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In Search of Moe and Curly By : David Petch Treasure Chests.com |
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Larry
Moe and Curly formed one of the most successful comedy trios in history, who
rightfully so, went with the stage name The Three Stooges. Their
routine was based on physical slapstick comedy applied to numerous stories
and awkward situations. Their bumbling stupidity and lack of focus on any
given situation made for entertaining comedy clips that spanned several
decades of the 20th century. An example of their fine comedic routines can be
seen in this clip titled Carpenters. To view an
infinite supply of "The Three Stooges", simply enter this into the
search bar on www.youtube.com and be prepared to be entertained
for hours. Speaking about being entertained, enter Larry Kudlow.
John Browne of EuroPacific Capital was recently part of a debate in
which Kudlow, along with two bullish cheerleaders,
were trying to tear at the fabric of his bearish case. Browne is British,
extremely knowledgeable and extremely polite...too polite to be dealing with
the antics of Kudlow and Company. If you have not
noticed, by the title of the article, a picture of "Larry" Kudlow was collated with images of Moe and Curly...now
all we have to do is search for modern day representations of Moe and Curly
on the Wall Street Entertainment. The problem is there are numerous
candidates to add a "Moe" and "Curly" in forming a modern
day trio, except they all perform monologue financial comedy shows. I have only tuned into watch Kudlow and
Company once in a blue moon to get a perspective of how far off the
mainstream media is at understanding where we are in the commodity cycle. My
conclusion is that they are still in the denial stage and have not even
entered into the opposition or tentative acceptance yet...these psychological
hurdles must be leaped over first before we enter slavish acceptance, which
represents the blow-off phase. So, this commodity bull market may last far
longer than any of us are lending credit. Further points mentioned within
this article are related to the slapstick routine that Kudlow
and his crew present which lack merit and substance. Interest Rate and Commodity Cycles Long-term interest rate cycles last for decades. According to my work
on the 10-Year Interest rates generally rise slowly as economy gains strength after a
bottom is put in place after a significant bear market has terminated
(remember bear markets go out with a whine, not a growl). A change in trend
for a strong period of economic growth must be confirmed by numerous factors
such as a confirmed economic bottom, real estate bottom, lack of a currency
crisis, favourable demographic profiles in nations one seeks to invest in
etc. Stock markets have an inverse relationship to gold...the 1980-1999
period was in a bull market across the broad market indices while most
commodities were in a severe bear market. For nearly 20 years, commodity
prices were extremely low, which caused a lack of exploration and resource
development for increasing reserves in the ground (oil, gold, silver, coal,
cobalt etc.). Lack of exploration caused many of these companies to high
grade the resources they had, leaving only the chaff. Since 2000, commodity prices have risen substantially, but so have the
expenses associated with exploration, development and maintenance of
infrastructure not to mention the fact that labour and labour shortages have
also gone up hand in hand. The price of mining one ounce of gold has been
recently stated to cost $700-800/ounce at present, leaving only $80-100/ounce
profit, which represents around 10-11% profit...this is a minimum for any
sort of business trying to make a profit. Anyone who does not look at the net
profit gold mines of present and thinks gold stocks are overvalued are
examining these companies incorrectly. Rising inflationary pressures have
forced costs up across the board so commodity prices must rise in order for
companies extracting raw commodities to meet their associated costs or they
close shop, plain and simple. What Makes a Bubble? Generally, bubbles occur when there is an excess supply of a given
commodity or item in the market. Gold, oil and silver production are
far from bringing additional supplies onto the market. The ability to explore
for new resources and extract them is directly linked to the amount of
available energy. Since we are in the era of Peak Oil, this automatically
suggests that supplies will be limited in the future due to the availability
of energy for extracting resources. For anyone not familiar with the concept
of Peak Oil, I suggest everyone pay a visit to Matt Simmons web
site, as he is by far the foremost global expert on Peak Oil. When the above situation occurs, thereby restricting supply, coupled
with real negative interest rates similar to
what occurred in the 1970's, it represents a turning point where longer-term
interest rates will eventually begin to move up, dragging the price of gold
much higher. Markets control longer-term interest rates, no matter what meddling
