Monday, December 06, 2004

Rotten to the Core—Immorality Does Matter to Markets


Anyone who thinks the answer to mankind’s problems can come from human beings rather than Divinity should stop and take a reality check and explain how that view can be justified. There are those of us who have paid attention to the facts in the Blanchard lawsuit, or Reginald Howe’s lawsuit, or the facts presented daily over the last number of years from the Gold Anti-Trust Action Committee, regarding the manipulation of the gold markets. We have been appalled and continually reminded that the people we have trusted to protect us have instead been causing direct injury to those of us who have invested in gold. These so-called protectors have also caused terrible indirect injury to markets in general through the distortion of the Clinton “Strong Dollar” policy that helped pump up the equity and bond bubbles of the 1990s. We were told as school kids that the American government was supposed to stay out of markets and allow “we the people” maximum freedom so that we could be creative and productive. Most of us naïve Americans have swallowed the line of pabulum that says we can trust government to do what is good for us. We have continued to believe, for example, that a Federal Reserve would help us “smooth out” the economic cycles, and even though during the 1930’s we had the most severe depression ever, starting sixteen years after the Fed was created, we have still believed in government. More than most agencies, we have trusted bureaucracies like the Federal Drug Administration (FDA) to honestly restrict dangerous drugs from the market before they were licensed for sale through physicians. But now we learn that the FDA, a government entity, has not only knowingly allowed a drug to be sold that caused hundreds of thousands of heart attacks, but that it threatened an honest doctor whose conscience caused him to blow the whistle on this evil, dishonest behavior.

I guess we shouldn’t be surprised given the fact that over the past couple of decades, Americans and their institutions have increasingly blurred the distinction between right and wrong and between good and evil. And it isn’t just government. It’s all of us—even our mainline churches no longer know right from wrong. Churches used to teach that adultery, fornication, homosexuality, dishonesty, theft, murder, slander, etc., were wrong. Now, more often than not, mainline churches jump right in on the practice, as they defend most if not all of these sins in the name of social tolerance. And lest many of my more serious fellow evangelical Christians think this criticism doesn’t apply to them, think again. As much as I personally admire, support, and thank God for James Dobson, when is the last time you heard him question government theft by way of fiat money and the government’s violation of our Constitution that paper money enables? America is a veritable cesspool of evil and corruption—and we want to use our military to impose this on the rest of the world? Where does this moral rubber hit the practical road of the market place? President Eisenhower spoke of how nations are usually not destroyed from outside enemies but from rot and corruption within. We are spending ourselves into debt, and our families are falling apart; this has led to drugs, delusions, and future generations who will be left to pay for our extravagant expenditures, but who also will be unable to cope because of the moral impoverishment that keeps people from being all that God created them to be. All you really have to do is see how badly kids that go through divorce fare in their education and job performance. Many do well, but statistics show that almost all are hurt to a great degree.

I am frequently criticized for “preaching” about morality in a financial newsletter. But how on earth can we ignore the kind of exponential rise in immorality in America today and think it will not impact markets negatively? Do we think the repression of truth by the FDA about a drug that has caused hundreds of thousands of heart attacks is not a moral issue and that it does not have enormous repercussions for markets? Do we not see that this growing culture of fascism (marriage between government and corporate entities) in the United States is a significant threat to our freedom and hence to smoothly functioning markets? Do we not see that our two-party system is largely a charade between a mainstream that, for the sake of profit, ignores both our current culture of government-sponsored death, and immorality? Is it not relevant to the markets that, increasingly, government and large corporations do what they please for the sake of power and profits? Where is the evangelical church on these issues? It simply goes along with our fiat money system, which is legalized theft at the hands of government and corporations and enables our policy makers to defy and ignore the laws of our land as spelled out in the Constitution.

