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This is directed
toward those readers who have heeded the siren song of the establishment and
have put their assets into the stock market. I say to you: NO STOCKS,
NO STOCKS, NO STOCKS, not at this time.
The
basic reason is that we are in the second upswing of the commodity
pendulum. First, what is the commodity pendulum? And second, why
should this affect your decision to put your assets into stocks?
Above
is the chart of the CRB (Commodity Research Bureau) index since it was
created in 1956. Note
carefully, here are the important events:
- In 1963,
President Kennedy, on the advice of his Keynesian advisors, deliberately
cut taxes in order to create a budget deficit. Such Federal budget
deficits are a signal to the Federal Reserve to print money. The
great mass of the idiots out there do not know that the government does
not borrow money from the people, or even from foreigners, to meet its
deficits. (The great to-do in the media about China
and Japan
funding our deficits is the same misdirection a magician uses with his
slight-of-hand.) Government “borrows” from itself
(if such a thing makes any sense). That is, the Fed prints money
out of nothing and “lends” it to the U.S. Treasury.
The Fed, which is in practice an agency of the U.S. Government, lends money
to the Treasury, which is an agency of the U.S. Government. And
somehow this makes everything all right. Imagine if you tried the
same sort of thing. Your family has spent more than its income,
and you need to borrow money. No problem, you just buy your son a
printing press. He prints up a bunch of money and lends it to
you. Presto, your family’s economic problem is solved.
In U.S.
history prior to 1963, this had been a temporary expedient, used only
for the financing of wars. In ‘63, it became the routine
way of doing business.
- Despite this
printing of money, commodity prices did not change from 1963 to
1971. During the same time consumer prices began a regular
advance. For example, consumer prices rose by 6.2% in 1969.
This advance led commodity prices to decline in real terms (although
they were constant in nominal terms). Adam Smith argued that
prices had to move in the direction indicated by supply and demand over
the long run. This is good theoretical economics, but it is not of
much help to the speculator. The speculator has to know when
prices are going to rise. And a study of this period (1963-1971)
illustrates the fact that commodity prices lag behind (are less elastic
than) consumer prices. This was the first downswing in the commodity
pendulum.
- By 1971,
commodity prices were at their lowest real level in American
history. Commodity producers were getting old (1963) prices for
their products but had to pay new (1971) prices for labor, materials,
shipping, etc. They were hurting, and many of them started to go
out of business. By the early ‘70s, the supply of most
commodities was going down, and at the same time Nixon ramped up the
amount of money in the country (9.2% increase in 1972) which of course
represents demand for commodities. Prices exploded over the course
of the decade. Consumer prices doubled, and commodity prices
tripled (correcting their under valuation). But, and here is the
important point, with commodity prices moving up aggressively some of
this increase passed through into consumer prices. The
relationship between money supply and consumer prices was temporarily
altered. For example, consumer prices rose by 12.3% in 1974.
For prices to outrun the increase in money in this manner had never
happened previously in American history.
- With prices
galloping ahead at their greatest rate in peacetime American history,
with price and wage controls having completely failed to stop
“inflation,” the Fed was forced to step into its public role
as “inflation fighter.” Actually, it is only the Fed
which makes prices go up. The Fed was given the paper money power
in 1933, and since that date prices in the U.S.
have multiplied by a factor of 17. To call the Fed the
nation’s inflation fighter is similar to calling Al Capone the
nation’s top policeman. As the Fed tightened credit (to slow
the growth in money), this forced the stock market lower. From
early 1973 to late 1974, the DJI fell almost in half. This is
characteristic of an upswing in the commodity pendulum. Commodity
prices move aggressively higher. Some of this feeds through into
consumer prices, and these rise more rapidly than the money
supply. The Fed is alarmed; it tightens credit, and this causes a
sharp drop in stock prices. From 1966 to 1982, the U.S.
stock market lost ¾ of its real value. So much for the
notion that stocks always go up. They may go up during the
downswing of the commodity pendulum but not during the upswing.
- By 1980,
commodity prices had caught up with a more normal real level. Ronald
Reagan had an opportunity to restore the country to normalcy by
reversing the evil decision of 1963 and stopping the printing of
money. But Reagan was a New Dealer. He had been a New Dealer
in the 1930s, and he was still a New Dealer in the 1980s. He
continued the policy of massive budget deficits and the printing of
money. His innovation was to call this conservative. (Prior
to this time conservatives were known for balancing the budget.)
Reagan was conservative in what he said, not what he did. During
his two terms in office the U.S.
money supply almost doubled. However, the nation was now in the
downswing of the commodity pendulum. Commodity prices fell from
their high of 337 in 1980 to a low of 182.95 in 1999. They fell
even more sharply in real terms. By 1999-2001, the real CRB index
was only one-half its (very under valued) level of 1971. So you
see, if commodities rose rapidly in the 1970s, they were going to rise
twice as rapidly in the early years of the 21st century.
