THE LIBERTARIAN ENTERPRISE
Number 601, January 1, 2011
"Okay, here's THE PLAN"
Special to The Libertarian Enterprise
Some months back I made a market psychology analysis that the Dow would not close about 11,500 ever again. I should probably have put in some sort of error bar on that prediction to make it seem more scientific. But it really isn't science. It is a "technical analysis" "chart formation" market psychology reading. Which makes it about as much guess work as anything.
Today, Thursday 23 December 2010, the Dow closed at 11,573. So, half percent error bar included, the market is now above my expectation. So, I was wrong. Of course, I did indicate a caveat.
There are two ways in which one can reasonably interpret today's closing price on the Dow. One is that the economy is now in a runaway hyperinflation, which is only going to get worse. There are in fact plenty of reasons to support this view, which I'll get to here below. The second interpretation is that the people on Wall Street can read the chart formations just like anyone else, and they are shamming.
We know that money has been fleeing equity funds, too. For 33 weeks in a row, money has flowed out of equity funds. A total of $100 billion has been pulled in the calendar year to date. Billions are also being pulled from tax free municipal bond funds and other bond funds. See for details.
Everyone is leaving the ship. So, how to save the crew? Simple. Get some euphoria going by having someone with really deep pockets buy the market up, past the right shoulder of that good old head and shoulders formation. Make it look like a new perma-bull. That brings in ordinary investors, who then buy stocks that the insiders want to unload. Once all the stock is held by suckers, the Federal Reserve stops buying, and the bottom drops out. (Which would vaguely correspond to my expectation, but would be much more sudden.)
So, is the Fed buying? Some indications are yes:
If they aren't, it is something of a mystery who is. Mind you, with $9 trillion passed out by the Federal Reserve in 2008 to big banks, big insurers, big corporations, my guess is that sequestering is breaking down. So, who really knows where that money is coming from? (Keep in mind the entire global economy is like $70 trillion and the USA economy is officially $14 trillion or so.)
If everyone who knows anything is selling now and getting out, even though the "Bush tax cuts" are extended for now, should you be a buyer in this stock market? Or, if all the rats are fleeing the ship, maybe you should get to a life raft.
How can it happen? The Federal Reserve has already created $9 trillion which were passed out to big corporations and big banks. They have apparently taken steps to sequester these funds. For example, they are paying high returns to banks to keep them from lending out those trillions. Any time they want "quantitative easing" they can make it happen. And quantitative easing is in quotes because it is a euphemism for theft. It is monetary inflationthe way banking gangsters take the value out of your bank account without altering the balance by making the currency worth less.
Why isn't it easy to do? Because every other country in the world can do it at the same time. Which means that the perceived value of the dollar can drop dramatically or rise dramatically on the "dollar index" which simply measures comparative rates of inflation. Since gold and silver are traded in dollars, worldwide, it makes for an interesting situation in the precious metals markets, when the dollar is apparently strong against other currencies.
So, my conclusion here is that we don't yet know what to expect. In many ways the behaviour of the Federal Reserve for its entire history since the sleaze bags met in 1910 on Jekyll Island to conspire to make it happen has been to prevent people from being able to predict the rate of interest. That, in turn, has dramatically exacerbated the business cycle.
What fundamental change has occurred that suggests we won't have inflation? Extending the Bush tax cuts is good for individuals, but it also exacerbates the deficit. Higher deficit spending is inflationary, and at some point is going to result in spikes in interest rates. You thought paying off your credit cards was hard with 15% interest, wait until the rate becomes 90%.
Back in May, I predicted that if the Dow does close substantially above 11,500 (plus half a percent or so) then we are in for a dramatic hyperinflation, like nobody has seen in the USA since the Greenback and the Confederate currency were inflated in the 1862-65 period. Well, even adding in an error bar of half a percent, the Dow has done this thing.
So what evidence do we have for hyperinflation? Well, oil is back up to $91 a barrel. Gold has hit all-time highs in recent months, including earlier in this month. Silver has hit highs not seen outside a few months in December 1979March 1980 time-frame. So against widely considered commodities, the dollar is going down. And we can't reasonably compare it to currencies because other countries are inflating, too.
Then there are those $9 trillion created out of thin air (printed, in the old-fashioned parlance), passed out to big banks and corporations, and allegedly "sequestered." It appears that money is moving into the economy.
