOUL) in the years ahead argue for a much lower Dollar (just to attempt to pay the tab, if nothing else!).  Greenspan, in 2005, is doing his part to keep the bids coming in on U.S. debt, albeit only in the shorter maturities UP UNTIL NOW.  


Whereas, the Sage was the lone wolf in a pack of mongrels months ago in forecasting Fed Funds well over 4.0% by year's end, we now have the Johnnies Come Lately in econo-land venturing as far as 4.5% out on the yield curve by Greenspan's retirement date.  The only constraint to a 5% Fed Funds rate (which buys wiggle-room for the Fed WHEN, NOT IF, they have to reduce rates to attempt to stave off the upcoming 2006 recession) is the timing of the uptick in 10-year and longer interest rates.  Although Fed tightening has assisted in the onslaught of more than one recession in my brief existence, even the newly appointed Fed Head in 2006 will be loath to invert the yield curve too visibly and be put on the political hot-seat for causing the currently developing recession.  Of course, all of us know that Greenspan & Company have done more to create the staggering imbalances in our current economy and financial system than any group of Government Interveners that ever existed, but we will gladly watch them play their political games.  That is, as long as we are individually taking actions to counter the mess they are creating.  Rest assured that none of their maneuverings will spare us from our eventual fate of price rationalizations in the years ahead; and this means painfully lower prices in virtually every asset class.  I guess it merely provides material for us newsletter writers.

Chinese Water Torture can be used to describe the stock market in 2005 also, which has basically gone nowhere since January 1st.  And what gains have been achieved in industry-specific sectors have been gleaned at not-insignificant risk to the stockholder.  If we just take a quick glance at the S&P 500 over the last 5 years, the clouds part and the light shines in:

All I see is a market that recouped the expected 60% of its 700 point decline from the 2000 top and is now struggling to stay aloft; the internals to the stock market have already rolled over months ago, showing weak volume on up-days in a consistent manner now.  If you think that the fundamentals are improving going into the Second Half of 2005, then I guess you hold stocks, but more and more data, after appropriate analysis to separate the fudges from reality, are pointing to a weakening U.S. economy.  The mis-information coming from the financial media and Washington, as well as our beloved Fed Chairman, really is a disservice to retail investors who may not have the resources or time to truly analyze the quality of daily financial and economic information.  Just a look at the near-term prospects for two of the largest companies in the U.S., Ford and GM, will tell you all you need to know about the true health of the U.S. economy.  Neither company is making any money under their current Employee Pricing Plan promotions which will last for some time to move formed metal off of dealer lots.  One of these companies may not be around in 2015, I don't think that is an exaggeration.  Oh, did I mention there were announcements for another 75,000 in layoffs last week amongst a diverse list of American companies?!!

Lastly, but not leastly, the Chinese Water Torture analogy applies to the price behavior of the precious metals in 2005, but this action is dripping to a finale where the victim becomes the victor.  Remember that trading in precious metals is a global affair, so the grip that the Comex has had in the past in setting gold and silver prices is gradually being loosened by emerging markets in China, Hong Kong, and India.  Maybe the regulators of those commodities exchanges are more attuned to the best interests of the citizens they are supposed to serve.  The Comex appears to be the bastion of both large speculators and Commercials, but the statutes establishing the CFTC say nothing about favoring one group of participants over the other.  Money talks in this country, and those that generate the largest trading fees for the Comex have gotten blatantly preferential treatment up to this point, but the landscape is changing.  As more and more daily trading volume occurs off the Comex in far-away lands, where the citizens know from not-too-distant experience of the eventual destruction of virtually every fiat currency, the Comex will become a price follower and not a price leader.  I liken the action in the metals so far in 2005 to a constantly coiling spring, that right now is wound so tight that the shorts will soon be running for cover.  Add to positions before you go on summer vacation.

