.The Kondratieff Winter & The Case for Gold
Anon
4 March, 2003
"This
is the shabby secret of the welfare statists' tirades against
gold. Deficit spending is simply a scheme for the "hidden"
confiscation of wealth. Gold stands in the way of this insidious
process. It stands as a protector of property rights. If one
grasps this, one has no difficulty in understanding the statists'
antagonism toward the gold standard." Alan Greenspan, 1966.
"There
can be no question that the US economy is at its most critical
juncture since the Great Depression of the 1930's. With both
the cause and pattern of the present downturn diametrically different
from those of prior recessions, it should be clear that past
experience cannot help in accessing what is to come." The
Richebacher Letter, October 2002.
"Sharp rise in US job losses adds to gloom." "Fears
grow over faltering global rebound as Germany and UK also report
bleak economic news." Front Page headline: The Financial
Times Jan 11/12 2003 "US job losses increased sharply last
month, adding to concerns about the weakening global economy
recovery. The 101,000 decline in payrolls was the largest since
February and surprised Wall Street... US job losses last year
reached 181,000 the worst since the end of the 1991 recession.
Losses in the manufacturing sector became more widespread. Makers
of aircraft, cars, computers and films experienced some of the
biggest percentage declinesin employment along with restaurants,
bars, retailers and banks." Ibid.. The Kondratieff winter
is here, and it is getting colder.
The economy
has only just begun its slide into the Long Wave depression,
and already excessive debt is leading to significant bankruptcies.
As the recession deepens, and it will, the pace of bankruptcies
will increase markedly. It is akin to a landslide that starts
from a single rock dislodged from the top of a steep hill. Once
the Kondratieff winter debt landslide is set in motion there
is nothing that will stop it until it has run its course.
The primary purpose of a Kondratieff winter is to purge debt
from the economy. That process is just beginning with collapse
of companies like Worldcom, Enron, Global Crossing, K Mart, Florsheim
Shoes, Formica, United Airlines, Conseca, GenTek, Mcleod USA,
Williams Communications, and others, whose names escape me as
I write this. By the time this Long Wave winter reaches its conclusion,
considerably more sizeable US corporations, which are household
names, will undoubtedly fail due to excessive debt. As long as
the economy continues to prosper, large debts are manageable.
When the economy slows down, corporate revenues fall, and debt
becomes an onerous burden. This is compounded by the scarcity
of capital and rising interest rates, as banks tighten their
lending practices. For example, even though the Federal Reserve
has now cut the cost of borrowing to its member banks 12 times
in the past 11 months, the cost of borrowing to the telecoms
has approximately doubled. Ford Motor Company paid a higher rate
of interest in its latest debt offering in December 2002 than
it did six months before, in spite of the 300-point basis rate
cut by the Federal Reserve over the same period.
During 2002, more than 180 publicly traded companies filed for
Chapter 11 bankruptcy, which led to the destruction of $368 billion
in assets; a record. These failures included six of the 12 largest
corporate bankruptcies in US history. And it has only just begun.
Martin Weiss counts an additional 2,453 publicly traded companies,
which are vulnerable to bankruptcy. These bankruptcies are closely
following the haemorrhaging of US corporate earnings. AOL lost
almost $100 billion last year. This colossal number is far greater
than the total market capitalization of all the publicly listed
gold stocks, which is about $70 billion. Several other major
US companies are spilling red ink. According to Martin Weiss,
technology companies listed on the Nasdaq have posted losses
in excess of $190 billion over the past 12 months. This was sufficient
to wipe out all of their accumulated profits of the past six
years. The liquidation of excessive debt and a mounting tide
of bankruptcies will continue, as the US economy falls into it's
forth Kondratieff winter deflationary depression. There is perhaps
as much as another $10 to $15 trillion of debt which must be
erased from the economy before winter has run its course. This
is a staggering amount and infers that the bleakest part of the
Kondratieff winter is still far into the future.
These bankruptcies are beginning to significantly impact US banks.
Following the Kmart bankruptcy, J.P. Morgan Chase suffered a
$117.8 million loss and Fleet Boston Financial, a $119.9 million
loss. Between May and October 2002, J.P. Morgan's share price
had fallen a whopping 60.5%, which effectively sliced $46 billion
from the firm's market cap. Excessive debt always has a major
negative impact on banks. The Japanese experience should serve
as a stark reminder of that fact. "This much is certain,
whenever any society accumulates debt beyond its ability to repay,
it is the creditors who are robbed." Hoppe, Donald. The
Donald J. Hoppe Analysis, November 1983. P.138
Consider the following: "What would one have to think of
a major US corporation whose finance arm with debts of $US 170
Billion while the company itself stands with a balance sheet
net worth of $US 7.8 Billion (down from $US 19 Billion as of
the end of 2000) and whose recent earnings covered less than
half of its total interest burden? That US company is FORD. Some
people have finally taken a look at the Ford balance sheet. Ford's
commercial paper lost $US 6 Billion in four days."
"How could a company with $US 170 Billion in debt paper
outstanding, with current earnings insufficient to service even
half of this debt, and with a net worth of $US 7.8 Billion still
have ANY commercial paper in the market place? Ford does."
The privateer http://www.the-privateer.com Late October 2002
edition. (reproduced with permission).
Not only does
Ford have this enormous amount of debt outstanding, but it also
continues to add to this monstrous burden. The only thing that
can save Ford from bankruptcy is a resonant rebound in the economy.
Will that happen? Not likely, because most of the Kondratieff
winter lies ahead of us. Anyway, car sales in the US are now
stalling. "Shrinking car sales hint at consumer fatigue
in the US Unnerved by job cuts and random violence, shoppers
are not tempted by interest free loans." So the Financial
Times reported on August 23, 2002. Jeff Barry, the sales manager
at the Jacobs' Twin car dealership, which sells Ford, Hyundai,
Mazda and Honda brands, said that in August his dealerships delivered
130 new cars to customers, but that this month its likely to
be only half that number, and he said, "People are getting
laid off daily. There's a vast majority of people who are worried
about committing themselves to something they can't fulfill.
The whole damned world is in turmoil."
The only means left to Ford, and many other companies too, is
to borrow to pay the interest on its debt. Obviously, that cannot
continue for very long. On October 23, 2002, Ford's debt rating
was cut by S&P to two notches above junk with a negative
outlook, which means that further downgrades are probable. October
was the worst single month for the Three US automakers in four
years. Car sales at Ford fell 36.6%. At GM, sales dropped 40.3%
and even Daimler-Chrysler, which had not pushed the cut-rate
financing deals was off 25.8%. According to Martin Weiss' Safe
Money Report, "an auto sales bloodbath is in the making."