We also know that the plans of the globalists have been to form large confederations of nations into regional super-national entities, such as the European Union. Then join it all together in a world government. We know that they have the ambition to unify all currencies so there is no hedge against inflation when they have only one currency. (Of course, gold, silver, copper, and other items have always been a functional hedge. And the Internet is quickly proving to be a source of dozens of new currencies.)
How to force the issue of a North American Union and the adoption of an "amero" regional currency? Crash the dollar.
So either the current rally is phony, or the current rally is part of a hyperinflation. In either case, are you really wanting dollar-denominated securities? Probably not.
You should seek value in speciality markets such as mining stocks, high technology stocks, and in trading options on volatility and currencies. You should protect your wealth with gold, silver, copper, and other commodities. You should unwind your involvement in major banks and large state-dependent corporations in preparation for dramatic changes in the post-2013 world. Seek out private exchanges, learn about communication privacy, especially encryption, and help build the new economy in the shell of the old.
Alternatively, there may be a dramatic hyperinflation. In which case seek value in income producing stocks, hedge your currency inflation risk using precious metals, and prepare for a dramatic unwinding of state-related enterprises. That could be labelled "Germany 1919-23" Much of the same advice applies.
If it isn't Japan in the 1990s, it is the Weimar Republic in the 1919-1923 era. Neither is a healthy economy. Look for widespread unemployment to persist.
Something to Watch
Some years ago, roughly 2007 or so, it stood at 0.11 for long periods. In 2008 it sailed up to arbitrarily high values like 5.7, and even higher depending on which sources you care to cite. It remains persistently higher in recent weeks, running down to 0.238 and back up to 0.241. There was a period in early 2010 when it was around 0.18. There are good reasons to think of it as an indicator of trouble in the economy. So, keep an eye on it.
Obviously a dramatic rise would indicate a shift in the banking and financial sector's underlying cost structure. It may presage big bank failures. If you have not already moved your money out of banks and into a credit union very near you, you should undertake that action now. If you have not closed credit vehicles such as lines of credit, credit cards, mortgages, and auto loans with major banks, do so now. Remember that the collateral of your mortgage debt and auto loan may not actually be encumbered if the transfer of the debt obligation was not done according to state laws in your state. When in doubt consult a trained professional, and demand proof from whoever attempts to collect.
If you are insured with a major insurance company, switch. Look at their balance sheet, look carefully at any annotations. A sudden shift in the cost of liquid money would dramatically alter their ability to pay out on claims.
Metals and Ratios
Gold has set a number of new all-time highs during calendar 2010. It is not out of the question that a year-end rally could send gold over its current all-time high of $1426 set in early December. The year 2011 is might even go without a Summer doldrums, but in any event the time to consider liquidating gold is always May. You sell in May and go away, then remember to buy again in September. Generally you'll find little loss except in, well, exceptional years such as 1979.
Gold's price rise from six months ago (starting, say, 5th of July) ran the price from $1160 to $1426 per ounce, with nearly perfect Fibonacci retraces to about $1320. On a very long term chart, such as the Kitco.com ten year report, the price of gold looks to be in a persistent up-trend. Only a complete fool like Gordon Brown would have sold half the Bank of England's gold at the bottom in 1999gold bugs still call it the "Brown bottom" for that reason. See the chart here:
Silver has shown a similar performance in recent months. Again, it moved up from a base price of $18 established over many months of trading to over $30 an ounce. And it also has re-traced to near the Fibonacci "golden mean" expected value of about $25.20.
Silver is much more volatile than gold, for many reasons. It has many more industrial applications. There are a lot more mineralisations that feature silver. There have in past years been mountains of mine tailings with significant silver waiting for the price to move up. As these are refined and liquidated, the supply cushion goes away. Silver has also been the subject of commodities futures trading commission investigations, and Chicago mercantile exchange group (a cartel that appears to be operating commodities markets in restraint of trade) margin manipulations.
Here's a nice long term chart for silver:
Before looking at what to expect from gold and silver in the next few years, let's look at another way of pricing gold. We can take the price of gold in dollars and divide it by the price of silver in dollars to find the number of ounces of silver it takes to buy one ounce of gold. Let's do that now.
Gold was trading on 6 September 2010 at $1,250. Today (Christmas Eve) it is not trading. Last price was $1384.40.
Silver traded on 6 September 2010 at $19.86 per ounce. Today it is at $29.22 per ounce.