The U.S. Dollar index is hitting major resistance in the 90 area as we enter the second half of the year, and the lose of position of the currency with our major trading partners in Asia, especially China, almost guarantees that the bear market in the Greenback is soon to resume.  The Chinese revaluation of the Renminbi is a pivotal event in the currency markets (and eventually the stock, bond, and precious metals markets!), even though the Dollar had lost momentum weeks ago before the Chinese announced their new basket float.  More and more talk is coming out of the Middle East and Russia of pricing oil shipments in Euros, so the Dollar's day in the sun is setting.  Furthermore, the crossing of the 350 level in gold priced in Euros this year was another pivotal event for the continuing bull market in gold:

Granted, there is no liquid, immediate alternative to the Dollar to totally replace it in international trade as the dominant medium, but changes in reserve currency status can be an evolutionary event versus a revolutionary one.  As we noted with glee in June, the Dollar/Gold inverse price relationship fell apart as both commodities rose over 5% in that short period.  Gold and silver are truly the Currencies of Last Resort, and as the Dollar's desirability wanes as it has since 2002, there will be more and more periods where the precious metals break their shackles from the Dollar and operate as the true global currencies they represent.  But many factors are aligning as we plug through the dog days of summer to provide us with sizeable gold and silver gains as we enter Fall. 

Do your homework in understanding the centuries' old reasons for owning the precious metals.  Once you do your due diligence, you will have the conviction to not only hold during these Chinese Water Torture periods of backing and filling prices, but the courage to step up and accumulate more.  More sandbags in a nuclear event are always better than less.


Back to TOP

  



August 24, 2005:  Like Flying an F-16 Blindfolded.


Since I have bombed and strafed the financial media over the last 7 years without let-up, I feel that this month's analogy is quite appropriate.  What I am coming to realize, with some disgust and even more trepidation, is that the average American does not have a clue as to the fragility of our financial system and economy.  As long as stocks seem to go up in price in lockstep with their equity-challenged houses and cheap money is flowing like water from lenders, then Americans see no need to peek below the clouds that they are so effortlessly soaring over to observe what the terrain looks like below the billowy surface.  Actually, more like a smoke-screened surface.  The problem with this disposition is that the speed of home equity extraction, installment credit borrowing, and subsequent spending is much faster than a blindfolded pilot or consumer can mentally handle with respect to consequences.  This is one reason modern aircraft have many functions that are fully automated, but a pilot who is going to return to terra firma still has to constantly monitor the instrument panel to stay out of trouble.  I am not going to restrict the pilot's seat to consumers in this month's tirade, since we have a hanger full of bureaucrats in Washington who are also gleefully playing with the aircraft's stick at near supersonic speeds AND with deadly munitions onboard.  But it is an apt comparison to make of a blindfolded pilot operating a multi-million dollar marvel of technology when discussing the behavior and attitude of the American consumer in late summer, 2005.  And that F-16 that seems to have no bounds according to Cheerleader ACE Number One, Alan Greenspan, is the U.S. economy and financial system.

Our don't-have-a-clue pilot has pulled back on the stick a little as jet fuel prices have gone through the roof in 2005; more familiar to the man on the ground is the bell ringing at the gasoline pump with per gallon prices at $2.65 and going higher.  I think I have forecast $3.50 per gallon gasoline in the not-so-distance future for Americans in past epistles, and I reconfirm that forecast now.  I would say by summer of 2006 that a giant weight or air flap to discretionary spending (and economic growth!) will have been extended to slow our aircraft down even more, possibly to stall speed, aka SEVERE recession.  A severely strained economic system with a record debt burden and diminishing income growth prospects is very unlikely to experience a mild adjustment period.  A muddle-through economy has a low probability of unfolding in my opinion.  As many petro-experts have expounded of late, this is not an oil supply shortage induced price-spike per se, but a DEMAND SURGE from developing countries such as India and China that is unprecedented in global history.  We are assuming that the plane will coast to a non-fatal landing in this analogy, but a more terminal ending is not out of the realm of possibilities due to the loss of speed in totally uncharted turbulence (economic growth not sufficient to service outstanding liabilities).  The trivialization of the impact on the pilot of surging fuel prices by the ground crew in Washington and in the Federal Reserve hanger is also unprecedented, as one who used to get up at 4:00 a.m. in the morning in 1973 to get in line to get a gasoline ration knows otherwise.   As the most energy-hungry country on the planet (and most wasteful!), U.S. energy costs are a major component to economic wellness.

