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

In my interview with Ron Gilchrist, which went to press yesterday as part of the February 15, 2002 issue of "J Taylor's Gold & Technology Stocks," he talked a great deal about a very special man named John Exter. John was a pro-gold former central banker who understood how fiat currency will, over time self destruct. Like Ian Gordon and other deflationists, Mr. Exter understood that because fiat money is manufactured by way of debt, accelerating levels of debt would lead to growing levels of ill-liquidity until the system ultimately collapses. To Exter, Milton Friedman's notion, recently promoted in a "Wall Street Journal" article, that you can simply print enough money to inflate your way out of this ill-liquidity is nonsense. Why? Because in order to print money in a fiat currency system, you must issue more debt. But it is debt that is leading inexorably toward an ill-liquid and bankrupt monetary system.

Recalling John Exter's views about our fiat currency system, I should like to quote Ron Gilchrist who said the following:

"John differed from Keynesians and the Monetarists. Their econometric models were inflation driven. John's model is a debt model. You may have in the past heard of the inverted pyramid of debt that Mr. Exter used to illustrate his model. "He took all of the assets in the system and arrayed them according to their liquidity. He found there were far more illiquid debtors in the system than liquid debtors. So he inverted the pyramid to reflect this and then placed it upon a base of gold.

"For example a liquid debtor would be the Federal Reserve itself, the currency notes they issue are a liability of the Fed. An illiquid debtor might be a corporation with a too highly leveraged balance sheet. John believed the pyramid could keep growing but only as long as the authorities were able to keep the debtors in the system liquid enough to service their debts. Once that point was passed the pyramid would cease growing and begin to shrink as the most illiquid debtors failed.

"Enron would today be an example of an illiquid debtor. Investors will react by moving down the pyramid to improve their liquidity. The most savvy of all investors will leave the pyramid altogether and move into the GOLD base. Today, that is what the Japanese people are doing."

"Concerns Grow over Squeeze on Corporate Funding"

"Ron's comments were made last week and published in our February issue that went to press yesterday. So what do I see when I open my copy of the "Financial Times" today? A front page story with the above noted heading. The article noted how a growing number of companies are no longer able to borrow in the short term commercial paper markets and thus are being forced to draw down huge lines of credit with the banks. Lenders are becoming increasingly concerned about future earnings prospects as well as the quality of earnings with a growing number of firms. And, according to the Fed, non-financial commercial paper has fallen by 40% since November 2000 to $209 billion.

"Of course the banks picked up the slack because they have lines of credit in place for which they receive facility fees. They are required to lend on those "committed lines." But from what we hear, banks are becoming increasingly hesitant to renew lines of credit, not to mention adding new ones. And for small companies trying to raise capital. Forget about it!

Barron's Is Now "Playing the Whore" too!

"I have always believed "Barron's" was one source of mainstream information that was at least partly balanced and fair. But now I have to wonder about that view. I had taken my eye off of the "Earnings Yield" for S&P 500 as published every week in "Barron's" But when I glanced at the figures published for February 4, 2002 I was shocked to see that earnings as reported by "Barron's" suddenly surged from $28.31 for the week of January 28th, to $39.28 for the week of February 4th. Then I noticed a footnote that explained that "Barron's" had begun to report operating earnings rather than net earnings because that is the way S&P now reports it. Barron's have not changed the way they report earnings yields and PE ratios for the Dow or the Transports or the Utilities. Just for the S&P which have been reporting astronomical PE ratios that make those of pre 1929 crash multiples look conservative by comparison.

"The effect of this "accounting" change was make the S&P earnings look less overvalued. But who is kidding who now? In one week, the Earnings Yield rose from a paltry 2.50% to 3.50%. Abracadabra! You are Rich! At a time when lies and spin are being more questioned than ever before, I would have expected better of "Barron's" than to pass this garbage along to unsuspecting investors. I had counted on these numbers as essential data used in the "O'Higgins approach to determining whether I wanted to be weighted in bonds or stocks. Since S&P itself is really to blame for this, another example of American lies and deception, I'm not sure where one can get actual net earnings for the S&P. Perhaps this was done to help out an increasingly embarrassed Abby Joseph Cohen who has been consistently overly optimistic in her S&P earnings predictions? In the end, what this kind of chicanery is doing is adding to a loss of confidence in paper assets.

