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Ed Bugos

Ed Bugos


Ed Bugos is a former stockbroker, founder of GoldenBar.com, one of the original contributing editors to SafeHaven.com and former editor of the Gold & Options…

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If Not Inflation, Then What?

FULL VERSION of a June 8, 2001 Report

In (a) libertarian society, since everyone would know that false stories are legal, there would be far more skepticism on the part of the reading or listening public, who would insist on far more proof and would believe fewer derogatory stories than they do now - Murray Rothbard, "The Ethics of Liberty"

I don't think that Wall Street has heard our call for the stock market yet; allow us to make it loud and clear:

Dow 7000! That's 4000 points

And it will not immediately rebound, this time. In fact, it is entirely possible that 10 years will pass before these levels are revisited, unless perhaps, Dow Jones & co. adds a gold stock component to the industrials.

Yet it is the recovery and potential breakout in U.S. stock prices that is right in the middle of the global financial debate this week. It looks like a good move, but then what bull trap doesn't?

Remember folks, despite the fire sale for dollars, it is still a bear market in the broad stock market averages, and last week's reversal in the Dow Industrials was the sole one out there. Our readers know the reason for that because they are aware of the true leadership. Part of the reason for the general disorientation, however, is that the mainstream analysis continues to be cavalier about how central the inflation debate is, to either, the bullish or bearish case. This should be an insult to you, but on the bright side, it is bullish for liberty (see Rothbard quote).

For if it seems perfectly legal for Mr. Greenspan to get up on stage and perpetuate one false story after another today, liberty cannot be far away.

Though we've noticed that his line has a subtle global unity to it this time. That is to say, its echoes have been heard overseas and its might has been felt in Forex markets. Dollar bulls have won yet another battle by pushing the trade weighted dollar index to new highs, effectively correcting your inflation expectations by adjusting the dollar price of physical things lower. How does that work? Through an adjustment in the dollar price of other currencies, even lower, the process transfers an excess of purchasing power from one paper currency to another, the dollar in this case, thereby allowing the US to export its inflation, and then some, to the rest of the world.


Recall, that officially, the international currency arrangement is to aim for stability, but to sanction instability if the objective is for global growth. Nevertheless, dollar strength continues to stress the arrangement. I don't think that any one of the global central banks lowered their interest rates this week. Still, this kind of dollar strength needs international support in order to sustain. If there is a new unity, what drives it, and is it sound? More importantly, is it as sound as the nonsense that forms the bullish case for stocks, particularly the blue chip Dow.

Speaking of that…
After trying to come up with a cogent bullish argument - presumably one that would justify a run at Dow 13000 or higher - we found none that could stand the contradiction of recent facts, and are forced to conclude that the bulls will be left wanting, again. So, in order to give them a fair shot anyhow, we have posted a (satiric) plea to Mr. Greenspan, on behalf of all shareholders of the American dream:

Dear Alan,

Listen, about this new economy. I have sincerely been trying to persuade myself to get bullish on stocks, but you persist in punishing my enthusiasm. How the hell can I buy today's leaders - Alcoa, Exxon, or 3M, for instance - at today's prices, if you're telling everybody that there is no inflation?

And if there is inflation, how can I buy IBM, Intel, or Dell, particularly if your data informs us that workers there are slacking off now, that it costs more to pay them, and that excess inventories now overhang demand? Furthermore, how can I buy Boeing or Honeywell if you insist that the government is trying to keep a budget surplus?

I'm anxious about being laid off, but the Union guys are putting pressure on us to get tougher on pay. They seem to disagree with you on the changing costs of living. I know I need to save, and that the right place to put my savings is in the safe blue chips, like the Dow Industrials, or Utilities. Utilities never go bankrupt, right? But my disposable income keeps shrinking. Still, if I can keep my job and we get the higher pay, maybe I'll be able to take a shot anyhow. Maybe I'll even get some more stock options!

Speaking of luck, I write to you in the hope that you'll send more money. Wal-Mart tends to be out of inventory often, and they won't increase prices because you tell them that they don't have any pricing power. But then I need clothes, so I have to go elsewhere, where it costs more.

And despite all of your effort (for which I am thankful) to persuade the gas station attendant to lower pump prices, he refuses to negotiate. I tried to tell him that his inventories are piling up… even showed him charts and stuff, and that I can hold out, but he just laughed at me and claimed that his inventories will continue to go up because his company will make more money that way. And so will he, when he sells his stock options.

