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Storm Watch: INDEX
by James J. Puplava / Financial Sense Online
Storm Watch: The Catalyst
For the next theme to emerge and become prominently visible as well as obvious to all, the public must gradually lose confidence in paper. It has already begun with the shift to real estate as more investors feel secure with something tangible rather then the intangible and fleeting wealth of the stock market. As the value of the dollar continues to depreciate and as the Fed prints more money, public confidence will gradually begin to dissipate. A loss of confidence in the dollar has already begun in the international markets. Foreign investors who are financing our monster trade and current account deficit have already begun to diversify out of dollars. Central bankers have been the main force keeping the dollar from collapsing in an effort to keep their own currency from appreciating against the dollar.
As the Fed prints its way out of deflation, the dollar will continue its downward trajectory causing assets to flee the dollar in a flight to safety. The coming financial disasters that will result from the Fed's blundering policies will steer more money into hard assets, especially gold and silver. Marc Faber has written extensively on the curse of empires. As empires mature and peak, they then go into decline. A prominent feature of this decline is a depreciating currency, rising interest rates and inflation. Investors should now prepare themselves for this eventuality...
May 29, 2003
Storm Watch: The Golden Bull -- I'm bullish on 'things'
In the last half century, there have been four key primary trends and investment themes where an investor could have done exceedingly well as an investor. If all that you did was to find these trends, get on board and ride them out, your investment decisions would be simplified. On a similar note, it is what has made Warren Buffett the second richest man in the world. ... Maybe it is difficult to replicate Buffett's genius in ferreting out great business franchises, but it is possible to duplicate another element of his success, which is patience. If you can spot a new bull market or a new primary trend and then get on board and ride it until it is completed, that is how big fortunes are made.
...If you believe that this is just the beginning stages of a new bull market, then relax. Hold on to your shares and don't panic every time a countertrend develops. Instead, plan to add to your positions during every corrective phase. Even simpler would be to dollar-cost-average your purchases. I favor this approach at this stage of the new bull market because it is just beginning. You can do so easily with actual bullion or coins depending on your financial circumstances or with a gold mutual fund. I favor dollar-cost-averaging because it creates discipline, which is completely lacking in the gold camp at the moment. Many new investors have tried to time the market without much luck due to improper training and technical skills. Since we are still in the early stages of a new bull market the disciplined approach of regular purchases is favored.
Instead of focusing only on price, start thinking of quantity. Start thinking in terms of how many ounces or shares you own. Lastly stop worrying and fretting every time share prices or bullion prices drop. Instead, view them as buying opportunities. Your goal at this point should be to accumulate as many shares or ounces as you can during phase one of the bull market. You should also try to familiarize yourself with the fundamentals as much as possible. This will not only help you understand the new bull market, but also keep you from panicking every time there is a correction in the price of bullion or the precious metals shares.
March 29, 2003
Storm Watch: TEN-SIGMA Part One: Introduction
In the words of Warren Buffett, derivatives represent a ticking nuclear time bomb that could wreck havoc on the financial system and the economy. ... John Q. Public is waking up to the fact that inflation is becoming real as he pays his bills the first of every month. Washington is intervening in the oil markets, the stock market, the bond market and the currency markets. The moral hazard argument is now at work. We know about bank deposit guarantees. Now it looks like we'll have financial market guarantees. Hold on to your wallets - this is going to get interesting. If you don't want to be struck by lightning, you don't stand under a tall tree in an open field during a lightning storm. The same wisdom can be applied to the world of derivatives.
March 13, 2003
Storm Watch: Oracles, Soothsayers & Fortune Tellers
It is apparent from the graphs shown above [see article] that the US economic and financial system is headed towards a major train wreck. It is only a question of timing. Nobody in Washington or Wall Street sees it, for they are all either Keynesian or Monetarist or a combination of both. Even the bastion of the bond markets, Pimco, is calling for Keynesian-style stimulus and monetary reflation. Wall Street wants the government and the Fed to use all means at their disposal to ward off a deflationary debt collapse.