December 2002.
Employee Pension
Plans Seriously Under-Funded
Besides this
colossal debt burden facing the majority of US corporations,
many also face a black hole with regard to their employee pension
plan funding. This is a scandal that is only now beginning to
attract attention Martin Weiss in (www.safemoneyreport.com) writes
that there is a $78 Billion shortfall amongst just 234 listed
companies in the S&P 500. This is the shortfall between the
amount these companies have set aside and what is required for
these companies to pay to their employees at retirement. For
example, General Motors owes its pension fund $19.3 Billion,
which is almost 50% of GM's total market capitalization, and
Ford owes its pension fund $14.5 Billion. According to Weiss,
the total amount of aggregate pension liabilities for 354 companies
surveyed was $1.06 Trillion and the total amount of liabilities
(funded and unfunded) for all of the pension plans in the US
is $4.3 Trillion. This is really only the beginning of the problem,
which will be compounded by larger and larger investment losses.
For example, Martin Weiss anticipates that if the corporate pension
funds of the S&P 500 companies lose just 5% this year, the
shortfall in pension funding is going to be at least $109 Billion.
These pension plan funding shortfalls are hidden in the companies'
balance sheets via legal GAAP gimmicks. This allows corporations
to project annual returns on their pension funds and write off
losses spread over a number of years against these projected
gains. For example, a company projects an annual return of 10%
on its pension fund assets of $100 Million ($10 Million). But,
the company's investment losses on these assets are actually
5% or $5 Million. You might suppose that the company would show
a loss of $5 Million on its profit and loss statement, but that
is not a requirement. It can spread that loss over a number of
years, assume 10, and write one tenth of the loss or $500,000
against the projected gain of $10 Million, there by showing a
net gain of $9.5 million. Through this legal maneuvering the
company can buy time in maintaining its pension fund at the required
amount to satisfy its pension commitments and avoid deducting
the loss from the bottom line. As investment losses deepen, so
too will the hidden losses in employee pension plan funding.
Eventually, however, these losses will have to be revealed. The
losses will have to be recouped from corporate earnings, which
are likely to be meager; or, the losses will compound losses.
What this ultimately means is that many employee defined pension
benefit plans are in jeopardy.
For the individual, the desperate employee pension plan shortfall
is compounded by the enormous losses now being experienced in
individual IRAs and in Canadian RRSPs. It was not that long ago
when individual Americans and Canadians in their 50's and 60's
could look forward to a comfortable retirement based upon: their
investment holdings outside their retirement plans, the defined
pension benefit that their employers guaranteed them on their
retirement, and the growth of their individual retirement plans.
Unfortunately, as the Kondratieff winter has unfolded each of
these individual wealth and retirement mediums have been incurring
substantial losses. Several stories attest to the pervasive fear
now rampant among prospective retirees. Many cannot face opening
their retirement plan statements, because of the losses that
they know will be shown.
In the Financial Times of 26/27 October 2002, Tony Jackson headlines
his Weekender article, " Perplexed by Corporate Calamities."
He should not be. The calamities are evidence of the unfolding
Kondratieff winter. He writes: "There is a long list of
industries seduced by their share prices into overextending themselves,
from telecommunications to insurance. The bull market also led
many companies to make pension promises they could not keep.
Yet what interests me is the host of things going wrong that
seem unrelated to the financial markets." He then cites
the wretched state of electricity companies. "In the US,
according to Standard and Poor's, power generators have not been
in such bad shape since the 1930's depression. (We are beginning
to see a lot of comparisons with the 1930's, which is something
very few writers mentioned, even as little as a year ago). In
the UK, several electricity companies are in effect bankrupt.
In France, the state-owned Electricite de France is likely to
fall into a loss situation this year, mainly because of the wretched
performance of its businesses in Argentina and Brazil."
"It's the
Debt, Stupid"
When President
Clinton was fighting his first presidential campaign against
George Bush senior, he kept a piece of paper in his pocket on
which he had written, "It's the economy, stupid." This
was to serve as a constant reminder to him that he was fighting
the election during a time of a mild recession in the US. In
like manner, all my readers need to know is that, "It's
the DEBT, stupid," which is the principal cause of the impending
depression.
In the 1990's,
total real debt increased $15.4 trillion. (= 52% of all current
debt)
Last year it took $8.20 to produce $1 of income (GNP). Last year
household and business debt increased 3X faster than the economy,
domestic financial sector debt soared nearly 4X and what the
Federal government extracted from Trust Funds now stands at $2.6
trillion.
Foreign interests own about $8 trillion of US assets, including
13% of all stocks, 24% of all corporate debt, 43% of US government
debt and 14% of US Agency Debt (i.e. Fannie Mae).
It's a Depression
A depression
is far more severe than a recession. A depression takes a great
deal more time to shed all the imbalances in the economy. "A
depression involves the capital goods sector of the world economy
and the illiquidity occurs or becomes apparent in the far more
critical (and enormously larger) area of long term credit. A
depression is worldwide because it is also a result of the illiquidity
in the international debt system. Excessive inventories of consumer
goods and illiquidity in short term business and consumer credit
can generally be worked off in a relatively brief time, without
excessive or prolonged distress. But over-investment in capital
goods, which includes large buildings, factories and specialized
technologies and entire transportation and communication systems,
takes decades to develop, and excessive inventories of capital
goods quite obviously require a number of years to be absorbed
or consolidated" The Donald J. Hoppe Analysis, October 1982.
Thus, a Kondratieff winter is characterized by an overcapacity
in basic industries on a worldwide basis, over-investment in
the capital goods sector, severe illiquidity at every level of
the financial system and a massive and intolerable debt burden.
These conditions have always led to financial panic and economic
depression. "Illiquidity in long term credit and international
debt is the result of an entire generation's errors, excesses
and follies and consequently takes a long time to correct."
Hoppe, Donald, The Donald J. Hoppe Analysis, October 18, 1982.
Alan Greenspan,
"The Greatest Central Banker of the Century."
What Mr. Greenspan
says we are experiencing is simply a series of mild recessions.
Because inventories have been declining, he thinks that is a
sign that the economy is on the mend. If only it was that simple.
How can it be any different this time when the imbalances are
more acute than they have ever been in history?
"Greenspan declares U.S. recession over." "Economy
already growing, says Fed chairman, buoyed by week's positive
data," trumpeted Canada's Globe and Mail Report on Business
on Friday, March 8, 2002. The Federal Reserve Chairman himself,
appearing before the House Banking Committee the previous day,
had said, "The recent evidence increasingly suggests that
an economic expansion is underway." Really? The evidence
suggests to the contrary. Very little of the excesses built into
the economy throughout the Long Wave autumn have been exorcised,
and the debt, far from being reduced, has continued to expand.