I can't sell my bond fund because it keeps losing value and I don't want to lose any more money now, so I'll wait for it to break even, which you can help simply by lowering interest rates… like you have for the first half of the year! My stockbroker says that's good for bonds.

God I hope so, because otherwise, I don't think that I'll be able to afford the Dow, at 29 times earnings.

I'll tell you what though. I won't tell anyone if the next time you want to hand out cash, you let me in line first. Then I'll buy the *^@#* out of the market for you! Because frankly, where I am in line at the moment, everything is always up by the time I get your handouts. It really sucks!

Cheerleader for hire
(yes we made that all up)

The Bullish Case for Stocks
The bullish case today rests on expectations for interest rates to fall in tandem with "expected" Fed policy direction, for inflation rates to peak - in the first month that the effect of the first rate cut is supposed to grab hold - and for a recovery in capital spending to resume, after corporate coffers have been re-energized with fresh FOMC credits.

Stock (market) salesmen today (everyone) say that equities can trade at a premium to fixed income investments due to the argument that stocks are the best long-term investment around, and therefore deserve a low risk premium to other assets. So, the thinking goes, if the Fed can just keep rates low, expensive stock prices will be the norm.

The dollar, of course, will take care of itself, relative to other currencies and things, because it will always be in demand, regardless of how freely available it is. The law of scarcity does not apply if dollar denominated returns are supported by high rates of labor productivity, which will always be higher in the United States because (they have the highest paid statisticians in the world working for them?) it has the world's youngest population on the planet? Or is it because the United States has the freest and most efficient market system in the world, with regard to the allocation of the nation's scarce resources and things? No, it must be attitude! They've got such good (optimistic) attitudes about profits.

At any rate, perhaps because of that, it is also the case that bulls believe declining fortunes overseas will result in rising fortunes for them here in NY, like in 1998. The bottom line is, and we all know it, that if stock prices can go up, and the dollar can go up, then inflation can be contained, or absorbed, and productivity will be easier to talk up again. This is maybe true, theoretically. After all, the whole idea of inflation is to direct it to where it produces the most sustainable gain - that would be asset prices traditionally. Profits would come back because the whole business of capital investment is driven by stock speculation, or the equivalent. A soaring dollar rate can certainly help support the marginal, or subjective-use, value of additional money supply, thereby putting pressure on some prices while letting others rise.

In reality, however, this does not cure the inflation, or its destabilizing effects. It is only a mechanism that further distorts the market process, possibly creating further malinvestment, or misdirected investment.

The Bearish Case for Gold
As for gold, who needs it? I recently forced myself to listen to a local University radio station, where they had broadcast a live symposium on the dangers of gold mining, to society. I was proud of myself for not driving into the meeting and giving this guy a lesson in critical thinking. He was complaining that the growth in gold mining is unnecessary because the gold is needlessly stored in a vault for the sheer purpose of capitalists to manipulate our finances with, and that therefore, it has no utility to anyone, especially the common man. This they now preach, I presume, at the University of British Columbia.

Another graduate in Philosophy from one of our esteemed local Universities is John Kaiser, currently the brains behind the 7-year-old Kaiser Bottom Fishing Report. John is an extremely thorough analyst but suffers from the same affliction as I do - over thinking. Unfortunately, he rarely comes to a conclusion due to another affliction: the "I hate being wrong" affliction. Here is an example from his February 26th issue, Calling All True Bottom Fishers:

I would love to see the gold price break down because it almost seems necessary as a prelude to a major bull market. Perversity might dictate that gold not develop a bull market until the last gold bug has been drawn and quartered. But on the other hand some strange shot from left field could send investors stampeding into gold tomorrow.

We estimate that John is about 20 months behind. The Bank of England has already accomplished this - mid 1999. We are drawing and quartering John not just because we want to poke fun at the man, but also because he is a fair representation of the bearish case for gold, even if at some point, he persuades himself that he is bullish, which according to his entire argument, should not happen for another decade! As far as we are concerned, John is the best micro stock analyst on the West Coast, but his grasp of economics is as good as his broader forecasts.