In general, this kind of self-serving blurring of the distinction between right and wrong is increasingly pervasive in a process of serving disinformation and abuse of our fellow citizens (or “sheeple,” as Roger Wiegand calls us average folks), who are being led to slaughter by the ruling elite for their own grand purposes. Applying this to the equity markets is quite obvious, and I think the following Alan Abelson quote from the November 29 issue of “Barrons” makes the point of how dishonesty hurts us average working stiffs that depend on “Kudlow and Cramer” for our financial information:

“The economy still looks like a fighter on the ropes making a lot of head feints that beholders with little name tags that proclaim “economists” interpret every which way, according to their bias, and, more importantly, what they think will make their clients feel good. We finally got a big-number payroll addition, which merited two-and-a-half cheers (it doesn’t get the other half cheer because the total was swelled by the need to patch up what the hurricanes had torn apart—a one-shot deal—and included a loss of manufacturing jobs). For every report that spells improvement, there seems to be at least another that says, uh-uh. While we’re not a big leading-indicator fan, that the official index has posted five declines in a row strikes us as rather an evil omen for the economy.”

Bob Pisani of CNBC also spoke of this kind of ingrained cultural deception that leads the sheeple to slaughter when he noted the hypocrisy of the bulls this past Friday. First the bulls were saying the equity market has to go higher because we will get a tremendously strong jobs report on Friday, December 3. Then when the jobs report was far weaker than even the most pessimistic folks predicted, they said that the market has to go higher because with the economy weaker than they thought, interest rates will decline.

Big Money Accelerating out of Stocks

Meanwhile, once again, we see that America’s richest and most well-advised elite are not following the advice being given to the sheeple. On Wednesday, December 1, the “Wall Street Journal” pointed out that during the month of November, the ratio of sales totaled more than $6 billion, while purchases totaled just $130 million. That amounts to more than $46 of sales for every dollar of purchases. That was the highest ratio of sales to purchases by the captains of American industry since August 2000, when the equity bear market—which still remains very much intact—had just gotten started.

Based on this information, George Muzea, the president of Muzea Insider Consulting Services, has turned bearish on the equity market. In the Journal he was quoted as saying, “Clearly from an insiders perspective, risks have increased, and I would say that there’s probably a greater number of companies that are going to disappoint than the Street is anticipating.”

That and other fundamental macro and micro economic factors lead your editor to believe 2005 will be a significant down year for stocks.

Housing Bubble as Key to the Kondratieff Winter?

Thankfully, there are a handful of honest mainstream analysts and economists who do not allow their jobs to get in the way of an honest appraisal of reality. Stephen Roach, chief economist at Morgan Stanley, is certainly one such admirable man. In his latest missive on Friday, December 3, he spoke of the enormous and growing danger of the housing bubble in the United States, and concluded his essay with the following paragraph.

“Ironically, there have been a number of positive developments that have fallen into place recently -- an orderly depreciation in the dollar, sharply declining oil prices, and grounds for encouragement on the prospects for a soft landing in China. But America’s imbalances have taken a turn for the worse, and the housing bubble could well be the final straw. Income-short consumers are playing this bubble for all it’s worth -- enjoying the psychological benefits of the so-called wealth effect and utilizing the technology of refinancing and second mortgages to extract purchasing power from this over-valued asset. Unfortunately, these trends have led to the virtual elimination of US saving -- triggering a classic current-account-adjustment dynamic with attendant risks to the dollar and interest rates. That makes the downside of this bubble potentially far worse than that of the equity bubble. That would be an especially worrisome development for the US economy, since household real estate holdings of some $14 trillion currently are almost double the aggregate size of equity portfolios.