Therefore, if the government has to run deficits into eternity and spend wildly, then so be it. If the Fed has to expand credit, monetize assets, intervene in the financial markets by propping up stock prices or peg interest rates, then get on with it. Wall Street has a big stake in keeping its version of financial capitalism alive. The world of structured finance is in danger of imploding and the danger of this implosion has been deemed unacceptable in financial and political circles.
The danger here lies with inflation, instability, volatility, and ultimately, the collapse of the world's present monetary system -- something the world has not seen since the days of John Law. It is apparent that there will be no foot put on the breaks as credit will be supplied in ample quantities to help levitate financial assets of all types...
January 11, 2003
Storm Watch: CRA$HMAKER
By special request of Financial Sense Online, this installment, 'CRA$HMAKER', shall only be available to USAGOLD readers through the Financial Sense website. Access via link given above.
[Excerpt] ...A storm appeared out of nowhere that would wreak havoc on the world's financial markets. By the end of the day, it looked as if the financial system was headed for the abyss. In the words of one observer on the Street,
"This one came out of the blue. I didn't expect it to be so bad... we froze around 3p.m. and just started watching the screens. Even the phones stopped ringing. We were watching history in the making."
The crash on Wall Street was a worldwide phenomenon. Stocks were not only crashing in New York, but around the globe. The markets in Japan and Hong Kong crashed and some would remain closed for a week.
November 16, 2002
Storm Watch: Bubble Troubles - Part III
A current price-earnings multiple of 22 on the Dow, 33 on the S&P 500, and 37 on the NASDAQ 100 (the NASDAQ Composite has no P/E ratio since it has negative earnings) would hardly be considered a bargain. Historically, the major stock indexes have sold at 12-14 times earnings throughout the last century. At bear market bottoms, they have gotten as low as 7-10 times earnings.
The real issue here is the quality of earnings and what high P/E multiples really mean. If we take the current P/E on the three major averages, the Dow is offering investors a 4.6% return. The S&P 500 is offering a return of 3% and the Nasdaq 100 earnings yield is 2.7%. These returns are not commensurate with the risk involved in investing in today's volatile and high-risk market.
You often hear the reason dividends are so low is because companies choose to invest profits to expand the business instead of paying shareholders in the form of a dividend. This may have been true, but the next question should be, How well did management reinvest your money? ...profits were squandered in mergers, stock buybacks and option schemes for top executives that fleeced the shareholders.
September 27, 2002
Storm Watch: Bubble Troubles - Part II
Our economy runs on credit and so do our financial markets, which use leverage to enhance investment returns. It is hard to find a segment of our economy that doesn't run on credit. The U.S. financial system is one of the most efficient and innovative systems in the world for generating and distributing credit. There seems to be no end in obtaining credit through this financial system. Money, or in this case credit, is plentiful.
It is hard for most financial experts and economists to come to grips with the fact that nothing backs our system of money but debt. For that matter, it is even more difficult for many to understand that there will someday be a limit to that debt. If we had to pay back all of our debt, there would be no money left within the system. ...This "monetary play" is where we are today. The U.S. monetary system is extremely unstable, careening from one financial crisis to the next. Under our present course of action we could end up with major inflation, deflation or both. The Fed and the government are pulling out all stops to prevent deflation from occurring, while at the same time creating conditions that could lead to inflation.
September 20, 2002
Storm Watch: Bubble Troubles - Part I
Credit expansion in the U.S. over the last three years is running at an annual rate of $2 trillion, equivalent to 20% of U.S. GDP. In addition, unlike an earlier era in American history when debt was used to build the nation's infrastructure during the 19th century, debt today is used for consumption by consumers and unproductive investments by businesses resulting in malinvestments in the economy. Consequently, the U.S. economy is now made up of multiple bubbles.
