Gold Market Manipulation & that Giant
During the very first days after becoming U.S.
Treasury Secretary, Paul O'Neill candidly and honestly said
he thought the U.S. dollar was too strong. Judging by the
response of Wall Street, CNBC and the Financial Times, you
would have thought he committed high treason. Yet, why would
O'Neill not think the dollar was too strong? He should have
known because he watched competitive pressures build against
his aluminum company, not because of superior competition,
but simply because his company was being taxed in the form
of a stronger dollar. With the dollar growing stronger, the
price foreign producers received for the sale of their production
into the U.S. was rising while the price Mr. O'Neill received
for his aluminum he sold overseas was declining. In other
words, like American producers since the Clinton Strong dollar
policy was implemented in the mid 1990's, Americans are being
priced out of their own markets as well as foreign markets.
Speaking as an American rather than a globalist, O'Neill knew
that the dollar was too expensive.
But the powerful interests who run America,
the head guys at the major banking institutions on Wall Street,
do not care much about America. They are globalists who will
just as soon trade with the enemy if it means gaining global
wealth, power and influence. These are the same bankers who,
even with Roosevelt's knowledge, traded with Hitler during
World War II. (For more information on this issue, read "Trading
with the Enemy" by Charles Higham). So when O'Neill spoke honestly
as an American, Wall Street interests began to question whether
he was up to the job of being Treasury Secretary. The "Financial
Times" talked about how the new Administration needed someone
who understood Wall Street rather than Main Street. Well from
that pressure point on, Mr. O'Neill learned very quickly to
spout Wall Street's line, namely the falsehood that America
needs a strong dollar. Wall Street might want a strong dollar
to keep financial markets from falling out of bed. But an
overvalued dollar is no good for anyone in the long run, not
even Wall Street. Having sold out, Wall Street allowed him
to stay, at least for the time being.
Why does Wall Street want a strong dollar, even
when it means American industry is disappearing from our shores?
Because without it, the street would not have been able to
suck in global capital into what now amounts to something
like $1.5 billion per day. And without the strong dollar,
which was engineered by the Rubin/Summers team, the stock
market orgy which allowed Clinton to avoid removal from office
and claim credit for the boom, would not have been possible.
Armed with the knowledge of "Gibson's Paradox (see www.goldensextant.com),
the Clinton Administration and the Federal Reserve knew that
if it were to succeed with their collectivist interventionist
policies of bailing out Mexico, Long Term Capital Management,
Russia, Asia, etc. it would have to "cap" the gold price.
And so it did. Having been taught a lesson about the strong
dollar during the first days of the Bush Administration, all
indications are that Treasury Secretary O'Neill has pretty
well picked up were the Rubin/Summers team left off so far
as gold manipulation is concerned.
Gold Rigging Leads to a Troubled "US Centric"
I greatly admire Stephen Roach, Chief Economist
at Morgan Stanley because he seems to have the courage to
speak the truth even when the truth is not always politically
correct on Wall Street. Thank God there still remains one
or two objectivist thinkers on Wall Street! Roach has labeled
the global economy as "US Centric." By that he means that
in order for the global economy to retain even a faint pulse,
the U.S. consumer must continue to spend stimulate the demand
side of the global economy by continuing to spend year after
year, more than he earns. In other words, Americans must continue
to dig themselves further and further into debt, while our
capital markets continue to suck in $1.5 billion per day to
make up for America's daily shortfall of savings.
Roach has been saying ever more frequently of
late that for the global economy to turn to some semblance
of supply and demand balance, the dollar must become weaker.
That would help reduce demand and increases savings in the
U.S. and reduce savings and increase demand in other parts
of the world. Roach says that the dollar must decline vis-à-vis
the Euro and the Yen by 15% and 20% if it is to be restored
to a level that makes sense on the basis of trade.
