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A weekly outlook for global financial markets A Weekly Outlook and Analysis of the
Global Investment Climate

for December 19, 2000
The Quest for Economic Freedom
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All market manipulations are essentially manifestations of the socialist mentality, as the intervention necessarily dictates the misallocation of scarce resources. Thus, so long as governments believe that they must, or can, produce a market outcome or prevent market discipline for whatever reason, we are doomed to economic injustice. But the worse crime of all is that this fact is unbeknownst to the vast majority of voting citizens who still believe that they live in a free market democracy when they cast their ballots. The reality is of course far grimmer, or somewhat ironic, depending on where you live. It is that the evolution of a typical fiat monetary system is entirely political rather than economic. In the end, our leaders will do everything they can to maintain the purchasing power of the currency, and they will do it with a popular mandate, in the name of the Welfare State.

The Gold Antitrust Action Committee (GATA) has been gaining critical momentum, in its spirited campaign for a more transparent gold market, ever since key player Reg Howe slapped some of the world's most highly regarded officials and bankers with a complaint, which he filed in a Boston court one week ago Friday. Press coverage, while expectedly predisposed to disbelief, has nonetheless been cautiously growing and has developed into a loud stir. Perhaps symbolic of a developing consensus, a Paris based business group recently jumped on the bandwagon and also threatened to sue for damages, should the BIS privatization go through at below fair market value.

As you may already know, Mr. Howe, with the support of GATA, has sued the Bank for International Settlements, Mr. Greenspan, Mr. Summers', as well as key Bullion Dealers for damages related to an underhanded ploy to buy out the minority interests in the BIS at well below established fair market values, and for infractions aimed at exposing the transactions in the White House's secret slush fund - the Exchange Stabilization Fund - whose reported flows have been shown to correlate nicely to gold market activity since 1995, I believe.

But at the heart of the whole issue is the enduring belief that the US government, Fed, and certain investment dealers have gotten more than a little caught up in an ostentatious monetary scheme, which undertaking has come at the expense of many more legitimate industries, globally, and which will cost the taxpayer dearly. To be sure, whether the scheme has been carefully deliberated or not, the consequences are effectively the same - accordingly, through the process of induction, if the consequences come into existence, one can argue that a scheme must therefore necessarily exist. Anyhow, the enormous expansion in money (dollars) and credit over the past decade has exceeded any precedent that we have been able to find this century, and it has leapt far beyond boundaries, which would normally represent the limits of economic reason.

Contemporary (establishment) explanations for how this monetary inflation could have come about without resulting in disaster include a technologically induced productivity shock to the economy, a magically rebalanced government budget (or surplus), an historical propensity for foreigners to soak up excess dollars, and the illusion of Economic Freedom… in order to maximize dollar utilities I presume. Yet, the data does not really support a single one of those hypotheses. Indeed, a much more cogent argument can be made that the debacle has been avoided by one ingenious financial alchemy after another, and that the cumulative net result is the proliferation of extraordinary excess and of massive monetary/economic imbalances built upon a pyramid of insurance, and hedged through some benevolent counterparty superman.

Even as the consequences of the scheme gradually appear, indicating to us that the alchemists are fresh out of ideas, the consensus still thinks that the solution to the whole mess is to simply lower the cost of "money," and get on with it. They are missing the point. The point is that there is too much money, something which the low price of gold has conveniently masked. But fear not, for if gold prices rise, the bulls still have Larry Kudlow to insist that there is a "deflation of liquidity" going on? More like a deflation of egos buddy. Has he not seen these?

Not weighted index Energy Weighted
CRB (commodity) Index Goldman Sachs Commodity Index TR

Though I suppose that I should not be at all surprised having seen with my own eyes what I did see today, after the Fed announced no change in policy, in both interest rates and the bias. In the statement, which accompanied the decision, the FOMC disclosed that the balance of risks generally remain toward inflation, but that a slowing in economic activity and the fact that long-term inflation expectations remain contained has diminished the inflation risks looking forward.

