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Operation SafeHaven

"Operation SafeHaven!" was the U.S. Treasury Department's effort to trace the movement of stolen Nazi booty towards the end of the Second World War …

"Gold 2000 in the year 2000?"
What a beauty. Remember that one? I was (shamefully) thinking about burying that call, which was made in one of my more enthusiastic modes earlier this year, but then I thought we'd be just like the other 98% of blue chip analysts. So before anyone else seizes the opportunity to put egg on my face, I will… we got a little ahead of ourselves… Ok, there, that wasn't so bad. Now, the disclaimer:

We tend to be notoriously early on some calls anyway, but rarely entirely wrong… if I may say that at all, humbly.

In fact, the evidence suggests a slow motion disentanglement of what we have been trying to show our readers for some time now. In some respects, it is actually quite remarkable to watch. The epiphanies, which some of the stock market bulls have been experiencing, for instance, about the illegitimacy of many of the business models they themselves had been promoting only one short year ago, were easily predictable. What is their excuse? "We gave it an honest shot?" That about sums it up for most, but heaven help those who knew what they were really doing… tsk-tsk. Perhaps relocating to a new SafeHaven might be an option.

Anyhow, it wouldn't be fair to point out our bad calls if we did not give ourselves due credit for the good ones… in the stock markets generally, in the currency markets recently, in the oil markets (until last month anyway), about the economy and the consumer, and my very favorite in the July 8th issue of the GoldenBar Report, The Politics of the Dollar, that Larry Summers' days as Treasury Secretary were numbered.

That call was premised on the dollar conundrum: that since the more conspicuous fundamentals for the dollar were about to turn down, we concluded that the Treasury Secretary was either going to get stuck with the strong dollar mantra in a weak dollar environment or would have to make a brave call to the markets in order to preserve his own credibility. Either of which were ultimately fatal, we hypothesized, to his career in Washington. And yes, we are just as surprised to be right as you are. For, we had thought that the turndown (in the dollar) would occur earlier and the Summers' replacement, later.

A New World Order
The question that immediately came to mind when we heard of Mr. Paul O'Neill's appointment in Summers' place was, what happened to Lawrence Lindsey, ex Fed governor and supposed economic advisor to Bush? Was he even considered?

Maybe he didn't want the job. No offense to Mr. O'Neill personally, though quite possibly, it is relevant that the old Alcoa heritage is shrouded in controversy surrounding its notorious role in supplying the Nazis with Aluminum, under a cartel agreement with I.G. Farben (a Hitler owned company, we understand) during the Second World War. According to American Journalist George Seldes, in a book written near the end of WWII, Facts and Fascism, while the Germans allegedly received all of the supply that they needed to build their warplanes with, Alcoa is said to have sabotaged the mass production of Aluminum in the US in order to keep their monopoly and in accordance with their agreement with I.G. Farben.

Alcoa's sabotage of American war production had already cost the U.S. "10,000 fighters or 1,665 bombers," according to Congressman Pierce of Oregon speaking in May 1941, because of "the effort to protect Alcoa's monopolistic position . . ."

"If America loses this war," said Secretary of the Interior [Harold] Ickes, June 26, 1941, "it can thank the Aluminum Corporation of America." "Thurman Arnold, as assistant district attorney of the United States, his assistant, Norman Littell, and several Congressional investigations, have produced incontrovertible evidence that some of our biggest monopolies entered into secret agreements with the Nazi cartels and divided the world up among them," states Seldes in his book, "Facts and Fascism," published in 1943. "Most notorious of all was Alcoa, the Mellon-Davis-Duke monopoly which is largely responsible for the fact America did not have the aluminum with which to build airplanes before and after Pearl Harbor, while Germany had an unlimited supply." - George Seldes.

George Seldes was a crusading American Journalist (in 1943), albeit left leaning I think, who was determined to ensure that the history of the 20th century was written truthfully. Sadly, he lost, for as the opening line in the movie Braveheart says, "History is written by the winners."

We are bringing this to your attention because as we look out over the horizon, politics in America does not appear to be what people think it might be today. It feels odd to me, for example, that we have to fight for free markets in a supposedly free market economy. In any case, the real relevance is that Mr. Bush will want to lobby for the Star Wars missile defense system, and eventually, he is likely to want to expand on other defense projects in the future. So perhaps, the appointment contains more strategy than it may first appear. You be the judge.

The appointment of Mr. O'Neill, to an historian, may symbolize Republican victory in a century long battle that Roosevelt continues to lose to this day… the fight against the government within a (his own) government. If one were to liken the situation to the unconscious mind, he or she would find that, in the very same way that this mind is invisible to us and less understandable than the conscious mind is, the government within a government too, which may be nothing more than the unconscious mind of the government, but at a minimum (in both cases), is certainly the most powerful part.

