Where is the market headed? For openers it’s weaker than it was in October 1987, when interest rates were somewhat higher. Market deterioration began in May this year and more aggressive leakage began in August as the Morgan Stanley Business Conditions Index fell 9-points to 40%. That is the third consecutive monthly reading below 50%, which puts the 3-month average at 44%. The advance bookings fell 14-points to 49%, its first venture under 50% in its 6^th month history. That is deterioration and analysts agree, increasing their negative ratings from 24% to 41%. Finally the mantra of free trade isn’t working so well. You can never have prosperity for all, especially when the playing field is not level. America is playing under a terrible handicap. It cannot compete with labor costs 75% to 90% below ours and we can’t compete when countries devalue their currencies daily. We need fair trade and we are not getting it and our competitors have no intention of allowing fair trade.

            Housing starts fell 3% in July and they are off 21% since peaking in January. Building permits fell 7% in July to the lowest level in four years. Staff is being cut but it has only begun. There is a six-month to one-year lead-time on housing. During that period the major layoffs begin. There is no question a fall in permits, construction and employment in construction, mortgage creation and in real estate sales and assessments, but that will be offset by the tremendous money and credit creation that has been going on for sometime. Those who look for deflation from real estate will be disappointed. Deflation will only come when you see money and credit begin to retract. In the meantime, we will have stagnation and inflation – stagflation and we’ll see $4 trillion lost in real estate over the next four years. Somewhere along the way the Fed and the other central banks that are inflating will have to give up and allow the purging of their economies. In the meantime those in gold and silver related assets will protect their wealth and perhaps make a great deal of money.

            As we have told you often, you cannot believe any of the statistics coming out of Washington because truth is something these sociopaths know little about. That goes for the employment figures. Over the past three months there has been a loss of jobs not a gain of several hundred thousand, but again that is being offset by the high flow of money and credit, increasing credit card debt and the record removal of home equity. Any market professional should be going on the defensive – this is injurious to the economy.

            The economy is going to slow more sharply over the next three years than most any professionals realize. They simply don’t understand what they are dealing with. They for the most part have never had a bad day in the markets. They figure the Fed can always ride to the rescue and they are in for a big surprise. What is really disturbing is Wall Street analysts and economists take official statistics at face value. When you are operating from an incorrect premise it is difficult to be right. Inflation is not the official 4.1% or 4.5%, it is 10.9% and most people on Wall Street know that, but they won’t go on record to that effect. We are going to slow down and it’s going to get progressively worse and it’s going to end in depression. Why do you think we’ve had an inverted yield curve for nine-weeks? We previously, earlier in the year, had one for a month. For those who don’t know, that is when the yield on the two-year Treasury note is higher than the year on the ten-year Treasury note, which is very abnormal. It’s caused by the Fed feeding too much liquidity into the short end of the market. This time it is not going to be different. There is going to be copious pain for everyone, even those who protect themselves in gold and silver assets. During the first two weeks of September the stock market will oblige you with your final chance to sell. Don’t let that opportunity pass you by.

            You have seen the MSBCI figures and they are borne out by the Conference Board’s leading economic indicators that have fallen at a 1.4% annualized pace in the past six months. In the past when they have turned down for six months straight, there has been a serious slowdown or recession. Rather than report on all the indicators we’ll just say several are pointing in the same direction. A signpost Wall Street refuses to recognize. We see growth in GDP in the second half of next year even or a minus. Using your home as a piggybank will have come to an end. We have never gone into a correction when earnings and debt have been anything like they are today. Then there is the tide of liquidity, which is enormous. The correction will be deep and devastating. Eighty percent of our economy is service; our manufacturing capability has been and is being deliberately destroyed. Going out the other side of this terrible experience is going to be very difficult...

            As we commented in an earlier issue for now interest rates have peaked and with an election pending and incumbents and Republicans in serious trouble, we do not expect there will be another rate hike until January. That gives inflation six months to have its way with the economy. That means the dollar and the stock market are headed lower and inflation, gold and silver are headed much higher. If rates were to be lowered after the election, the dollar would break 80 on the dollar index and fall to 50-55, which would under today’s leveraged conditions bring on financial chaos and gold higher than $1,700 an ounce and silver over $50 an ounce. Inflation would officially reach 10%. If that were to happen it would be suicidal. Incidentally, the dollar has already begun its descent and by election time will be testing 80 as gold should be testing $850. Again, rates will bring raging inflation and that action would have the Swiss franc testing $1.14, the euro $1.3666 and the pound $2.00. Now, mind you this does not factor in any untoward events. If the Fed leaves rates where they are for the next two years then you can expect progressively higher inflation and a progressively lower dollar - 80 will be broken to the downside.  We believe that unchanged rates will be Bernanke’s choice, as he will prefer a weak dollar to domestic recession and depression, he has just proven that.

            Those of you who are in gold and silver and are out of the market and have dollar assets, sell them. Switch to assets denominated in Swiss francs and Canadian dollars. The gold and silver shares and numismatic gold coins are basing out here. Buy now as it will be your last best chance...

            As the result of economic and monetary policies we’ll have stagflation or depression for another seven years. The insiders are going to find out again that military Keynesianism does not work. That is why the Fed officially terminated M3. They want to hide the disintegrating US economy, and the implications for the dollar, by obscuring this significant measure of monetary inflation...

-- Posted Wednesday, 23 August 2006 | Digg This Article

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