Below are some excerpts from his case against gold under the title, Gold Bashing, from his January 21 speech in Vancouver this year:

Gold bugs, who tend to imagine themselves as hardcore American patriots, have an intense hatred for the technology sector because they appreciate gold and technology as symbols of the tension between antiquity and modernity. They recognize that gold is losing the struggle and it makes them furious. But what makes them really, really mad is their suspicion that modernity has cheated in its battle against antiquity.

In the March-June 1999 issue of the Kaiser Bottom-Fishing Report I published an essay contending that the gold leasing strategy of central banks is really a secret liquidation of their "dead" gold reserves in exchange for interest bearing securities.

The gold bugs think that their personal opportunity to profit from soaring gold prices is being unfairly compromised by the supposed efforts of Alan Greenspan and others to prevent a short squeeze by suppressing the price of gold. What baffles me is why this gold loan "problem" should merit so much manipulative intervention when the evaporation of $100 billion in the market cap of Intel alone, never mind the trillion dollar value that vanished during NASDAQ's decline in 2000, failed to unleash a financial crisis? If a short squeeze should ever develop, I think the central banks will simply take possession of the paper collateral put up by the borrowers and strike the leased gold from their books as "sold".

The people who pray for a return to a gold standard are not just immoral, but also very stupid. They are stupid because they think there is something finite and immutable about gold that prevents it from being abused by governments in the way that paper money has historically been abused because you cannot readily create new gold supply. I've already complained about the immorality of using violence to accumulate or extract gold. Now, how finite is gold? Gold is everywhere in varying degrees of concentration, even seawater. Gold has worked well as a hard currency during the past several thousand years because extraction technology evolved slowly. But during the 20th century the evolution of extraction technology accelerated even as energy costs plummeted. The potential supply of gold is almost infinite.

The recent technology driven bull market helped establish the US dollar as the dominant global currency and underlined technology as the foundation for American economic supremacy. In the minds of investors the price of gold has become an inverse proxy of American supremacy.

There are not a few things wrong with that thinking. But we'll have fun (for lack of a more appropriate term) with this a little later. On the subject of being mad though, I should mention that it is more like a laugh, at least when reading that. The anger that John misinterprets is selective, and probably occurs when he says something to someone that is so stupid it is inarguable. No, mad is not the right word. What we are witnessing in the gold market today, I believe, is akin to the kind of senseless majority oppression of the minority, which may have been the mark of unstable democracies throughout history.

It could very well be the kind of emotion that increases in intensity, in direct proportion to the level of democratic instability. Now let's discuss stocks:

Dow Jones Industrial Average

There have been six full-fledged, maybe arguable, but certainly meaningful reversals in the two-year trading range above, for the Dow Industrials. We'll count the "??" as a reversal because technically, it is. But does it count anymore than the others, and will it hold?

Trend followers beware here, because it is a contrarian's market, or has been for two years now. The simple odds are for a reversal. They improve when you consider that it is a bear market for the broader averages, and even more when you consider the bear market in world equities. They improve even further if you extrapolate the current trend in market yields and profit fundamentals.

Bulls are scraping the Bottom of the Barrel
What will change these facts? What will it take to get the Dow to break up and away from this trading range? More rate cuts? With rising prices and yields everywhere? Has there been enough of a slackening in demand to offset the potential inflationary boiling points in the economy? We know from Nominal Wealth that this (credit) cycle cannot sustain the dollar (exchange rate) in reverse, so that question is moot.

We know that jobs have been lost, and that as a result, job insecurity is possibly on the rise. Yet wage pressures persist.

US Labor Productivity
Average Hourly Earnings
US Average Hourly Earnings: rate of change

Consumption rolls ahead at the expense of saving rates, purchasing power, and productivity, though perhaps at a slower pace.

Stocks of oil and gasoline are piling up, yet this is presented to the public as deflationary.

I believe this to be the latest ploy of dollar policy, in this confidence game. In the field of money, hoarding will reveal itself in the savings rate because to hoard, by definition, means to amass and store in hoard. When the price of money rises, the incentive is to hoard. When it falls the incentive is to spend, in our kind of economic system.

Crude Oil Inventories

We know that, in the United States, there is a shortage of energy available at a good price, which is why prices are way up there. Naturally, rising oil and gas prices will induce suppliers and consumers to hoard inventory. Hoarding is a normal inflation behavior. Selling that inventory is not an option unless prices are expected to come down.

