An in depth analysis of global financial and economic debates
September 12, 2000
An in depth analysis of relevant
Global Financial and Economic Debates

Wall Street Kisses Goldilocks Goodbye
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Those who scorn inflation today will hail it tomorrow as the
last bastion of profitability
Ed Bugos


Rising Wedgies

Some market technicians, including myself, view the rising wedge as a completion pattern. It is not an easy pattern to discern, especially if the market has fooled you with so many more easily visible bearish sucker plays. A rising wedge, as distinct from the corrective bounce that is often interpreted as a flag when it takes on the same shape and shorter duration, is often a final extension to a long running bull leg. Even if one is seen, it is difficult to believe because of the bullishly misleading sequence of higher highs and higher lows coming at a high point in confidence for the market.

Yet, even though not a certainty until prices begin to fall from and therefore confirm the pattern, its implications are thought to be large enough that many speculators try to anticipate the break. In theory, these patterns are defined by a narrowing in the rising price channel on diminishing volume, and can last anywhere from two to six months, sometimes even a little longer. A diminishing, or petering out, in fresh investment interest explains both their price behavior and volume behavior. And when they do fall out of this humdrum pattern, the degree of the move is almost always substantial.

Virtually all of the stock charts below, and which I use for my report come from, my favorite free (for now) charting website1.

Inside the Dow 30; a few important "possibilities"

American Express Co.
American Express Co.
Citigroup Inc.
Citigroup Inc.

General Electric Co.

General Electric Co.

Intel Corporation

Intel Corporation

I have deliberately omitted marking up the charts so that you may make your own interpretation, but I am sure that you will find, in all cases, that long existing trends are already in place, that volumes have visibly diminished over the past six months (of course it is summer, but a wedge is a wedge), that the intermediate trend channels have noticeably narrowed, and that outside of GE, momentum has been generally diverging, even so far into September. Ask yourself, where is this index without these component stocks? Naturally, if this assessment proves correct...

...That Will Not Be Good

Dow Jones Industrial Average
Dow Jones Industrial Average
NYSE Composite Index
NYSE Composite Index

In both of the blue chip indexes above, momentum appears so negligible as to cast aside the significance of the breakout in the broader NYSE composite (to the right), which itself almost appears to be developing a six month rising wedge. However, that being said, there is indeed a few things happening in the stock market that deserve special attention.

A potential theoretically perfect negative correlation

Wall Street bulls will sell the powerful rally in the Dow Utilities Average as a double whammy. If their slow growth scenario pans out, these puppies should benefit from the lower interest rate environment, they will claim. If the energy crisis escalates on the other hand, there is a powerfully bullish story in that direction for the Utilities! Before I go on, which of the two preceding outcomes do you think that the below charts have already been discounting?

Dow Jones Utility Average
Dow Jones Utility Average
Dow Jones Transportation Average
Dow Jones Transportation Average

If you guessed the latter, you are dead on. At least four American Utility icons are positioned to take advantage of a growing global need for alternate power infrastructures less reliant on oil and gas. These companies are clearly the global leaders of choice in such an undertaking, many of them having been around as long as the Fed and perhaps more necessary, if the energy problem literally turns into a crisis. Therefore, I would suggest that the developing negative correlation with the Dow Transports supports this latter, more interesting growth story.

While both averages may benefit from lower interest rates, only one can truly benefit from an energy crisis. The following companies have spent significant resources, and perhaps even time, positioning themselves to benefit from this, globally. They have the knowledge and capital to offer many oil dependent economies an alternative, higher tech solution to their energy problems. So put down your Benjamin Graham textbook and check out these charts:

Duke Energy Corp
Duke Energy Corp.
PECO Energy Co.
PECO Energy Co.

Southern Company
Southern Company

Unicom Corp
Unicom Corp.

Glancing at these stock charts, one might conclude that there are some big things happening here. Undeniably, he or she would be correct. There are, but again, they have nothing to do with lower interest rates or defensive investing, and they have everything to do with increasingly bullish expectations for global demand to step up for alternative power infrastructures. Comically, if Wall Street really gets behind this "remarkable" story, they will have to denounce their Goldilocks allegiance! There is no double whammy here. Let me put it to you this way; without a potential oil crisis, there is no real potential for this Utilities play.