This past week, Dr. Roach finally began to talk
about an issue my friend Dr. John Whitney, CEO of Itronics
has been so concerned about for at least a years and that
is the artificially low level of the Chinese Renminbi vis-à-vis
the dollar. Dr. Whitney has noticed that bulk commodities
are being shipped half way around the world, through two canals
before being imported into the U.S. Barite is one commodity
the Chinese are selling into America and frankly the only
reason they can compete with American producers of barite
is because of the overvalued U.S. dollar or if you will, the
undervalued Chinese currency. This is obviously true because:
a) Production of barite is capital intensive in China just
as it is here, so there are not low cost labor advantages
and b) transportation costs to ship a heavy commodity around
the world is extremely high. There fore the only plausible
explanation for the ability of china to sell these kinds of
products into the U.s. is the overvalued dollar.
That Giant Sucking Sound is from China
Ross Perrot was concerned about the U.S. losing
its productive industry to Mexico when he debated George Bush
Sr. on the issue of NAFTA. He warned that we would hear a
giant sucking sound of industry being suctioned from the U.S.
to Mexico as unfair advantages would lead to high levels of
unemployment and an exodus of high paying jobs from America.
There is no doubt that higher paying jobs have been fleeing
the U.S. even during (or perhaps especially during) the boom
days of the 1990's. But increasingly that ugly sound is now
coming from China.
From a primitive economy a few years ago, China
has emerged as the fourth largest industrial base in the world,
behind the U.S., Japan and Germany. Moreover, it is now producing
higher value products, which means it is able to import more
wealth. Growth is furious, especially into the U.S. as Americans
continue to borrow and spend like a prisoner eating his last
meal before his date with the electric chair. According to
a Wall Street Journal report last week, the U.S. imported
$1.2 billion of Chinese electronic products in July and that
imports of these products into the U.S. is up a whopping 47%
over last year. Indeed, the Wall Street Journal article also
spoke of the huge amount of capital that is pouring into China,
to make that country more efficient. Bear in mind that with
the dollar overvalued, U.S. not only are Chinese imports cheap,
which cause Americans to buy them, but investing in China
is also very low cost for American corporations.
With global capital pouring into China, not
only Stephen Roach, but a growing number of economists around
the world are complaining about China exporting deflation
to the world. Dr. Roach mentioned how the Morgan Stanley aluminum
company analysts were downgrading his profit forecasts for
American companies because of the rising pricing pressure
on American firms thanks to cheap Chinese exports, caused
in large part by an undervalued Chinese currency. Huge waves
of new supplies, coupled with excessive amounts of American
debt which is now beginning to savage the demand side of our
economy is, without any doubt in my mind, leading more and
more toward Ian Gordon's Kondratieff Winter becoming a reality.
(Read our 1999 interview with Ian Gordon at www.mininstocks.com.)
Dr. Roach quite rightly says that to restore
equilibrium to the global economy, the dollar must decline,
whether Wall Street likes it or not. He says that on a trade
weighted basis, the dollar needs to decline by 15% to 20%
vis-à-vis the Yen and Euro. Then he says that unless the dollar
is also devalued vis-à-vis the Chinese currency, the Euro
and the Yen will have to appreciate by more than 15% to 20%
vis-à-vis the dollar to make up for the overvalued Chinese
currency. But that certainly won't be a fair solution for
Europe and it won't solve a problem of trade imbalance between
the U.S. and China.
What is really needed is a return to a fixed
rate regime based on a politically neutral currency like gold.
Will that happen? Not as long as the U.S. remains in the drivers
seat because the U.S. in fact is now gold poor. Even if you
believe the U.S. has all the gold it claims to have in its
vaults (it most likely does not because it claims gold leased
out is still in its vaults) the U.S. does not even have enough
gold in its vaults to provide a 1% backing of its money supply
(M-3). By contrast, the Euro has about 15% backing plus most
of the member countries themselves have considerable hoards
Not only American consumers, but America as
a whole has lived beyond its means for a long time. We have
managed to con foreigners into sending their savings to America
to finance consumption today and thus ensure poverty tomorrow.
We are in fact consuming our seed capital and thus underwriting
poverty for our children and grandchildren. But more discouraging
than anything is that with the exception of Stephen Roach,
Wall Street is doing all it can to dumb the American public
down by ignoring one of the most simple law taught in economics
101, namely that if we consume everything today, our standard
of living will suffer tomorrow. Eat drink and be merry! For
tomorrow you will die. Perhaps subconsciously, America knows
it is doomed and thus is simply denying reality.