WalMart's recent sales figures bear this fact out, since lower income customers already pay a disproportionate share of their incomes just to get to the store.  Whether customers are executives or day laborers, the cost to drive 15,000 miles per year in a vehicle that struggles to get 20 miles per gallon is almost $2,000 at today's gas prices; and those are after-tax dollars.  If the day laborer is only making $18,000 per year, that single expense line item is over 10% of gross income.  So the WalMart Barometer of Consumer Spending is an early indication of an economy losing air speed.  But as gasoline prices stick and continue into winter with an upward bias as heating demand competes for available crude stock, all across the socio-economic spectrum there will be fewer road trips taken to the mall, regardless of the end destination, downscale or upscale.  It has happened in every oil crisis since the first sheik decided it was pay-back time.  Surging energy costs are a tax on an already debt burdened consumer that robs the economy dollar for dollar of spending that could go toward other goods and services.  And we will not have any tax breaks coming anytime soon to counter this significant Energy Tax drag on the economy.  The Federal Government has fired its last Tax Break afterburner, at least until after the 2006 elections, as the war-aggravated Federal Deficit has re-emerged as a campaign issue for the opposing sides.  But to date, as evidenced by the record setting Transportation Bill just propelled through Congress, an historic case of too much, too late, I may be naive in thinking that politicians won't be able to pull more pork out of Uncle Sam's hat should the economy need fiscal stimulus in 2006.  It is just that the Dollar will suffer additionally should Congress resort to further spending to pile upon a monumental National Debt.  However, knowing the character, or lack thereof, of politicians seeking re-election, the Dollar's resuming downturn will be reinforced by a Congress that never got the memo that Deficits Do Matter (DOM).  As a country, we are destined to spend our way into Reserve Currency Oblivion.

The Top Gun proudly sitting in F-16 One, of course, is none other than Sir Alan Greenspan, who has parked his knightly steed for a few more horses that will allow him to soar upward along with his estimate of himself.  And to soar along with his estimate of the job he has done as Central Banker One since 1987.  As they say in the military, he is a Short-Timer, but he handles the stick like he actually knows what he is doing, not realizing that he too is blind-folded to the America he leaves behind.  While there were not any Weapons of Mass Destruction found in Iraq, the Maestro's craft is laden with armaments that the world has never seen before:

1.)  The American Debt Bomb in the Trillions of Dollars that has a hair-pin trigger at all levels:   Federal, State, corporate, and consumer.  It has been so easy making this WMD with lax lending standards, inadequate financial institution oversight, creation of non-bank lending spigots, negative-to-low amortization mortgages with ticking variable rates, negative real interest rates, and irresponsible encouragement for borrowing to spend from the air traffic controllers, SAG (Sir Alan Greenspan) and Helicopter Ben.

2.  The Housing Bubble Bomb that superceded the previous model known as the New Millennium Stock Market Bomb of 2000 and where the triggering device is already ticking its way to detonation.  The affordability issue has recently turned sticker shock into flattening sales, but just wait until buyers actually demand lower prices to leverage their futures away.  Prices are already retreating in the much ballyhooed Washington D.C. area; new home builders are having to rethink their asking prices as they begin to sit on more and more units completed, yet unsold.  The device's guidance system has already initiated its countdown with an inventory of housing stock that is approaching the magic 5 months supply at the current sales rate.  No shortage of explosive power here.

Even with record low mortgage rates, the U.S. Happy Homeowner finds himself using a record percentage of disposable personal  income to have the American Dream of home ownership.   Something is very wrong with this picture:  OVERPAYING FOR HOUSING, just like chasing NASDAQ stocks in early 2000!

3.  The Financial Derivatives Bomb that has been designed by engineers who are not quite sure how the end product really works (or if it does work), what risks it really protects against, what could trigger a premature detonation, or how many megatons of TNT are really packed into its neat little package.  All of the equity in all of the banks whose engineers have devised this baby will be wiped out in a nanosecond if there is detonation.  Even if just one of the bomb's stabilizer fins breaks off, there will be financial system devastation.  Can you say, "$55 Trillion"?!!

4.  The Dollar Devaluation Bomb that caught an updraft this year, but is now rediscovering gravity as the fundamental flaws in this reserve currency turn its trajectory earthbound again without hope of a recall.  Since we live in a Global Village (with all of the tribes intermittently fighting with one another), the demise of the Dollar will have lasting implications for Americans for decades to come as their ability to attract foreign capital is compromised and their cost to acquire foreign goods is increased.  When this baby goes off, the landscape will be covered with a lower standard of living for Americans.  Another 35% devaluation is easily in store for this munition.