"This recession has corrected nothing, because the Fed fought
the powers of correction tooth and nail. Thus, the real corrections
in the economy lie ahead." Richard Russell, www.dowtheoryletters.com
It is amazing to me that so many people who should know better
continue to heap accolades upon Alan Greenspan. Senator Phil
Gramm (R-Texas) recently called the Federal Reserve Chairman,
"the greatest Central Banker of the Century." If this
kind of adulation were not so stupid it would be comical. It
must create in the mindset of the Chairman that he is omnipotent
when it comes to the economy. It is something akin to the English
Stuart Kings, who were adamant about their belief in the ëdivine
right of kings'. Charles 1 was executed by Parliament after he
had been defeated in the English Civil War and James II was ostracized
from England, after the 'Bloodless Revolution'. If Alan Greenspan
suffers the same fate of James II, perhaps Queen Elizabeth will
welcome him to England, where she has conveyed on him an honourary
knighthood in consideration of his outstanding efforts as the
world's most important central banker. When this Kondratieff
winter has reached its coldest and bleakest moment, Sir Alan
Greenspan will be vilified by those who have borne the brunt
of his grandiose fiat experiment. It has been an abysmal failure
and one that will bring severe financial distress to many Americans
and to millions of others around the world.
Upbeat Official
Pronouncements
Now the President
believes too, or at least he purports to believe, that everything
is on the mend. "I am optimistic about our economy, and
I should be. The fundamentals are strong. Interest rates are
low. Monetary policy is sound," he declared to worried Americans
on August 5, 2002. And in a moment of New Year's Eve cheer, the
President said "our economy is strong, it's resilient; we've
got to continue to make it strong and resilient." I guess
that is why he had to unveil his latest stimulus package on January
7, 2003. Sounds like Herbert Hoover who, immediately following
the stock market crash in October 1929, said, "the fundamental
business of the country, that is production and distribution
of commodities, is on a sound and prosperous basis."
Several other official pronouncements have downplayed the seriousness
of the situation, whether by design or ignorance is unclear.
What is clear however is that the Federal Reserve Board is hugely
concerned. The rapid reduction in interest rates, 12 in total
so far, and the gigantic increase in the money supply is evidence
of panic in that quarter. Maybe, just maybe, Alan Greenspan truly
believes that these monetary and fiscal efforts have saved the
day, but the latest events such as the recent stock market woes,
rising bankruptcies and declining consumer confidence must be
sufficient to reestablish his concern that the economy is once
again in a downtrend.
Federal Reserve
Actions to Offset Deflation
The Federal
Reserve has only two means at its disposal to re-ignite the economy.
These are a reduction in interest rates and an increase the money
supply. These methods have always worked in the past, that is,
at least as far back as the last depression. But of course that's
precisely where the economy is once again and that is why it
is not working and why it will not work. The Federal Reserve,
through these actions, creates the conditions whereby there is
plenty of money available to borrow and the borrowing costs are
cheap. But it is the banks that must consent to lend the money
and it is consumers and corporations that must express a desire
to borrow. Neither of these conditions prevails now. Banks are
already substantially increasing their loan loss provisions as
countries, corporations and consumers renege on their respective
debt obligations and prospective borrowers have limited borrowing
room remaining. "Considering, however, what has actually
happened during the recovery to resource allocation, jobs, profits
and general indebtedness, it is a compelling conclusion that
the U.S. economy is in even worse shape today than a year ago
when the recovery began." The Richebacher Letter, January
2003.
Contrary to
popular belief, the Federal Reserve acted with similar vigour
to that currently demonstrated by Alan Greenspan, to arrest the
decline in the economy in the early 1930s, but to no avail. "If
the Federal Reserve had an inflationist attitude during the boom,
it was just as ready to cure the depression by inflating further.
It stepped in immediately to expand credit and bolster shaky
financial positions. In an act unprecedented in its history,
the Federal Reserve moved in during the week of the crash-the
final week of October-and in that brief period added almost $300
million to the reserves of the nations' banks." Rothbard,
Murray, America's Great Depression, P.191.
Not only did
the Central Bank inject massive amounts of dollars in the banking
system, but it also dramatically lowered interest rates in an
effort to re-start the economy. The rediscount rate was lowered
from 6% to 4.5% in the space of three weeks into the bottom of
the stock market crash, which ended in mid-November 1929. By
the end of 1930, the rate was lowered to just 2%. By mid-1931
the rate was down to only 1.5%. At the same time, as the depression
deepened the Federal Reserve frantically tried to inject money
into the ailing banking system, but to no avail as desperate
savers rushed to convert their deposits into cash and gold to
be held outside the bank. During 1931, "The Federal Reserve
tried its best to continue its favorite nostrum of inflation-pumping
$268 million of new controlled reserves into the banking system."
Ibid, P.231. As we well know these aggressive fiscal and monetary
actions on the part of the Federal Reserve at that time failed
to arrest the Great Depression. Given the magnitude of the debt
problem at the onset of this Kondratieff winter, it is unlikely
that similar actions that have already been instigated by Alan
Greenspan will prove successful in thwarting the deepening Kondratieff
winter.
"Alas, regardless
of their doom, the little victims play"
What is so
surprising to me is how sanguine people appear to be about the
financial events that are now unfolding. Their memories of the
good times have not been dulled by a growing financial catastrophe.
They view every bankruptcy as a one of a kind and are incapable
of linking one to another. They see three down years in the stock
market as an almost sure thing that the year 2003 will be an
up year. "American investors still have faith. Not even
the dismal economy or last year's 24% plunge in the S&P 500
has shaken their staunch confidence in the US stock marketÖMore
than 60% believe the S&P will be higher at the end of 2003
than at the end of 2002, while 10% expect it to be around the
same level." The F.T. Thursday January 9, 2003. After all,
the last time that there were four down years in succession was
so long ago. Let me see when was that? Of course that was in
1929,1930, 1931 and 1932, which of course just happened to forecast
the greatest depression in US history, but they just cannot see
the parallel. The latest Intelligence Investors poll (Late December
2002) shows bullish stock market advisors at 49.9% versus only
26.5% in the bearish camp. Think on this for a moment: the Japanese
stock market recently touched lows not seen since 1983 and at
that time the Dow Jones Industrial Averages were trading somewhere
between 1100 and 1200 points.
