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Deflationists "Win" The Week Ending June 28, 2008

By Jay Taylor      Printer Friendly Version
Jul 8 2008 9:57AM

Our IDW Falls Sharply to 141.78

It was a brutal week if you were in anything other than silver, gold, and energy stocks. In fact as noted below, we made some great headway, vis-à-vis the S&P 500 this week. But virtually everything in our IDW lost value this week from the prior week. Check this out:

  • India stocks down 15.47%!
  • Homebuilders down 5.74%
  • Real estate investment trusts down 5.57%
  • S&P 500 down 3.0%
  • Autos (Toyota) down 3.46% (General Motors stock fell to the lowest level since the 1950s!)
  • The Long Bond yield was down 2.79% on the week
  • Gold rose 1.91% more than silver, which is considered a deflationary sign
  • Gold rose 0.60% more than the Rogers Raw Materials Fund, which is also considered deflationary

On the inflationary side of the ledger, as has been increasingly true, are the commodities. Oil rose 4.15%, copper was up 1.23%, the Rogers Raw Materials Index added 2.24%, and silver gained 0.92%. Gold was up 2.85%.

What makes analyzing the macroeconomic picture so difficult is this gigantic tug of war between the natural deflationary forces of the market that, if left to their own resolve, would take us into the greatest depression now the world has ever known. I say that because the world has never seen such insanity of money creation in human history, because there has never been a time before in history when everyone was off some sort of commodity money standard that limited excesses. Excesses have not only run wild, but the conventional wisdom at this time continues to be Keynesian/communist antimarket insanity, which is why I believe we are all in for one very, very frightening inflationary hell. We are just starting to see the early stages of it, but in terms of time, it may not be far away, because of two factors. First, as just noted, virtually every central bank in the world subscribes to Keynesian monetary policy as opposed to Austrian free market wisdom. Secondly, as noted in the chart of Germany above, once confidence was lost in the currency, prices of everything went exponential. Of course this is why we own gold.

This week gold outperformed silver and a broad basket of commodities in the Rogers Fund, which by the way is heavily weighted in hydrocarbon products of one kind or another. And with the plunge in our IDW, our moving average intensity reading fell to +1.0, which is the most moderate inflationary reading we calculate, 3.0 being the highest, 2.0 being in the middle. This kind of plunge calls for Ben Bernanke, the chief anti-market proponent in the U.S., to start writing checks and distributing them over the American landscape, to avoid the depression that would otherwise be heading our way.

That would be very, very frightening, but not nearly as bad as a hyperinflation, which will wipe everyone out, rich and poor, unless they have and are able to hold gold and silver, which unlike paper money have intrinsic value.

We have widened the gap some more this week between the S&P 500, which is down 12.94% year-to-date, and our Model Portfolios. In fact or Low Budget/Low Maintenance Model Portfolio has actually edged into positive territory for the first time in a few months. With uranium stocks as well as gold stocks in general looking as though they may now be ready to move higher in conjunction with their underlying metals, we think the prospects are bright for posting another positive year in 2008 while the equity markets crash and burn. We also think that given the growing global inflationary pressures, long dated U.S. Treasuries are also likely to soon crash and burn.

What about copper? My friend Chen Lin pointed out that no matter what happens, China is going to have to spend enormous amounts of money to rebuild its earthquake-shattered area. He noted that over the next year or two China is going to have to rebuild what amounts to ten Manhattans. According to Chen, the earthquake smitten is home to a population of approximately 100 million people. Chen was quick to point out global slowdowns are in fact reducing demand for metals but the tremendous demand for copper and steel and other commodities is not going to fall out of bed
given the huge rebuilding requirements of China.

What we believe is that the Keynesian policies of deficit spending and then printing money to fund that debt has fueled enormous mal investment and economic dislocations, which are manifesting themselves by horrendous increases in the price of raw materials. This is in my view the first move toward a rejection of fiat money. The only way this can be stopped is to orchestrate another Paul Volcker. But the chances of that happening are virtually nil in my view even though the hypocritical Larry Kudlow is now crying for that policy, even though he was at the front of the line cheering on the inflationist fed when he and his Wall Street cronies were getting rich, richer and richest through that wealth confiscation.

And so I’m betting that policy makers (bankers and politicians) around the world and especially in the U.S. will continue to inflate. Trouble from their perspective is that although they can increase the money supply they can’t control where it goes. They would like to keep us buying trashy fiat paper instruments so they can keep ripping us off. But the world, if not yet Americans, is getting wise to this Wall Street/Washington rip off scheme and they are saying take your paper dollars and put them where the sun don’t shine, much as Charles de Gaulle said us to 1971, when he said in effect, “we don’t want your stinking dollars. Give us real money. Give us gold which has intrinsic value that cannot be destroyed by American politicians and bankers.” But Bernanke being the ultimate believer in paper money, can be certain not to follow a Volckeresque policy that is now essential to avoid disaster. Rather he has promised us he will print more and more money at a faster and faster pace. And if the banks won’t lend out newly created digital currency and thus serve to expand the money supply, he has his helicopters (rebate checks and handouts of all manner) which he has vowed to use to spread trillions of dollars over the American landscape and into the hands of an increasingly desperate populace.

Of course, as the pain of inflation begins to spread we see even super inflationary Larry Kudlow on CNBC last evening calling now for a “return to Volcker” policy so we think it is possible though not likely that Bernanke could be replaced with a Fed Chairman who would pull the rug out from under the inflation trade much as Volcker did in 1980. Even though it is especially hard for me to envision a President Obama agreeing to such terms, if you believe as I do that the owners of the Fed, not the President and Congress runs our nation, you have to count on that possibility if those who really control our system think it is necessary. After all, as we saw with President Kennedy, Presidents who do no cooperate with “the program,” can be replaced. The point is we American voters really don’t have anything to say about these matters. An illusion of democracy serves only pacify us and keep us distracted from really important policies. If we did move toward a Volcker like policy, we would face a depression that would make the 1930s ordeal look like child’s play. So rather than a move toward honest money, more likely we will get the Amaro currency which will be forced on Canada and Mexico so that we have one trading block.

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J Taylor
Editor of J Taylor’s Gold & Technology Stocks newsletter



Mr. Taylor is editor of J Taylor's Gold & Technology Stocks newsletter. A native of Ohio, he has resided in New York since 1973 when he began working there for Barlcay's Bank International. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp. In 1997 he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital.

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