Additionally, if OPEC's 800,000 daily barrel addition doesn't quell oil prices immediately this week and inflation numbers come in on the high side of expectations, momentum may carry these stocks further, at least for a week or so. However, I personally am inclined to wait out the highly probable second bear leg in the rest of the market to unfold first. That's right, second.

On the other hand, go Goldilocks go
Rumors surfaced in Germany midweek that Europe's biggest banking group, Deutsche Bank AG, is in talks to acquire the mighty JP Morgan. Can anybody appreciate the politics behind this supposed deal as much as I can? I never saw it coming. Anyway, by the end of the week, Morgan's CFO, Peter Hancock handed in his resignation to pursue longstanding entrepreneurial interests. In the end, this may turn out to be nothing but a difference in opinion, at worst. But if it were nothing, why would he not put off his resignation until after this whole thing was over, being sort of a key person in a major acquisition and all? Anyway you slice it; it still is a red flag.

Is the US investment business for sale? This is the thought that had crossed my mind when I first heard this merger talk on Wednesday, before Mr. Hancock's resignation. It is the thought that crossed my mind when DLJ sold out to Credit Suisse Group recently. The seed for that thought, however, actually occurred immediately after the UBS acquisition of Paine Webber. The reason is that I had just finished The Politics of the Dollar, where I had put forth that the US is now vulnerable to political extortion on account of potentially discontent foreign dollar owners. In other words, the balance of political power will shift to foreign dollar owners as long as US politicians will want to keep them from selling off the currency (to prevent inflation). Let me explain.

These events have been driving M&A speculation in the US financial sector to new heights, dragging along with it the Dollar/Euro exchange rate. The big monetary problem facing the financial system is the circulation of excess dollars. Therefore, I suggest that it is in the US interest, in order to forestall a dollar crisis at this point, to convert foreign short-term deposits into long-term foreign direct investment. And I believe that it is in Europe's dollar owner's interests to find something useful to do with all of their excess dollars. So while the Europeans are busy buying US banks from day traders at record highs, American financial interests may be buying failed Asian banks, cheaply. This is nothing but an observation at this point but it is interesting, because in my second to last report, Inflation versus Deflation, I suggest that Japan is a net global creditor and therefore most likely to survive the currency debacle that is right around the corner.

Even worse, however, is that these headlines take away from all the other garbage that the Europeans are buying. I have observed, in previous research, the relationship between the falling Euro and the rising issuance of US Asset Backed Commercial Paper, specifically finance company debt or consumer installment credit. My conclusion was that the US financial sector has been monetizing low quality debt in this last cycle. This argument can also be found in the report Inflation versus Deflation. Interestingly, in an August 31 issue of "Capital Issues2," entitled "Watch Reserves, not Rates", the author points to a striking 0.88 correlation between US commercial bank paper and the European Central Bank assets. This is the first time I had read their quality work.

"Operation Discredit GATA," is well under way!
Normally, I stay away from arguing any claims that I cannot properly bear out, which is why you will find little on the topic of manipulation, other than the occasional restrained inference, in any of my other research. There are two reasons for this. First, conspiracy theories are far too easy to discredit, and should the allegations actually be true, the theorists will surely be targeted. Second, I have long ago accepted that many markets, especially gold, just simply get manipulated anyhow. Why wouldn't they? In fact, Mr. Greenspan himself said this recently while speaking about the rapid pace of change and innovation in the international financial system:

The rapidly changing international financial climate is certain to create nostalgia for the gold standard among those of us engaged to replace it - Paraphrase.

Some skilled traders, as well as myself, purport to see it in the tape on far more occasions than the average person might want to believe. The whacked out gold/silver ratios, gold/oil ratios, and gold/asset ratios are enough to at least legitimize any inquiry into such manipulation. Global bankers who declare that it represents an unprofitable investment in the new economy easily meet every rise in the demand for gold with their own supply, unwittingly improving its fundamentals with each ounce that is sold from their vaults to the public. And even while global monetary fundamentals arguably improve to gold's advantage relative to the international reserve currency's outlook, revealing an enormously conspicuous anomaly on the chart, the World Gold Council claims that it is certain that there exists no such manipulation.