It's the impending war with Iraq, of course, that is keeping
the stock market from rising. "Our view is that stocks are
being affected by war talk. If it weren't for all the hand-wringing,
stocks would be off to the races." Tim Hayes, Global Strategist
for Ned Davis Research as reported by Richard Russell www.dowtheoryletters.com
December 27, 2002. (I emphatically endorse Mr. Russell's work
to all my readers). Anyway, the war will be over almost as soon
as it has started, or so they think, and then investors can turn
their attention back to the business of making money in the stock
market. But the bear market has nothing to do with the war, it
has everything to do with the astounding excesses that were built
into the economy throughout the Kondratieff autumn and particularly
at its cusp. This includes absurd valuations in stocks which
were explained as they always have been by the mantra, ëthis
time it is different;' a huge mal-investment in all industries
and in particular telecoms and the internet; an oversupply of
all goods and services; unconscionable greed; a spate of ridiculous
mergers and acquisitions that did nothing to enhance business
but simply overburdened corporations with debt; stock buy backs
which added more debt, but enhanced the value of executive options;
and debt burdened consumers, beguiled by huge profits in the
stock market and easy lending practices at the banks.
It is not that difficult to understand why most people have no
inkling of what lies ahead. Times have been so good for so long.
America has been on a tear since the end of the Second World
War. She has been the most prosperous and the strongest military
power in the world. Sure there have been recessions, but the
last one of any consequence was between 1981 and 1982. Not many
of us even remember that. Nor do many of us remember that the
US military might was beaten in Viet Nam. But, all in all, things
have been very good in America for more than 50 years, or at
the dawn of the present Kondratieff cycle in 1949. Why would
not the average American believe that nothing has changed and
that the good times are still here, just interrupted by a temporary
blip? Unfortunately, those good times were created through excessive
debt. But the good times are over and America now faces a devastating
deflationary depression, which is likely to create violent social
unrest. The American people have been imbued with a feeling that
they have a perpetual right to wealth and good times. Unfortunately,
many will become destitute, leveled by an overwhelming debt burden.
Current sentiment is reminiscent of that which prevailed in 1930.
"Down to the last weeks of 1930, Americans could still plausibly
assume that they were caught up in yet another of the routine
business-cycle downswings that periodically afflicted their traditionally
boom-and-bust economy." Kennedy, David. Freedom from Fear,
the American People in the Depression and War, 1929-1945. Oxford
University Press. P.65. Most Americans are still spending as
if what has just been experienced is a mild hiccup in an otherwise
booming economy and they are adding to their debt as a means
to support their excessive spending habits. US corporations having
reduced their inventories are starting to rebuild them in anticipation
of renewed consumer purchases. The stock market is reflecting
this hope of an economic recovery and is performing much as it
did following the first bottom in November 1929.
From the price
lows, which were reached on November 13, 1929, stocks advanced
into the spring of 1930. By April 1930 Steel was once again nudging
$200 and American Telephone and General Electric had almost reached
their pre-panic highs, "Stock-market-minded businessmen
hoped and half believed that this was but a temporary trouble:
did not the graphs of security prices on the financial pages
show an encouraging uptrend?
Many corporations increased their dividend rates; the total amount
of money paid out in dividends was only three percent less in
1930 than in 1929. New investment trusts were coming to birth,
and the pattern which prevailed among them hardly suggested any
widespread doubt in the resumption of old-style prosperity; for
most of them were "fixed trusts."Tom, Dick and Harry
were cheerfully buying participations in these curiously rigid
trusts. Why shouldn't they? They knew enough economics to know
that business ebbed and flowed in cycles; if you knew economics,
you knew that the time to buy was after a panic, and that it
was the leading corporations of the country that were likely
to prosper most in the bull market of the 1930s." Allen,
Frederick Lewis. The Lords of Creation. Harper Brothers, New
York, 1935. P.400. But things were not back to normal and the
economy was not about to improve. It was barely holding its own
and was well below the levels of 1929.
In the Globe and Mail, Report on Business section, dated December
28, 2002, a front page headline reads "Dundee Wealth to
buy IPC for $120 million." It transpires that the new company
will manage about $23 billion in assets and have more than 1,300
financial advisors across Canada managing this money. Obviously,
Dundee Management is bullish and is gearing up for the onset
of a new bull market. However, the Kondratieff winter is a time
of massive financial adjustment and the problems are far too
immense to be solved in the normal course of events or corrected
by the usual central bank strategies.
"Farewell
house, and farewell home" Richard Crashaw
Unfortunately,
Sir Alan has simply created another bubble. The stock market
bubble has burst, but he has induced the real estate bubble through
his ability to print money. Because the real estate bubble has
been pumped up by debt, it too must burst into the Kondratieff
winter. Investors caught up in this latest bubble are completely
oblivious to it, just as those that were duped by their apparent
investment prowess at the peak of the stock market were oblivious
to its ridiculous over-inflated characteristics. It is likely
that many investors now buying into the real estate bubble, through
new purchases, upgrading to more expensive homes or refinancing
existing homes are the same as those that were caught in the
loss of $8 trillion since the stock market peak. It is unfortunate
that they fail to understand that real estate is now in a similar
position to stocks at their peak. From this lofty level, home
prices can only go down. Real estate cannot be immune to the
overall health of the economy and the Kondratieff winter anticipates
a deflationary depression at least on the scale of that experienced
in the previous Kondratieff winter.
Not long ago the newspapers were full of stories about the booming
Toronto real estate market. One such story was about a couple
that had accumulated some savings and did not want to miss out
on the market. They purchased a home after a cursory visit and
the following day could not remember any details of the house
that they had bought. Another story discussed a dozen real estate
agents in their BMWs lined up outside a home anxious to make
a commission by making the sale. And yet another story told of
a real estate agent who put in an offer to purchase a home well
above the asking price. The bank rejected the mortgage application
on the grounds that the house could not be appraised at such
a lofty value, but lent the agent the difference through a demand
loan.
I recently returned from a short golfing holiday in Phoenix.
My host has a property within a gated community just north of
Scottsdale. There are 5 different spectacular golf courses situated
in this large community. He told me that several investors had
purchased large lots here for as much as $3 million at the stock
market peak. Now, many of these lots have been put on the market
for $2 million, but are not selling. He also told me that there
were more than 400 expensive houses on the market in the community,
but they were just not selling. I was also told that houses in
Phoenix and Scottsdale priced above $300,000 were also not selling,
whereas below that price there was still a brisk market.
In 1951, approximately 13.9% of household expenditures were allocated
to housing costs. By 1995, that number had almost doubled to
26.8%. Today, according to Martin Weiss, "many homeowners
spend more than 50% or even more of their take home pay on their
mortgages" and mortgage delinquency rates are hitting record
highs.