"So if you can't trust Barron's who do you trust? ANSWER: I know I am tooting my own horn. But 'independent people' people like Ian Gordon, Dr. Larry Parks, David Tice, Dr. Ron Paul, Bill Murphy, Reggie Howe, James Turk and a host of excellent GATA folks and of course yours truly, not the Abby Joseph Cohen's of this world have had a pretty good track record since 1998 or 1999.

Secular Bear Market Remains in Place.
Don't get Suckered into this Bear Market Rally.

"The technical posture of the stock market remain very week. Volume has been slowing down. The recent rise has come not from a surge of buying, but rather from declining selling. Volume patterns suggest that the big money continues to come out of the market while shenanigans like those from Barron's and CNBC continue to sucker the little to keep putting his money into the market. Such is the case at the tops of all great bull markets.

Business fundamentals, not just in the U.S. but around the globe are lousy. This past week consumer confidence declined unexpectedly and plant utilization was down. Prices remain weak which mans companies with huge debts are having trouble earning "real" profits from which to service the debt.

"Stocks remain hugely overpriced no matter how S&P and Barron's spin their whorish stories. With debt beginning to weigh the U.S. economy down and as we are sucked inevitably toward that black hole known as a depression, where every attempted bail out simply leads to even greater problems, because the alleged cure by Mr. Greenspan is in fact the cause of the problem in the first place. So, we remain committed to our Model Portfolio which is up 16.70% so far this year, compared to a 3.82% decline for the S&P500.

"The best performing asset by far has been gold. Our gold shares are up 56%. Attractive as this gain may be, it may also be just the beginning of a secular bull market for gold that can be expected to coincide with a secular bear market for paper assets in general. Why? Because as liquidity problems become ever more pronounced, there is no more liquid asset in the world than gold. The Japanese are figuring

"Little by little, confidence is on the wane. Little by little, people around the world are turning to gold. Except for a few of us old time gold bugs, Americans in general are way behind on this curve. The Japanese and other Asian countries are riding the crest of this new wave that is just now beginning to rise and swell into a global Tsunami. Where will we Americans be when the existing monetary system is scraped for a return to a gold backed fixed rate system? We will be in deep do-do because compared to the Europeans who have sufficient gold to back the Euro with a 15% or higher backing, we have sufficient gold for less than a 1% backing, even if you believe the Treasury lies about the gold it reports on its balance sheet.

Gold continues to look strong, with its closing price well above its 200-day moving average, which is around $283. With gold breaking out above long term downtrends, and with global events seemingly building in favor of gold, I am increasingly convinced that we are most likely on the verge of a secular bull market in gold.

VIEW THE GATA WASHINGTON PRESS CONFERENCE

C-Span covered the GATA Press conference this past Tuesday. If you were not able to catch the telecast, you can view it in streaming video or order the tape. To view it in streaming video, go to: http://www.c-span.org/business_economy/

This program will be aired for no more than a couple of weeks so be sure to tune in now. Hopefully, many GATA supporters, particularly those outside of the United States, will find time to view this illuminating and no doubt historical presentation while it remains online.

If you can't watch it via streaming video, you can purchase it from C-SPAN a videotape of the conference by going here:

Due a shortness of time and also because his commentary is so interesting and informative, I am going forwarding to you some commentary from GATA this past Thursday. Enjoy!

"The Drama Builds

"Yes, it surely does. Today, was a Mexican standoff. The Gold Cartel is desperately trying to keep the gold price from going north of $300. They know that means $350 to $400 gold right around the corner and mega financial problems for the bullion banks. The savvy gold bulls can see GATA is right and know it is just a matter of time now before the cabal goes "tapioca." Thus, they are not afraid of taking the cabal on anymore.

"Silver is explosive. It is grinding away higher, with few specs long in a relative, historical sense. If silver takes out $4.75, it could rally another 75 cents in a blink.

"So much happening, so fast this week. For me it is like a pinball machine. The pinballs are flying all over the place; the bells and whistle sounds are deafening due to the continued successful hits.

