 My
Mind is Clear...
Ian Gordon
The Long Wave Analyst
Geneva. Sunday, May 9th 2004
Posted May 13th, 2004
It seems almost surreal. Everything
seems in order. Traffic flows outside my window, but this Calvanistic
city is almost shut down because it is Sunday. However, the weekend
of solitude has allowed me a rare time for reflection and that
is good, because things become much clearer when they are not
subjected to the noise of competing viewpoints. I have access
to the internet and over the past few days have read many writers,
including some of my favourites like Richard Russell (www.dowtheoryletters.com)
and Bill Bonner, the editor of The
Daily Reckoning, and of course newspapers such as The Financial
Times and The Times. My mind, far from being bombarded by the
amount of my reading, is clear. Perhaps I have been assisted
by my presentations of The Long Wave, so far in Paris and Geneva,
and almost certainly by my visit to Monsieur Jean-Antoine Cramer,
a traditional Swiss banker of the old school, who was kind enough
after my one-on-one presentation of The Long Wave, to invite
me to his beautiful home just outside Geneva, where we continued
our discussion. We were in agreement on almost all the issues,
and we agreed that the fundamental reason for the impending collapse
was the enormity of the debt bubble that Alan Greenspan has spread
throughout the world.
So, that tranquility and order that is manifested here in Geneva
and almost everywhere else in the world is about to be shattered
by an explosion of the debt bubble. There is no warning before
a bomb explodes. However, there is some warning before the debt
bubble explodes. That warning is apparent now, and the crisis,
as I see it, is imminent. The warning is rising interest rates.
Rising rates place an intolerable burden on over-leveraged debtors.
There are just too many of these and many will suffer the consequences
of their stupidity. If rising rates place over-borrowed debtors
in jeopardy, what do they do to the bankers and hedge funds that
have made hay from the so-called carry trade, which is to borrow
short and buy long? Their long positions are underwater, as are
the US debt positions held by the great creditor nations.
It appears that the world, and in particular the US, is in the
beginnings of a credit crunch. I believe there is insufficient
capital to finance the enormous amount of debt, some new, and
some that has to be rolled over as it expires. In my opinion,
interest rates must rise under the circumstances and weaker borrowers
are crowded out and must pay exorbitant rates to stay in business,
which usually means that they do not. There was a credit crunch
during the early stages of the last Kondratieff winter and rates
rose in the face of a deepening depression forcing many high
debtors into bankruptcy. While the circumstances today are similar
to those of the early 1930s, they are much more acute. In the
early 1930s the US was the world's largest creditor nation and
did not have to rely on the goodness of foreigners to lend her
money. Nor were the debts of US corporations and individuals
anything like they are today. Foreign money has poured in to
finance not only US government debt but also that of many of
the better-known US corporations, despite the fact that many
of these companies are massively laden down with debt. As the
value of the dollar falls and interest rates rise, these foreign
creditors will experience losses on their US debt holdings and
eventually withdraw their capital to safer havens. This negatively
impacts interest rates and the ability of high debtors to service
their debt obligations. The problem is compounded by a weakening
economy.
The one thing missing from the so-called recovery was the creation
of new jobs. That problem was apparently eradicated in March,
when there were 308,000 new jobs created after a paltry increase
in all the preceding months of George Bush's presidency. How
did these jobs suddenly materialize, just when they were needed?
The truth is they did not. They are the results of creative Government
reporting, as 95% of these jobs were part-time. New government
jobs exceeded the total, meaning that private sector joblessness
increased. To make matters worse, 400,000 Americans ran out of
unemployment insurance. I have not seen a detailed analysis of
the April figures, which were released on Friday and also exceeded
the expected number, however, I am sure it'll be more of the
same; that is, misleading numbers suggesting that the jobless
recovery is no longer jobless. There is some poetic justice associated
with these figures, as they suggest an economic recovery in the
making, which is also contributing to rising interest rates.
In my opinion this will be the kiss of death to the bogus recovery.
Already,
rising interest rates have dampened American enthusiasm for home
re-financing. I cannot transport charts into this report, but
even a relatively novice chartist is likely to be shocked by
the massive tops evidenced in the charts of US homebuilders and
in companies like Fannie Mae and Freddie Mac. Read Clive Maund's
excellent
analysis.
These charts are indicating serious pressure for US real estate
and the bursting of that enormous debt bubble would have a catastrophic
effect on the US economy. The Japanese real estate bubble continued
three years beyond the Japanese stock market peak. That bubble
was not so much one related to homes, but rather to commercial
real estate, particularly in large urban centers. The American
bubble is centred on individual housing and a US real estate
collapse would be devastating, not only to the US consumer, but
also to all businesses associated with the industry, and in particular
the mortgage lenders, such as Fannie Mae and Freddie Mac. An
indication of impending collapse would be a rise in interest
rates beyond the norm for these voracious borrowers.