Having said that, and not wanting to expand on the topic any further, our auxiliary research on the history of US industry revealed that George Bush Sr. (Reagan's successor) might have attempted to make reparations for his family's dishonorable WWII connections, by enlisting in the Air force. So, we think that GW comes from a very honorable family. Unfortunately for him, the evidence increasingly suggests that we cannot say the same for the infrastructure that surrounds him.

Maybe it is time for us to all stop wondering and whining about why things are not as they seem, and acknowledge a few facts.

Last week, for instance, Clinton's economic advisor, Gene Sperling, fervently asserted that he did not think it was appropriate for Bush to talk down the economy when "98% of our blue chip analysts project solid growth for the foreseeable future." Bush's transitional spokesman handled it very well by diluting the fact that presidents can talk down an economy as easily as they can talk it up, they simply can't.

Of course, for if they could, then perhaps the Clinton administration's upside biased policies ought to be reexamined? But I only saw his effective rebuttal on one channel, MSNBC. Every other correspondent (that I was able to observe) reported only the populist Clinton viewpoint.

First of all, we will like to add to the rebuttal: "Mr. Clinton, 98% of your blue chip analysts have simply been wrong all year long, on anything important." Second of all, Mr. Bush's proposals for a weaker economy are realistically "optimistic" in light of the cogent case for economic and monetary disaster encroaching upon the US economy, and which fragility becomes painfully evident in the media's paranoid criticism of (GW) Bush's truth serum. Lastly, the point is moot because the economy is going to weaken and the same people are going to beg the President for the tax cut, which he is trying hard to build a case for with his "gloomy" outlook for the economy.

Still, GW made his first "reel" mistake during the announcement and appointment of Mr. O'Neill as the new Treasury Secretary last week; he implied that there was a need to calm dollar speculators before the dollar index even broke down. These kinds of mistakes used to cause market crashes, but obviously, the experience in 1987 was not wasted1. Today they (mistakes) are shushed away in a secret Fed meeting the morning after… probably designed to humble Bush for his negligence, but thankfully interpreted by the markets as deliberations about an interim surprise interest rate cut. So as the dollar broke down the next morning, the stock markets managed to put in a rally on the interpretation. What an ass (oops) backwards world we live in today?

Notwithstanding, Bush's mistake has made Greenspan's job a little more difficult - couldn't have happened to a nicer guy - since a weakening dollar exchange rate, an "oversold" oil market, still generally and broadly rising commodity prices, (perhaps) a diminishing ability to act obscurely on the precious metals markets, and a declining confidence in the US economy will make an interest rate cut without a stock market collapse a very dangerous proposition. Having said that, if Greenspan is indeed guilty of involvement in the gold price collusion, maybe he deserves that the people all around him are confused about money and what lower interest rates will really do... in other words he made his own bed and deserves credit for the higher than normal political pressure on him to lower rates, this time around.

In a Bull market it is really remarkable to observe how governments can do no wrong, but since history has shown that, on average, governments and free markets do not mix, it is conceivable that it is the Bear, which determines that everything they do, will be wrong.

Truth versus Truism

Morgan Stanley Commodity Stocks Index
Morgan Stanley Commodity Stocks Index
30 Year US Treasury Yield
30 year US Treasury Yield

If you ponder these two charts, you might find it odd that yields have been declining this year, despite the convincing inflationary activity in most commodity markets, as we keep painfully (to you) pointing out. Furthermore, the chart on the left portrays where the momentum in equity markets, however sparse, generally is today. Phillip Morris' big gain this year is not unrelated to the civil strife in Zimbabwe, for instance, where the production of the main national crop (tobacco) and currency (tobacco), has suffered a supply shock.

Look for the Bond market breakdown…
Despite, or perhaps confirmed, by Clinton's affirmation that the Treasury is going to retire $237 billion dollars of debt this year and that it has a shot to clear the entire national debt off of the books by 2009. Ok Bill, we have already heard that fib, what's up? The figures of course "do" include the social security surplus and the far out figures "do" of course include assumptions that the windfall in general capital gains tax revenues will continue into the hereafter and save us all.

But we should thank the President for bringing his weak link to our attention once again, because we have been looking for a top in the Treasury market, for weeks now.