This gives us 62.9 ounces of silver to buy an ounce of gold in early September, compared to 47.4 ounces of silver to buy an ounce of gold today. In other words the price of gold measured in ounces of silver has dropped by about 25% in only a few months. Why?
I believe this drop is a strong indication that we have entered a period of dramatic inflation. Monetary inflation not only in USA dollars but also in Japanese yen, British pounds, European Union euros, and other currencies seems very evident. Gold setting record high prices and silver setting highs compared to every month on record except December 1979 to March 1980 is a strong indication of monetary inflation. Fuel prices are similarly indicative.
During the dramatic inflation of 1979 which was exacerbated by the confiscation of Iranian assets in November 1979 (which was perceived in the Islamic world as a threat against every other Islamic nation's assets in the USA) there was a surge toward gold and silver. There was an attempt to corner the silver market by the Hunt brothers at the same time. This resulted in January 1980 all time highs (on the futures market for the April delivery) of about $50 an ounce for silver and $895 an ounce for gold. You can quickly calculate that those figures represent a 17.9 ounce price of gold in terms of silver. That is to say, at the previous record highs, an ounce of gold cost less than 18 ounces of silver. We have a ways to go before that ratio is reached again, but no reason to suppose it represents any sort of functional limit.
You are probably asking yourself, how did the system save the dollar in 1980? And the answer is very simple. Paul Volcker instituted very high interest rates, during a time when the USA was still the world's largest creditor nation. A few years later, Alan Greenspan instituted low interest rates and a monetary inflation policy which effectively exported dollars to the world. There was, at the time, a high demand for dollars in places with even worse inflation such as Argentina, later Yugoslavia, Russia, and later Argentina again. This demand has now been largely satisfied, and the dramatic borrowing of the USA government and its state and local governments has made the country the largest debtor nation not only in the world, but in the history of the world.
What should you expect from the gold and silver prices in 2011? I think you should expect generally higher prices. There is now timing on supply to consider. Generally by this point in a long term bull market in precious metals, one or more major mining discoveries is announced and begins to make its way onto the street. That used to take three or four years of higher prices, but environmental concerns have prompted much tougher mining laws, and even places like Mongolia with a rapidly developing economy which ought to have a sensible mining policy have announced dramatic alterations in the rules (very recently). So supply is an issue to watch, but it remains hard to figure out what to anticipate from it.
As to demand, there is a continuing and persistent demand for gold and silver as hedges against inflation. As this becomes ever more widespread, silver should have the best of it, because ever so many more people can afford to buy silver than can afford to buy gold, today. The same is true for copper.
About seven months ago, copper was persistently around $3 a pound. Today it is significantly over $4 a pound. I would anticipate that copper is also going to move higher on inflation expectations.
Should these expectations of inflation and possible hyperinflation abate during 2011? They would, if governments got their deficit spending rapidly into order, began to reduce borrowing, showed any signs of doing anything but monetising the debt. As it is, no, there is nothing fundamental in the economy nor on the horizon to suggest such a change. To the contrary, all policy makers are pronouncing the need for more deficit spending, tax cuts, and increased spending. Even the promised end to "war" in Afghanistan in 2011 is being pushed off to perhaps 2014, if ever.
At the moment, the Dow stands at 11573.49. Gold stands at $1384.40. This gives us a price of 8.36 ounces of gold to buy the Dow.
Back in 1999 when the Dow had been rising for many years, and gold falling, that price was over 45 ounces of gold to buy the Dow. I think it is noteworthy that while gold has gone from $252.80 or so per ounce at the Brown bottom to $1426 or so at its all time high earlier this month, the Dow has basically stagnated, moving up over $14K only to fall back to today's level, about where it was in 1999. Had you known to expect this situation you could have sold out of stocks and bought gold in 1999 and be sitting on a very nice fortune right now.
Indeed, if you had just one ounce of gold in 1980, sold it in January of that year, bought the NASDAQ, kept in that basket of stocks until 1999, sold out and bought gold, you'd have a very large fortune indeed. I leave such hypothetical speculations as an exercise for the reader. Yes, it really is that much.
I have previously written extensively on the Dow : gold ratio. I am on record believing that a reset value exists below three ounces of gold to buy the Dow. That level has been reached a number of times in the 20th Century, and it seems to have been necessary to get that low in order to see any new long term high in stock prices.