September 13, 2002
Storm Watch: Keep it Simple
Bill O'Reilly always says, "keep it short and pithy" in reference to e-mails. I have been told at times that my Storm Updates are "a lengthy read." The reason for their length is that they reflect the damage and the complexity of the nation's economic and market infrastructure as well as the unwinding of the world's present monetary system. These issues can't be discussed in simple prose or in short pithy essays. Monetary policy and its impact on the financial markets, the economy and the credit systems are complex subjects. I don't need to tell you about the thickness of economic books. Needless to say, economic and financial issues are complex subjects that take time to explain, especially now since systemic risk exists everywhere.
July 26, 2002
Storm Watch: The Economic State of our Union
This week most media reported Greenspan said two things: the economy is on the mend, but corporate accounting issues could undermine it. ... The Fed believes its policy of flooding the markets with money to keep interest rates low has been effective by the evidence of increased spending on durable goods and the strong housing market. Yet, that spending has not been strong enough to forestall a rise in unemployment. The crosscurrents the Fed refers to that remain a cloud over the recovery are the reluctance of businesses to hire new workers (they are still firing them) and a similar hesitation to increase capital spending. There is also the nagging problem of the stock market, which refuses to cooperate with Fed policy by continuing to decline with devastating effects on household net worth.
July 19, 2002
Storm Watch: Debt Valley
Investors and voters cry out for Washington intervention to fix things and make them better. ...Every time there was a crisis, the Fed flooded the financial markets with money to fix the problem -- whatever its source -- the peso crisis or the insolvency of a hedge fund. The standard solution was always to create more money. Throughout the 1990's the supply of money and credit in the system expanded nonstop. ...It created the illusion of prosperity. This prosperity turned into a full-fledged boom, then turned into a bubble, producing malinvestments in the economy and speculation in the financial markets. The secondary effects of that bubble were a grossly inflated stock market, rising debt levels at all levels within the economy, an expanding trade deficit, and a negative savings rate.
..The fact remains that investing has always been an uncertain endeavor. There are no guarantees, only degrees of risk. An American President and Congress can't guarantee investment outcomes. Nor will they be able to replace the trillions of dollars lost in this bear market. The more they try to interfere, the more they try to legislate, the more they try to tax, the worse things will become.
July 12, 2002
Storm Watch: Musical Chairs
Today in North and South America, we have currency depreciation, and in some countries, outright devaluation. ... Investors have held on for close to three years on hopes and promises that things are going to get better -- better for the economy and better for the stock market. ... Sometimes it takes time for the new trend to be absorbed and for market opinion to shift in the direction of the new trend. ... One man's winter is another man's summer. We have entered the winter months for financial assets; while summer is just beginning in tangible assets, especially in gold and silver. The greatest returns will be realized by those who buy what is cheap now before this new trend is embraced by the herd. The time to look for a chair is now -- before the music stops.
June 28, 2002
Storm Watch: Changing Preferences -- Part 2
The credit system that has evolved has moved further away from the traditional banking system and towards the global financial system that we now have today. ... Since the breakdown of the Bretton Woods system in 1971 and the end of the Smithsonian Agreement in 1973, the world has shifted to a system of fluctuating fiat currencies. This has led to a system of money moving freely around the globe into government and private assets such as securities that lack a secure backing and offer only tentative returns in exchange. The world's entire financial system rests on the shaky platform of unlimited debt and the concomitant ability of central banks to supply a constant supply of money to the financial system in order to keep it liquid and functioning. In turn, this dependence has led to an extensive use of financial derivatives that are growing faster than the supply of money and debt as a means of hedging risk and enhancing speculation through the use of leverage. ...the average citizen is blind to the risk embedded in their investments. Instead of caution and a growing awareness of risk, the world marvels at the capital markets' revolution [--] a dual system of money creation through the banking system and the securities markets. ... Individuals and institutions are starting to rid themselves of paper. This explains the growing rise in the demand for gold and its price around the globe.
June 21, 2002
Storm Watch: Changing Preferences
Under a fiat-based money system such as we have today, the government can increase the supply of money at any rate it desires. ...Today the Fed finds itself in a position where it must continuously expand the supply of money to the financial system or risk a financial collapse.