It is common knowledge that the Fed manipulates interest rates, and until recently, money supply as well. It is also well understood that the government manipulates (under the guise of regulation or some misguided policy directive) many other economic dynamics in our interest, presumably. Do we need a special briefing by the CIA to believe what we already know is likely true? The question therefore is why are they trying so hard to deny it? Perhaps because it is so difficult to come up with a plausible argument as to why it is in our best interest, but possibly also because they have learnt how effective outright denial of any wrongdoing can be, especially in dealing with a public that has a vested interest in their paper.

Whatever the case may be it can be treacherous as a professional trader not to assume that someone is playing market games. There is always a shepherd.

The Harder They Try, The More Obvious They Become

So suddenly, I find myself talking about a subject that I had always personally viewed as an overly mashed potato. The reason is that as a broker, when a promoter would approach me with a deal and become aggravated by my questions, he would pull out a thick technical report, sometimes as long as 100 pages or more, in the hope that I would be satisfied with the project simply because someone else already undertook the due diligence, presumably on my behalf. Though, to his negative surprise, upon reading through the mumbo jumbo, I would find not only that I had even more annoying questions, but also that I suddenly knew more about the entire venture than he did.

Similarly, Dr. Jessica Cross' recent 200-page report called "Gold Derivatives Growth Unsustainable" released on 4 September 2000, has literally dragged me out of the closet on this mashed potato.

The Definition of Spin

Lots of spin is going on out there these days, though it used to be called nonsense in the old economy. My 1984 Pocket Oxford uses terms like spinning, twisting, and manipulating a yarn to define the term in its linguistically intended form. But by far, Mr. Don Mathews at wrote the most interesting definition I have ever come by, which I view as relevant to the business of money also. In an article titled "Gore on Oil," he said that:

His (Gore's) charge of conspiracy and price gouging is spin. Spin is the political class euphemism for calculated mendacity, for planned distortion, for twisting and contorting fact and reason until truth becomes all but impossible to decipher. In the normal world, spin is thought of with disgust. But in the political world, spin is a tool, and the handiest tool at that; and those who use spin with skill rise high in politics.

In the financial business as well, he should have added. For as the price of gold declines and bankers continue to satisfy excess demand with their own gold "reserves," the spin they have found most opportunistic is that gold's monetary significance has diminished. And they have done much to twist and contort fact and reason until truth has become all but impossible to decipher. In fact, the same brute force tactics appear to have evolved in the financial stocks of late mention, and the spin they weave (if that makes sense) is European endorsement of the legitimacy of US financial interests.

Where is the Motive, they ask?
Oddly, unlike manipulating interest rates or exchange rates or oil prices or dairy prices or labor prices or what have you, "speaking" about the manipulation in gold prices is a grave taboo.

And there is an excellent reason for that. It is simply this: There has never been such a comparably long period of paper money prosperity as during this past thirty years or so, evidently. It is normally perceived that this kind of prosperity would not be possible on a gold standard; in as short a time as it is without one, at least. That is because on a gold standard, we have to accept some monetary discipline from time to time. On a "paper" monetary system, we can-will-and-have postponed the unkind "discipline," despite the fact that it comes at the expense of what is referred to as the lender-of-last-resort model. At some nearby point in the future this will probably come at an enormous cost. Conversely, on a theoretically proper gold standard, the average entrepreneur can at least be reasonably confident that he can keep any wealth that is conquered for longer than, say a couple of decades.

We have established this position many times in the past, and if you would like to review our arguments, please visit our homepage ( and pick out any one of our archived reports. You ought to at least agree that there has been a visible lack of financial discipline in recent years, whatever that may mean to you. So, when Dr. Jessica Cross suggests, through the FAZ3, that organizations like GATA have not even touched on possible motive, she has clearly under read the content at any of the websites that we publish through, including GATA's.