Death and destruction may perhaps be an overstatement.
Of course we gold bugs as well as anyone else hope it is.
Yet, any sound reading of history says you should always invest
when assets are undervalued and sell when they are overvalued.
Gold is extremely cheap vis-à-vis stocks which, as discussed
below remain hugely overvalued, even after trillions of U.S.
dollars have been shaved off of paper profits.
The S&P 500 Remains as Screaming Sell!
The above chart is a sample of the excellent
work provided at www.decisionpoint.com.
For just $10/month, you can get a huge number of charts on
equities, bonds, gold and silver and gold and silver shares,
all the major indexes, and a very large number of stocks as
well. Our focus is always more on fundamental analysis than
technical analysis, but if you want to keep an eye on the
technicals, decisionpoint is as good and as reasonably priced
as they come.
We have been harping about an overvalued S&P
500 at least as early as 1998, but the chart above provides
you with a picture of just how ridiculously expensive stocks
still are. Historically, a PE ratio of 10 (green line) has
represented an undervalued market, while stocks at 20 times
(red line) represented an overvalued market. The black line
shows the PE ratio for stocks today. Notice how it was 1966
- the year of "irrational exuberance" when the black line
crossed above the PE ratio of 20 times. Indeed, Mr. Greenspans
in his more honest days, did make some sense. He quite correctly
diagnosed our national market psychic as being "irrationally
exuberant." Trouble is, stock prices are even more irrational
now than when Mr. Greenspan made his infamous comment.
The editor of decisionpoint.com is Carl Swenlin,
who also provides commentary every week about stock valuations.
He told us at the end of this week the GAAP PE ratio was still
a very high 33.50 times. GAAP, which stands for Generally
Acceptable Accounting Principles, is the measure used historically
to value stocks. So when you want to look at the market from
an historical valuation, it makes sense to keep using GAAP.
So we see the current PE ratio of 33.50 times compares to
a normal upper limit of 20 times on the S&P 500.
The inverse of the PE ratio is the Earnings
Yield, which Michael B. O'Higgins uses as a yardstick to determine
whether stocks or bonds are the better buy. At the end of
this past week, the S&P Earnings Yield was 2.99% which compares
to a 10 Year Treasury yield at the close of this week of 4.09%
and AAA Corporates which are paying somewhere around 6.30%.
Stocks are indeed much more expensive than 10 Year U.S. Treasury
instruments even more so vis-à-vis AAA Corporate debt, although
the number of companies qualifying as triple A credits is
quickly diminishing as we continue to slide toward a deflationary
A Newer more Honest S&P Valuation Method
High as PE ratios are, they may actually be
higher. Why so? To its credit, S&P has come out with a new
earnings criteria that takes into account the "creative accounting"
of the late 1990's that jacked up earnings by applying liberal
accounting standards to the treatment of pension fund accounting
and the omission of options as an expense. If a more stringent,
and historically consistent means of accounting for those
items are factored in, the PE ratio for the S&P 500 would
be an astounding 41.59 times, equal to an earnings yield of
2.4%. This is about as high as the S&P 500 has ever been!
And this is taking place after trillions of dollars of investor
wealth has gone to "money heaven."
Again, if we could see a reason for optimism
regarding the growth of earnings, there may be some reason
for hope that over the next several years, if stocks did not
rise, but by merely treading water at current levels, rising
earnings may bring PE ratios back into line with historical
ranges between 10 and 20 times. Yet for reasons outlined above,
not only do we think earnings are not going to grow, but we
think they are likely to continue declining substantially
into the future. Because we take this view, we do not think
Robert Prechter's unfortunate vision of a Dow below 1,000
is not at all out of the question. Incidentally Ian Gordon's
target decline is pretty much in the same range as that proposed
The above report was included as
part of Jay Taylor's extensive weekly "Hotline Transcript"
report published on October 16, 2002. These weekly reports
are sent to the paid subscribers of J Taylor's Gold & Technology
Stocks every Saturday evening at 8:00 PM., EST. Visit www.miningstocks.com
for additional information.