When the value of money becomes questionable, people begin to look for alternatives. One of the most important factors determining the demand for money is its security. When its value becomes subject to arbitrary confiscation through depreciation, investors begin to switch their savings and assets from government-created paper to precious metals. This is what is now happening in Japan and in Latin America. On the day this article was written, Brazil was struggling to restore investor confidence. Fearing currency devaluation similar to Argentina's peso, the Brazilian real, has lost 15% of its value this year. The government plans to draw $10 billion from a $15 billion credit line with the IMF to shore up government finances.
June 14, 2002
Storm Watch: "Don't Worry -- Be Happy!"
As our mounting trade deficits continue to grow, the world will tire of financing our deficits. That is what the decline in the dollar is telling us. The U.S. now owes the rest of the world a net $4.12 trillion. Foreigners now own close to 40% of all U.S. Treasuries issued, 24% of U.S. domestic corporate bonds, and about 15% of our equity markets. Most of the $8 trillion U.S. assets held through foreign ownership is liquid. This means it can be sold and repatriated. No nation has ever been able to escape the consequences of large trade deficits. ...this period should be used to dump overvalued stocks. Get liquid and load up on gold, silver, and energy as they are dumped by weak hands. If you think a new era is upon us, or that the good 'ole days are returning, please read what I wrote on January 2, 2000 before you buy into the balderdash of "Don't worry ~ be happy!"
June 7, 2002
Storm Watch: The Sum of My Fears
The world's currency system, which is based on the dollar, is a system that rests on faith and confidence in paper assets and the governments that issue them. From Argentina to Japan, and now the U.S., that confidence has been shaken. The U.S. has been running perpetual trade and current account deficits that must be financed through foreign savings. There is going to come a point in time, and I think that time is soon, when foreign investors will no longer be willing to accept dollars in exchange for merchandise.
Traders, investors, and owners of dollars recognize that they are holding a depreciating asset. As long as there are no other assets of superior quality to compete with, they have few alternatives. Most currencies in the world have been steadily depreciating against one another. If you own paper assets, the main problem has been picking a currency that has the slowest rate of depreciation. It is the recent rise in the price of gold that spells the greatest threat to the dollar and the U.S. financial system. It can't be printed out of thin air. It must be produced.
May 31, 2002
Storm Watch: The Perfect Option
The immediate problem for the mining industry is similar to that seen in the energy industry. Both need to replace their reserves. Mining and energy companies are in the warehouse business. When you are in the commodity business, you produce commodities and then sell them. Picture a large warehouse building. In the back of the building is a door where new supplies are brought into the warehouse. The sale of the commodity goes out the front door. Unless the supply coming in through the back door is equal to the supply going out through the front door, your business is shrinking. That is why commodity businesses, like mining and energy, must constantly replace their reserves or else they will eventually go out of business.
May 24, 2002
Storm Watch: Rogue Waves and Standard Deviations - Part 2
It is this unexpected event that always surprises the markets. Despite the certainty promised by the models, we know from history that certainty is an impossibility. ... The companies, funds, investors, and governments best able to withstand a crisis are those who are unleveraged, liquid and have access to cash. Having no debt enables one to ride out a storm. Leverage becomes a ticking time bomb that offers few avenues for escape. In summary, the best protection against adversity is to have minimal debt and plenty of liquidity.
May 17, 2002
Storm Watch: Rogue Waves and Standard Deviations - Part 1
Episodes like LTCM and Enron illustrate the lack of transparency within the financial world. The world of disclosure that has worked so well for so long is breaking down. It is becoming more difficult to judge risk on and off the balance sheet because of obfuscation. Gaping holes remain in the system and are only getting larger. If accountants, analysts, and regulators can't find the risk contained in balance sheets, think of the problem for complacent investors. This complacency has given way to a greater moral hazard, which I believe can be traced directly to the Fed. Investors have been lulled into a false sense of security fostered by a belief that the Fed stands ready as lender of last resort to intervene and bail out the markets.