governments may try to do in the short-term. Once inflation really begins to
dig its heels in later this year and through all of 2009, lenders will
realize the associated risk with lending, inflationary pressures etc. This
will cause them to demand a higher interest rate associated with loans in
order to compensate for overall risk. Banks with laddered loan portfolios from rates on lower rungs to
higher rungs will require higher rates going forward to offset lower yielding
loans and cover operational costs. This will force people to live within
their means and automatically removes all components of the economy that
depend on credit. Since the US GDP is represented by 72% of consumers, the
overall economy is going to be hit hard. This will make the fiat paper regime
less attractive and will drive anyone with money into hard assets i.e. gold
and silver. Breakdown in Logic, Manufacturing Base and the Economy Kudlow fails to
realize the above, particularly that gold is money,
a commodity, and a hedge against inflation. In the 1979-1980 time frame when
interest rates went to 15-20%, the Another one of Kudlow's poor market
assessments is how a perceived bull market is developing in the broad market
indices (DOW, NASDAQ, S&P 500 Index). Price the S&P 500 Index using
the USD Index, the Euro, or Canadian dollar, and although the present nominal
value is near the 2000 high, in real terms it's actually no where near the
former high. This is a form of illusion...that being the purchasing power of
the S&P. Notice how Figure 1 illustrates the S&P 500 Index nominally
expressed, while Figure 2 shows the S&P priced relative to the USD
Index...quite a different perspective on how things look when the proper
light is cast on the situation. The S&P in real value terms against the
USD index is down around 22%. Just imagine how lower this value could go
should the USD declined to 58-60 by July 2009. Figure 1 Figure 2 Browne mentioned that the Now that the credit cycle has imploded, the 72% consumer-based economy
is under pressure based on the reliance of credit for transactions. There is
no way that the remaining 28% of the non-consumer economy (manufacturing,
small percentage government) can carry the One funny point of the interview with Browne was seeing Kudlow "squeal" with delight noting that oil
and gold were down for 1-2 days in a row. Oil shot up from $85 to a high of
$137, before declining sharply to $122/barrel and shooting up to
$138.change/barrel on Friday. Nothing moves as the crow flies, so
the above volatility should come as no surprise to those that realize a bull
market is a "Wall of Worry". One thing not mentioned on the show is
that oil is likely set to touch or surpass $150/barrel this year. And
eventually this will trigger a move in gold well above $1500/ounce by the end
of 2009. Conclusion The S&P is a fluid index, which by definition means that poorly
performing components can be removed and replaced with other stocks in
different sectors that perform well. At present energy and gold stocks make
up 7% and 0.5% of the S&P 500 Index, respectively. At the peak of the
1980 commodity bull market, energy and gold stocks constituted 25% and 17% of
the S&P 500 Index, respectively. From this perspective, with the
financial industry making up 30% of the S&P 500 Index only one conclusion
can be drawn. Financials will contract as a percentage of the S&P as the
commodity bull market matures, with energies and gold stocks making up much
of the difference. What happens to the value of the S&P 500 Index over the next 4-5
years because of this? Chances are it will remain buoyant, surprising many,
possibly even hitting between 1400-1600 between 2011-2012,
but that is based upon nominal value. If the S&P were to be examined as
per Figure 2 (any other currency), it may have a purchasing power value of
700-800...maybe lower. The commodity bull market will help to keep the
S&P 500 Index afloat for some time, but once the inflationary period
reverts to deflation, no more tricks will be up any sleeves to keep things
propped up...the magic hat will be empty. Once the commodity bull market ends
around late 2011/early 2012, the stock market is likely to start a sharp
decline not bottoming until some point in 2014-2016. I could go on into further detail covering all of the logic errors
present in Kudlow's argument, but you should be
getting the point by now, which is the primary aim here today. Kudlow is the epitome of Wall Street slapstick financial
humour, which is good for a laugh, but not to be taken seriously for
preserving wealth. Continue accumulation of gold and silver bullion, energy
stocks and precious metal stocks in politically secure areas of the world as
a financial storm presently not seen by many will soon to hit the A major portion of the work I do is technically oriented, but I write
2-3 editorials per week often intertwined within the analysis
. For further viewing of prior work, simply click on the Archive
section of this site. I update the AMEX Gold BUGS Index, AMEX Oil Index, US
Dollar Index, 10-Year David Petch Treasure
Chests.com Treasure Chests is a market timing
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