As well, the Dow : gold ratio remains the best measure of the exacerbation of the business cycle caused by the Federal Reserve. I refer you to this chart for further evidence:
While the very long term trend toward a higher overall value of the stock markets in terms of gold is unbroken, the variation around that trend has become extreme. You can also see on that Sharelynx chart that the economic down turn really began in 1999 in "real" terms. The 2002 and 2007 bubbles barely register in terms of ounces of gold.
You can also see that there is no reason to expect 3.0 to be the value where this crash makes a long term reversal. It could reverse below 0.75 ounces of gold to buy the Dow.
Previously I had predicted a secular crash roughly 2013 to a Dow below 8,000. Let's say it crashes to 5,000 and then rises over the next few years to about 7,500. There are records of even worse crashes, such as the 1722-1732 crash where nine out of ten stocks were destroyed as their companies went under, and the remaining stocks fell to only 10% of their former values, which were not again achieved until 1782.
A 0.75 ounce gold price of a Dow at $5,000 implies a gold price of about $6,667. If the crash goes to $1,500 on the Dow and the reversal transpires at a 0.5 ounce gold price, that implies a $3,000 ounce of gold. These aren't the only possible values for things to take, of course.
There is no question that unemployment is going to continue to be reported very high. This may last fifty years. It may out-last the reporting capacity of the government.
A great many things that have been reliable forms of employment are coming to an end. There is nothing you or I can do about these changes if we wanted to. There is no realistic way the government can do anything about it, either.
First class mail service is winding down. E-mail and the web have made it possible to move information, including finished documents, without using the mail. I can have a local store print a full colour fifty-page document in Singapore, today, without leaving my desk. On the whole, the movement toward on-line information is bad for paper-based industries.
Newspapers and magazines are already hard hit. Newsweek was sold earlier this year for a dollar. Local newspapers are finding their news "hole" shrinking along with the paid advertising pages. Auction web sites and web based classifieds are erasing their profits. Book publishing is shifting to on demand methodologies, with "espresso" printing machines capable of printing and binding full colour books on archive paper within minutes.
You can probably figure out whether paper companies are a good investment under these conditions. You can also predict an end to at least some aspects of the war on drugs. The trend toward marijuana and hemp legalisation is widespread and growing. And that trend is your friend. It seems unlikely that states are going to persist in maintaining a prison industrial complex in the face of growing budget crises.
There is no reason to suppose that the USA federal government won't institute forced labour camps and death camps, given the highly authoritarian nature of Stalinists like John McCain and Nazis like Joe Liebermann. And, yes, I do mean to be as rude as possible to each of them in these terms, though there are clearly ample bodies of evidence to support each statement.
So, why am I optimistic? In the short term, I'm not. In the next few years, I would not be surprised, at all, to find myself being tortured to death in one of Janet Napolitano's infamous "residential centres."
In the next fifty years, if any of us survive, I expect a flowering economy with all kinds of new technologies, totally divorced from the state. Privacy technology is making private stock markets possible (and proven). Private economic transactions are already going on, and the volume of them is increasing rapidly.
Once we shed the state, a huge amount of new things become possible. Voyages to Mars are not far off. Longevity research currently anticipates a 200 year lifespan for humans who survive to the year 2025 and a potential thousand year lifespan for those who live to see 2050. Flying car technology is already proven. Space tourism is still just over the horizon, but that horizon is being moved.
Europe is on fire. There is no reason to expect the authoritarians in power in the USA to be any less repressive. If anything, quite the opposite.
But one statistic does impress me. Violent crime is down about 6.2% for the first part of 2010. This strongly indicates that gun ownership is up, and people are more alert, better trained, and more ready to suppress violence or oppose it, than ever before.
Without doubt there are going to be a lot of people fleeing from cities in the next few years. The fires in Europe are coming to America. So, prepare. Keep a year's supply of food and water on hand. Have alternative power options ready. Have a deep hole in the ground provisioned for yourself and your family. Keep guns, gold, silver, canned food, seeds, and ammo in supply, fresh, and up to date. Keep your skills current. You'll need them.
We are in what is going to be a messy transition period for several years, possibly more than a decade. The break out into space is going to happen, and the other frontiers in Antarctica, the sea, and the sea beds are also going to open. Much that has been imagined is becoming possible.
Not to mention peace, love, and understanding.