April 26, 2002
Storm Watch: The Last Wave
Gearing is a process in which derivatives are used to gain control of a more expensive financial or tangible assets through the use of leverage at a very low cost. It allows for dominance of an asset class at a fraction of the cost of direct ownership. This process of leverage has been the main vehicle by which central banks have waged war against tangible assets in order to keep their prices suppressed. It has also allowed hedge funds to place sizable bets on everything from currencies and interest rates to commodity prices. A small amount of capital can control a much larger asset class. It doesn't matter whether that asset class is gold, silver, oil or a currency. The point to understand is that the paper markets control the physical markets and not the other way around. The explosive use of derivatives and the amount of leverage they employ has become the financial equivalent of fractional reserve banking for the investment world. The whole system works as long as confidence in the system is maintained. Should confidence evaporate, the system would implode if settlement were made in the physical rather than in cash.
The process of gearing has controlled the commodity markets for decades. It has kept prices low; while demand for products has expanded. This runs contrary to general economic laws. As a result, the demand for everything from gold, silver, oil, natural gas and food has expanded; while their prices have declined. In many commodities such as gold, silver, oil and natural gas we are living off decades of accumulated reserves in order to meet demand. This is a process that can't go on indefinitely.
April 12, 2002
Storm Watch: The Next Big Thing
Central bankers are fighting a two-front war. One front is in the financial system that requires constant injections of liquidity to hold back the debt defaults and prevent the system from collapsing. The other battle is to prevent users inside the system from shifting their funds to an alternative medium such as gold, silver, oil or any other tangible good that would compete with paper and credit. It is a lot like a fork in the road. On one side is the credit and paper money system that makes up the world's financial system. On the other road are tangible goods such as base metals, oil, silver and gold. The war is a constant battle where the public must be corralled on the one side of the road. ...The way the battle is waged is through the derivative markets.
April 5, 2002
Storm Watch: Let the 2002 Goodwill Games Begin! -- First Quarter Earnings
The importance of understanding the real meaning of earnings is that your financial well-being and your portfolio depend on it. The numbers reported in media and press statements can be entirely different. That is why before you invest, you need to understand what the term "earnings" means. Unless you understand this concept, you may be making investment decisions on incomplete information. The numbers given out in company press releases and reported by network bubbleheads are usually the pro forma numbers. This is the number before the company's dirty laundry of expenses and charges. In the majority of cases, the numbers you hear are variations of the above standard format. Very seldom do they reflect the bottom line.
March 22, 2002
Storm Watch: The Death of Literacy
...lack of qualitative thinking is most evident in the world of politics and economics. What passes for understanding is strewn with emotion rather than reason. Without the ability to reason, and with only emotions as our guide, any understanding of economic or current affairs is devoid of meaningful analysis. This is no more evident than the current discussion and debate within the financial markets. The late 60's and the decade of the 70's were a long period of rising inflation triggered by the U.S. abandoning backing the dollar with gold. After the U.S. went off a gold-backed dollar system, the Fed was free to print money at will, and it did. Inflation levels rose and the price of most commodities also rose to reflect the decline in purchasing power of the dollar. During this inflationary era, ordinary citizens and investors lost all confidence in the dollar. Instead, people put their money into hard goods.
When central banks create money, they oftentimes can't control where it goes. In the 1970's the money went into things. In the 1980's, 1990's and our current decade, it went into paper. Inflation has two outlets. It can manifest in higher prices of goods and services or in higher prices of paper assets. They are one and the same. The only difference today is that we no longer call it inflationary. It is known as "investment return." If stocks go up 20% for five years in a row, it is called a new era or new paradigm. If real estate prices rise 20% a year, it is called a boom. The very fact that few question the inflationary implications of these two phenomenons is another example of the lack of economic literacy.
