Monday October 08 2007 Volume 17 Issue 15 0920 EDT
The Coming Age of Mega-Turbulence
Alan Greenspan may have named his best-selling account of his twenty year tenure at the head of the US Federal Reserve well, but the age of volatility as we have known it, could be just a dress rehearsal for the coming epitath, the very earliest beginnings of which, we may have already witnessed, during what thus far has proven to be the 2nd most dramatic era of this decade.
The good news is, that this past Friday, with some incredible economic relief, we garnered a more than welcome and well earned reprieve in job creation that, with some hastily assembled revisions, for added impact and good measure, succeeded in enabling one President George Bush, (who at the beginning of his tenure, couldn't create jobs for toffees, to the delight of his perennial democratic foes), to able to boast Friday, an unsurpassed record in job creation, under his watch, of 49 straight and uninterrupted months of job formation, as the longest in US history, managing even to eclipse Clinton's enviable job creation record of the Nineties, not in terms of numbers, but in terms of time and we are all very happy about that, especially if, as long as the economic boat doesn't get rocked too much this month or quarter, could enure to a new record 50 month streak or perhaps even a whole lot more, if this Fed Chairman can
glide this economy through a possible softer-than-expected landing and resume its upward trajectory, through the next administration.
That may still be a tall order to plenish, but thus far, the Fed has been earning points and credibility for its deft actions in preventing a possible credit melt-down of sorts over the past month and while most are rejoicing this month for what amounts to a re-inflating of the long term economic bubble to end all bubbles, shorts went home this weekend an unhappy lot, with a lot of explaining to do to wives, but the fact remains the NYSE still has among the largest percentage short positions in its history and one day they'll be proven right.
So, at some point soon down the road, even though they may have been snookered by the Fed one more time in what may still be the mother of all short-squeezes on Wall Street, there will come a day when short-sellers will be rewarded and again welcomed home with open arms as the ultimate heroes of the day, probably very long of Gold and short stocks... And the fact is, that inevitable day is coming, sooner or later, because we have seen this movie before and know that trees don't grow the sky and that economic fantasies will give way to an new age of mega-turbulance as the stark realities of looming and overwhelming problems will begin to very strongly manifest themselves in a combination, of what over the past year, we have been warning, did eventually come to pass: We've already seen this past March and August in mini-meltdowns as warning shots accross the bows, for what will eventually be a big one.
One day down the road the Fed will be forced to re-engineer something like what they have so far succeeded in executing remarkably well, in their already now highly praised post-August reprieve, where we've seen unprecedented hinting of a rate-cutting spree actually send the Dow Jones Industrial and Composite Indices to new all time record highs, something very few could imagine just weeks ago.
Unfortunately, the Fed may have unintentionally set us up for a fall, down the road, that even they will not be able to reverse anytime soon and the real reason is, one day, the overweight of growing economic negatives, will simply overwhelm whatever the Fed may do, short of massive hyper-reflation, a prospect that could still befall one Ben Bernanke as the man of destiny, who above all others, has in his intensive analysis, mega-thesis and dissertation of the causes and effects of the Great Depression, so written and articulated extensively on the ultimate doctrine on how to prevent the next depression earning the title: 'Helicopter Ben' for declaring he would, if necessary, throw money out of a proverbial helicopter, if that's what is needed to turn the economy around. And thus, we all got a real foretaste of what's to come from Uncle Ben this past two months in that he's not afraid to put his money where his mouth is, and that is one of the reasons we have been so bullish on these markets, because just as in days of 1999 leading up to the "2000 Bubble", we calculated those monetary additions in $50 Billion tranches, that were about to become manifest in a combined monetary onslaught, that way back then amounted to around $150 Billion. However just in the past two months, $150 Billion was more like a day's work in multiple rounds of daily bailouts by central banks, hurling at times tens to even hundreds of billions at economies the World over, like it was a new contest of sorts, to see who could hurl the most money on any given day and the winner may have been the Europeans, as this game became a scarily serious panic, when for the first time since the 1930's, there was a genunine run on a major UK Bank.