5.  The Loss of Confidence Bomb, probably the most deadly of the cluster, is usually dropped as the final blow.  This device can be an evolutionary engineering feat, developed over years of intentionally misrepresented economic statistics, broken retirement promises, irresponsible fiscal governance, liberty robbing legislation, irresponsible monetary policy, inadequate environmental controls, and on, and on, and on.  This is effectively the Neutron Bomb, that vaporizes the populace, yet leaves the buildings standing.  This bomb, should it jiggle loose from its wing mounts by an over-confident pilot, could cause a chain reaction of detonations of all of the above WMD's listed above.  The landscape below would be irradiated for decades to come.

 I hope no reader thinks that I take these issues lightly in putting them in terms that may slightly entertain.  The armaments that have been created for our mythical F-16 (a fighter, I know, more than a bomber for you Air Force retired out there) are the most deadly the world has ever imagined.  I am trying to make a point.  Many have not been listening up until now, partially enamored with the impaired pilot's acrobatics, but the roaring engine noise of complacency will soon flame out.

And that point includes taking out Flight Insurance for all those that could be impacted by this ill-piloted aircraft.  Greenspan has thought he was a much-less-handsome Tom Cruise in rocking the wings up and down in a playful manner, but he still does not realize he has been flying blindfolded by his own experiences, prejudices, political ambitions, and ego.  His replacement, Ben B. I am sure, will think he is another ace, and probably do some aerial acrobatics with the 10-year Treasury Note yield to attempt to keep the craft aloft.  Blind-folded pilots should never be allowed to leave the hanger.

Long-lived assets like the precious metals are of the buy-and-hold variety.  You, nor I, can predict with any certainty when they will reward us with doubling and tripling in value.  But the one thing we should always be able to predict in owning them is that they will be, as is proven by centuries of history, a value secure asset when all other assets fail.  Gold and silver (PM's) are your parachutes in this analogy.  They will bring you safely to earth should the Ship of State crash, lose a wing, or stall.  You have no certainty in predicting the safe landing of a blindfolded pilot flying a highly advanced bomb-laden aircraft at supersonic speeds.  You do know that you can catch enough air under your gold and silver parachute to ease your decent.  And you may even land in a better place.

Forget about the short-term squiggles in the PM Chute.  If you have ever packed your own parachute, you will realize that every extra minute you spend in getting it tangle free is one less minute you will worry on the way down.  And you won't have to fumble at 100 mph trying to find the reserve cord either.


Back to TOP

September 25, 2005:  Investors Stuck In State of Denial.


I can't for the life of MEself figure out what passes for logic in the financial markets these days.  Some of the reasoning is so perverse that one would have to be standing on their heads and spinning about like a top to make any sense of it.  Here is just a Whitman's Sampler of what faulty logic is purported to be behind daily swings in various U.S. asset markets:

1.  Hurricane Katrina and now Rita are going to be net good for the economy as the Federal Government and private citizens open up the money spigot to give the sagging economy a much-needed boost -  SO STOCKS RALLY.

DUH - if you pay twice for the same assets, goods, and services and at much higher prices the second time, has your well-being doubled or are you under water by the current replacement cost amount?

2.  Higher interest rates alone make the Dollar a more appealing asset to own, especially if you are a foreign investor - SO DOLLAR RALLIES.

DUH - if the guy down the block owes you Billions of Dollars, what do you gain with a higher interest rate on the debt if he pays you with progressively less valuable units of currency or even technically defaults by extending the payback period?  Plus, you are not even getting a positive Real Interest Rate after U.S. inflation of 5% to 6%.  The borrower in this case is technically bankrupt because the revenue required to meet all obligations, some $55 Trillion plus in the next 15 years, is just not there.

3.  Not as many refineries in the U.S. Gulf Coast were severely damaged during Katrina or Rita to provide a continued climb in gasoline, natural gas, and heating oil prices - SO OIL DECLINES.

DUH - the period of time that even one of the major refineries along the Gulf is out of operation or operates at partial capacity is enough to keep supplies tight in the U.S. of all three refined products; while price spikes due to the storms will be temporary as markets overreact and customers panic, possibly hoarding to avoid further near-term price hikes, the global supply shortages of these distillates continues at the onset of the American winter and upward pressure will exist on petroleum products well into 2006.  Some U.S. refining capacity may be permanently lost in the New Orleans area, period.  And don't forget about the workers needed to run the refinery operations, who have no place to live in the next several weeks, or the infrastructure of electricity, barge traffic, Gulf oil rig production of potential supply, receipt of oil tankers along the Gulf Coast, and environmental clean-up required at virtually all refinery facilities.