March 1, 2002
Storm Watch: Dow 10,000 versus Gold $300
In many ways, the Dow has become the key to maintaining consumer confidence. As long as it remains close to the 10,000 level, consumers can hold on to the illusion that we're okay and that better times lie ahead. Keeping the Dow at or close to 10,000 is part of the confidence game that is now being played in the financial markets. If the Dow falls below that level, as it did following the terrorist attacks on the Trade Center in September, then hope dims and can quickly turn into fear.
...due to accounting changes, it is now estimated that companies will write-off close to $1 trillion in impaired assets from their balance sheets this year. The problem for Wall Street and their partners in the financial media is how to maintain the illusion of prosperity going forward. However, the battle for confidence has now decidedly turned in gold's favor.
There are four significant forces that have now aligned themselves in support of gold. These forces are 1] the storm front that is building in the economy and the financial markets around the globe, 2] the battle over hedging in the gold markets by producers and bullion banks, 3] the record level of low interest rates, and 4] the crisis in credibility in the financial system.
February 15, 2002
Storm Watch: Parallel Times
History has a habit of repeating itself. The technology boom of the 20's runs strikingly parallel to the tech boom of the 1990's. Wall Street willingly obliged investors who blindly paid higher prices for overly inflated earnings by telling them it was different this time. The parabolic rise in technology stocks was further explained away by Wall Street spin telling investors that investment yardsticks were no longer applicable. In fact, the most troubling aspect about the last decade was the use and application of the word investment. It became the masquerade for speculation. Prior to the advent of the "New Era," there were sound investment principles that guided the selection of common stocks for investment.
It was the absence of sound investment principles and the urge to forget them which contributed greatly to the excesses of both eras. Instead of investment stewards, Wall Street became the fox that fed on the lamb. The Street developed a symbiotic relationship with the press that became the conduit for the stream of hype that fed investor psychology. Wall Street needed an advertising source to drum up demand for its pipeline of new offerings. The media needed stories and ratings. The two fed on each other and the myth of the "New Era" was born. The media not only fed the growing level of speculation in the market, they also created some of its more prominent stars. The wise men were ignored and replaced by analysts and Wall Street pitchmen.
February 8, 2002
Storm Watch: Breakdown
"investors can't trust the directors, executives, accountants or analysts to come up with good numbers." [Wall Street Journal, January 21, 2002] Kmart and Enron's bankruptcy point to a growing problem. The integrity of our financial system is breaking down. The Wall Street Journal's article nailed it right on the head.
...The business world is more complex today than it was 30 years ago. Most large companies have global businesses. The capital markets have become much more sophisticated as risk levels have risen due to a international monetary system that is no longer fixed and anchored to gold. Besides business risk, companies that operate internationally face interest rate and currency risk. This has led to an explosion in the use of derivatives as a means of hedging against that risk. Yet, the use of derivatives to hedge against risk has become an oxymoron. The very risk they were designed to hedge against has created even greater risk in the financial system. LTCM and Enron are recent examples of what happens when risk strategies turn to speculation.
January 25, 2002
Storm Watch: Margin of Safety
Today's markets are driven by news and short-term events. The emphasis is on trading rather than investing. Over the last decade, the markets have gone through a metamorphosis from a market driven by investors with long-term horizons to one dominated by speculators with short attention spans. Hope, hype and spin are more important than facts and analysis.
At a time when markets are overvalued, when the economic outlook is less certain, and when the country is at war, safety takes on new meaning. We live in a time when the financial system is subject to perilous risks. Systemic risk is all around us in the economy, the financial markets, the international monetary system, and in war. We can no longer take what we see and hear at face value. We must learn to question it. Annual reports, and the numbers they contain, have become less reliable. The auditor's report is now subject to question and the financial numbers must be reconciled with the footnotes. We must learn to think of the investments we make as businesses or at least look at them in the same way that we shop. Examine the merchandise, compare the price, and be mindful of what you pay. Allow yourself a margin of safety, and learn to buy at a discount.