Immediately, the stock markets went south and Mr. Kudlow, accompanied by CNBC staff, began interpreting the statement for us. Apparently, the FOMC just made a 180-degree turn in the "bias." I am still not entirely sure if what I saw was deliberated or just desperate, but surely, there has been no significant change in bias. As a matter of fact, in light of the heated price action in an increasing number of commodity markets recently, the FOMC has got to stay on record as fighting inflation, regardless of what is said in public.

Anyhow, it is not possible to find a single precedent this century for the current state of our monetary system and for the degree of excess, apparent in this bubble economy. We need to go back much further, perhaps as far as the early 18th century, in order to appreciate the historical parallels with today's economic conundrum. Both the Mississippi Bubble in 1721 France and the South Sea Bubble in England, which turned out to be the world's first real stock market crash, were only a few years apart and resulted from similar financial alchemies. In fact, you might find that John Law's monetary proposal was every bit as sophisticated for its time as today's Fed model appears to be to many people today (provide link). It had to have been, in order to fool so many people, wouldn't you agree?

More important to us though is the relevance, in those parallels, which essentially lies in the consequential development of the economic systems of the day. The analysis has given us a much better understanding of the framework within which Fed policymakers really operate.

A Monetary "Scheme?"
Of course, I believe that one exists, for the first article I published at SafeHaven was called The Big Gamble, and How the Fed Gambled the Global Monetary System on the New Economy. It was my thesis and concluding argument, as I graduated from the brokerage school of gambler-i-tis in March of this year.

If true, the consequences are enormous. Historically, the process of any expansionary monetary cycle is entirely asymmetrical in its natural prognosis, as most boom bust sequences are, but whether or not, by artificially prolonging the expansion phase, the consequential bust can be ever further postponed or simply result in an economic contraction of greater severity, will determine who in the end is guilty. But the verdict is probably already the latter, for we have no reason to believe that this time will be any different than our historical precedent, so far.

So if Mr. Howe and GATA's allegations are true then we have been living under a glorified socialist regime for some time now. Accordingly, there ought to be an extraordinary amount of malinvestment and misallocation of capital and other resources, a typical consequence of the socialist agenda, only your "invisible hand" is a banker rather than a politician. Once we delve into the way in which our monetary (political) system truly works it becomes apparent that the incentive to depress gold prices is consistent with who really heads this economy, the banker, and a historic rival for the metal.

In the complaint, Mr. Howe lists several valid legal precedents for the action, and correctly alleges that these officials conspired to depress the price of gold in order to extract monetary benefits, such as could be imagined in an environment of rising dollar inflation rates where the low or declining price of gold clouds the very fact.

Not included in the complaint (nor should it be) is the general grievance; that we have been taught to endure several sickening explanations for gold market activity. For instance, when gold prices rise, it supposedly doesn't matter because the metal no longer ought to be perceived as a monetary reserve, and thus, cannot be an effective "inflation indicator." On the other hand, we are told that when gold prices decline that obviously this means that there is no inflation. Indeed, there may be a potential deflation.

Perhaps not surprisingly, the legal action has not prompted a satisfactory reply by any of the named defendants, with the exception of a shy retort from the BIS. Should defending interests try to bury this news, it would be a familiar modus operandi, but it could also be their biggest mistake. For, the chorus of investors and people around the world, who continue to find that few plausible explanations exist to counter GATA's conclusions or to explain the increasingly odd and non-transparent gold market activity, is growing. To leave unanswered a growing cry from the people is treason in a democracy, particularly if the accusations have ramifications important to the core of our global monetary system, and thus our "Economic Freedom." And particularly when the accusers have grounds for the lawsuit and have accumulated substantial circumstantial evidence to implicate the defendants.

If all that people want are freer markets, what possible reason could exist not to give it to them? Oh yes, lest we forget that because the value of the US dollar is arbitrarily assigned a purchasing power, as it is not backed by anything except the fact that the US government has committed to enforce it as legal tender, this deemed value cannot coexist with a free market in gold. Have we reached that point of recognition? I know that we all must know that such a point is ultimately inevitable under our dysfunctional fiat global exchange rate arrangement; however, I do not yet think that many of us are prepared to consider that that point has already arrived. It has.