Meanwhile, homeowners have been taking the equity value out of
their homes, beguiled by low mortgage rates. In 1940, average
home equity was at 85%. By 2001, average equity had plunged to
only 55%. Of course this is only an average. There are many US
homeowners with little or no equity in their homes. When prices
begin to fall, and they will, this paltry ownership will soon
turn to a negative equity, which is going to create all kinds
of problems if the owners cannot meet their mortgage payments.
These payments will become crippling as unemployment grows. Or,
when the housing market starts to incur losses similar to the
stock market, limited home equity will become an excessive and
frightening burden to the owners. It is somewhat like being margined
to the hilt in the stock market at the peak in prices.
The bursting of the real estate bubble has begun.
Implications of
the Coming Depression
What is the
likely outcome of this coming depression? Using the last Kondratieff
winter as a guide, here are some of the possibilities. Remember
that the excesses at the peak of this Kondratieff autumn were
far greater than they were at the peak of the last Kondratieff
autumn. That includes debt, the stock market, the real estate
market, greed and dishonesty. The payback is likely to be horrendous.
· The worst bear market in stocks since the 1929-1932
bear market (the previous Kondratieff winter bear market) and
possibly worse even than that one. "We've entered a bear
market that's so big, we haven't had anything like it since the
1700s, and that was a 64-year corrective process. " Robert
Prechter and Adam Levy in Bloomberg News, 24th Dec. 2002. Repeating
the 1929-1932 winter bear market experience could take the DJIA
to 500.
Huge losses in real estate. Heavily mortgaged homes and apartments,
industrial complexes, shopping centers and office towers are
likely to experience significant losses in value as they did
in the last depression. "By the time this whole thing is
over, you'll be able to buy your favorite neighborhood mansion
from the bank at 10 cents on the dollar." Ibid. Many buildings
will be left only partially built and boarded up. Donald Hoppe
says that in Chicago, following the 1929 crash, not one new office
tower was started until 1955.
Massive unemployment. At the peak of the last depression more
than 25% o the American workforce was unemployed. This will mean
a significant increase in the number of homeless people and street
beggars.
Serious banking problems, including banking runs and failures.
The huge debt problem is a banking problem. The Japanese experience
is a good indication.
Decimation of professional sports. The huge player and management
salaries of the past few years cannot hold in a Kondratieff winter.
Many professional sports teams will be bankrupted (The Ottawa
Senators and Buffalo Sabres are just the beginning), and professional
leagues will be considerably downsized. Tiger Woods will not
be able to command $2 million appearance fees, purses for golf
tournaments will be considerably smaller, and sponsors will not
renew their agreements, resulting in fewer golf tournaments per
year.
Government Debt: In 1929, the US was the largest creditor nation
and the federal debt was a paltry $16 billion. Now however the
official debt is almost $6.4 trillion, which added to all to
off-budget debt, which includes social security, probably transcends
a Federal Government liability in excess of $10 trillion. State
Governments are also starting to feel the pinch. The lead headline
in The Arizona Star on January 2, 2003 was "States Destitute."
The article went on to describe the desperate plight faced by
many of the US states as revenues fall and expenses rise. This
must ultimately mean higher taxes.
Major civil unrest. People will not countenance poverty after
the extreme feelings of wealth experienced at the end of the
Kondratieff autumn. During the 1930's there was some civil unrest,
especially on the part of some war veterans who built a shantytown
in Washington, until they were routed by General McArthur. At
that time, far fewer Americans were invested in the stock market
than in 2000, personal debt was considerably less than it is
now, and most Americans did not have official retirement plans.
All this sets the stage for a much more angry citizen after the
losses take their toll.
Infringement on individual liberty. It is very likely that governments
will escalate this process in an effort to curtail anti-government
protests.
Curtailment of municipal services, due to the cost. This includes
public transportation, garbage collection, police and fire services,
and maintenance of parks, streets and other public works.
Secessionist movements on the part of some States and some Canadian
Provinces, particularly in the West, as Federal dictates become
too overbearing.
Trade Wars. The desire to protect inefficient industries in the
face of a deepening depression becomes of paramount political
importance, just as it was in 1931 when President Hoover signed
into law the Smoot-Hawley Act, which imposed a host of ruinous
duties on imported foreign goods. President Bush has already
started down the road with agricultural subsidies to US farmers,
steel tariffs on foreign imported steel products, duties on Canadian
softwood lumber and, currently under review by the United States,
the actions of the Canadian Wheat Board in support of Canadian
grain prices. Free Trade agreements notwithstanding, the US has
a record of simply making up the rules to suit itself.
I have listed these possibilities to convey to you that something
very different and far more drastic is likely to occur in our
immediate future; something of which we have no experience, but
something for which we must be prepared.
The Depression
Presidents - Bush & Hoover
Calvin Coolidge,
President Hoover's predecessor, decided that one term in office
was enough, even though he had presided over the most prosperous
period in American history.
Coolidge's presidency was witness to, at least up to that point
in time, the greatest bull market in stocks in American history.
That record was to be shattered in the subsequent Kondratieff
autumn during the two-term presidency of Bill Clinton.
In his last State of the Union address to Congress on December
4th, 1929, the outgoing President reflected that, "No Congress
of the United States ever assembled, on surveying the state of
the Union, has met with a more pleasing prospect than that which
appears at the present time. In the domestic field there is tranquility
and contentment and the highest record years of prosperity. In
the foreign field there is peace, the goodwill that comes from
mutual understanding. Regard the present with satisfaction and
anticipate the future with optimism."
On that record, why would the President not seek another term?
Probably because his private thoughts differed from his public
pronouncements. When his wife Grace was asked why her husband
wanted to leave the White House amidst this period of great prosperity
she replied, "Poppa says there's a depression coming."
Sobel, Robert. The Great Bull Market, Wall Street in the 1920s.
P.118.
In his acceptance speech as nominee for the Republican Party,
Herbert Hoover said, "We in America today are nearer to
the final triumph over poverty than ever before in the history
of any land." He was shortly to be disabused of his lofty
prediction. Following his inauguration, it took only six months
for the stock market to peak and the Great Depression to start.
This threw millions of Americans into the very poverty that Hoover
had anticipated would be eradicated. Unlike his predecessor,
Calvin Coolidge, Hoover's one term in office was not a matter
of choice.
