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Market Comments

We are moving ever deeper into the belly of a great primary bear market. For the sake of my new subscribers, let me again describe the second phase of a bear market. In the second phase of a bear market (and the second phase is usually the longest phase), stocks go down as they discount deterioration in the economic, social and political fabric of the nation.

Is the social and political fabric of the US deteriorating? I think it is. First, our cowardly Congress handed over to President Bush the power to decide whether to make war on Iraq or not. I don't know whether Bush is smart or not, I don't know whether he has a personal agenda or not, I don't know what Bush thinks about when he's alone at two in the morning. Bush may be a model citizen with the best instincts imaginable. He may be all or none of the above.

But yesterday 10,000 sailors and marines sailed out of the port of San Diego, and I can see the ships from my veranda at the back of the house. Let me put it this way -- my 24-year old son isn't in the service, but if he was I'll be damned if I would want one man deciding whether he's going to war. I would want the US Congress to decide. The US Congress will not decide whether we go to war. And there's a growing tide of Americans who are against this war (and, according to today's LA Times, a majority of WW II vets, of which I am one).

What's the point of the above? I think it smells of deterioration in the political and social fabric of the nation. It's undemocratic.

As far as the Bush tax plan, again there are many for it and many against it. There's no question about one thing -- if passed it will send the deficit through the roof. And that's economic deterioration.

The cover of Barron's headlines "THE DEBT BOMB. America's household, business and government borrowings are at a record level. Nothing to worry about? Or a prelude to disaster?"

Again, economic deterioration. Or do you think that sky-high debts that are still rising are healthy?

Headline in today's usually bullish Investor's Business Daily -- "More Signs Of Slump As Trade, Confidence, Output All Head South. Relentless cost-cutting, layoffs, war with Iraq blamed for late '02 Slump."

The confidence of US investors is starting to decline, and we can see it in the latest Michigan survey, in the CNN/Gallup poll and in the survey run by Investors' Business Daily.

Friday's glum report from both IBM and Microsoft upset the market somewhat, but when the market goes down you're never sure exactly why it's heading south. More often than not, it's for reasons not readily apparent in the news of the day.

At any rate, my point is that we're now moving more deeply into the classic second phase of this great bear market.

I was interested in Felix Zulauf's comments about gold in Monday's issue of Barron's (page 24). Zulauf founded a Swiss asset management firm. Says Felix, "The policy of the US central bank is going to destroy the dollar. Confidence in the US currency at some point will collapse, and you'll have a run on the US dollar. Money can't go to other currencies, because they have to support the dollar. Gold will act as a monetary currency without the liabilities of ill-guided central bankers. Another way of looking at it is to say that the US has underinvested in capital investments to supply the goods that US consumers are demanding. You have spent your money by buying on credit instead of investing. The Chinese are investing. They are building an empire.

"The US is the largest debtor nation. About $3 trillion are held by foreigners if calculated at the purchase price, and foreigner are still buying US assets. Last year they bought about $45 billion of US equities, but that will change at some point. When people realize there are fundamental problems in the US economy, the dollar will begin to decline in a major way. The process actually started in 2001. Other central banks will at some point then try to support the dollar, because if it declines too much, it will hurt their exports. They will be forced to adopt the same policy as the US central bank, and you will have the whole world creating more fiat currency. That's when gold will really run."

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