"What to focus on:

"Gold Derivative Banking Crisis

"This one I have gone over for the past couple of years and there are many ramifications to the issue. What is most important to keep in mind is that many bullion banks, central banks and gold producers have written a myriad of gold calls in the $315 to $320 area. Once that area is breached, we could have a nuclear type of gold melt-up price explosion. They will be forced to cover outright, or be forced to delta hedge. The Gold Cartel will do all it can to keep that from happening.

"It is not only the calls that have the bullion banks panicked. Their gold loans will start to go under at those levels, as will their short futures positions. That is why they are so desperate to keep gold from closing above the $305 mark. Once that area is breached and holds, it will give the "goldbusters" the confidence to go after a clearly weakened cabal.

GATA

"Word is spreading all over the world that GATA is right. In addition to the Handelsblatt story, there was major GATA coverage in the Italian press this past weekend. We are working on a translation. In addition, Newsmax will have a GATA story out soon. C-Span is being besieged by GATA supporters to re-run our luncheon at the National Press Club. Keep up the requests. Then, there is coming coverage from the press who attended our Lincoln's Birthday affair.

"Congressmen Paul's Gold Bill 2/14 WASHINGTON (Dow Jones)--Rep. Ron Paul, R-Tex., introduced a bill Wednesday "to limit the use by the President and the Secretary of the Treasury of the Exchange Stabilization Fund to buy or sell gold without Congressional approval."

"In a statement, Rep. Paul said his bill restores proper Congressional authority over gold policy.

-END-

"Boy, is this one a beauty. Think about it. The Treasury has told half of Congress that the ESF, or the Treasury, is not involved in the gold market in any way. Congressmen Paul is asking the President and Treasury Secretary to ask Congress's permission if they want to deal in gold. What are President Bush and Treasury Secretary O'Neill going to say when queried on this issue by the press?

"This Bill can blow the gold market wide open. All the press or members of Congress need to do is take James Turk's brilliant work and formulate questions to the President and Treasury Secretary based on his discoveries. I shall ask James to formulate 3 or 4 questions and pass them on for dissemination purposes.

"The prices of gold and silver can blow sky high at any time!

"More goodies from John Brimelow:

"Indian ex duty premiums: AM 36c, PM $1.20, with world gold at $299.50 and $299.05. Below legal import point. The Indians are evidently yearning for $295!

"Despite a 0.5% rise in the yen and another firm day on the stock market, the Japanese public continued building their long gold position on Tocom. Open interest rose another 225,000 ozs to 14.6Mm on volume of 3.7Mm ozs (or 37,000 Comex contracts: Comex last reported open interest was 14.8Mm ozs; 31,000 contracts traded yesterday).

"It looks clear that, with respect to Japanese gold buying, 'the genie is out of the bottle' as Dow Jones quotes a trader saying. UBS Warburg observes "Japanese demand (quite different from .. Tocom buying..)remains very firm." A WGC official remarked on their 'Gold Demand Trends conference call that the Japanese public may well buy a respectable 25 tonnes of metal this month - more than the WGC's estimate for Japanese investment demand for the entire first half of 2001! Their willingness to keep on buying this week without any particular encouragement from the yen of the stock market is notable and significant. As UBS Warburg says:

"gold's short term fortune appears to be in the hands of the Japanese general public. So far these traders have proved up to the task, having bought gold steadily at every opportunity."

"So it does appear that Japan is going to be the key influence in gold for the next few months. The country has a case of mildly deflationary stagnation. This would not be all that serious - apart from opportunity cost -except that the weak banking system cannot stand it. If the authorities do nothing effective, as usual, further frightening bankruptcies will occur, alarming the now gold-sensitive Japanese public still more Intriguingly, from the point of view of gold's friends, just about any solution involves large scale yen depreciation, which the Tocom numbers demonstrate also triggers gold buying (open interest now up 114% since Dec 21).

"The ever sagacious Bridgewater Observations today starts its' "Daily Observations" with an article entitled "The Sinking of Japan", remarking:

"An interesting and ominous confluence of forces is coming together to affect Japan and those who are affected by the Japanese...(i.e., almost everyone)....The yen needs to decline in order to revive the economy, end deflation and reestablish Japanese competitiveness...the rate of "quantitative easing" and purchases of foreign investment assets by the "government sector" will have to be huge"

"The more alert parts of the Japanese public are aware of this and have drawn appropriate, gold friendly, investment conclusions."