Like Herbert Hoover, George W. Bush assumed the presidency at
the end of the Kondratieff autumn. At the time of President Bush's
inauguration, the great bull market was almost at its peak. Affluence
in America was pervasive. Money flowed, just as it had done in
1929, from every corner of the earth to participate in the great
American miracle. Unfortunately, the Kondratieff winter has now
overtaken President Bush. The affluence, built on a mirage of
debt, and the flows of money from foreign sources are evaporating,
just as they did after the stock market crash in 1929. President
Bush is faced with a depression that will be at least as severe
as that which faced Herbert Hoover--a depression that robbed
the competent Hoover of a second presidential term. George W.
Bush is likely to suffer the same fate. No mercy is shown for
those in power at the onset of a Kondratieff winter.
The Case For Gold
I want to leave
my readers in no doubt that gold is the absolute investment
of choice during the Kondratieff winter. At this time, there
appears to be considerable doubt that this is so. This disbelief
in gold is primarily due to the fact that throughout the Kondratieff
autumn gold has been in a bear market. This bear market lasted
from 1980 when gold reached a record high price of $850 per ounce
(the end of the Kondratieff inflationary summer) to 2000, when
gold dropped to $252 per ounce (the beginning of the Kondratieff
winter). Every gold price rally during those 20 years was a bear
market rally, and every gold stock rally was a short-lived phenomenon.
Thus, for 20 years investors have been conditioned into believing
that gold is a very poor investment medium and that they should
put their money into stocks. That belief continues to this day
even though stocks have been in a vicious bear market and gold
has been in a blossoming bull market.
When stocks are very high priced compared to gold, it's time
to sell stocks and buy gold. This always occurs at the end of
autumn.
During the Kondratieff autumn, paper investments, like stocks,
bonds and real estate, are always the investments of choice.
Indeed, during this season these particular investment mediums
reach outrageous prices by autumn's end. In such an investment
environment there is absolutely no reason to own gold. But when
the Kondratieff winter begins with the peak in stock prices (2000
and 1929), gold becomes the investment of choice, because the
outlandish excesses in autumn lead to severe financial distress
and monetary chaos. Allow me to show you.
Distress in the
banking system
As the depression
got underway following the crash in stock prices in 1929, the
US banking system all but collapsed. Bank failures spiraled into
1933. Shortly after he had assumed the presidency in March 1933,
Roosevelt ordered the closing of all banks so that federal inspectors
could determine which banks were solvent and which were not.
Those that were deemed insolvent were forced to close and the
depositors' money was lost. There was no deposit insurance at
that time. The banking failures caused a run on even solvent
banks, as depositors were fearful that their savings would be
lost. Much of the money taken out of the banks was converted
to gold.
The current crisis in the Japanese banking system is an example
of how the excesses of the Kondratieff autumn play havoc on a
country's banks. When the Japanese autumn turned to winter in
early 2000, 8 of the 10 largest banks in the world were Japanese.
Now only one Japanese bank carries that distinction. What are
the Japanese people doing to protect themselves from their enormous
banking problems? They are buying gold..
So size by itself is not a protection against bad loans. Large
banks have large loans on the books. Many of these loans will
turn bad as the Kondratieff winter gets underway. Do not think
that American banks are in some way immune to the ravages of
winter. The enormous debt amassed during the US autumn is frightening
and its effect on US Banks is likely to be just as devastating
as has been the Japanese experience. For many US banks the debt
mountain is not the only issue that must be addressed in winter;
huge derivative positions are also likely to add to banking woes.
Americans, mindful of the ravages of winter, are increasingly
turning to the security of gold.
Failure of Paper
Money
History is
replete with stories of government induced paper money systems,
all of which have failed. The dollar system, which was imposed
on the world at Bretton Woods in 1944 and which became a pure
fiat system in August 1970, when President Nixon closed the ëgold
window' is now in the process of failing.
In my essay entitled "The War on Gold' published in September
1999, I introduced my readers to three more recent paper money
experiments, all of them failures. These failures all resulted
in a return to the stability of gold as a backing for money.
These three paper money experiments were the 1787-1796 French
Assignat, the 1775-1792 Continental Dollar and the 1796-1810
fiat Pound Sterling. In 1810, the British Parliament appointed
the Bullion Committee to ascertain why the price of gold had
risen during the fourteen years when the pound had been de-coupled
from gold. The Committee reported; "Inflation is an increase
in the money supply. To restrict inflation you look to the note-issuing
authority, whether it is a central bank or a government mint,
and restrict note issue. The only effective restriction of note
issue, in light of experience, is convertibility into specie
such as gold and silver." Following its experiment with
paper money, Great Britain returned to a gold backed-pound. Its
leadership in that regard provided for world monetary and financial
stability which endured for more than one hundred years; that
is, to the outbreak of World War I in 1914.
Since the introduction of the fiat-based dollar system, there
has never been a time when the world has experienced a stable
currency environment. The dollar system has allowed the United
States to take unfair advantage of other countries by constantly
being indebted to them. This level of indebtedness is no longer
sustainable. Foreigners must send back $2 billion per day to
the United States just to sustain its unquenchable thirst for
money. Last year the US, with 5% of the world's population, accounted
for 70% of the world's debt. Every year the US consumes more
than 75% of the capital that is available to the entire world.
This voracious appetite for money is starving the rest of the
world, which is unconsciously financing America's huge military
requirements, which at $350 billion per annum is larger than
the military budgets of the next twelve countries military expenditures
combined. Clearly this cannot go on. As the US debt bubble continues
to unwind during this Kondratieff winter, foreigners will no
longer want to hold dollars and the US fiat currency regime will
be over. What will replace the fiat dollar? It can only be gold,
because all other currencies are only paper, too. "These
paper-versus-gold battles have been fought before. The stark
fact is that paper currency and debt money have never emerged
triumphant in a straight, head-on battle with gold. Why not?
Because gold has tangible worth and is limited in supply. Paper
has negligible tangible worth and is unlimited in supply."
Sutton, Anthony, The War on Gold, page 157-158.
Collapse of the
Monetary System
In conjunction
with the failure of the fiat dollar system, the world monetary
system based on the dollar will collapse. The US is facing financial
catastrophe brought about by excessive use of the printing press
to manufacture a mountain of debt. The debt bubble is now in
the initial stages of collapse. When the world understands the
magnitude of the impending disaster, the abandonment of the US
dollar will reach panic proportions. This will drive up US interest
rates, which will add to the financial maelstrom. The worldwide
abandonment of the dollar will in turn lead to panic buying in
gold, which will, fulfill its traditional function as money of
last resort.