Consequently, if the defendants pursue a strategy where the news of supposed monetary scandal is buried until the market volatility (hopefully) blows over, it is perhaps convenient, but fateful. It is convenient because most people are still afraid of the inevitable reversion to some form of gold standard, and accordingly, are still willing to hope that their fiat dollar prosperity doesn't vanish.

It is fateful, however, because this reversion may already be under way. For we believe that the forces of inflation are nearly unstoppable now as the utility of the dollar peaked structurally, in accordance with the peak in the broad stock market, in mid 1999. And so long as inflation (which has little to do with recessions or expansions in economic activity and everything to do with the interaction of supply and demand for money and credit) is not recognized by the monetary authority who is supposed to guard against it, it will resolve in the same way as did a stock market bubble that stopped looking like a bubble sometime after 1997. By growing larger.

And the winner is…
Thus, it is inevitable that as the inflation grows, the cry of the people will turn into an angry roar should the matter upon us not be satisfactorily settled. And I think that dealing with questions from an angry population is going to be much more difficult than dealing with these questions today. But, I suppose that they have already had their opportunity to respond to GATA while no one generally believed the accusations? Well, they say that war is won before it is fought. This war is getting interesting and I believe that it has already been won, by GATA.

The reason for my controversial (suicidal) call is simple. If I had a dime for every billionaire who was self made, I wouldn't have enough to phone the operator with. The point is that markets have made men (and women), and they have made stories. It is not the other way around. A market economy is a lot about being in the right place at the right time, and certainly, the wrong place to be today is in a position where you have committed to denying the existence of conspicuously gathering inflationary forces.

We have noticed that over the past week it has not been so much that people generally do not believe GATA's allegations to be true. Indeed, privately, almost anyone will concede the likelihood that they are. On the contrary, we believe that many people are actually afraid that they are true. How else do you explain the bottleneck in reporting such an obvious headline grabber and newspaper seller? The complaint, whether founded or not, is a fact. No reporter ought to need to check with the Fed in order to publish these facts, even if it is explicitly named as one of the defendants. It is also not without merit, as the Fed has been changing the rules and the future role for the BIS, at the quantifiable expense of minority public shareholders.

Hence, we must conclude that to a large degree, many people fear the consequences to the economy (and their wallets) of the revelation of such truth that would undermine the arbitrary value of the legal tender, which ownership currently guarantees them a lavish global purchasing power. Of course, that would explain the original hesitation by the press to release the story.

What if GATA is right?
What if a plan is indeed underway right now to create one large (privatized) global central bank, which is intended to not overtly supplant, but perhaps compliment and build on dollar policy? Of course, creating the perception of an ever-larger lender of last resort would be the linearly contrived idea here. But it would have to be backed (or at least anchored) by either a confidence in the fiat monetary inputs or by some form of asset.

Fundamentally, it is probably far too late for anyone to prolong the dollar's role as an international reserve currency, and hence an acceptable central unit of account to all international parties involved in the prospective monetary arrangement. And dollar confidence is important, for consider that the existence of such an institution without confidence for the dollar is not possible today unless it is determined that another fiat currency supplant the dollar's role first. A bridge if you will. Perhaps this is what the agenda for the Euro is. However, it is unlikely that dollar governors will concede any real power to the ECB in the world economy, and hence, that plan would likely yield to one where the aim is to stabilize the three major world currencies, against each other, equally.

Thus we find it no coincidence that the Euro's precipitous slide is about to reverse, and certainly no coincidence that such reversal is well timed with a maneuver in Dollar/Yen, which is "effectively" making the dollar look like a centrifugal force in Forex markets, similar to the pivotal point of "stability" on a teeter totter for instance.

Markets have a way of staying immune to bad news so long as they can inflate, and immune to good news when they no longer can inflate (not bad huh?).

