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| Federal Open Market Committee and
Gold
Do Interest Rate Manipulations Control Economies? |
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“Think simple as my
old master used to say-meaning reduce the whole of its parts
into the simplest terms, getting first back to principle.”-Frank
Lloyd Wright 1868-1959
We think if the Federal Reserve has only one
tool, interest rates, to manipulate our economy they are either
missing the forest for the trees or they clearly understand
the problem and would prefer not to discuss their weaknesses
in public.
Our observation says they see the big picture
and use the Plunge Protection Team and propitious timely remarks
by government windbags to reinforce their intended outcome.
What most do not see coming is one very nasty rude shock.
While the 1929 event isn’t yet sitting on our front
porch it’s walking up the front driveway and there is
no where to hide.
In the year 1999, just +70 years from 1929 and
in perfect cycle time, the K-Wave should have crunched all
markets in a massive realignment. Mr. Greenspan came to the
rescue in the nick of time with give-away cash policies and
merely substituted one popped bubble (stocks) by building
two more; trillions in new consumer housing and debts. Had
markets been permitted to correct, albeit with a nasty fallout,
we would today, be well on our way toward a national and global
fiscal healing. However, this was not to be as political expediency
won out and we all got rescheduled.
What’s Next?
Instead, the agony was prolonged, the rubber
bands were stretched ever tighter, and now we are in for one
big DOOZIE of a correction. Getting back with Mr. Frank Lloyd
Wright’s premise on simplicity let’s lay it out
simple and straight.
Mr. Consumer and his brood have been rowing
the boat with construction of the most massive housing bubble
in history. Next, after building, buying and selling all those
McMansions our beloved man on the street proceeded to extract
an average of $10,000 per year in new spending money for toys,
gifts, and junk to further pump the economy. Granted some
of the cash was saved but most was spent on multiple ocean
freighters of cheap trash imported from China along with over-priced
American gas-hog trucks.
Now of all this is great and McWonderful as
long as certain things continue. (1) Staying employed is mandatory
along with reasonable pay increases keeping pace with inflation.
(2) The ability to annually tap the housing ATM must continue
so those ill-gotten gains can keep the economy pumping. (3)
There must a continuous long line of buyers at the new house
model McMansion front door with open checkbooks and a willingness
to keep buying. (4) Fannie Flub and Freddie Quack must keep
buying all their spurious, junky mortgage paper to maintain
liquidity airspeed, relieve mortgage companies of this gigantic
messy debt load while preventing a crashing power dive of
derivative bond paper.
All Primary Points are Failing or Have Failed
Already
Not only did one or more of these important
economic props fail; but they all are failing. Consumers are
losing good jobs by the thousands. We read a marvelous essay
today with intricate details on how government payroll counters
lie. It was one of the best eye openers we’ve ever seen
and if you read it you would be mad as hell.
The housing ATM blew a fuse and is now inoperable
as the line of buyers at the model home front door left town.
When they vanished, so did new homes sales. With no new sales,
house values began to skid and a blizzard of for sale signs
appeared like new fallen snow. Of course this smashed existing
housing values and now the whole game is going in reverse
only faster.
Fannie Flub and Freddie Quack are mired in criminal
scandals and we’ve discovered, (no surprise) they do
not even know how to count. No wonder those 800 auditors have
spent years pulling their hair out with one hand while pounding
out irrational computer answers with the other. While these
two quasi-federal mortgage bond dumps for junky mortgage paper
are still alive; at the front of the line, the house buyers
are simply absent. Just like in computer land when you put
nothing in you get nothing out.
Corporations have lots of cash and some are
posting strong earnings. That’s
real nice but they are not investing the money in new equipment,
facilities, and people.
That’s not so nice. As one analyst proclaimed,
these companies are not hiring new people, only government
is and that’s creating more of a drain. All we see are
stock buy-backs to create shareholder value by reducing the
number of shares.
Next, these corporations pay out more in
dividends and spend the rest buying out each other. Where
is the new growth and value being created?
In what we call fashionable
accounting, companies conjure up legendary smoke and
mirrors financial statements indicating stronger earnings
and suspect growth by not counting
all the debt exceptions and one time charges. If we
hear CNBC quote earnings ex-items one
more time we will er, hit the mute button.
For an economy to prosper there must some kind
of asset leader pulling the train. It can be consumers, corporations,
new industry formations or solid expansions of existing business.
Today, in America, we see none of this. As one trader put
it, companies don’t pay back debts from real earnings
and growth any more they recapitalize the debt and impose
more interest expenses. It’s all a wizard’s financial
composition of obfuscations.
Two magnificent examples of this are General
Motors with about $380 Billion in bond debts and a net worth
of roughly $15 Billion. Ford Motor is just as bad if not worse
with similar numbers. Worse yet for Ford, they have little
or nothing that people want to buy. The competition is running
them all over especially the Japanese.
When all this fiscal excitement reaches the
latter more terminal stages like now, most everyone including
corporations and consumers simply refuse to buy. They get
scared and start saving, further inducing the spiral of deflation.