The great American debt bubble looks ready to burst into smithereens.
This would be devastating to the world's economy and its financial
system. As for the stock market, forget about it. How could stocks
survive in the face of such disaster? Anyway, US stocks look
ready for a new downward move. The broadening top, that is in
place, and other technical evidence suggests that this move could
be violent.
I am reminded very much by the recent recovery in stock prices,
by its predecessor winter recovery, following the crash in 1929.
At that time the Federal Reserve dropped interest rates and flooded
the banking system with money, much as Alan Greenspan has done
this time, although nowhere near to the levels employed by the
current Chairman. People re-invested in stocks and the economy
appeared to be in recovery. By April 1930, stocks had regained
50% of their losses and investors believed that they would continue
on to new highs. The muted economic recovery based on the drop
in interest rates and a significant injection of money into the
banking system also contributed to the renewed confidence. But,
it was all a false promise. The economy and the stock market
had by no means corrected the excesses of the roaring 20s and,
what followed from that stock market peak in April 1930 was a
debilitating series of falls in stock prices to a bottom almost
90% below their peak and the destruction of the American psyche
in the ensuing Great Depression.
The great autumn stock bull market of the 1920s at best attracted
some 1.5 million Americans to its magnetism, whereas the autumn
bull market of the 1980s and 1990s, which was almost 2_ times
bigger in terms of its price move than that of its predecessor,
has attracted some 50 million Americans. It should not be difficult
to imagine the utter financial ruin that be experienced by many
Americans should the winter bear market follow the course of
its predecessor. There is no reason to believe that it will not,
as bear markets typically image the preceding bull market.
This brings me to the question of gold. Despite the shocking
fall in prices not only for the metal itself, but even more frighteningly
for the share prices of the junior mining stocks, the reasons
for owning gold and gold shares are even more compelling and
apparent today, than they were in 2000, when this 4th Kondratieff
winter began with the peak in US stock prices. Allow me to review
these reasons and to suggest additional reasons, which have become
apparent, as this winter has unfolded.
1. The inevitable
failure of paper money: It's been tried many times before and
has never succeeded, because the system provides for no discipline
and allows governments to inflate the money supply to ridiculous
levels. This inflation has always led to a bubble of immense
proportions, which always bursts. Remember The South Sea Bubble,
or the Assignant bubble, or John Law's bubble, or more recently
the 1921-1929 stock market bubble, and of course the Japanese
stock market bubble, which ended in tears for the Japanese economy
after its collapse in December 1989. Then of course there's the
most recent stock market bubble, which at least for the Nasdaq
collapsed after its peak in 2000. I believe Alan Greenspan has
engineered another bubble in a desperate bid to keep the over
leveraged US economy going. When the real estate bubble collapses,
as it will, (rising interest rates will do the trick), it will
be a major financial disaster, since so many people have their
wealth tied to the equity in their homes.
2. The failure of the US dollar as the world's reserve currency:
The process is already beginning. Reserve currency status always
belongs to the world's premier creditor nation: Britain in the
1800s and America in the 1900s.
3. The impending collapse of the world economy led by the United
States into the Kondratieff winter: That process has already
begun, but the pace will intensify in the face of rising interest
rates. The purpose of the Kondratieff winter is to cleanse the
economy of debt. The world economy, and principally that of the
United States, is built on a massive bubble of debt. The purging
of this debt will have a resounding impact on financial institutions,
which have been the major debt providers.
4. The end of the American empire: The US has failed in Iraq.
Its forces are stretched too thin. This will lead to challenges,
which create geopolitical uncertainties. What currency do people
turn to in times of uncertainty? It used to be the dollar, but
no longer, and all other currencies are fiat too.
I believe the
case for gold is stronger now than it has ever been. The recent
setback provides a buying opportunity. Why is it only in investing
that people want to buy high and sell low? It is because they
get comfort in doing what the crowd is doing, but most of the
crowd has not the slightest idea about the impending economic
and financial disasters. Gold is your protection in these very
difficult times.
Investment in well-managed junior gold mining shares is recommended,
because these companies are growing their gold resources, whereas
the producers are depleting theirs.
Yours truly
Ian Gordon
The Long
Wave Analyst
Geneva. Sunday, May 9th 2004
see also:
May 13 GOLD COMEX: The Stuff
of Bottoms
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