4.  The Federal Reserve is soon to discontinue raising short-term interest rates because Uncle Alan will have put the Inflation Genie back in the bottle - SO BONDS CONTINUE TO RALLY.

DUH - the U.S. central bank is still 100 to 200 basis points away from providing a Positive Real Interest Rate for bond investors, especially over-committed foreign central banks, and any early 2006 cessation of Fed interest rate hikes is likely to be due to a markedly softening U.S. economy, given a deadly body blow by CAT4 and CAT3 tandem hurricanes whose $300 Billion combined recovery costs are hardly a temporary set-back.  Fed Funds of 4.5% are likely by February, 2006, as Uncle Alan continues his window dressing for his January, '06, swansong.  Federal Reserve also has to defend a indefensible Dollar, at a time when higher intermediate and mortgage interest rates would be the final leg kicked out from under the economy.  Currency traders are buying the higher Dollar yield argument right now, but reality lurks just behind the corner with the Triple Deficits ready to go right off the historic charts or should I say right off the U.S. Balance Sheet.

5.  Corporate earnings are likely to continue to keep growing above-trend going into 2006 and, thus, stocks are not overvalued - SO STOCKS RALLY.

DUH - just a causal glance at daily lay-off announcements, not to mention a mostly bankrupt U.S. airline industry and barely solvent domestic auto industry in Ford and General Motors should be enough to convince American investors that corporate executives do not cut back on trained employees in a promising/solid growth environment.  Just the opposite, lay-offs and operational rationalizations occur usually during the throes of business retrenchments.  And today's executives have learned from the past that it is better to begin lay-offs earlier rather than later in a business slow-down.  They do have year-end bonuses to think about also and are padding the bottom line while they have one in 2005.

6.  Gold and silver will not be allowed to rally much further because the bullion banks on behalf of cheating Washington Accord central banks as well as the CFTC and Plunge Protection Team (of the Treasury and Federal Reserve) stand ready to supply metals and financial futures' shorts to the gold and silver markets, respectively - SO INVESTORS STAND IN DENIAL OF THE TREND.

DUH - demand for gold and silver is a global affair, hence, the recent new highs in gold in all currencies to include the Euro, Yen, and Dollar.  Any manipulation of the precious metals markets in the U.S. by the authorities is likely to be restricted to the 6-hour trading time of the Nymex/Comex and most participating central bank supplies of gold are vastly reduced since 1997.  Watch the before- AND after-U.S.-hours trading in the metals in the weeks ahead to get a glimpse of what a truly global marketplace can do for higher prices when U.S. traders can influence prices only about 30% of the available time.  Once it becomes more widely known that China is quietly accumulating gold reserves along with Russia in place of devaluing U.S. Dollars, no lid aside from the suspension of trading or revised physical settlement rules could be kept on the yellow dog.  And a trading suspension or revision of settlement rules is highly unlikely for an Administration blamed for just about everything except measles; the Democrats would pounce on this breaking in metals trading as another example of a failing Republican Administration that supposedly prefers to not look out for the little guy in deference to the Fat Cats and Corporations.

  Inflation is accelerating in the U.S.  Until lower demand for energy products is precipitated by slowing global growth brought on by oil sticker shock and over-indebtedness, we will see many cost of living items going steadily higher into 2006.  The reported CPI is total junk, as we know, but eventually, even the prevaricators will have to let the numbers gradually increase in their releases to the often-times gullible public.  Housing has begun to roll-over with respect to price increases and sales while supply mushrooms, but as rents begin to play catch up, once again the CPI prevaricators will have to let the increases flow through.  The Metals are in fine metal.

****************

I think a general in the New Orleans recovery effort coined a phrase, "Just Being STUPID Again" to the monolithic press when they continued to badger him about who was to blame for the delays in hurricane relief and rescue.  I just toyed with the idea of changing this month's title to:  "Investors Still Stuck in STATE OF STUPID", but thought better of it as a shepherd leading a disorderly flock that I had better not be seen beating about their bleating heads.  I am sure I will be able to add to the list above in the days and weeks ahead more and more examples of perverse "logic" on why investors should remain in extremely over-extended financial and real estate assets, but history will eventually show that this was one of the most irrational periods of investor reasoning and resultant behavior that the world has ever seen.