- And that brings
us up to today, dear reader. Today Obama is following the policy
of Nixon. He is setting incredible records in the printing of
money. Except Nixon was satisfied with $billions. Obama is
printing $trillions. What is the difference between a billion and
a trillion? Only a factor of 1,000. So if prices were rising
in the 1970s by approximately 10% per year, does this mean that they
will be rising in the 2nd decade of the 21st
century by 10,000%? A rational examination of this subject does
not allow us to give specific objectives because much depends on what
Obama and Bernanke do. Both of these men have a lot in common with
Arthur Burns (Fed chairman of the early ‘70s) about whom I made up
the following poem:
For
what he say, and this is true,
Is far
removed from what he do.
Bernanke
has not yet tightened (as Burns did in ’73). But there is a lot
of pressure on him to do so. There is a general sense in the media that
he has been too easy too long. And a Fed chairman who defies the media
is chopped up into ground hamburger and served to the dogs. He who
rides the tiger must be very careful when he decides to dismount.
This
is the problem with a bullish stock position at the present time. We
are in the upswing portion of the commodity pendulum. Commodity prices
are rising rapidly, and they will soon spill over into consumer prices.
That will force the Fed to tighten. And here we have a stock market
which is more over valued than any market in history. From 1982-2007,
the DJI went up by a factor of 18.2. It is still 13.6 times its 1982
low. The two previous great bull markets of the 20th century
(1922-29 and 1949-66) both multiplied by a factor of 6.
One
of the statements which clearly illustrates the ignorance of the economic
establishment is their assertion that stock prices always go up. I
heard the same argument when I first entered the market in the early
1960s. (“Buy good, sound stocks for the long pull.”)
As above, the stock market immediately proceeded to lose ¾ of its
value in real terms (while gold was multiplying by 12½ in real terms).
Evidently,
no one in the establishment knows how to do simple arithmetic. When
researching stock prices, it is important to keep an index in real
time. Indexes constructed after the fact tend to leave out those
companies which went bankrupt over the period (and hence are not around when
the index is constructed at its end). Indexes constructed after the
fact do much better than the average investor (who could not know which of
his stocks would go bankrupt and had to act in real time).
The
first real time stock index in American history was an index of rail stocks
constructed by Charles Dow in 1885. This index moved sideways from
1885-1896, when it was replaced by the Dow Jones Averages. From 1896 to
1933, the Dow Jones Averages also moved sideways (the bull move of 1922-29
being offset by the bear move of 1929-32). That is, for almost half a
century real time stock indexes moved sideways.
This
is indeed what stock indexes do in a free market economy (which includes a
gold standard). The wealth created by the productive geniuses of the
country flows through to the average person. The large gains in the
productive genius’ stock are offset by the declines in his
competitors’ stocks. The people get richer, and the stock market
goes sideways. The only reason that the stock market has gone up since
1933 is that F.D.R. introduced the printing of money and the easing of
credit. As interest rates go down, stock yields go down along with
them, and this of course means that stock prices and P:E ratios have to go
up. (F.D.R. knew this. His motive was to rob from the poor and
give to the rich. So you see, pretty much everything you have been
taught is a lie. And we are now very close to the point where that lie
is going to cost you dearly.)
So
you are buying into a very overbought stock market. If Bernanke has to
tighten, then it will drop like a stone. The stock market is still
bullish at the present time, and I can’t predict when Bernanke will
tighten. (I won’t need to. All one has to do is to wait and
watch. The tightening will precede the stock decline, and one will have
an opportunity to desert the sinking ship.) I have no big quarrel with
the short term stock trader who is nimble and does not fall in love with his
trades. (However, he is missing a great opportunity in gold.) But
the person who buys the whole establishment line will be destroyed in the
second upswing of the commodity pendulum just as he was destroyed in the
first. (And since he provides political cover for the paper
aristocracy, which is stealing from the American people, he will be getting
exactly what he deserves.) On the other hand, experience shows that
commodities can ride out a Fed tightening. And gold is the easiest
commodity to trade. It is well-traded, does not have volatile moves and
obeys technical signals very nicely. In the game of speculation, one
must put the greater probability on one’s side. And recognizing
that we are in the second upswing of the commodity pendulum is the first step
in this process.
To
guide honest people through these terrible times of ignorance and lies, I
publish a fortnightly (every two weeks) newsletter, the One-handed
Economist ($300 per year). You can subscribe by going to my
website, www.thegoldspeculator.com, and
pushing the Paypal button. If you don’t like Paypal (which are my
sentiments), then you can subscribe by sending a check through the U. S.
Mail. $10.00 discount for using the mail (send $290). Special bulletins
are put out when necessary. Thank you for your interest.
Note
on Obama’s socialized medicine proposal, which is very much in the news
at this writing. Having failed to win the votes needed for passage, his
supporters have resorted to the tactic of “deeming” it passed,
violating the Senate’s rule allowiing filibusters and are trying to bully
the country into submitting. The social fabric is being torn in a
manner I have never seen in my life, and violent revolution is a
possibility. I have never seen the country in so much turmoil.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This
letter is available (both electronic and paper copy) for $300/year with a
3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
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