In short form, it is my contention that ultimately this cost will manifest in a loss of confidence and purchasing power of the paper currency with the weakest fundamentals, which have less to do with any deceptive productivity edge, than they have to do with other more complex monetary issues, such as the natural consequences of profligate dollar imperialism. Nevertheless, by then we shall see where all of the false wealth has been transferred to, and we may then possibly even lose faith in the spin weaving banking system - dare I say it. And if we were so brave as to try and revert back to the coherent economic logic behind "sound money," which was responsible for many of the enormous and real economic expansions of previous centuries, the Federal Reserve System that was developed in 1908 may have to completely dismantle. That certainly explains the taboo, don't you think?

Let me warn right now, that this line of reasoning, as logical as it indeed may be, ranks very high on the controversy scale. Why don't you practice it on your nearest neighbor and watch his or her haughty reaction, just for fun? This does not mean the argument is wrong, but will only reveal that your neighbor owns stocks. It took a long, long time for the Fed to become as powerful as it is today, where millions and millions of investors watch Mr. Greenspan's every single move, as if they knew what to do with the worthless information.

Given all of these circumstances, how hard do you think that it would be for any powerful financial interest today to persuade an "expert" to denounce such manipulation that everyone already knows exists? And if our economics are right, which they probably are, the motive for manipulating gold prices could not be greater at any time in history than it is today.

The Irony of Power
The only real mistake that the Fed had ever made, in terms of defending its power, was to allow the monetary inflation to overcome the economy and manifest in profuse quantities of low quality securities, which are now owned by too many weak hands. Here is the irony; these "hands" now have the power to decide the Fed's destiny. So yes, expect the "expert" nonsense to intensify, as there are few markets other than gold, where "they" may still exert an advantageous, and more direct influence. The next few years should prove very interesting to this argument.

Gold And Paper Have Become Mutually Exclusive

In her report, Dr. Jessica Cross examines the whole argument about gold derivatives and whether there exists any manipulation of gold prices at all. When I first glanced at the 200-page phase one project, I thought to myself, what a waste of %#&! time and money. Mine too. Nonetheless, it is my obligation to answer the call. In the preamble, Jessica states that:

"As Virtual Metals noted in the initial proposal for this study, any detailed research into the derivative phenomenon would probably generate as many questions as it provided answers. This has indeed been the case and consequently, it is acknowledged that further work is warranted."

Here are a few of my "initial" stupid questions:

1. Who is going to actually study this enormous intimidating looking pile of bureaucratic nonsense before the presidential election is over?

2. Why did the World Gold Council assert their confidence in previous numbers at the Gold Conference in France only a few months ago, if they had yet to even complete such a study?

3. If there are many more questions now than before, where does she get off making any conclusions whatsoever about anything?

I suppose that one has to justify the scarce resources (she apparently is doing this work for the supposedly impoverished gold industry) allocated to this project undertaking that appears to be motivated mainly to discredit GATA's conclusions, and that is going to be hard to do if the conclusion is that GATA may actually be right.

Everybody Has A Vested Interest in Something

The FAZ reported the discovery that many of GATA's supporters have personal monetary interests behind their accusations. I am glad they noticed. I certainly do.

If these people want to accuse the little pissed off guys of having a vested interest in what they are talking about, I demand that they show me an example where that isn't the case for anyone else!!! I gather that I do not need to list many examples here.

The WGC and GFMS, representing the gold industry, unquestionably have a vested interest in keeping gold prices down, for example. At least until the industry's most important producers unwind their offside hedges. The evidence suggests that a significant "majority" of gold producers could lose a lot of money should gold prices double too quickly. In fact, such an event could easily escalate as the weaker producers would run into solvency problems and consequently, into production delays because they suddenly cannot afford to finance their daily operation. So yes, even the gold industry has a bearish vested interest in the Gold business today!

If these "people" really want to use that angle, I am sure that GATA can multiply it tenfold!