American investors are caught in the 1980's rut of thinking that business as usual will continue to serve them well in the New Millennium.  However, current conditions are anything but normal.  For instance, when do you remember inflation trending higher month after month and 10-year and longer-dated bonds holding their own or even trending higher in price with lower resultant yields?  When do you remember money markets yields at 2.5% and inflation for Joe Six-Pack running at 5% plus and spiking higher?  When do you remember stocks rallying when a hurricane is downgraded from a Category 5 to a Category 4, still an extremely deadly force by any historic measure?  When do you remember $100's of Billions of losses being net positive for the U.S. economy?  And lastly, when do you remember Americans using their homes as cash machines to allow them to continue to keep a consumption-based economy afloat?  And when do you remember being consistently lied to by elected officials about just about every aspect of your governed life?  These are rarified times indeed as in Charles Dickens' time.

Don't get caught in the Stupid Crowd.  If it doesn't make sense, then don't get sucked into playing your money with the crowd.  A prudent investor always looks for potential problems down the road and takes appropriate actions.  

DON'T BE STUCK IN A STATE OF DENIAL.



Back to TOP

October 25, 2005:  Peering in the Portholes of the Titanic, DIVE #2.


It just keeps getting better and better for us ezine writers! There is certainly no dearth of material to write about especially as the Masters of the Universe continue to puncture one hole after the other in the Ship of State.  And we are actually paying these guys at the Public Trough to sink the bright prospects for many generations of future Americans via a guaranteed lower standard of living.  Place yourself in a sophisticated submersible (since only sophisticated investors read this dribble!) and get ready for the ride of your investing life.  I can't recall how deep the rusting carcass of the once great ship Titanic now rests, but for drama's sake, let's image that we are going down almost two miles into the dark, cold abyss to do detective work on why the great ship floundered in the first place.

We have a new iceberg that was launched into the economic and financial seas just yesterday, The Helicopter Bernanke Berg!  The HBB, kind of like WMD.  Now one would think that with a moniker that combines a rescue aircraft with a natural hazard that one could rescue oneself in this instance, but au contraire, mon frere!  (We can call American Fries French once again now that we know their intelligences are assisting us against the Real Infidels!)  If we carefully inspect the bow of the broken vessel below, we can see traces of rotor scrapes that signify that the iceberg that struck the finishing blow was indeed the Bernanke Berg.  Isn't it so refreshing that the once most powerful nation in the world would utilize the services of another academian to pilot the most complex vessel ever constructed by financial engineering.  His is a split persona:  Both the Captain and Iceberg of the famed Titanic legend!  This Captain of the Ship of State has never achieved success and recognition outside of the dismal science of economics and within the more demanding galleys of private enterprise, where just meeting next week's payroll can tax Davy Jones himself.  And he promises to continue on in the Great Greenspan Tradition (GGT) of trying to eliminate moral hazard from the financial landscape and provide a willing (and maybe not so ABLE!) Fed to inflate Liquidity floatation devices within the sunken vessel at a moment's notice.  So by announcing that he will follow in Sir Alan's duck-like footsteps, we have the precious metals on a tear today and the Dollar sinking like a rock.  Do you think the crew of the ship, those Asian Central Bankers down in the main engine room shoveling coal (U.S. Dollars) back into the boiler (U.S. Treasury notes) as fast as their monetary shovels will work are getting a little green around the gills?  Remember that the Iceberg of Lost Confidence is the deadliest of them all!

Now this Berg-Captain has espoused the facility of using inflation targets as a means of guiding the Ship of State, even has suggested the use of price controls to reach this economic nirvana!  Gosh, the ink is not even dry on his acceptance speech, and he is showing what a true clone of Uncle Alan he really is!!!  Remember that Uncle Alan brought us the Whip Inflation Now (WIN) buttons during the very cold economic evenings of 1973 and 1974, and what a breath of fresh, salty air to see our new Captain take the wheel with a similar sextant.  The Sage of Wexford, an old salt himself, suggests that we use a target of 5.563789 % to be our North Star in guiding the ship to port, since we are already there now AND BERNANKE BRONZE BUSTS CAN BE POURED IMMEDIATELY IN FEBRUARY, 2006, WITH A PROCLAMATION THAT NO ADDITIONAL INTEREST RATE HIKES ARE NECESSARY TO CONTAIN INFLATION.  Ah, the Sage must be bedazzled by the Northern Lights of Officialdom to suggest such a target, well outside of his realm of purported expertise, but we have a school of non-experts in this country giving "expert" advise.  And if Sir Bernanke, since we anoint all of our monetary leaders, should use the BLS CPI index as his Big Dipper, then he can wrestle the wheel early from Greenspan and declare victory before he even dons the oakleaf clusters of the Captain's Hat.

