Reflections on Argentina

The recent Argentine debt fiasco is but a small sample of a problem that will spread rapidly in 2002 and in coming years to countries plagued by debt and unsound currencies, but especially those countries who refuse to tow the line and yield to the demands of international banks in the areas of currency, economics, and even politics. Argentina now stands as a prominent example for a host of smaller "emerging" countries which now stand on the brink of debt crisis and may be having "unacceptable" ideas about how to deal with that debt. But more than that, the recent Argentina example is a symptom of a much bigger problem that is beginning to envelope not just emerging economies, but even "mature" economies such as those in America and Great Britain. The debt implosion created by the Argentina experience is but the first shot of a series of shots that will echo throughout the world in coming months.

Argentina announced last week that it was formally suspending its debt, and that economic stimulus aids would be forthcoming in the weeks and months ahead. In declaring a moratorium on its debt, the Argentine government did the only thing it could possibly do under such dire circumstances (notwithstanding the ire he invoked from certain vested interests for doing so). Suspending the debt was a good first step for Argentina, but unfortunately its repercussions will be felt elsewhere. After all, when the nations of the world are all in debt to a small cadre of international banks, those debts and the interest on principal MUST be collected - and if one country can't pay, it means the debt must be spread so that EVERYONE pays.

Someone will be made to pay for Argentina's enormous debt. The question is, who? The answer should be obvious-the same entity who always pays for the mistakes and debt problems of other countries the world over, the U.S. taxpayer! It is no wonder that Clinton and Bush Jr. worked feverishly to incorporate Argentina into the North American NAFTA "free trade zone." They knew that we would soon be forced to pull Argentina's massive load in the very near future and were merely making preparations for it at the bequest of their puppet masters. As one "NAFTA" economy falls after another the U.S. will be made to bear the growing brunt in the form of higher taxes and foreign aid, all of which will be financed from the pockets of American citizens.

In fact, the BBC, the voice of the world's financial capital in London, has as much as admitted who will be forced to brunt Argentina's financial crisis. On Monday, the BBC reported that "Emerging market economies will bear the brunt of the interim Argentine government's decision to suspend payments on its $132 billion debt," it said, and noted further that the U.S. would play a big part in this gigantic debt bonanza. This is yet another proof that Year 2002 will be a bad one for the U.S. as our market and economy will be weighed down not only with our increasing domestic problems but with those of our neighbors to the south.

Notwithstanding the poor economic condition of Argentina, its stock market has shown market improvement in recent weeks and is pointing to at least an interim recovery rally which will provide some relief to its investors. We pointed out in The Bear Market Report a few weeks ago that Argentina's Merv stock index was at an intermediate-term bottom and was a buy at current levels. We based our forecast on the bullish double bottom pattern in its chart along with the bottoming interim cycles. Sure enough, the Argentine stock market began rising and was up over 20% alone during Thursday's (Dec. 20) trading session! This bullish performance came in the face of extremely bad news for the country's socio-economic outlook, including news of riots, debt problems, et al, confirming the technical strength.

Along these same lines, another observation we can make concerning the riots in the streets of Buenos Aires in past weeks is that this type of social behavior is common at precise bottoms and is an excellent confirming indicator that a bottom of some sort has been seen in the stock market. This just goes to underscore the old saying about "when there's blood in the streets, buy!" While the Argentina financial situation was fortuitous to many traders and investors, the larger implications will not be so pleasant.

The country's economy is far from sound and will ultimately worsen under the coming scourge of K-wave deflation in the next 2-3 years before anything approaching recovery begins to manifest. This same assessment can be applied to any number of economies the world over. What Argentina's crisis really serves to underscore is that a monetary system totally unbacked by either gold or silver is destined to fail sooner or later, and its fall will be a calamitous one. The lesson that Argentina is even now learning will soon be shared by a host of nations, including ours.

The other lesson that we can learn from Argentina is that the only sure financial insurance in times of economic and political chaos is precious metals. Not surprisingly, the gold market outlook has been made the better by Argentina's debt problems and is reflecting increasing technical strength as the last of its intermediate- and short-term cycles bottom. Truly, the way is being paved for a powerful Year 2002 performance.

We observed last week that gold has finally absorbed its final lines of supply that kept prices contained within a range between $272 and $284 and is poised to explode into the New Year. This quenching of overhead supply by the buyers came much quicker than we initially expected, and as of Friday's close on the Comex, gold had broken four successive downward-sloping trend lines, proving that the final remaining layers of supply have been accounted for. The supply/demand balance has now been tilted to favor the buyers. Silver, meanwhile, is undergoing a rally of its own and is leading the way for the precious metals as we close out the year and prepare to enter a new one.

February 2002 gold futures on the Comex have been trading in a range between roughly $284 and $272 since October. The overall pattern of this range-which obviously represents accumulation-is that of a bullish head and shoulders reversal pattern. It was during the formation of this 8-week pattern that the four remaining layers of supply from the September sell-off were absorbed. Not only have these four layers of supply been accounted for (as evidenced by the four broken trend lines) but a new set of steeply-rising trend lines to the upside have been formed and this set of lines projects to at least $288 by early January. The measuring implication of the pattern projects a price high of at $310-$320 sometime early in the New Year-precisely where prices need to break in order to turn the trend uniformly bullish!

The problems for Argentina-and for the rest of the world-are far from over. We will see even greater manifestations of these in the coming year, including here in the U.S. But the investor whose portfolio is firmly entrenched with gold and select gold mining equities will be able to ride out the storm and prosper while others are failing.