The cumulative effect of all these actions, capped off by a come from behind the curve fed has already actually been manifested rather forcefully on markets around the World, sending many to new all time record highs, in a bid to keep Global growth on track, after the Fed got its biggest wake-up call in decades, as to just how precarious the economic situation might actually be and how they have to keep the Global money train hauling the World economies along at an accelerating pace and avoid becoming the ultimate train-wreck.
Much of the blame for bringing World economies and markets to the brink can be laid at the Fed's door, because as we have stated before, you can't have it both ways... Ie: If you are going to pre-emptively raise rates as Greenspan started doing thirty months or so ago and then proceed to ratchet them up relentlessly in what amounted to a totally unprecedented 525% cumulative rate hike: Sooner or later, the economy will buckle, because no mature economy, especially the US and still engine of the World, can overcome such a drastic and dramatic interest rate of change over such a relatively short timespan, and the first casualty of same has been the US's housing sector, which lives and dies by interest rate differentials and is a very slow ship to turn around and so far the imminent sword of damocles hanging over the US economy. Why? If the housing slowdown or contraction is joined by the economy and markets and later, the rest of the World, then, no amount of Fed bailout or reflation, will reverse a multiple contraction anytime soon, and on top of all that, the cyclical tendencies of the Triple Decade Impact, wherein economic booms or growth periods have a 25 to 30 year lifespan simply because, economies, like marathon runners or athletes of any description or bulls in a bull-fight, tend to 'die' of exhaustion and is reason enough to be worried, that the Fed almost blew it and went at least a percentage point too far over the past year or so, and now we are witnessing looming consequences of the same trap that the Japanese fell into and apparently the Fed did not learn from...
In other words the Feds failure to pre-empt the coming housing and potential economic crunch, not lowering rates sooner, has already started to impact millions of lives, that are now in housing jeopardy and could end up affecting billions of lives through their ineptitude. As CNBC's Bill Siedman has so oft stated: Every recession since the institution's inception, can be laid at the Federal reserve's door and is really a result of the Fed's failure to pre-empt downturns, a la Greenspan in 2000 or every recession prior. The Fed always gets scared in the waning stages of a bull market because inflation and market activity tend to experience the final extremes of their bull moves before expiring, even though glaring indicators such as employment creation tend to peak often-times months, or years before.
So the big question is, in spite of the past few week's economic and markets respite: Did the Fed nip this one in the bud just in time? We don't know. We sure hope so and to be honest with a falling dollar and a still growing Worldwide economy, huge backlogs to build 787 planes and other transportation for the future like there's no tomorrow, there just might be enough internal new economic stimulus to maintain a reasonable growth-rate... But there are no guarantees, and that is the reason for writing this update. In particular, because it is definitely not lost on this author, that almost the "identical negative influences" that resulted in the Crash of '87 are again hanging over our markets, exactly 20 years later. We also appear to be going down a similar path, retracing the same footsteps, that led to a 6 fold increase in Gold and a 12 fold increase in Silver emanating from the fall of '77, exactly 30 years ago, almost to the day.