US Dollar Index
US Dollar Index
30 Year US Treasury Prices
30 year Treasury Bond Prices

For the record, Mr. Greenspan & co also gave us a valuable contrarian signal when the FOMC said, in its statement accompanying last week's decision, that long-term inflation expectations remain contained. I hope he wasn't talking about the highly illiquid six-year OTC customized oil contract that he referred to in a speech this fall, or the inflation inducing (I mean, indexed) bonds, which were created to ultimately ensure either the bankruptcy of the government or its currency. Think about that for a moment… in an economic environment of rising inflation rates, how is any government going to pay the mounting obligations on an inflation-indexed bond? By printing more paper?

Indeed, we are going to assume that the statement refers to the yields on longer-term treasuries, even though that data is skewed by the misguided declarations of his partners at the Treasury department. For it certainly would not be referring to how commodity prices continue to rise in price and breadth, and on a generally rising dollar, this year.

Then, he would be simply lying. Anyhow, you cannot get a better opportunity for a contrarian call in the money business than when a glorified central banker is telling the world, from his pedestal, that there is no inflation and further, that there are no worrisome inflation expectations seeping into the economy either. Especially, when said prices have been generally rising now for two years and continue to do so even as the data suggests that the economy is weakening.

And, The GoldenBar Cheerleader of the Year Award goes to…
If GoldenBar and/or SafeHaven had a cheerleader of the year award, it would be in the form of a pink skirt to mail out each year to the player who has nothing else going for him. For the year 2000, the honor would have to go to DLJ's notorious tech analyst Thomas Galvin. We caught him on the air recently, telling the world that inflation is going to drop like a rock next year, and the Fed is gonna lower rates, and blah, blah, diarrhea of the mouth.

Still fresh in my memory is watching this man literally jumping up and down, fist slamming away at the air in front of him, practically ordering everyone to buy tech stocks all year long... the cheaper they got, the better! Now, when someone is wrong, they are wrong. It isn't really nice to beat them up about it because we deal in a business of half truths (Victor Niederhoffer). But this guy (Galvin) is something else altogether. His arrogance is offensive. The only thing that is going to drop like a rock next year, if he doesn't stop using badly chosen superlatives to persuade the public to take on more risk, is his career.

One Year; Dogs and Stars

NASDAQ 100 Index
Nasdaq 100 Index (- 33% YOY)
Goldman Sachs Commodity Index
Goldman Sachs Commodity Index (+ 50% YOY)

He is wrong, and it is as simple as that. Maybe Mr. Galvin ought to take some time out of his busy lunch and makeover schedules to glance at the broad array of commodity charts (which we will discuss shortly) before plunging in front of a moving train. It is one thing to be a really good cheerleader, but it is quite another to be a contrarian. Rule number one, is to lay low.

Although we fancy ourselves quite the contrarians generally, we pick our spots, but oddly, in this case we are not really being contrarian at all. Actually, and as I have been saying almost repeatedly all year long, the real trend has indeed been our friend, as you can see in the chart above on the right. For some reason, however, the shepherds of Wall Street are simply and quite literally blind to the "facts," these days. But I suppose that fact simply makes our call all the more, a no-brainer. Let me explain.

What is it, to be a Contrarian?
Some would say a fool. Some are. But perhaps the best understanding of the concept (that I have read) came from a trader interviewed by Jack Schwager, in his first "Market Wizards," a series of books in which he interviews various traders, fund managers, and operators, in order to find the common element(s) of success. Since I could not find the book to plagiarize the concept for your benefit, I will paraphrase it. And because I am better at internalizing concepts than details, forgive me for not recalling the name of the trader who surely deserves the credit. Anyhow, if I remember correctly, his idea was coined the concept of "variant perception."

Contrarians correctly believe that the market is not efficient and can often be wrong. They also believe, perhaps arrogantly, that they can spot turns where no one else can. Clearly, this takes a different kind of mentality than that which has invaded stock markets today. In fact, I will contend that the systematic elimination of the contrarian, in the economic role of keeping the price mechanism efficient, on the way up, was probably one of the clearest signs of a malfunctioning bull that we have ever had the privilege to see. Thus, our next point:

If it didn't pay to be a contrarian on the way up, why should it… on the way down?

This particular trader understood that it was the change in mass perceptions, whether correct or not, which offered the best opportunity for trading profits. In other words, in the old school of freer markets, anticipating "any" change was how to make the most amount of money over the long run. It was simply a low risk, high reward investment strategy, but not one generally suited to an era of extreme monetary, asset, and credit inflation… note to Julian Robertson.

Anyhow, the idea is to look for and develop a cogent hypothesis - the more obscure (without trading off plausibility) the better. If everyone knows about it, even if it is true, then it is worthless. Of course, once you have found conviction in a particular hypothesis, the goal is to speculate as to how everyone will figure out what you know. In other words, the goal of a contrarian is to not only speculate on change, but to anticipate how the markets will be discounting that change next week, next month, or next year.