In the previous Kondratieff winter, which started with the collapse
of US stock prices in 1929, the world monetary system, based
on gold, collapsed, following Great Britain's abandonment of
gold in September 1931. The simple reason for the failure of
the monetary system at that time was because it was too restrictive.
At that time governments were unable to print excessive amounts
of money to fight the growing economic calamity. It is for exactly
the opposite reason that this Kondratieff winter will see the
collapse of the international monetary system. A paper money
system imposes no restrictions on the amount of money that can
be produced. Unfortunately, the US has taken maximum advantage
of that prerogative, and as a result has created an enormous
debt bubble, which will now collapse into the Kondratieff winter.
This collapse will lead to the disintegration of the world monetary
system, based on the dollar.
Gold in Deflation
It is not my
intention here to get into the interminable argument as to whether
the US faces a period of inflation or deflation. I have made
my point in most of my past issues that the Kondratieff winter
is always the season of deflation because debt is deflationary.
And there is far too much debt in the US. "I'm very much
afraid that the US is going into a state of deflation. The bonds
are telling me that. The economic statistics are telling me that.
My insides are telling me that. The US has accumulated too much
debt. The US has accumulated more debt than it can handle. The
situation looks increasingly as though the debt mountain is about
to fall over. If it does, we will have deflation" Richard's
Remarks, January 8th 2003 @www.dowtheoryletters.com.
The Federal Reserve is gearing up to fight deflation and has
put the dollar printing presses on maximum output in an effort
to overcome it. Alan Greenspan admitted as much when he addressed
the Economic Club of New York on December 19, 2002, "Moreover,
a major objective of the recent heightened level of scrutiny
is to ensure that any latent deflationary pressures are appropriately
addressed well before they become a problem." The entire
financial system is jeopardized by an overwhelming debt burden
which collapses into deflation. This collapse causes a panic
to own gold.
Scarcity of Gold
In the paragraphs
above I have cited many reasons as to why gold becomes the money
of choice during a Kondratieff winter. I have shown that the
winter is a time of acute financial distress. I have suggested
that in if the dollar system collapses, and there are compelling
reasons to believe that it will, there will be a worldwide panic
to buy gold. But gold and gold equities are very scarce and massive
buying of the monetary metal will have a huge positive impact
on price and will dramatically drive up the price of the few
companies that mine gold and the few companies that explore for
it.
The following chart shows the relative values of different asset
classes at the peak of the world's stock markets at the end of
1999. The value of gold and gold equities were miniscule as compared
to stocks. They still are.
Even now, there
are more than a dozen US companies that have market capitalizations
larger than the combined value of all the gold companies.
Climbing a Wall
of Worry
According to
Financial Research Corp, a Boston Based Research firm, US investors
added $612 million to gold funds in 2002 after withdrawing $9
million in 2001. Gold funds had net assets of $3.2 billion at
the end of November 2002, or 1% of the $2.8 trillion in stock
funds. Even though gold funds have been the top fund performers
in the US the past two years, the skepticism still remains. Vanguard
Group has barred new investment in its gold fund, the second
largest, since June 2002. Rebecca Cohen, a Vanguard spokesperson,
said, "we were very afraid that investors were chasing performance."
She alluded to the returns of gold funds during the mid 1990's
as justification for Vanguard's policy, citing the fact that
the average gold fund rose 9.5% in 1995 and 1996, only to drop
48% (post-Bre-X) in the next two years. Ms. Cohen said that Vanguard
has no plans to re-open the fund. First Eagle SoGen Gold fund
surged 105% in 2002, and the average gold fund appreciation was
64% in that year, but investors still maintain their fascination
for investment in all other equities. "Since 1926, the S
& P has returned 10.6% annually, 4.8% better than corporate
bonds and double the return of government bonds. I see no reason
to believe that that's going to be any different in the future.
Equities look extraordinarily attractive right now compared with
bonds." Straszheim, Donald. President Staszheim Global Advisors,
Los Angeles, July 22, 2002.
In spite of the major increases in price in gold and gold equities
in 2001 and 2002 and the corresponding bear market in all other
stocks, very few investors are convinced on either score. This
is a contrarian's dream. As most of you will know, every bull
market climbs a wall of worry, at least in the initial stages,
and so it is with gold. In the Globe and Mail, Global Investor
section, written by Rob Carrick dated Saturday, January 11, 2003,
the main article headline reads "In Search Of This Year's
Midas Touch." "Precious metals funds were golden in
2002, producing big returns in an otherwise lackluster year for
mutual funds. The category might not shine so brightly in '03,
but there could be treasures in other sectors." This is
the same Rob Carrick, who in the same paper wrote on January
2, 2002, "What's the best financial move you can make for
2002? Get into stocks now. That's now, as in immediately. If
you don't, you could miss out on as near to a surefire win as
there is in the ever unpredictable world of investing."
The current
article interviews several mutual fund analysts, none of whom
pick a gold fund as an investment of choice in 2003. "Still
game to try precious metals funds? Then limit your exposure to
5% of your portfolio and get ready for an exceptionally volatile
ride." Ibid
It is time to remind readers that it took 25 years (1954) for
stocks to regain the price level that they had reached at the
peak of the autumn bull market in September 1929. Investing for
the long term at the beginning of a Kondratieff winter is financial
suicide. But, the so-called experts still do not get it. No wonder
the average investor is so confused. Gold stocks have outperformed
all other equities the past two years but few advisors recognize
that fact. Even if they do, they somehow expect that this out-performance
will be reversed during 2003. It is a pity that they fail to
understand that the seasons have changed. The Kondratieff winter
is a time to seek the safety of gold, and not a time to be invested
in paper assets, all of which are based on a mountain of debt.
Robert Prechter's
Gold Price Target - $200
Some gold investors
are concerned because Robert Prechter of Elliott Wave fame is
calling for gold to fall to $200 per ounce. Normally, I would
pay attention to anything that Mr. Prechter has to say, but his
stance on gold is clearly incorrect. He argues that if the gold
price had not been fixed during the last depression it would
have fallen like the price of all commodities, including silver,
on account of a reduced demand. This was of course true for all
other commodities, but gold in the Depression took on its historical
role as money of last resort. In the early 1930's, the demand
for gold was enormous, based on distrust for paper money and
a rising tide of bank failures. So large was the demand that
Secretary Treasurer Lamont informed President Hoover, towards
the end of his tenure, that the US would soon run out of all
its gold. Roosevelt assumed the presidency in March 1933, and
immediately ordered the confiscation of all gold that US citizens
had amassed, so as to replenish the US Treasury.
Indeed, one might argue that had the price of gold not been fixed,
its price, based on this huge demand, would have risen considerably.