Does this sound like an economic train wreck in the making or what? Well, the first thing to keep in mind is that the August meltdown started from around these levels, when everything looked just fine, and the March meltdown or first Sub-Prime shot accross the bows, was already a distant memory... But not for us, or subscribers to MODAR, as we observed inherent weakness begin to set in almost immediately following the Dow Jones Industrial's puny attempt to post a new all time record high at 14,000.41, kind of hanging on by its fingers as traders tried to oblige by propping it up in waning minutes of trading on July 19 2007, in the fakest looking "Palendrome" record signature, we had ever seen, since the equally suspicious and possibly in all of Dow Jones history unprecedented 'Double Top' of 2999.85 identical closes, of July 19 & 20 of 1990, right before the Dow went into a sickeningly unexpected 20% plunge on the back of Saddam Hussein's invasion of Kuwait. Underscoring the fact, that you always need to have your wits about you, and pay atteniton to every subtle detail on Wall Street, because therein can often lie the "Holy Grail of Foresight" that can lead to great riches for those of whom "Fortune" can most definately favor with a prepared mindset, and is why we heavily shorted the markets on Monday July 23 in our largest short position recommendation then to date, at a cumulative 90 contracts, accross all major indices and basically held and added to that short bias until electing to cover and go long exactly 1 point off the S&P low of 1375 registered on August 16, 2007. And that's not all, by the end of the day, our recommendations had us long well over 1,000 S&P contracts in the mother of all wagers, correctly betting as it turned out, that August 16, was the monumental reversal we bargained for, ahead of new all time record highs...
Back to the present, and the other major looming problem a la 1987 could be the US Bond market, which, on the heels of Friday's job numbers went into a one-and-a-half-pont swoon and could de-rail the ongoing market advance on any further weakness as it begins to sink in that behind the veneer that US Bond Market yields could ratchet sharply higher to defend a rapidly weakening and extremely vulnerable looking US Dollar, therein depressing Bond values and ultimately stock prices, much as occurred exactly 20 years ago in 1987, and the implications this time around, could be potentially worse as inflation numbers due for release this month could be in the double digits and could force Bond vigilantes to act independently of the Fed and push Bond market yields even higher in a knee jerk reaction to the looming economic realities of a newly built in inflation rate that has to be approaching 10% on imports alone, that have to account for an additioanl 10% decline in the US unit over the past year and the resultant sky high prices we are seeing accross the board in just about everything involved in the economy that involves our daily goods and needs and in particular, cost of transportation.
All though it may not have sunk in for many yet, in spite of the greatest economy ever not only for the US, but also from a truly global standpoint, there is not an infinite supply of money in the World to sustain the US's insatiable trillion dollar appetite for that additional funding it so badly needs to compensate for its ever widening and cumulative trade deficit or to keep its economic machine running as we discovered in the first taste of the credit crunch encountered just two months ago and certain to loom again, if all does not go well:
And that's the problem... The UAE or GCC's with their $1.5 Trillion in disposable assets piled up from excessive oil profits are starting to shun not only the US Dollar as their reserve or trading currency, but they may also be abandoning some US investments, because they see the US Dollar getting still weaker and any flat or losing investments they already have, could be subject to the cutting of any immediately impending further losses, that would have the dual impact of weakening the US Dollar further and the underlying asset class as well, which more than likely could the principal bulwark of the US Government's funding machine, ie: US Treasury Bonds, putting further pressure on rates to rise, thereby potentially increasing not only the domestic deficit, already slated to expand massively as exploding Baby Boomer retirement responsibilities will increasingly need to be met, draining coffers and increasing the trade deficit also as the dollar further erodes, or worst still, in the worst of all worlds, we become a quasi-banana republic currency, wherein, nothing, not rising long term rates as bond prices plunge further or short term rates rising to 100% overnight, as has occured in the past in other currency debacles, such as the multiple division by 3 of the Mexican Peso of 15 years ago can attest did happen.
We've already warned several times of the coming Trillion Dollar Killing over the past two years or so and this time we are crying wolf as it appears to have arrived right at our doorstep, ready to beat down the doors: The Trillion Dollar Killing is really our personification of a currency inspired Worldwide panic, caused by the growing realization of foreign investors in US Treasuries that they truly stand to literally lose a Trillion Dollars or more. Added pressure to perform or cut losing investments, could conceivably cause a kind of run on US Bonds that would make the run on the Northern Rock Bank look like a tip by comparison... Now all of this may look a lot like conjecture, but remember the path we are going down and where we've been to in the past... Usually very few ever saw it coming and we have already seen dramatic moves in Gold, Silver, Platinum, Palladium and Copper to the upside and in the US Dollar to the downside in a disturbingly accelerating trend. And you have to ask yourself today: What are the investors who were lucky enough to get their money out of Northern Rock thinking? We're willing to bet that many of them are thinking it's either Gold, or the Mattress..!