January 18, 2002
Storm Watch: Stargazing -- The Art of the Financial Future
The financial markets have gone down two years in a row and portfolios are still hemorrhaging. Hope is still alive and most people, including investors, are looking to the oracles to tell them, "Better times lie ahead." It is this blind faith in the power of the oracle that has kept the markets from falling into the abyss. General public confidence is still running high despite a plethora of bad news on the economy. Earnings are still going down, companies are still restructuring and laying off workers and we are still at war. Optimism remains high because the oracles tell us things are going to get better. Economics has been called a dismal science and for good reason. Forecasters failed miserably last year to predict the speed of the downturn or another bad year for corporate earnings and the stock market. Economists predicted 3% economic growth. Instead of growth, we got a recession.
It is important to realize that what happened in the 90's was a bubble which is in the process of deflating. Monetary authorities are making a valiant effort to reinflate it. Downside risks are everywhere. That is why investment strategies should remain conservative and investors should remain on high alert.
January 11, 2002
Storm Watch: Too Many Ifs to Say When
In today's world, maintaining political power depends more on manipulation of the news than it does on truth or facts. So the monopoly of news has become a mechanism for mass brainwashing. Analysts and economists are calling for more money creation and government spending to pull us out of recession. Little regard is given to its inflationary implications. ...There is always the danger that money creation may lead us into an inflationary environment that the Fed will be unable to control. There is also the risk to the dollar. What would happen if confidence is lost in the American economy? The U.S. is still running huge trade deficits financed by foreign capital. Greenspan runs the risk of withdrawal of foreign capital if returns get too low or if inflation starts to get out of control. Greenspan is performing a high wire act with little room to maneuver. He can't afford to make mistakes or risk loss of confidence. If confidence is lost, the house of cards crumbles.
December 14, 2001
Storm Watch: Déjà vu ~ Haven't we been this way before?
At the moment the Fed's money machine is still feeding the financial system and keeping alive three bubbles: the stock market, real estate, and the dollar. .... It appears that the American economy is requiring even greater doses of credit to keep it afloat. The Fed is only too eager to oblige. There is, however, a point of no return... a point when debt burdens become too large, a point when creditors are no longer willing to lend, a point when borrowers can no longer make their payments, and a point when bankruptcy and default become the only option and the only way out. It is a time when the bubble can no longer be inflated. The hour arrives when policymakers run out of options, when the consequences of their actions must be faced. It is a time when the strength of the foundational stone is tested and we will learn whether the artifices of modern finance will hold. That time is approaching and it cannot be avoided. ....we still have three partially deflated bubbles that authorities are making every effort to reinflate.
December 7, 2001
Storm Watch: Reinflating the Bubble
Like the Internet bubble that ran between 1997-99, current earnings don't back the recent rise in technology shares. Like then and like now, the rise is without any regard to fundamentals or financials. The 40% rally in tech stocks since September 21 is running way ahead of fundamentals and it could lead to another sharp correction. This is a momentum-driven market and nothing more. Most stocks are going up against a weak outlook for profits and a declining economy with very little signs of improvement. The bubble is back and it is being reinflated by the Fed, hype, hope and hyperbole. The question now is, How long will it last?
Everybody knows price and the latest news, but nothing below the surface. Ask questions about real earnings, macroeconomics, microeconomics, global economies, and monetary inflation policies, nobody knows or cares. Where the price is at the moment and what is currently flashing on their screen is all they know. Everything else is much too complicated. This lack of understanding of economics or investing is why so many people got burned when the market bubble burst. Devoid of independent thinking, they don't process what they read and hear. It is why they will get burned again. They fall victim to trends and fads and have simply become followers. They are easy prey and like sheep are being led to the slaughter again.
November 30, 2001
Storm Watch: Running Out of Time and Bullets
It is obvious everywhere you look, that central banks are flooding the markets with money. So far it hasn't been able to rescue the economy or financial markets. Stock prices are still going down, global economies are still heading toward recession, and corporate profits are disappearing. The Fed has fired most of its bullets and they have missed their mark. Time may be running out for Mr. Greenspan and his fellow peers around the globe. The more time that elapses between each Fed rate cut and recovery, the greater the degree of disenchantment. If the economy and markets don't bounce back, the risk is greater for the dollar. Confidence in paper is evaporating. The longer rates of return for savings and investment remain negative, the greater the chance that money being created so abundantly by the Fed will seek a new home. For Mr. Greenspan, the hourglass is running out of sand and there are only a few bullets left in the chamber.