Consequently, it must not be allowed that the dollar "simultaneously" declines against both the Euro and the Yen, for then it could be perceived as dollar weakness instead of Euro strength, and all hell would break loose. If we can see this, so can our dollar governors who undoubtedly already have. Thus, US investment dealers will probably help along by simultaneously unwinding their profitable Euro carry trade and replacing it with (re igniting) the Yen carry trade.

Euro Yen
European Currency Unit (ECU) Japanese Yen

But what are they going to buy with the additional Japanese funds; dollar denominated securities, or things that actually inflate? While the Fed may not want the latter, it might not have a choice on the matter (where are these rhymes coming from?). The point is that monetary policy has to become increasingly sophisticated (read interventionist) in order to fight the free market forces, which are already in gear. And if Reg Howe and GATA are right, this whole thing can quickly become a national security matter if it isn't one already.

Just think about this for one moment. What would happen to the confidence and the (arbitrary) purchasing power assigned to the dollar if the world indeed found out that a group of highly regarded bankers conspired to manipulate gold prices in order to manipulate our perceptions about the fundamentals for the US dollar and economy? Though I am certain it did not start that way.

But what would happen to your confidence in the banking system, if you found that your banker has been misrepresenting the currency it has been eagerly selling (or lending to) you, and further, that this currency was suddenly to become much less valuable? What would happen to a global economy, which has become dollar (deluded) dependent? Basically, what this might mean is that the game, as we know it, would be over. Now, I can almost feel your disbelief as you read this paragraph, but if it is disbelief that I am sensing, don't be alarmed. I only mean that the rules are about to change in a big way, and perhaps unpredictably so, but there will always be opportunity.

Having said that, perhaps Lenin said it best when he suggested that there was no better way to uproot the basis of society then through the debasement of the currency.

"Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." -- John Maynard Keynes.

Who really wants to cause that? Can you begin to comprehend why keeping this quiet even if it were true could ultimately have to become an issue for the new national security minister? For if the allegations are true, the consequences would undoubtedly, and probably unjustly, punish the taxpayer rather than the person(s) who committed the evil. But that is to miss the point, which is that somebody has simply got to stop it.

The reason is that the status quo, or the path of least resistance if you will imagine, is to move further and further away from a free market (economic system), and closer to a centrally planned system of resource allocation. Maybe free speech would eventually have to yield to an oddly mad version of the prisoner's dilemma, whose byproducts would necessarily intrude on your privacy.

Vital industries, products, services, and economies will never develop while gambling houses will proliferate and criminal activity will rise, because the only other way to make a living is to denigrate yourself to the satisfaction of the government's wishes. Wealth will never be created, but only stolen or redistributed, while productivity will do nothing but fall for lack of incentive. Then one day, someone will wake up and say, "hey, isn't this supposed to be a democracy?"

Folks, that day has arrived, we just have not realized it yet. And believe it or not, that someone is Bill Murphy, the very vocal Chairman of the Gold Antitrust Action Committee. For whatever his true vested interests, the man is a champion of democracy.

The virtuous cycle doesn't work any longer…
The virtuous cycle, of dollar favorable capital flows and resulting "prosperity," depended upon the cooperation of a voluntary and able consumer, a voluntary and able international investor, an accommodative monetary policy, an accommodating administration and banking system, and most importantly, a benign global economic environment in which soft dollar deals would actually work. Almost none of these factors exist today, except for the few Japanese investors who have already forward sold enough dollars for the moment that they can afford to volunteer their complicity for a little while longer.

So as decisions are made, which strive to avoid the admission of a core truth and which perpetuate the status quo, even as participants become increasingly unwilling (or unable) to partake, historical precedent will ultimately overwhelm. Should the guilty party (even if guilty by association) really want this time to be different, it will need to avoid the path of least resistance and make some tough moral decisions.