And God forbid, this New FedHead, puts his interest rate hikes where his mouth is, we could be looking at 7% Fed Funds by the time the Icelandic flows start to thaw next spring.  In order to quell inflationary expectations in an environment where the rate of increase in prices has yet to subside and the world's reserve currency has been given a temporary reprieve from walking the plank, any central banker worth his salt knows that you have to provide a real rate of return attractive enough to keep the suckers anteing up to the bar.  And hopefully that is not a sand bar of which I speak.  Expectations of an eventual positive real rate of return on U.S. debt instruments sometime in 2006 has throw a life preserver to the sinking Dollar for now.  However, we all know from Econ 101, a course both Greenspan and Bernanke (a.k.a., Alan Junior) placed out of due to their SAT scores and their erudite mannerisms, that the creditworthiness of the borrower eventually comes over the heaving horizon and becomes the residual basis for currency and asset valuations.  Don't want to spoil the party with all of the current Ballroom Dancing onboard ship, but interest rates to the moon won't save the U.S. Dollar from its eventual devaluation of another 30% to 50%.  Did not save Mexico, did not save Argentina, did not save Brazil, did not save Chile, did not save Thailand, did not save Russia, you get the picture.

And now with Printing Press Bernanke at the helm, only the bottom-feeding central bankers do not see the white mass ahead that is truly a ship-stopper.  Once the crunching of the ship's outer hull is heard in the control tower, the bells will sound the panic of reversing screws.  But, alas, the damage will have already been done to seaworthiness, and the lifeboats should be on deck as my fingers fly across the keys (how about those metals at $473 for gold, $7.82 for silver, and $945 for platinum?!!  Got a lifeboat to spare?  Were you at the beach when the Sage told you about the Fall Rally?!!)  Because when the hold of the ship is laden with record debt bursting at the bulkheads, sheer momentum (Force = Mass times Acceleration) will carry the ship forward and it this instance, the direction is unquestionably down.  Eventually cheaper interest rates in mid- to latter-2006 will do little to save a crew that is financially already 10 feet underwater, using debt to pay current expenses like the anchor thrown in one's lap at the gas pump every week and at the furnace outlet this winter.

Although I know you landlubbers would like me to cease the nautical metaphors, Dramamine may be in order, bear with this submersible captain and let's peer into some more of the fractured portholes to complete our detective work:

1.  Noteworthy Overboard, Class One:  Realtors and mortgage industry mates that have seen the price wave crest and now can do all they can to avoid the undertow of sagging demand (at record prices!) and surging supply.  Can you believe that Housing Starts were like a 30-foot wave in September?!  Don't want to ride this wave?  Houses that sold at 100% over their price 3 years ago in a couple of days are now taking a more normal 3 to 4 months to move, and at a discount averaging 5% off of asking price.  This industry group will be swimming with the fishes in late 2006 and 2007.  And unfortunately for many in the construction trade (and possibly some deserving builders!), there will be little plywood available to keep them afloat in this speculative froth.  A shark mouthful out of the strongest growing employment sectors over the last 3 years.

2.  Noteworthy Overboard, Class Two:  U.S. automotive manufacturers and suppliers such as General Motors, Ford, and Delphi are in a severe industry retrenchment where the magnitude of lay-offs and plant closings are just in the initial stages.  Since all of the above are either in Junk Bond status or in bankruptcy, expect the U.S. auto industry in 10 years to be around 40% of its current production capacity outside of Daimler-Chrysler.  Excessive executive and line worker compensation to include world-record benefits at all levels have made the current U.S. automobile industry not only non-competitive, but financially insolvent no matter what the U.S. economy does in the next decade.  The only alternative to retain a vestige of domestic metal bending in the future is drastic domestic production downsizing, default on the majority of current retiree pension and health insurance benefits, and massive outsourcing of production .... overseas.  And my 40% seat of the pants estimate may prove to be optimistic.  Oh, and did I mention they are not building the vehicles that the majority of Americans want?!