And that's the main point of this missive and what we have been talking about all year, since we outlined our future for Gold right from the first day of 2007 and at various intervals since then, when we have never once wavered in our resounding bullishness for the metal and sector, constantly and consistently counselling all to take advantage of any weakness in Gold or Gold stocks, no matter how or what or who was saying otherwise, and as we traverse into the second week of October and witness December Gold rebounding back to almost $750 per ounce, which may we repeat is a fantastic price for Gold and any Gold mining company in historic terms, that any higher from here, virtually means any future Gold and Silver gains, will be transferred to the bottom line values of any mining company.
The burdens of successive booms and bubbles have been piling up over the past three decades of hypergrowth in the US and World economies and sooner or later, we have to pay the piper for the cumulative inflationary impact, which has yet to fully and completely manifest itself in terms of a long overdue compensatory rise in Gold and Silver prices. To give some idea of how far inflation has come, the Prime Minister of Qatar recently stated that a truer fair price for Oil should be about $125 per barrel today, arrived at by just applying an average 2.5% annualized inflation rate since 1973. If that is the case, imagine what that cumulative inflation rate has done to the US Dollar's purchasing powe and how far Gold and Silver have been left behind. Characteristically, following each major three decade or so financial booms over the past century, beginning with the relatively modest 8 fold increase in the Dow Jones Industrials from 1902 to 1929, each of the subsequent 10 years or so economic and market downturns were compensated for and accompanied by significant increases in Gold, Silver and mining stock values over the next decade, and repeated exponentially in the case of Gold and Silver in the 1970's with a 20 fold and 50 fold increase respectively, following only a 10 fold increase in the Dow from 1942 to 1967-70 and this time with the Dow near new all time record highs this morning on the back of an 18 fold gain since 1982, over only the past 25 years, pray tell, where are Gold and Silver prices going this time around if the financial boom today is so much larger than anything we have ever seen in the past, especially the monumental gains that Russia, China, India, Brazil, Mexico and the Middle East have all experienced and bring to bear exponential multiples of latent Gold and Silver buying power down the road, on top of the fact that the World is running out of Gold and Silver with perhaps 11 or so years of supply remaining at current consumption increase in growth trends factored in? Its a daunting prospect, but as we have said before... Something or some exogenous event may be the catalyst for a Gold and Silver, mania of all manias to unfold, and just as the Hunt Brothers tried to corner the Silver market in January 1980, today it could be a country or group of countries that try either deliberately or inadvertantly through weight of numbers, to do the same, with potentially mind-blowing consequences for all, especially early investors... Extrapolating out from the mega financial boom growth of this triple decade impact, it is not impossible to surmise a Gold price of $9,000 per ounce and $300 per ounce Silver, but to be more realistic, our longer term target remains at $1,785 for Gold and $120 Silver, with next decade objectives that could range as high as $3,900 to $4,700 or so for Gold and upwards of $200 for Silver. Thus far, we are humbled by how well our predictions have to date unfolded and for the time being, continue to expect an orderly increase in prices, although we are watching carefully for any real acceleration in prices to unfold that could usher in new all time record highs and a run to $1,100 or so, or even as high as $1,450, in the belief that a run up to such levels would potentially create a new floor for Gold in the $800's and a new range towards higher highs.
The accompanying Gold report courtesy of R J O'Brien, not only endorses our own views on Gold: The accompanying charts are quite startling in their emphasis of the decline in Gold production, especially in South Africa and the huge growing demand for Gold in India, to the point that should such growth continue unabated, not only in India, but around the World, demand will surely overwhelm supply.
We would therefore use any renewed short-term weakness in gold and silver prices to acquire additional positions in precious metals.
We believe Santa Fe Gold Corp SFEG is the most undervalued gold asset on planet earth.