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.
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
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.
(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.
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?
Sachs Commodity Index TR
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
Currency Unit (ECU)
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.
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.
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
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.
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."
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.
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.
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?"
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.
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
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.
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
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.
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.
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.
500 Large cap
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.
Put / Call Ratio
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.
Jones, 10 years
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.
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.
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