The Prisoner's Dilemma
Almost one year ago now, on the eve of the signing of the Washington Agreement, a friend of mine dubbed the situation a "prisoner's dilemma" because as long as no one else would cover their shorts all would be Ok, but under this theoretical quandary, such an outcome is obviously a Utopian fantasy. The Dr. Jessica Cross document looks more like a "prisoner's tale" than a revelation, created only to buy the prisoners some badly needed time while they all continue to cheat on each other. Though I have only studied a part of it so far, I am particularly thrilled with this comment in her report:

"This swift evolution (toward derivative products) is evidence that the derivatives are a natural and thriving concomitant of a free market in gold. Perhaps for this reason alone their presence should be accepted rather than eschewed."

The document must have been written by at least two different people! For one thing, in the first sentence of the overview on page 14 it is claimed that:

"This research neither endorses nor denounces the use of derivatives in general."

These contradictory comments are only a few pages apart. Where is her credibility? Again, I will repeat for her own benefit if she ever reads this, that derivatives are indeed a natural evolution in a global economy that has developed on top of an unstable fiat monetary experiment, blah, blah and blah.

I really do not care what your credentials are. If you do not accept this argument because you are a paper bull, that is one thing, but if you do not accept this argument while you are supposedly representing the "gold" industry, you either don't know the first thing about money and credit, or you are a liar!

No wonder the FAZ claims that GATA hasn't sufficiently explained the motives behind why anyone would even want to manipulate gold prices - they obviously did not read or understand the diversity of arguments that GATA has worked hard to present. Dr. Jessica Cross should have spent more time studying economics than statistics or the anecdotal consensus in the cab driving industry, for then she might actually be able to see the forest.

What is so bad about Fiat anyhow?
Mr. Birnbaum, in a 1996 report4 to the Joint Economic Committee, concludes that the derivatives business is completely unnecessary were there to be less volatility in the free floating fiat exchange rate system in the first place. He makes the case, and if he doesn't I do, that this volatility is also unnecessary, and only exists as a result of an unstable and misguided (politicized) monetary policy. Thus, the enormous growth in the unnecessary derivatives business (which I am sure Dr. Cross has a vested interest in) is a direct consequence of this unnecessary exchange rate volatility.

A secondary result, he suggests, is that the business of the world has moved away from the real economy and has been dominated by asset speculation and general goods arbitrage. He is more right today than ever. In 1999, I observed this outcome on my own (captured nicely in the following chart by Alan Newman) and dubbed the US economy a stock market economy to my clients. However, many bulls still insist this is all on account of the new economy!

Dollar Trading Volume vs. GDP

I'll say. Therefore, in this context, you bet that derivatives are a necessary evolution. That is not in question. The question is what happens next? Many economists have been trying to prove the growing instability of this monetary system, or systemic financial market risk, and anyone that works for the gold industry should be on the same bloody page. It seems that the biggest obstacle facing the gold business today, is that investors have forgotten what the value of gold really is. Who can blame them? After thirty years of spin, the facts have obviously become twisted and distorted, rendering the truth far, far away. End.

A proposition for my readers
In conclusion, I have a big problem with the way this overly lengthy report was presented. The first 40 pages or so contain summary conclusions, while the rest of the report (160 pages) details the "extensive" research put into these conclusions. Of course, I am far too polite to suggest that was the order in which the report was actually written. My bet is that only a very small minority of passionately interested parties will go beyond the assertions made in the first 40 pages. Do you get the picture?

So, here is the deal. Being one of these passionately interested parties, I will omit the conclusions and study the "extensive" research in the last 160 pages of the report this fall, and before the election! I will then write my own conclusions based on Dr. Jeckyll's analysis, and I will then compare my conclusions to the expert conclusions drawn by the esteemed "Dr." I will try not to make it a lengthy treatise and will only publish it if I get enough email requests to do so.

Edmond J. Bugos

1. I like the site because it offers lots of interactive options. Specifically, the chartgallery is presented so that you can view all of the important global stock market indexes, US sub-indexes, and commodities one after the other without having to find different indexes all over the site.

2. Capital Insight Ltd, email
3. Frankfurter Allgemeine Zeitung; German Newspaper.
4. Dollar Instability and World Economic Growth; October 1996

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