November 16, 2001
Storm Watch: A Penny Less ~ A Penny More
Welcome to "The Earnings Game," a quarterly entertainment that is accompanied by much aplomb and repeat performances. ...For those who know the plot of "The Earnings Game", it has the same beginning, the same format, and the same outcome each quarterly showing. Companies beat analysts' estimates, the media gives them a standing ovation, and investors show their appreciation by bidding up the price of the shares. ..."The Earnings Game" is much more complex than what appears on stage. However, there is a general plotline that is performed sequentially, and if understood, will give the viewer a better understanding of the game. There are three rules to this game that are critical to understanding how it is played and won.
November 9, 2001
Storm Watch: Countermeasures
During times of war, the government usually runs a budget deficit as it spends more than it takes in taxes. The added stimulus through deficit spending and the monetization of debt creates inflation. It is this fear of inflation that has kept long-term interest rates from coming down. Unable to bring down interest rates the Treasury has intervened by its decision to stop selling 30-year bonds. ... With the economy worsening, the Fed is flooding the market with money in an effort to meet a rise in the demand for money from companies and investors who are showing an increase in preference for liquidity. This would normally raise the cost of money. By shrinking the supply of bonds, or in other words, by limiting their sale, the government is trying to lower the cost of money, by driving down its price.
November 2, 2001
Storm Watch: Pressure Points Seen in Global Economies
The Fed has fought each crisis as it always has by injecting vast amounts of money into the financial system as shown by the various forms of measuring money from MZM to M-3. There must come a point however when a limit is reached as to the world's ability to absorb dollars. ... Once the monetary unit is no longer tied to the value of gold, the government can then debase the currency by expanding the monetary base through printing money. The fiat system that follows leads to monetary disorder. It has been this way throughout history. In the end, people always return to gold.
October 26, 2001
Storm Watch: Three Trends That Will Take Us Deeper into Recession
There is a great disparity between the world of paper and the physical market for commodities. It has been distorted beyond fundamentals due to the ability of paper leverage to control vast amounts of oil, natural gas, silver or gold. To become more familiar with the real world of energy or metals, there are various web sites that can keep you abreast of the real facts that underlie these markets. By doing your own research and visiting these sites, as Paul Harvey points out, you'll hear "the rest of the story."
October 19, 2001
Storm Watch: Let's Face Facts
One of the most disturbing aspects of the markets this week is the apparent manipulation of the gold and silver markets. The price of gold, which rose prior to and after the attacks, has been kept in a narrow trading band all year. The trading band has been capped at $292 an ounce since the Trade Center attack when it made a run for $300 an ounce. It was pushed back by heavy bullion bank selling at every attempt to breach that level. Gold prices have not been allowed to rise above that level because once it does, the jig is up. The losses in the derivative book of certain bullion banks would overwhelm the financial system. Last week I referenced the interest rate position in derivatives for the nation's top seven banks. This week I'll show the other side of the ledger, which is the derivative book in gold. At close to $90 billion, it dwarfs the actual physical market.
October 12, 2001
Storm Watch: Pedal to the Metal
The fed funds rate now stands at 2.5 percent... This is the most aggressive action I've seen from Mr. Greenspan since he assumed the office of chairman of the Fed in 1987. That was the year Greenspan had to tackle the stock market crash that could have led to a global meltdown of the financial system. Back then, the economy was in better shape. ... What happened on September 11 was a very big, unexpected event. The last time anything of this magnitude happened was in the third quarter of 1998 during the Russian debt crisis. ... The result was a major financial crisis, which bankrupted LTCM and nearly brought the world's financial system to an end. ...The smart money is heading into gold and silver. They have been buying and continue to buy.
October 5, 2001
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