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One of the
brightest, most erudite, scribes at Bloomberg News, Caroline Baum, titled
her last article with the plaintive wail, "How Can We Get Out of This
Mess"! Another asked "When Will the fever break"? The
answer is simple. The cycle must be completed. But, people,
this is NOT a mess! Indonesia, Turkey, Russia, Argentina, Japan, are a
Mess, but N. America is still milk and honey, and not a mess. Yet.
Last week's failure
of the Superior Bank in Chicago, (the first of several we believe), after
the 20% drop in the S. & P., the 60% drop in the NASDAQ, the 10 year
long meltdown of Japan, the Russian default, and the impending default of
Argentina and Brazil on their Sovereign debt, enables us to see with
crystal clarity where we are, and where we are going on the Kondratieff
cycle.
Argentina's default
has been "restructured". Re-papered! $708 M. of interest on a
mere $130 Billion. The problem is Acceleration. Favorite banker ploy.
Billions due soon. If you cannot make the few hundred million now, the
Several Billions in a couple of months are not on. Interest goes to 15-
30%. Beautiful! http://darren.lib.utah.edu/money_problem_quotes.htm
The Game Explained.
What is a
"Mess"?
Currency meltdown,
banks broke, unemployment over 10%, and in Indonesia's and Russia's case
no rule of law. Armored personnel carriers in the streets for elections, THAT'S
a "Mess". Reported some time ago, but unconfirmed, is
the largest selling consumer item in Japan has been a home safe. The
people know that ALL the banks are broke, so they put their Yen under the
mattress. A couple of their life insurance companies and big retailers go
into bankruptcy, etc.
Russia is now
reported to be bringing back their gold coins to get people to save in
gold coins instead of Rubles or USD, and Argentina has a run on the banks.
Now THAT people, is what constitutes a "Mess"!
What, then, is
"The Cycle" that must be completed that Jay Taylor and Mike
Alexander keep referring to here in the GOLD-EAGLE?
THE KONDRATIEFF
CYCLE
Nickolai Kondratieff
was a Russian economist who determined the economic cycle that bears his
name. There are people way smarter than me, Mike Alexander, (well
published on http://www.gold-eagle.com
,), Bob Bronson, and Ian Gordon who have described, dissected, and
analyzed the timing, length, cause, etc., of the K cycle in great detail.
There are, naturally, opinions that differ somewhat about the technicals
of the cycle going back two or three hundred years. When are the years of
turns, how long was it, Fifty, Sixty, Seventy years, and so on. The cause,
effect, and timing of the current cycle is what matters.
Ian Gordon's
description is easily understood, as he breaks the cycle into four parts
and names them for the four seasons, whereas others refer to the swings as
troughs and peaks. A most intriguing factor is the major Wars being
started in the cycle when nation states seem motivated to go to war for
economic reasons. WW -2 & Vietnam ? Bob Bronson's work on pegging wars
to the cycle is a must.
The cycles have been
getting longer, going back to 1800. 50 - 70 years. Major characteristics
are amazingly similar in macro but HUGELY, differ lots in Micro, as things
do change. The primary factors of Interest rates, (Bond Yields), commodity
prices, equity prices, inflation, deflation, AND THE Gold Price, are the
components to be observed. This one was technically over in 1987, but the
FED chose to throw gasoline on the fire then and then again for the LTCM
crash.
Ian Gordon's
description and breakdown of the cycle, nomenclature, timing and events is
well depicted as a clock with the break points between the
"Seasons" at 3-6-9-12 O'clock. Corresponding to the others
troughs and peaks. Six O'clock = SPRING = Start of Inflation - 1949 -
1966
- DJIA 181.04 -
968.54
- Best Investments
= Equities, Real estate.
- Consumer
confidence rises with employment, and Inflation coming off the
recovery from the "Winter" Season's Deflationary Depression
of 1929 - 1949. Important to notice the 20 year time frame. Bretton
Woods and I.M.F. are done in 1946.
- Government and
corporate bond Interest Rates bottom at 2.5-3%.
- The gold price
was fixed, the USA went from a gold standard to a silver standard to
no standard for the dollar. F.D.R. outlawed citizens owning gold, and
lots of other interesting events for those interested in details.
Nine O'clock =
SUMMER = Runaway Inflation / 1966 - 1980
- DJIA 986.54 -
838.74 Equities go sideways.
- Interest rates
triple from 5% - 15%.
- Vietnam War.
- Interest rates,
commodity prices, real estate explode up with inflation.
- Capital good
sector overbuilds, (malinvestment into over capacity).
- Gold briefly
spikes over $800 in 1980. One ounce buys the DJIA.
- Oil spikes over
$40. Perceived to be going to $60-100, and banks loan on that.
