Taylor on us Markets & Gold

Don't Be Fooled by Friday's Market Action

The equity markets enjoyed a huge short covering rally on Friday (07/05/02), but don't be fooled by that. We remain in a huge bear market that has, at least in terms of the Dow barely yet begun. Remember that some of the greatest rallies in stock market history have taken place during bear markets. The action on Friday will serve to suck many unsuspecting victims back into the market. Readers of this newsletter should not be among them.

It is really amazing that although the S&P 500 has now been down 13 of the last 16 weeks, it STILL remains hugely overvalued vis-à-vis its GAAP P/E ratio. Remember it wasn't until a few months ago that Standard & Poor's began their own grand deception scheme to paint a false picture of corporate earnings. They chose to use operating earnings rather than GAAP earnings to calculate the S&P 500 PE ratio. Thanks to www.decisionpoint.com, we can continue to keep up with the old GAAP numbers so that we can, on an historical basis compare earnings on an apples to apples basis. At the end of this past week, the S&P 500 P/E ratio was at a still historically high 40.7 times! That translates into an Earnings yield of 2.46%. That continues to compare most unfavorably with the 10-year U.S. Treasury yield of 4.875%. What this tells me is that in terms of the major U.S. equity indices, it is more prudent to be a lender to the U.S. government than an owner of U.S. equities.

It is always important for investors to take a longer view of the market. We will seek to help you do that once again this coming week when we again interview with Ian Gordon in our July 2002 issue. Ian will tell you why, unfortunately, the Kondratieff winter storm is continuing to bear down on the U.S. and global economy right on schedule as predicted in our 1999 initial interview with this unsung Canadian hero. Ian reckons the emerging economic decline will be at least as terrible as the Great Depression and probably worse because the excesses of the current bubble (which is only slowly being deflated) are so much greater than the excesses leading up to the 1929 crash and depression aftermath.

Richard Russell Sees "the Wrath of God" in S&P 500 Chart

Ian Gordon isn't the only serious analyst who thinks the global economy may be facing a cataclysmic downturn. Richard Russell (www.dowtheory.com) who is one of the most experienced and savvy analysts on the planet, had the following to say in his Friday commentary:

"Remember, looking at the monthly charts of the major averages, we see the weight of many giant "head-and-shoulders tops in place - tops that began to form as far back as 1990. Frankly, I've never seen head-and-shoulder tops this big, so I really don't know what to expect. If formations in major stock averages ever looked like the 'wrath of God,' the formation in the S&P and the Nasdaq and the Wilshire and the Utilities are it.

"What does it all mean? What do these massive tops in so many leading averages and indices mean? I can only guess that these tops imply a huge, a frightening amount of stock (supply) to be sold. And since technically, the head-and-shoulders tops contain a measuring device or 'count' to the downside, I have to think that this bear market has a long and costly way to go before it finally expires in exhaustion.

"And you ask, what could cause stocks to go down as far as these tops suggest? I can only guess. If I had one guess it would be that the formations are implying that the US will be in deep trouble and that the US will be toppled from its current position as the world's only super-power.

"Some observers are saying that the US, in taking on its position as "policeman to the world," has spread itself too thin, and as a result the US is heading towards some kind of a financial crisis.

"Others are saying that the US, as the world's largest debtor, has placed itself in a dangerous position in that the US is at the mercy of its creditors. And with the dollar having topped out, it's a question of what the creditors will do-and when.

"A third suggestion is that the US consumer has taken on far too much debt. That in the deflationary global atmosphere (which we are now in), US consumers will not be able to service their debt. Deflation could therefore run amok through the US economy. And this is why the Fed is now back doing what it does best -frantically pumping up the money supply."

Common inflation/deflation grounds?

As far as finding a common grounds on the inflation and deflation issues, I'm not sure if that is possible. As with many issues, people have dug in their heels and have staked their reputations to a certain chain of thought. Some of us have tried to remain as objective as possible. About the best I can do is to continue examining the various thoughts on this very key issue.

But what I would like to suggest is the following. Since gold seems to work well in both environments, investors should place a relatively large percentage of their portfolios in a diverse portfolio of gold shares and gold itself. And until we see signs that excess supplies are working themselves off of the world's markets and that profit margins are starting to improve, assume that we are heading for delfation, rather than inflation. If we are fortunate to see profit margins truly increase (no gimmicks), then we should start to see increased capital expenditures and increased private sector job creation. Unless that chain of events takes place, I think it makes sense to assume deflation rather than inflation. That, in my view means, minimize debt, build up cash reserves and gold investments.

Gold Mine Geographical Diversification? Absolutely!

I would also agree with Dave that geographical diversification when it comes to mining companies is very wise for the very reasons he observes. For this reason, we do hold some gold shares with properties in Africa even though African political risks is viewed as being very high.

ARE WE DOOMED TO BE A POLICE STATE?

As we approached the 226th birthday of the United States, Congressman Ron Paul raised some extremely important issues that have to do with the quality of life for Americans. Not only is our economic freedom and abundant lifestyles at risk, but so to are the most important provisions of the U.S. Constitution, namely the basic freedoms we Americans have come to assume will last forever. The right to worship as we please. The right to speak openly about issues that may be extremely unpopular to Americans in general. The right to openly oppose our government's policies - yes even sacred cows like Alan Greenspan and our President. These are rights of every American. Congressman Paul suggests they may soon be lost unless America begins to comprehend that our policies may in fact be inadvertently undermining those freedoms.

A couple of years ago, a CEO of a New York based commodity trading firm told me that Frank Veneroso had been called to Washington and told to shut up with respect to some things he was supposedly had said about a South American government he had been working for. When I asked Frank about this allegation, I realized that the story made up by the CEO was false and was being used to paint Mr. Veneroso as an unstable individual. In any event, when I asked the New York CEO why in any event Mr. Veneoso might not enjoy the first amendment rights which I had always thought were guaranteed to every America, even for radical ideas, the CEO told me that we do not have our first amendment rights if speaking out leads to a loss of confidence and instability in the banking industry. That was news to me. I don't know where exactly in the Constitution it says that, but in any event, that is what this well connected establishment CEO said.

Moreover, Mr. N.Y. CEO used one of the oldest tricks in the books to try to discredit Mr. Veneroso. Relating to his right to free speech, Mr. CEO told me that "when it comes to central banks, you can't go out and recklessly say something that will destabalize the markets and then use the excuse that you have forgotten to take your medicine." This of course is a method the Soviets used to discredit their own dissidents. You simply imply that you can't trust what dissidents say because after all, they are not emotionally stable. I do not know Mr. Veneroso extremely well, but on the few occasions I met with him and had dinner with him, I have never observed anything that seemed to be in the least abnormal unless it was his exceptionally high level of intelligence.

But here is what is really scary. According to at least three separate accounts, Mr. Veneroso has in fact now been muzzled by the establishment, with respect to his views on possible manipulation of the gold price. According to former business associates of Veneroso, they said that he was told to stop writing his "Gold Book" and that he feared that if he did not do so, he may not have long to live!

In my view, Mr. Veneroso presented a problem for the establishment. He received his information from central bankers themselves. That combined with his Harvard education and exceptionally successful track record made him too credible when he, through his statistical research demonstrated the logic behind the gold manipulation story GATA has been so diligently telling now for several years.

Did our government or our central bank which some believe now owns our government shut Frank Veneroso up? No of course not! This is America and things don't happen that way here right? Against this backdrop, let me suggest you read Congressman Ron Paul's speech on the floor of the House of Representatives which can be accessed via his web site at www.house.gov/paul/congrec/congrec2002/cr062702.htm