In his book Conquer the Crash, which I encourage you to read,
Prechter writes, "I suspect that the reason that people
bought gold then (early 1930's) is that the US government had
fixed the price, at $20.67 per ounce. While everything else collapsed,
gold was soaring in relative value, and its value gains were
guaranteed. Who wouldn't buy it? If the government had fixed
the price of any other substance, people would have invested
in that instead. Today, gold, like silver in the 1930's is free
to trade at market price, which means that it can go down during
a dollar deflation." But what we are now witnessing is a
dollar deflation, and the gold price far from falling is rising.
It is true that gold was soaring in relative value to all other
commodities. If the government had fixed the price of, say, steel,
would everyone have rushed to buy steel ingots? The gold price
was fixed because it was money and convertible into paper dollars
at the fixed price of $20.67. People and countries exchanged
their paper dollars for gold coins, simply because gold was money.
By the way, it still is money.
Though it is very early into this winter cycle, gold is already
being accumulated by knowledgeable and concerned investors. Just
as people like Bernard Baruch, began to purchase gold and gold
mining shares following the 1929 stock market crash. The gold
price is rising because demand is increasing all over the world.
On January 9, 2003, Ron Insana reported on CNBC, "a gold
dealer that he has known personally for a long, long time recently
told him that throughout his entire career (the dealer's) he
has never seen so many high net worth people buying so much gold."
Reported in Richard Russell's Remarks on January 9, 2003.
As the international financial crisis unfolded following the
Wall Street crash in October 1929, investors moved through a
five-stage investment strategy in search of safety. Allow me
to review these stages for you, courtesy of Donald Hoppe.
1 .
A flight from questionable securities into strong securities
The
flight from the Nasdaq stocks to the comparative safety of the
Dow stocks has already taken place. Eventually, of course, all
US stocks will fall to price levels that most investors cannot
fathom. Similar flights have taken place out of most foreign
stock markets, the German Dax being a good example.
For a time, the beneficiary of this foreign decline in stocks,
particularly in Europe and Japan, was US stocks, but that all
came to an end in 2000. Investment money is now being attracted
to some relatively obscure foreign stock markets and US Treasury
bonds, which are perceived by many as the ultimate in quality.
2. Intense
liquidation of inventories and commodities
The
process of inventory liquidation has been vicious and has resulted
in price deflation for many products. While some commodity prices
have increased, others have declined. The prices for grains have
increased, because of extreme shortages caused by drought conditions
in the principal grain-growing regions of North America. Oil
prices are high, because of the threat of war in Iraq and political
uncertainty in Venezuela. Some metal prices remain relatively
high, copper for example, because of demand in China. On the
other hand lumber prices have collapsed in anticipation of major
slowdown in homebuilding in the US.
Once the worldwide depression gets underway, the price of all
commodities are likely to collapse, as they did during the Asian
crisis in 1997. At that time oil prices dropped to $10 a barrel.
3. Liquidation
of commercial real estate, houses and farms, both through foreclosures
and sacrifice sales at a fraction of former values
This
is well underway in Japan and other Asian countries, including
Hong Kong, where home prices have dropped by more than 70% since
their peak in 1997. It is in the early stages in North America.
Farm and commercial real estate prices are already in decline.
Rental rates are falling too, as vacancy rates increase throughout
all the major US cities. For example, vacancy rates in Denver
have increased from 14% to 22.3% in the year ending the 3rd quarter
2002. Meanwhile, home prices have peaked and prices for top-end
homes are beginning to fall. Generally, real estate prices continue
to appreciate, following a major stock market peak. In Japan
prices continued higher two years after the peak in the Nikkei
at the end of 1989. Thereafter, prices fell dramatically. The
real estate market in the US cannot continue to defy the reality
of the economy.
4. Flight
from banks into cash and gold
In
1929, 659 US banks failed. In 1930, at least through October,
approximately the same number shut their doors. Then in the final
60 days of the year, with a sickening suddenness, another 600
banks were suspended, bringing the annual total to 1352. As the
failures intensified, "mobs of shouting depositors shouldered
up to tellers' windows to withdraw their savings." Freedom
From Fear, p.66. In 1931, another 2294 US banks failed. When
these depositors withdrew their savings, not only did they take
cash (paper money), but they also took out gold, which at that
time be converted from paper money at a fixed price of $20.67
per ounce. Of course gold can be purchased today, but the price
is not fixed and it is rising in the face of increasing demand.
5. A
flight from cash into gold
As
the banking failures intensified and the gold standard monetary
system began to crumble, initiated by Great Britain's repudiation
of gold in September 1931, the move from cash to gold became
a stampede; so much so, that the US was on the verge of running
out of its official gold holdings. As a result, in 1933, the
US was forced off the gold Exchange standard system, and confiscated
private gold holdings, to replenish depleted reserves.
The Inverted Financial
Pyramid
John
Exter, a past member of the Federal Reserve Bank, has been a
gold advocate for most of his business life. I have kept some
of his writings and treasure them. It was John Exter who called
the fiat dollar 'an iou nothing.' A long time ago, I saw a copy
of his inverted pyramid chart, which he had constructed to indicate
the relative degrees of liquidity in financial assets during
a deflationary collapse, which he believed inevitable in a fiat
money system. I wished I still had that chart; lo and behold,
in his January 2003 issue of Gold and Technology Stocks, my good
friend, Jay Taylor, used John Exter's chart, which I have reproduced
here. "As you work your way down the pyramid from top to
bottom, you encounter increasingly liquid assets. The only asset
on the pyramid that retains intrinsic value and liquidity, no
matter what happens through any and all circumstances is gold."
Ibid
Small
Business
Real Estate
Diamonds/Gemstones
OTC Stocks
Muni Bonds
Corporate Bonds
Listed Stocks
Government Bonds
Treasury Bills
Cash
Gold
Gold Bull Market in Progress
Gresham's Law
states 'bad money drives out good money', which means if paper
money and gold exist side by side, people will use paper money
and hoard gold. We are in the initial stages of repeating Gresham's
Law once again. Trust in paper money is eroding fast and the
5000-year history of gold as the ultimate money of choice is
once again giving competition to paper money, which is simply
backed by a mountain of debt.
The gold bull market is already in progress, but it has gone
unrecognized, except by the few astute investors, who know that
the seasons have changed.
Winter is the season when all the excesses that have been built
into the economy during the entire Kondratieff cycle, particularly
autumn, are cleansed. This cleansing is always extremely unpleasant
and involves severe financial and monetary distress. It is this
acute distress that drives investors to the ultimate money GOLD.
4 March, 2003
321gold Inc
ref: 035312
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