Thus, it has to be the goal of dollar policy to bring those expectations down, if only to hoard some more for the state. But to point to this process as potential supply, which will put an end to the problem, omits two things: first, the monetary impetus - undoubtedly the source of the problem in the first place - of the past five rate cuts has only now arrived, theoretically.

He said that it is likely to be "some time" before the interest rate cuts ordered by the Fed since the beginning of this year have their whole effect on the economy. He added that he does expect the economy to accelerate by the end of the year - Robert Parry, San Francisco Fed President, June 7, 2001.

We must presume then, that the hoarding will continue, or at least not unwind. Yet at the same time, powerful "democratic" forces have been reportedly pressing for a cap on wholesale electricity prices. Thus, both monetary as well as social policy are geared toward subsidizing the excessive consumption of cheap energy, thus further accelerating the actual shortage.

So show me those charts again and tell me that those inventories are going to come back onto the market again any time soon! Keynes might try to sell it, but I won't buy it. And credit markets are not buying it either. Yields may be ready to explode!

30-Year US Treasury Yield

The yield flattening trade, dollar strength, weak economic reports, and oversupply concern in the corporate issues market drove fresh flows into treasuries for most of the week, putting some pressure on yields. But those flows got nailed with fresh Treasury supply yesterday, driving yields back off of their 200 day moving average and perhaps putting in a higher low now.

So when the bulls say that inflation has peaked, have they considered these factors properly? After all, have they considered that lower interest rates at the front end are not only increasingly difficult to justify, with (non regulated) market yields going the other way, but also increasingly destabilizing? In other words, the steepening yield curve could accelerate the inflation of US money aggregates.

No Pricing Power??

Alcoa, Inc. Philip Morris

I wonder what that (inflation) can do to the still very low equity risk premium - the one, which implies (assumes) that stocks are the best investment class around? This is a dangerous assumption, because it is not applicable when inflation and interest rates run above the tolerable levels of the late nineties. Even the risk free part of the theory that underpins the low ERP is under considerable debate now as national default rates trend ever higher. This debate will be cleared up soon enough by the way - when the administration announces its first unexpected budget shortfall.

Where is the Rabbit?
So then, what miraculous event could trigger a 2000 / 3000 point rally, from here? Really, why else would you buy the Dow? For the dividend? I mean, you've got to have a good reason because it has not moved that many points without a whipsaw, since late 1998 / early 1999, and if you haven't noticed, it just rallied 2000 points.

Has anything good transpired since 1998? For the fundamentals I mean. Has there been an improvement in labor productivity somewhere? No. Are expectations for profits rising or falling? Generally, they are falling, and may have much more to fall in many sectors. But a top down analysis may lead the average analyst to assume a recovery is just around the corner for the economy, and thus conclude that this will show up in the bottom line. That of course will depend on how real, rather than nominal, the recovery is.

Remember, San Francisco Fed President Robert Parry says that it is not a matter of if the economy responds to the monetary stimulus of the past five months, but when.

Can the strong dollar boost stocks?
How is an exceptionally strong dollar good for the multi-nationals in the Dow? Won't profits get crushed like McDonald's and others did earlier this year?

Indeed, what happens in the second half of the year, to the economy as well as to stocks and bonds, will have everything to do with what happens to the dollar. When the monetary stimulus that Mr. Parry discusses, kicks in, we expect commodity prices to start rising again, in dollar terms. They have been rising against the other currencies all year long, as a consequence of dollar policy.

Inflation rates in Europe have been rising above trend. They have been doing that in many of the nations that engage in exchange rate arbitrage with the US, for the benefit of trade. For, as you now know, the current objective of dollar policy towards inflation is to export it. The higher that the dollar exchange rate will rise without a moderation in the rate of growth in money supply, the more inflation there will be for US trading partners to contend with until one day the rising dollar rate finally craters domestic demand.

In the meantime, will the ECB be forced to pressure the TED spread, which has already declined from 120 to 40 basis points over the past year? It shouldn't matter to the dollar because no one will buy the euro if they raise interest rates, will they? And the Fed doesn't really care about the Euro, beyond its utility as a source of purchasing power. But that's where the analysis will be wrong.

If we are correct in our hypothesis, how long can it be before political friction begins to affect the current global currency arrangement, or monetary order? The ECB can't really risk supporting an inflation agenda without the same degree of control over the inflationary byproduct that the Fed/Treasury have today. And that degree of control can only come from the kind of confidence, which only time can create.

