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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 |
