Market Wrap

Week Ending 1/9/09

The Economy

Consumers are tightening their belts. Borrowing declined at a 3.7% annual rate during the month of Nov. A reduction is consumer credit will cause a further drop in consumer spending.

Main stream analysts view this as bad news. In my opinion it is one of the remedies needed to heal the existing financial malaise. The root cause of the present debacle is excess credit and money creation.

All three segments of the economy: consumers, businesses, and the government, have taken on too much debt. Fiscal restraint and financial discipline is needed. Now is the time to cut back on spending and to increase savings. Only savings leads to real wealth accumulation.

Increased debt levels only make the moneylenders wealthy. Society may be spending and buying more, but only because they are borrowing more; which is another name for going deeper into debt.

This is not wealth accumulation - it is the road to debt servitude and a decrease in the standard of living.

The first chart below shows the recessionary drop in consumer credit. The second details the Fed's reaction to the financial crisis: a zero interest rate policy that will only breed more of the same excess credit creation that fueled the boom now gone bust.

The new administration is proposing a fiscal stimulus package to jump start the economy, with the government spending (borrowing) up to 1 TRILLION dollars to rebuild segments of the infrastructure. This sounds encouraging and is well meant; however, where is the money going to come from?

In a paper fiat monetary system, more credit means more debt; all of which lowers the purchasing power of the money so created. This debasing of the currency is the problem that needs to be corrected; anything else is the same as that which has come before.

When money is sound and saved, and then lent out as credit, the debt so created can be repaid. When money is unsound, credit creation leads to debt that cannot be repaid, as the purchasing power of the money loses value due to excessive money creation. This is the crux of the problem. If the money is unsound, the financial edifice built upon it is unsound.

This is why the Constitution mandates gold and silver coin as money; and disallows bills of credit to be accepted between the states as legal tender.

Gold and silver cannot be created by fiat; they must be mined from the bowels of the earth by hard work. This prevents excess money and credit creation, which if left unchecked, leads to loss of purchasing power.

Therein lays the problem and the cure of that which ails America. It is not the state of the Union that is in question - it is the state of the monetary unit, of paper fiat Federal Reserve Notes: bills of credit that are disallowed by the United States Constitution.

Thomas Hoenig, President of the Federal Reserve Bank of Kansas City had the following to say about the situation:

"We have a lot of stimulus in the economy from monetary policy, we have a lot of stimulus in play and on the way from fiscal policy, and those, I think, will be important positive factors."

"If we do it, and do it right, we will come out a better economy for it. If you withdraw too quickly, you will cut off the recovery. But if you wait too long, you will then provide the seed, if you will, for the next series of inflation, perhaps excess, and crisis. So it's a very delicate balance between those two things and it's dependent upon judgment."

In the last year, M2 money supply has expanded at an annual rate of 8.1%. During the same time, M1 increased 11.8% and is presently approaching levels not seen since the 1980's.

This is why the dollar is losing purchasing power. More of the same will not correct the problem; it will make it worse by adding fuel to the fire.

Richmond Federal Reserve Bank President Jeffrey Lacker made similar remarks as Thomas Hoenig, President of the Federal Reserve Bank of Kansas City sited above. Lacker starts off on a stronger footing than Hoenig, but his final comments are most telling.

"Many historical instances of monetary instability have been the result of central banks being prevailed upon to use their balance sheets for fiscal ends."

"No matter how one assessed the overall merits of such programs, it is important to recognize that these are fiscal measures."

"There could well come a time at which monetary stimulus needs to be withdrawn to prevent a resurgence of inflation, even though credit markets are not deemed fully healed."

"Monetary policy stabilizes the purchasing power of money over time by keeping the price level stable."

The last sentence, highlighted in bold print, is questionable at best, and demonstratively wrong at worst. On its own website, the Fed has a "calculator" that measures the purchasing power of money from any given year.

Since 1913 the dollar has lost over 95% of its purchasing power to date. To say that the Fed's monetary policy stabilizes purchasing power does not square with the facts.

As mentioned above and constantly in past reports and articles, including the new book Honest Money - the main cause of all financial problems is the very fact that paper fiat debt-money is constantly losing purchasing power.

Only sound money of gold and silver can cure the inherent disease of paper money. The money supply charts above clearly show that monetary policy is run amuck and out of control; and far from being stabilizing. In fact - it is extremely destabilizing.

It is time for those "in charge" to admit the system is broke and needs to be replaced with the constitutional system of gold and silver coin. A state of denial is simply putting off the day of reckoning. Less pain will occur if sound money is restored now - not later when the problem has grown even larger.

Bonds

For 2008, Treasury bonds were the best performing asset class. This is because of a flight to "safety" by investors. Most investors believe that U.S. Treasury bonds would be the last asset to default. This may or may not be the case compared to assets that are "within" the system.

Gold is outside of the "system", which is the reason the bankers do not want the precious metal in the hands of the people as money. If such were to occur, the elite would no longer have control of the money power; and the power to create money at whim. For further details see: Honest Money.

It is interesting to note that although Treasury bonds were bid way up during the financial meltdown, corporate debt lost ground. Businesses are perceived to be at greater risk to default as compared to the government.

The reason is because the government has the power to tax and to create money in partnership with the Fed. If a business were to try that they would be shut down and thrown in jail.

The chart below shows how bonds have far outperformed the stock market. Some would consider this illustrative of a parabolic rise that will not sustain.

Gold

The gold rally may be fizzling out short term. GLD ran into its upper trend line and bounced back down, closing below its 200 dma as well.

Last week's report mentioned that this was likely to occur, as negative divergences were present and still are.

Both RSI and the histograms are showing divergence and MACD has put in a negative crossover. GLD needs to break above its upper trend line to term the short term trend around.

After that the Sept. and Oct. highs would be the next targets. Gold's short term direction will most likely be determined by the U.S. dollar; and whether Mideast fighting escalates.

Gold Stocks

Gold stocks have rallied up well off their October lows, however, it must be remembered that they had been crushed in the meltdown before. Until the Sept. highs can be bettered the trend is down.

GDX has bumped up into overhead resistance and its upper trend line has held. This is the first line to be crossed for the gold stocks (34). RSI has a negative divergence and MACD is under a negative crossover. Histograms have turned down as well.

The gold shares act as if they need a rest and time to consolidate. Any weakness that holds support may offer good entry value. I am waiting and watching in anticipation.

Invitation

The above is an excerpt from the full market wrap report available at the Honest Money Gold & Silver Report website. This week's report contains twenty-five charts & graphs, including six individual charts on the stock watch list.

Just made available on the site is an audio version of the book Honest Money. A free copy is included with new subscriptions along with two special reports: Investment Vehicles for Bull & Bear Markets; and How to Protect Your Assets in today's turbulent markets.

The first is a list of over 50 ETF's and other investment vehicles offering profit potential on both the long and short side of various markets: stocks, bonds, currencies, gold, oil, water and more.

The second special is a list of actions that can be taken to help protect your assets; including T-Bill Only Money Markets, wire redemptions capabilities to gold depositories, both here and abroad; and more. Stop by and check it out. This week you can request a onetime free full market wrap report on the site via the email provided.

Good luck. Good trading. Good health, and that's a wrap.

Come visit our website: Honest Money Gold & Silver Report
New Book Now Available - Honest Money