And although the dollar bulls are convinced that rising euro interest rates will crush the euro, we aren't. The reason is that in truth, the recent force of Europe's inflation is the Fed. Thus a rise in euro rates may induce a fall in the demand for excess dollars offered up by the Federal Reserve Board, as well as slow the rate of growth in euro money supply. That said, it may be that with enough fear mongering, US dollar governors could make buyers out of British voters:

U.K. Prime Minister Blair and the Labor party are expected to easily win today's general elections. Unfortunately, what looks like a celebration for Prime Minister Blair looks like a funeral for the pound as investors fear that a Labor win dooms the pound into becoming a Euro - Daily Futures

There are many things happening in currency markets, many of them will be seen by history as turning points, for whatever comes of them. The need for an anchor has never been greater than it is today. I believe that we will soon see why. But in any case, the idea that a strong dollar will be a plus for stock markets needs to be weighed against the political and economic consequences, of the strong dollar, short and long term. Short term it may support a relatively low risk premium, but despite the 20% rise in the dollar index so far this year, yields, as well as prices, remain conspicuously sticky, and have now begun to rise in anticipation of rising prices. So the short term appears to be coming to an end.

Certainly, breadth has been expanding but the advance/decline line remains well below 1999 levels, which even then was bearish. If declining breadth didn't count on the way up, why does the feebly expanding advance decline line count now? From our point of view, this is simply part of a bear market rally. The Dow Industrials remain a sell!

Canspec-Research Says Gold Bull still 10 Years Away!
In his January speech Mr. Kaiser does a terrific job at exemplifying the traditional mainstream perspective on gold. So much so, that it is worthwhile to use the speech for a lesson in basic economics today. We're not picking on John randomly. He just tends to be one of those analysts that never responds to any of his emails, especially if he disagrees. So we've decided to drag his ass out into public view. Furthermore, his ideas are considered important enough in North American mining circles to warrant our attention.

I gathered from his written speech that he blames gold for the atrocities of mankind and views it as an immoral standard of money. What he overlooks is that these atrocities were committed not in the name of gold, per se, but in the name of wealth, specifically the pursuit of an unequal distribution of it. Even his example of how the Spaniards destroyed an entire Aztec civilization for it, overlooks the fact that they were the unwelcome invaders whose goal it was to redistribute the wealth. The history of gold and money, in whatever form, is littered with examples of this type of plunder. For a good discussion on that, see Antal Fekete's Whither Gold at Fame.org under the heading, The Role of Plunder. For an example of a good paper plunder, refer to MacKay's version of The Mississippi Scheme.

John, as do many conventional analysts today, sees the U.S. dollar as the solution to a more equal distribution of world wealth. And further, he, as does our other student of modern socioeconomics, fails to appreciate the atrocities that have been committed in order to support the artificial purchasing power of the US dollar - acute poverty in commodity producing nations, excessive taxation in nations that subsist under (support) the US monetary order, the transfer of liberty from the individual to the state, and of course, the greatest sin of any democracy: oppression of the few by the many - and all just to achieve the ultimate goal of an unequal distribution of wealth. John hasn't quite learned yet that inflation is only a confiscation and transfer of wealth, and that dollar policy is designed to disguise just that. And it is because analysts like John do not understand these arguments that it will happen.

To be sure, we like John and always have. One of his strengths is his ability to scour through thousands of speculative stocks, weed out the scams, and differentiate between the ventures, which have the potential to become 100 baggers from those with barely the reward potential to justify the risk. If you need a source of analysis that will allow you to hone in on the Canadian junior gold stocks, which boast the most potential for speculative gain, this is your man. John knows everyone in the mining business, and we consider him a crucial part of the Western Canadian mining establishment. The world would be a poorer place without his thorough work.

But any macroeconomic analysis that omits a discussion of the very system by which the US (and global) economy functions - through the manipulation of money and credit - or worse denies it, is naïve, by definition. The analysis is riddled with outmoded terms like aggregate demand, supply shocks, stagflation, and deflation. It completely dodges the reality that in a monetary system like ours, these terms are intended to misinform investors about the fact that frankly, deflation is impossible.