We know Uncle Benny is plumb scared of deflation. He has read
about it, studied it and watched it’s perversity first
hand in Japan when their savers quite buying and puckered-up
into a non-buying squeeze slamming companies across the board.
Consequently, the Japanese have suffered in silence for eons
and are only now, 17 years after their market crash, emerging
from this disaster.
In the modern USA example of 1929 to 1942, only
war stopped the pain and began to move Americans from joblessness
and hopelessness to a brighter future. That 13 year episode
will be nearly matched again from 1999 to 2009 after which
world war gains another disastrous foothold. Next year, 2007,
should economically duplicate 1937, one of the roughest in
the 1930’s. Wars will stop depressions and governments
understand this perfectly. However, we think this time they
couldn’t wait the 13 to 17 years as they have run out
of economy saving bubbles. Government will aggravate a new
world war by forcing existing violent police actions into
something more nefarious and wide-spread. We hope to be wrong
on this one but have read too many history books to think
otherwise. To say history repeats is redundant.
What Happens with Investments?
New York will work with great effort to keep
the Dow above 10,000 forever. They don’t care if it’s
stuck on 11,250 for 25 years. All they want is to keep the
game in motion and collect the fund fees to get rich. For
now, most of the Sheeple don’t get it as they have been
house-broken to buy and hold forever and of course let’s
please diversify. Warren Buffet says diversification is a
marvelous method to induce more ways to lose money. Who would
you tend to believe New York or Warren?
A good stock market whack comes next month or
in October. Technically, we have watched them peak over the
cliff’s edge so many times and not fall. We are not
expecting them to fall this time. We could however, see a
Dow slide 1,000 points to 10,250 which for the fund managers
is still a comfortable resting place. Let it be known however,
that some of the smarter sheep are moving to cash as we saw
a +93% gain in money market funds over a recent time period.
This is an early sign the herd is getting restless and looking
over their collective shoulders.
Where Should the Smart Money Go?
It’s no secret the big bucks have been
made in Oil and Gold along with a list of industrial metals
so necessary for Asian growth. WSJ readers who watch the Dow
Jones-AIG Commodity Index can see industrial metals went from
static prices up nearly 120% from the first quarter of 2005
to the first quarter of 2006. Petroleum was up 31.3% and precious
metals in the same period were up 24.6%. More importantly,
precious metals were up 52.6% in the most recent twelve months
showing a faster rate of acceleration. Soon gold will be lapping
the field.
Grains and agriculture have lagged the metals
but they are the next group to get moving with some real power.
Japan opened their doors to American beef this last week and
the first load of steaks landed at Narita International just
hours after the green light. This will empty American stock
pens overloaded with cattle as ranchers have no feed; all
the grain burned up in recent drought.
Copper analysts at the London Metal Exchange
this week proclaimed copper will stay firm above $3.50 a pound
as the miners cannot catch-up until next April. And by then,
only if mining labor will settle some new strikes.
Nigeria had agreed to approve annual corporate
tax returns from Chevron Oil but decided after seeing their
very profitable statements they wanted to steal more. With
a flick of the pen, they said the oil company is in violation
of the tax statutes after they had
approved them, and asked for nearly $500,000,000 more.
Country risk is getting real nasty for the oil people and
it is now creeping into the mining community as well. This
is why Trader Tracks has focused on
Alaska, Canada and Nevada for gold and silver trades and other
investments.
A CEO of one of the largest gold miners said
recently, the global gold production is not going up, but
has leveled off and is going down. Why is this? It’s
because one entire generation of miners before our recent
gold rally has gone missing. Prices were not supportive of
gold and silver mining during that long dry spell. Now we
see a 20 year gap between newly minted mining engineers and
geologists and those in their later years readying to retire.
We have a booming need for experienced people
and they are not to be found. All the good ones have a job
and most of the mediocre ones, too. Precious metals mining
companies are now moving into the phase two of gold growth
and are buying each other out in the frantic search for reserves.
The big boys are buying intermediates and the intermediates
are buying the little fish. Meanwhile, the precious metals
labor and reserves food chain is drawn tighter. It’s
a really big deal right now to have 20 or 30 years of reserves
capable of maintaining enough future capacity to feed all
those ravenous Caterpillars, crushers, and smelters.
Smart investors are leaving the Sheeple herd
behind and are moving into the gold fields with speed. They
are buying stocks, coins, stock options, warrants, long term
leaps (options), gold backed funds and anything else they
can purchase that will put them in the way of this massive
many years’ gold rush. The Johnny-come- lately’s
will be left in the dust. Those in gold positions right now
will be eternally grateful. If your are not invested in the
gold markets now, plan to buy after August 21, 2006, subsequent
to next weeks’ minor technical correction.
Meanwhile, the herd, and the Federal Reserve
Interest Rate Manipulators are fooling those who could reduce
this melee to simple, straight forward facts. If
corporations and consumers stop buying and investing, FOMC
rate increases or decreases mean absolutely nothing. This
event is gradually moving into the markets.
Gold is the only game in any town along with energy. Soon
gold will be standing alone at the top of the investment pile
having created several new millionaires. -Traderrog
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