Twelve O'clock
= AUTUMN = Disinflation / 1980 - 2000
- Commodities
Collapse. Oil goes to $10, gold to $280
- NIKKEI drops 70%
39,000 -12,000. Japanese interest rates go to Zero.
- USA equities go
Mania. DJIA explodes: 838.74 - 11,750 // NASDAQ: 500 - 5,000.
- Dollar becomes
the reserve currency of the world.
- Commodities drop,
rise and drop. Oil $10 - 35, Gold $280 - $500 - $255.
- Central Bank, the
U.S. FED, begins flooding the world with Dollars to stop Stocks from
crashing after NASDAQ drops 60% back to 2,000, and worlds markets drop
into "Bear" mode of -20% +.
- Unemployment at
all time low.
- Russian default
on sovereign Debt puts markets at no bid. Greenspan, Summers and Rubin
make the cover of Time for saving the world.
- A Worldwide,
Huge, malinvestment in over capacity of Automobiles, retailers,
Telecom, "high tech", Internet related Mania goods. Mostly
funded by debt.
- · Corporations
such as IBM borrow $25-30 Billion to buy up $31 Billion of their
shares in the market, with questionable earnings of $34 Billion,
according to Fortune magazine. Are they soon to be the only
shareholder of their shares?
Now it really begins
to get interesting. Japan, Korea, Indonesia, Thailand, most all of Asia,
and Russia, had the share and real estate markets crash about Ten years
ago, entering "Winter". We can see the procession of events in
other countries moving in front of N. America. Guess who loaned them the
"money"? Russia managed to avoid defaulting on the Sovereign
Debt, for years. Of course they never intended to pay it back anyway, any
more so than Marcos, Suharto, Sukarno, Mexico, Brazil, Argentina, etc.,
did.
A VERY, VERY
important distinction that Gordon points out is that Japan has been
experiencing a 1-2% deflation rate on all goods and services. With the
almost Zero rate of interest on the J.G.B's, they are making 2% on the
cash under the bed in the safe. They have the highest rate of savings in
the world. The government proposed program to put a fund together to buy
all the loans in default recently failed. Has their Postal Savings System
been raided by the banks and the government like the U.S.A. social
security system?
O.K., so there is a
debt bomb problem ticking away. Just how big is it? Japan's non performing
loans are estimated to be 237 Billion yen, 40% of G.D.P. http://www.prudentbear.com/international_print.htm
Elsewhere, it is
hard to find a simple example of how big the problem is, but Daewo in
Korea is a quick snapshot. Hyundai, the car company of the conglomerate
has been for sale for 2-3 yrs. G.M., Ford, Crysler, all courted. Cannot
make the deal as the banks cannot take the write off on the $80 Billion of
debt for the car company to go out at $5 Billion. Is there any equity in
the other businesses in the conglomerate?? Who knows.
Three
O'clock=WINTER=Deflation/Recession,? Depression? 2000 -2020?
- Japan: NIKKEI has
crashed from 39,000 - 12,000, over Ten Years.
- NASDAQ drops from
5,000 - 2,000 / DJIA 11,750 - 10,000 (+ / -)
- Oil surges $10 -
$30 (+ / -).
- U.S. FED slashes
Interest Rates 50% in three months, 01/01-06/01. U.S. Bonds Rise as
greed converts to fear, Scared Money runs to safety. "Flight to
Quality" from around the world.
- Unemployment
rises. Current rate in USA 5-10%. Govt. No.'s are a lie.
- Consumer
confidence drops.
- Good and services
prices fall.
- Tariffs and trade
Wars competing for scarce sales begin.
- FED Chairman
states "Central Banks will loan / sell gold to keep price
down". He knows that the gold Price is the "Canary In the
Coal Mine"! See his past Speechs. http://www.gold-eagle.com/greenspan011098.html
http://www.gold-eagle.com/greenspan041998.html
- Debt defaults
begin and accelerate in earnest.
- Central bank is
flooding the market with money and slashing interest rates to fulfill
its charter of "insuring the profit of the member banks."
(What they did during the Savings and Loan crisis as the banks had the
same loans on the same real estate as the S. & L.'s, who had no
central bank to save them.) Then as now the income from savings
revenue to those who most depend on it is destroyed with the low
interest rates. Banks get bigger spreads.
- Currency
depreciation crisis kicks in as no one wants to own any bits of paper
with ink on it, and interest rates in the USA eventually spike up as
credit contracts and there is no savings to draw on.
- The currency of
last resort, the barbarous yellow relic is recognized again.
- The Debt is
liquidated, and the reflation recovery begins again.