Consequently, it (the analysis) will often be more correct in hindsight than it is in foresight, especially when the efficacy of such a policy is generally deteriorating. The value of such analysis then, has less marginal utility then does gold, over the long run. It only has value if the governors of our dollar system can control your inflation expectations.

Yet, even as we continue to show how the Treasury has been losing this battle, Mr. Kaiser claims that it is gold, which is losing the struggle. He sees gold bulls as the old-fashioned types that have an "intense hatred for the technology sector." Yet it is his analysis, which is littered with the words stupid and immoral, which reveals to us that it is the technology types that hate gold bulls, not vice versa. Let me assure you that John, regardless of his fence straddling deceptions, is very much a gold bull turned technology bull. So it is understandable that his irritation with gold bulls will only rise as he ultimately discovers that he has been buying one top and selling another bottom.

John has been touting the secret liquidation of gold reserves agenda by the central banks for nearly three years now, about as long as GATA has been shopping the secret manipulation of gold reserves agenda.

He is under the impression that the world's central banks are guided by the aspiration to rid themselves of this useless metal. Unbeknownst to him is why the banks accumulated the stuff in the first place. As a result, he sees no motive for manipulation.

Rather, he believes that it is the new economy, which has made the metal obsolete - as do legions of contemporary, and dare we say "temporary," analysts. Accordingly, he remains ignorant of the controversy that is implied by the World Gold Council's recent over-investment in Jewelry promotion - it supports an agenda to help try and demonetize gold John.

Part of the problem is that analysts without a monetary education have a hard time accepting that there are basically two dynamic variables, which influence the prices of goods and services. We've said them over and over again: the interaction between the demand and supply of the good or service, and the interaction between the supply and demand for the money that is used in exchange for the good or service. In short, and perhaps in order to be politically correct in this increasingly totalitarian environment, such analysis is only two-dimensional. Thus, it falls short on the truth, unless it is lucky.

The fact of the matter is that historically, central banks accumulate gold in order to depress the market. There is no other reason that they buy the stuff. Gold used to be freely dispersed, prior to the creation of the Federal Reserve System in 1913. Ever since, it has been subject to periods of distribution and accumulation, by central bankers, evident in the volatility of the Gold/Silver ratio, the old bimetallic standard that the constitution was founded upon, and which Antal Fekete brilliantly discovered as a method of detecting when the banks are accumulating, and when they are distributing gold. Over the past decade, and in aggregate, they have essentially distributed between 15% and 40% of their reported gold reserves, depending on whose figures you believe.

Gold/Silver Ratio
Courtesy of ShareLynx

And while the evidence supports our inflation argument as well as a reversal of central bank policy towards gold, Mr. Kaiser sees actions such as those defined by the Washington Agreement on Gold as a secret maneuver to blow off the remainder of their gold reserves. What he misses here is that a gold standard does not include central bank holdings of gold. In fact, a free gold market is a pure gold standard. That is one of the reasons that Nixon ditched the dollar-gold link (mistakenly viewed as a gold standard): because investors began to catch on that the Bretton Woods system was not a real gold standard. It is also why it was made legal to own gold - in order to perpetuate the illusion that gold does not have an "official" monetary role. It is an illusion because it does. In fact, we have a greater gold standard today than we've had for most of the century, by virtue of this "relative" freedom.

The wealth of a nation should be a function of innovation and productivity, not the function of greedy power structures and the luck of having gold in the ground. Gold belongs in the private sector, not in central bank vaults. To sanction an official monetary role for gold is an act of immorality against the human race - John A. Kaiser

Yet although he has got the blow off scenario backwards, he somehow still comes to the logical conclusion that "to sanction an official monetary role for gold is an act of immorality against the human race." It certainly is John! What is truly amazing is how John comes to the same conclusion that we do. I guess it was luck.

Therefore, we'll consider John to be our Trojan horse, persuading the central banks that it is indeed a good idea to sell more gold. Indeed, that is precisely what most analysts are today, Trojan horses. In this regard, Mr. Kaiser is convinced that the best way to go about that is to persuade the central banks that it is gold, not the dollar, which is infinite in supply. No kidding. The theory of relative scarcity need not apply here. Apparently, gold is everywhere to be found - in the sea, in the lab, and in space - and gold bulls are just plain too stupid to see that. Talk about stupid, John.