Speaking of tough decisions…
Lower interest rates will at best accentuate the malinvestment, or aggravate the inflationary forces, at worst. And while everyone has been anticipating that Greenspan will follow through with his promise for the Put, nearly two weeks ago, we are beginning to get the feeling that the tout was a set up. Is it conceivable that the Fed Chairman has been monitoring the effectiveness of his own bullish speech, in order to gauge whether or not an interest rate reduction would actually work? It is certainly tempting to think that he automatically expects stock prices to rise on his action, but it has got to be difficult to ignore the facts. The fact that the stock rally (from the previous week) faded quickly, and the fact that any new monetary liquidity continues to head towards already inflating things, confirms to us that declining marginal dollar utilities are still a factor.

I wrote that paragraph before the FOMC concluded this morning's meeting (honest). Under the circumstances, standing pat on interest rate policy is probably the path of least resistance, if not shear wisdom. Now that the FOMC is on record for guarding against inflation, the governors can come out of the closet and say anything bullish that they want. For the only thing that will be remembered by future historians, is the record.

Here comes the selling climax!
While most of Wall Street interprets events like the FOMC today as catalysts for something, which they typically cannot explain or understand, we view them merely as inflection points along a path - or a trail, which the market has already decided to blaze.

Accordingly, today's FOMC only delayed what was beginning to already occur late last week. It gave brokers a story to sell to your 401K plans, and it gave traders virtually the only thing to look forward to this month. It also provided us with one of the best selling opportunities that we have seen since September.

Both the Nasdaq and the Dow transports failed at around the 3000 level (the level is a coincidence) on Monday of last week, and consequently, gave back all gains. The S&P500 met a similar fate as it tried to make it through its downward sloping 50 day moving average. The bulls are running… right out of time.

Dow Industrials S&P 500 Large cap

As stock markets around the world opened for trading yesterday morning, we knew that the put/call ratio just had to be washed out before the selling could continue, for a glance at the chart will reveal that a lot of hedging activity dominated the Friday session.

CBOE Put / Call Ratio

Fortunately, nothing out of the ordinary happened over the weekend, and consequently, the hedges must have been unwound or offset, for sentiment turned bullish very quickly yesterday. Thus, had the FOMC made a decision, the ball would have been bounced fiercely into the dollar / bond court (for leadership), but it didn't, and so the ball has fallen in Wall Street's court. We will have to see if they can manage to keep it in play tomorrow morning, but we are strongly inclined to expect a no show.

Long-term Dow
Dow Jones, 10 years

Have a glance at the long term Dow chart above. We threw it in here, because we thought you should get a true picture of the forest. Wall Street salesmen have called many bottoms over the past year or so, and yet, with so many fallen trees, you would think that the forest would have been annihilated by now. We fully expect, that when it is oversold, these men and women will be far too embarrassed and far too poor to step up to the plate, for they will have gotten their wish… a selling climax.

General Electric Company Oracle Corp
Cisco Systems Intel Corp

Earnings, earnings, earnings…
In conclusion, we would like to point out that there has been some terrific analysis about the generally poor quality of earnings reported over the course of the late phase of this bull market (last year). Specifically, most bullishly predisposed prognosticators refused to highlight the extent to which earnings were inflated by extraordinary, non-recurring items, on the run up to nosebleed territory. We knew this day was coming, and will be preparing to discuss this in more detail at some future date. However, allow us to leave you with a graphical representation of the extent to which only two of the above market "leaders" have supplanted their traditional businesses with the activity of speculation.

Cisco's Business  
Intel's Business  


Please note that in Intel's case, the statement of cash flow reveals that their investment portfolios are not static; indeed they are churned and traded as though the company had no other way to make money (pun intended). Thus, we were not surprised at the ability of many of these leaders to beat earnings estimates on the way up. Equally as unsurprised, as we will be when these accounts are decimated and manifest by way of future write offs, perhaps at the dawn of a new bull market era.

In an unrelated story
The Gallup Organization recently reported (December 8) that only 32% of Americans say that news coverage is accurate. This is a new low, previously having been made in August 1998 (it was at 40% around the time of the '98 election campaign). To be sure, the number is often volatile. In fact, in 1998 alone it swung between 40% and 55%, but still, it is a new low.


Edmond J. Bugos

The GoldenBar Global Investment Climate is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you toconfirm the facts on your own before making important investment commitments.

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