“While it has only been four and a half years since the bursting of the equity bubble, memories have already dimmed of that extraordinary speculative excess. Yet in retrospect, that may have only been the warm-up for the main event. Bubbles have a way of feeding on each other -- ultimately compounding the problem and leading to an even more treacherous shakeout. That’s certainly the lesson from Japan and could well be the case in the United States. America’s housing bubble is now in the danger zone. So is its saving rate, current account deficit, and overhang of consumer indebtedness. It’s been a US-centric world for so long, that everyone takes it for granted. Yet global rebalancing poses challenges for all major countries in the world. Saving-short America will not be spared -- especially if it must now come to grips with the biggest asset bubble of them all.” (housing)

With many markets now pushing up toward key resistance levels (equities, various currencies) and the dollar facing a key support level at $0.80, and with the long bond seemingly ready to collapse, Roger Wiegand believes next week could be a very exciting week. In other words, we could break through some very key market values. Nothing in my view would be more devastating for the American economy and our equity markets than a crashing bond market. We are betting against the dollar, U.S. equities, and U.S. denominated debt instruments, and betting in favor of gold and gold investments, because we believe the laws of economics have not been repealed and that all manner of manipulation by our policy makers will ultimately be overcome by the truthful natural laws of the marketplace. As we near the end of 2004, I get the sense that we are getting very near the tipping point in which Ian Gordon’s Kondratieff winter thesis will gain a huge amount of credibility and support, well beyond that of this letter and Ian’s immediate following.

The Gold Bull Market Rolls On

With just three days of trading so far in December 2004, the average gold price for this month is $452.35. The 20-month average is $394.86, and the 40-month average is $353.21. Thus this powerful secular bull market in gold lives on. With the monthly average moving so far above the longer-term moving averages noted above, we would not be surprised or dismayed if gold were to suffer through some corrections here. But from a longer-term perspective, I would not let that bother me.

My good friend Chuck Cohen

suggests sentiment indicators and chart formations he evaluates is suggesting we could have a blow out in the gold markets even before the end of this year. Caution on the part even of gold bulls in the midst of all the other things going on has Chuck extremely bullish on stock and equally bearish on equities. Frankly, it doesn’t matter much to me whether we have to wait many months as long as we can stay on the primary trend of the various markets we follow.

But if not this year, I think next year should represent a return to the primary trends which are bearish for stocks and the dollar and bullish for gold and silver. Grudgingly, establishment folks are starting to come around to see the warts the U.S. economy, the worlds’ reserve currency, the equity markets and the bond markets are sporting. As Northern Trust’s Paul Kasriel was quoted in this weeks “Up & Down Wall Street” column in Barron’s, “The free lunch for the U.S. is nearing an end. In 2005, the rest of the world will revolt against sending us cars, bigscreen televisions and appliances in return for IOUs dominated in U.S. dollars. The revolt will take the form of a plunging dollar, which will curtail the growth in our standard of living—we have to give up more goods and services to get the same amount from the rest of the world as before—and our interest rates will continue to rise.”

Lets see. If we get a declining dollar, rising costs for consumers, rising interest rates, plunging retail sales and corporate profits resulting in still more layoffs at a time when America has indebted itself up to the hilt in the midst of the greatest debt burden in the history of the planet, where will the housing market be then? What will keep the U.S. economy from plunging over the cliff? Continued wars? But who will pay for those wasteful demand side expenditures when foreign governments no longer wish to assist the U.S. in its quest to secure limited global supplies of oil and when the U.S. economy is so void of opportunity that investing here represents a grand misallocation of resources? Stephen Roach warned above that the trillions of dollars shaved off of America’s balance sheet when the NASDAQ bubble burst may be only a warm up for the terrible devastation the bursting of the housing bubble may cause. Marshall’s Auerback said the folks at Prudent Bear are watching the U.S. housing market for the tipping point from inflation to deflation. While watching events unfold in the Kondratieff cycle is about as observable as watching paint dry, like watching paint dry it is in fact very observable. It just takes patience and continued attention to detail. While we may have avoided a tipping point into winter during 2004, all the evidence I look at tells me Ian Gordon’s view that the Kondratieff Winter is not only “spot on” by may hit us hard in 2005. For that we will be as well prepared as possible, which is what our Model Portfolio is designed for.


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