The primary
activity for the "Winter" is the liquidation of the massively
excessive debt that that has been allowed to be created out of nowhere
from nothing. Now how can this liquidation happen? It can be
inflated away, or wiped out by writing it off after it is defaulted. Japan
has been postponing it by obfuscating it in subsidiary companies, etc. Not
taking the write off. The friendly bankers and brokers in the USA have
been repackaging and reselling it as described in the F.I.A.S.C.O. book.
"How can the inevitable be postponed until after we have collected
this quarters bonus."
THE CURRENCY OF
LAST RESORT in Micro
Now if you choose to
disbelieve this cycle, I must ask if you are old enough to remember the
currency meltdown in Germany, where after "Old Marks" became
"New Marks". It took a bushel basket and then a wheelbarrow to
go to the store. In the Chinese version, it was reported to be cheaper to
burn the paper with the ink on it than to use the paper to buy coal. So on
and so forth.
Some simple
arithmetic shows that after the Turkish Lira dropped by about 100%, going
from 750,000 / 1 U.S.D., to 1,500,000 / 1, (Bloomberg News 07/17 2001),
that One little Ounce of gold will only get you a mere 400,000,000 Turkish
Lira. Indonesia is not so bad, yet, as with the Rupiah between 10,000 and
11,000 to one, that little Ounce gets you almost 3,000,000 Rupes. I
happened to turn on CNN one morning and saw the camera at the line of bank
tellers in a bank in Korea. The announcement was regarding the call for
the patriotic sheeples to bring in their gold to sell / give to the banks
to save the country. The poor souls did. 400 tonnes.
The East Indian
government tried a similar scam. Tried coaxing the people into turning in
their gold for some kind of government backed gold bond. Never saw any
reports for sure, but where the life savings of much of the populace is
worn by the women, and the country is the largest importer of gold at 700
tonnes per annum, they must have laughed out loud. Those folks have seen
the movie before, and know better. One Oz = 7,500 rupee.
A friend has to go
to Indonesia occasionally for business. He was buying finished gold
jewelry there for the gram price of gold, with no mark up for the cost of
making the jewelry. When they dropped into "Winter", and the
Rupiah dropped several hundred percent, a bit over 6-7,000 there was NO
gold on the streets. It had all been taken out of the country to
Singapore, or where ever. The people sold most of the rest at 15,000 Rupes
to the dollar and bought the gold back when the Rupe dropped back to 7,000
or so. Rupe is now about 10,000 to 1 USD.
CURRENCY OF LAST
RESORT in MACRO
It was no doubt
sheer coincidence, (we all believe in coincidences don't we?), that
shortly after Uruguay defaulted on their Brady Bonds they sold their 1.5
Million Oz. of gold. Just did not need it any more so what the heck. Hit
the bid. Had to Pay the interest.
It was very briefly
reported that Deutsche Bank had 50% of their shareholders equity out in
Russian Bonds, and another 25% in Brazilian Bonds. How much in Turkish
Bonds? When Bank of Boston was put up for sale as they were broke, friends
in the banking business reported there was no bid from anyone in the U.S
for almost a year. Losses from the gunslingers in investment banking on
emerging markets and derivatives were to huge.
So, Deutsche buys
them. "This acquisition will give us access to Investment Banking
expertise in the USA." (Read monster fees in a bull market.) (Now
"the Alex Brown Investment Banking model does not work. And is for
sale.") Shortly thereafter they show up on the B.I.S. list with about
a 4,500 tonne gold derivative position and Alan Greenspan and friend take
a seat on the board of the B.I.S. There was one and one only bit on
suggesting that the Russians hand over their only foreign currency earning
asset for the defaulted bonds, the Oil fields. Apparently the Russians
declined. Surprise, surprise.
Now, with Reg Howe's
fabulously brilliant lawsuit, http://www.goldensextant.com
, and the great work of Frank Veneroso documenting the gold derivative
position, we have the documentation of recent "reclassification"
of gold in the U.S. Treasury by Jim Turk. Coincidences for sure!
I was watching all
this over a year ago and was compelled to go verbal then. http://www.gold-eagle.com/editorials_00/doran040400.html
If you have not read it, I must recommend again the book mentioned in this
piece, "F.I.A.S.C.O.", where the details of how to package toxic
waste called "Emerging Market Debt", (wall paper), and repackage
and resell it to the gullible, unwitting, unknowing, and just plain stupid
and ignorant, like Orange County. How do you bankrupt a wealthy county?
"Derivatives". Merrill Stench paid something over $400 Mil., but
of course admitted no wrong doing. Poor sap at the county just did not
read the VERY fine print.
Are the
"emerging markets" going to emerge, from submergence? If so how?
Read the business plan of the failed Superior Bank. "Making Sub Prime
loans on cars and real estate at higher than usual rates for packaging and
reselling to investors." "Sub prime's are individuals who do not
do well when the economy slows." Wow! Who have thought?? Seems the
same as loaning Billions to "Sub Prime" countries that cannot
EVER repay, much less even pay the interest!