We are anxiously awaiting a rebuttal, or at least some further analysis, if only to expose the credulity of his arguments if not to provide the fodder for the bull market in gold to grow, and grow, and grow. But we aren't holding our breath.

If only we could show Mr. Kaiser how a true gold standard can accomplish his very goals for the human race - the accumulation of real wealth as the result of advances in productivity and innovation - his subscribers may have half a chance at protecting their savings. Since January, they are already at a loss if they don't own gold stocks. But we know they do, because there is no way that this brilliant analyst will leave his written words unhedged.

Bullish sentiment is just coming off of a high point, as measured by the put call ratio, but it is worth noting that even some of the bears have been looking for a new high here, though they only see it as the last dramatic blow off before the final crash. It is also worth noting, that the kind of pent up fear driven urgency not to miss out on the next big thing just isn't there in the background today to drive such an irrational move. It's more like the pent up anxiety to sell into such a final move, which we feel today.

Equally, there doesn't appear to be much that the rational investor could point to, to justify such a move. There have seen no real break outs, or even reversals, in most of the world stock markets, even after the tremendous amount of liquidity that the Fed has provided. Productivity has turned negative, valuations are prohibitive, yields have begun to rise again, and Greenspan says we ought to worry about profit margins due to rising cost (inflation) pressures.

He says there is no pricing power, but even if he were wrong, is there enough to justify owning the current equity leadership, which just coincidentally happens to be the inflation sensitive issues in the Dow? Probably not at these prices.

So what of inflation, by the way? Where is it? You would think that after we wrote The Inflation Breakout, prices would suddenly rise everywhere. What is this Bugos guy talking about? Where is the inflation?

Of course it's been soaring for some time now, which is why the dollar is up. What? Why would the dollar be up if dollar inflation rages? Because silly, that's how the Treasury fights the inflation and manages your purchasing power. How much influence on the dollar exchange rate do you think that the Fed and Treasury have, combined? We can only guess. Do you think that that influence rises if the ECB and the BOJ works with them? Of course this is the way the world works!! That's what dollar policy is all about: managing these relationships politically to the benefit of… guess what the main benefit would be: optimal purchasing power? Not! Try again… how about maximum purchasing power.

Doesn't inflation erode that as well? Ultimately yes. The subsequent political tension, if one country abuses the currency arrangement, doesn't help to control the inflation either. Isn't inflation public enemy number one? Yes, but as you know by now, inflation is also the agenda. So really, the Fed is public enemy number one.

After a massive monetary inflation this year, perpetuated in order to stimulate demand, the time has now arrived when most economists will expect to see the effects. Will it stimulate real or nominal growth? Will it accelerate stock prices or commodities? It will certainly accelerate the rise in bond yields, and odds are that the dollar will suffer as the market increasingly recognizes that the source of global inflation is in fact an excess supply of dollars, or negotiable dollar credits. But analysts continue to overlook the obvious, and will continue to, so long as their interests are compromised by the truth. Yet, precisely because it is the truth, we have to forecast a Dow plunge.

Arguably, the largest and most obvious macroeconomic influence on any market today, is the management of dollar policy. And there is only one reason that a currency policy exists: to manage the inflation of an inflation agenda. Yet there is hardly one topic that is less discussed in the analysis of capital markets today then that very reality. Thus, it is no surprise to us that analysts refuse to believe that the government has an agenda to manipulate perceptions. But it is a crime to give financial advice without discussing it, because it does exist. Were such policies openly discussed and assessed, comments like this would not even require the dignity of a response:

What baffles me is why this gold loan "problem" should merit so much manipulative intervention when the evaporation of $100 billion in the market cap of Intel alone, never mind the trillion dollar value that vanished during NASDAQ's decline in 2000, failed to unleash a financial crisis? John A. Kaiser

John, your financial crisis has already come. You just don't know it yet. At any rate, the outcome in commodities markets will resolve bullishly, we believe, but we aren't sure of the timing. It would make sense to look for something to happen in the last half of the year. The key will be how strong the strong dollar policy remains. We don't think it will be long before global central banks will be forced to raise their interest rates. At that point the game will visibly change. We believe, contrary to most analysts today, that rising interest rates in Europe and Asia would devastate the dollar, and possibly all the currencies. The point of recognition for inflation expectations has arrived, but it is being fought, daily. For, that is the one thing that is holding it all together today.

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