3.  Noteworthy Overboard, Class Three:  The Brooks Brothers suit will have to be capable of serving as a floatation device for the legions of financial industry employees who will meet icy waters beginning in 2006.  Although we have had some one-day-wonder rallies in the stock market the last several weeks, any but the most unsteady sealegs amongst us can see that the head of steam is fizzling in the Stock Market.  Even the most tsunamic of rallies occur on lesser volume and back-to-back wins cannot be mustered.  (Kind of like Michigan football up until last week with Iowa!).  And since we will inflate before we begin to deflate, maybe in 2007, the bond market players are going to have shark teeth marks in their derrières big-time and the first white-mouthed pass may be in progress as I rant.  The steady increase in short-term rates by the Fed puts upward pressure under intermediate yields going forward, not to mention nasty CPI releases, a waterlogged Dollar, and American Debt a seawall surge in itself.   And then to show you that the Captain is not asleep at the helm, Helicopter Ben may even enter the 10-year note arena on the short side in 2006 to prevent a recession-signaling inverted yield curve; I am sure they have an inventory of the stuff somewhere and the Treasury under Snow-Job will be glad to turn on the printing press to meet fresh 2006 deficits.  Who knows what devices lurch in the minds of I-know-better-than-the-markets Fed Captains?!!  Captain Kid looks like a piker compared to these guys!

4.  Noteworthy Overboard, Class Four:  Retail sales are about to take a hull shudder of historic magnitude as the shortfall in gross income growth in the U.S. finally catches up to the average American consumer.  Little light bulbs have now gone off in the Captain's quarters that the majority of economic growth since 2001 has been supported with borrowed funds, not newly created income, and the Captains Greenspan and now Bernanke do not want sailor's widows besmirching their names or legacies with handfuls of rotten fish.  Since credit whether home equity extraction or credit card flipping have made the 3-SUV Family possible in America, increases in rates across the board going into 2006 should strap those miscreants to the financial mast.  Look at weather battered Consumer Confidence readings to get an eyeglass look into the future.  Consumers lacking confidence don't open their wallets and purses; they historically bury them in the backyard by paying down debt and actually stocking the galley with some real savings.  Watch WalMart sales in the month's ahead to take a reading of the 2005/2006 economic winds.  Me thinks this should be a rather poor Christmas (can I use that politically incorrect word?) shopping season as a stranded consumer with an empty gas tank or a cold consumer with an empty fuel oil tank is hardly in the mood to shop until he or she drops.

 
So, as our futuristic looking vessel's ballast tanks are emptied for the ascent back to the rolling surface, the last greenish rays of light vacate the skeleton of a once great ship.  In a sense, we are archeologists studying those who came before, but in this case, we are more like viewers of the Twilight Zone, peering into a not-too-pleasant future.  Many Americans will be amazed that they missed what was before their very eyes for the last 5 years, but then again, many have cared not to see as it would interrupt their dancing in the Ballroom of the Titanic.

The precious metals have entered Phase II of the secular bull market that began 3 years ago.  As I have said before, ad nauseum, many travelers will be left at the dock as the rescue vessel sails away.  In my humble opinion, we will see an exponential rise in precious metals prices into March of 2006; that is, an acceleration in the weekly price appreciation.  Target gold at $525, silver at $9.35, palladium at $270, and platinum at $1,005.  Heck, if the new Central Banker of the World can have targets, why can't the Sage of Wexford?!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  

And as far as ETF's go, do you know for certain that none of the employees of the funds worked for Enron, Arthur Andersen, Refco, or AOL.

P.S.  If I had more concrete data about the total liabilities of Refco I would make more comments herein, but trust that this is the tip of the iceberg (last Titanic analogy du jour) in the obscure chain of financial intermediaries' interlocking exposures specifically with respect to unregulated derivatives.  Illiquidity in any market caused by the sudden failure of a major clearinghouse is certain to cause ripples in the pricing of the assets involved, in this case, commodities including the precious metals.  Stay tuned, but we have only seen the tip of this icy berg to date.


Back to TOP

On to More Archives

Back to Bullion Insights