In other words
loaning money to people who are not credit worthy for huge fees, and then
repackaging and reselling it and counting on the FED and F.D.I.C., (the
taxpayer), to bail you out. The identical business plan of Mr. Milken and
pals with the S. & L. loans.
Walter Wriston said
"We can loan lots to Sovereign nations as they will never
default." (Or words to that effect.) Whoops! Then the banks had to
get the I.M.F. to bail them out of the loans to Sovereign Nations that
started defaulting. Superior Bank In Chicago writ large for years!
CURRENCY OF LAST
RESORT VERIFIED AND CONFIRMED
What assets was the
I.M.F. founded with at Bretton Woods in 1946? 153,000,000 Oz of gold.
At $35.00 only a mere $5.355 Billion. Real money in those days. Want to
see Alchemy at its finest? Go to: http://www.imf.org
.
Click on the gold
article and the other articles. They still carry gold at $35.00 and still
use the old S.D.R.'s. They sold 50,000,000 Oz at $35.00 from 1976 - 1980,
to buy currencies, (guess which ones), just before the spike to +$800.
When the U.S.A. stated the S.D.R.'s were good as gold, the French showed
up to trade theirs for the gold.
I.M.F. Only has
103,000,000 Oz. left, which at current price of $270 is a mere pittance of
$27,000,000,000. 3,217 tonnes. The B.I.S. has the World gold derivatives
position reported of $262 Billion. About 26,000 tonnes. Assume every ounce
sold has a call to balance it and all is well. You bet. If you assume a
one to one call for ever ounce sold, then 13,000 tonnes, sold consumed and
gone forever. About Veneroso's numbers. The Total derivatives outstanding
are + $30 Trillion, interest swaps, etc.
No wonder the I.M.F.
has a plan to increase the capital of the I.M.F. to $280 billion. Gee
whiz, why would they need that? Where can it possibly come from? What will
it be? More S.D.R.'S? Yen? USD? Rupiah's? Euro's? The New USD? Similar to
my friends wife. Never overdrawn, only under deposited. Thankfully when
Slick Willies pals tried to raid the I.M.F. gold last year to "Help
the poor people in the poor countries", read "sell bullion to
make bond payments to banks", our Congress prevented it. Read how the
I.M.F. did the "Gypsy Swap", to bail out the Banks on the loans
to Mexico and Brazil. The Gold on the books at $35, is sold at the market
price. Profits used to make the bond payments and then take the gold back,
as the charter forbids selling, leasing or doing anything to dispose of
the barbarous yellow relic that is the …………
"CURRENCY OF
LAST RESORT"!
Does anyone out
there know of an auction where the low bidder wins, other than the Bank of
England gold auctions? If indeed the gold being sold out of the central
banks vaults at purposely depressed prices in auctions where the low
bidder wins, is replaced with bits of paper with ink on it that drops
dramatically, nay disappears, as has always happened before, maybe Mr.
Schicht's comments about hanging Bankers in the square will come back in
fashion.
Is there any other
commodity that passes for a currency, something that can be traded for
anything anywhere, and get bits of paper with ink on it,
"Money", or critically, goods and services?? Amazingly, it has
also had the demand exceed the supply for the last 5-10 years and sits at
a 20 year low?
In conversations
with friends and relatives about this I am always told that "I do not
want to hear about all that depressing Gloom and Doom." "Stocks
are the road to sure wealth forever." "Buy and Hold".
Certainly for the last 60 years if you just picked the right ones. Blue
chips. Stay with the low risk blue chips. Nortel, Lucent, Zerox, ATT, CSCO.
Seen the charts lately? Seen the commercials where the visibly concerned
audience of middle aged folks asks what can we do? Charlie Schawb tells
the audience to "Just Relax". Everyone relaxes and smiles on
cue. The last serious down draft and Fidelity brings the gray haired
Patriarch, Peter Lynch out of retirement to say "Buy and Hold."
(Don't you miss seeing the freaky kid Xeroxing his face for Ameritrade.)
I ask again,
"Is This Just A Simple Old Fashioned Bear Raid?"
Do you believe in Magic, the "Tooth Fairy", and years of
Coincidences?
What if the signs at the bank were changed to REALITY. "Loan us your
money". Instead of "Buy your CD here"?
Simple really, after every boom is a bust, and after every bust is a boom.
How high is up and how far is down. http://www.prudentbear.com/pastmanias.htm
To quote Mr. Ripley. "Believe It, or Not."
My sincere
appreciation to Gordon, Bronson, Alexander, and others for the education.
Ursel Doran
Core Engineering u.doran@att.net
Core Engineering is a boutique Gold and Natural Resource Engineering and
Financial Analysis consulting Group
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