For instance, suppose you expect that earnings shortfalls will be worse than expected, and suppose that you discover that this is due to some "extraordinary" items such as trading profits, which influenced the bottom line of many companies on the way up. Suppose further, that you can hold your liquor when everyone else is still staggering all over the trough. As a result you sell your stocks, knowing full well that when these people sober up, they too will begin to "perceive" the change.

This particular call is a no-brainer, if you've seen more than one stock market cycle. Yet, it gets people every single time, possibly because humans tend to believe, basically, what they want to. In my own experience, I have seen these market "inefficiencies" way too often (except in half of the cases I am one of the drunks too) to ignore the profit potential in trying to nail down the method to the madness.

So, what would you do as you see the outcome unfold as hypothesized, but ahead of the actual news? In other words, what if you notice the markets suddenly moving lower because everyone else has begun to perceive the same thing that you have? Do you wait until the news to cover your profitable trade and begin looking for another? According to the said trader, the answer would be no. The position is closed when you have gauged that everyone else has finally considered the risk and acted on it. Then, while everyone else is waiting for the news, our shrewd contrarian is already anticipating Mr. Market's next move.

Under the circumstances, therefore, since we believe that the misguided Mr. Galvin has been trying his hand at this contrarian stuff rather bravely lately, let's give him something to think about.

Yes, please Mr. Greenspan, lower interest rates…

US Dollar Index
US Dollar Index
2 Year Gold Prices
Gold Prices

While preparing to look through the charts of the least likely to be manipulated commodities, which exclude oil, gold, silver, etc, I hesitated, as I suddenly doubted my own hypothesis. Expecting to see one commodity after the other decline in accordance to the theory of a slowing in aggregate demand, my conviction instead only strengthened. With the exception of two (out of fifteen categories), most of the agricultural products have been firm all year right up until the present day, at worst, and in the case of some commodities such as Soybean meal, have risen substantially.

Goldman Sachs Agricultural Prices
Goldman Sachs Agricultural Prices
Goldman Sachs Livestock Index
Goldman Sachs Livestock

Even some of the Wheat (prices) have put in a sharp V bottom on the weekly charts at the beginning of the year and have followed through on the upside to this day. Cattle prices have been rising all year long, except for a bump in the fall, while hogs and pork bellies got knocked back down to break even in the third quarter, perhaps attesting to how many pigs got slaughtered on good olè (I mean old) Wall Street.

So generally, our views held up until I came across the energies, which seemed to be following the economy down, on the one hand, but which manipulative influence by US governments (and their dollar allies) cannot be ignored in observing the experiment.

But what if oil markets have been oversold now as a result? Since the dollar governors are reacting to their problem by selling (or moving) scarce supplies into the oil market, they will affect its short-term direction, but they will accentuate the longer-term fires of inflation in the process. And the more scarce the commodity that they pick on, the more dangerous a game of Russian Roulette that is being played. It is an interesting fact, that the commodities, which US interests have little control over, pose their biggest problems. Why the financial establishment doesn't talk about this explosive chart (Palladium) is a mystery.

2 Year Palladium
Palladium (2 year chart)
2 Year Crude
Crude Light (2 year chart)

We are not as confident as Galvin's fans are that the sell off in oil prices is terminal. Despite the fact that dollar governors have done quite a number on the chart, technically, the move may be nothing more than a correction induced by a despotic government. For, real trend support is at the last meaningful low… $23.50, made in the first quarter (this year) on a global stock market hit. Note that we are still higher than that low even though the economy has materially deteriorated since then. Also note that the damage in oil charts and in unleaded gasoline has not harmed either the broader Goldman Sachs total return index or the unweighted CRB index, nor has it even hurt energy prices in general.

Goldman Sachs Energy Prices
Goldman Sachs Energy Prices
Goldman Sachs Industrial Prices
Goldman Sachs Industrial Prices
2 Year Copper Chart
High Grade Copper (2 year chart)
2 Year Platinum Chart
Platinum (2 year chart)

Thus, we expect that any kind of officially postured easing on the interest rate front might be the catalyst to set in motion a sequence of events that will ultimately, or perhaps inevitably, lead the dollar to ruin. Besides, our guess is that the Fed is actually on to this. Not that it will matter much, for while all government actions tend to work out in a bull, they don't at all in a bear, remember? To be sure, we haven't seen a real bear since the seventies. Yet, perhaps the best indication that one has arrived is the observation that Mr. Market is no longer willing to make the politicians look good.

First, there was no real stock market rally on Bush's victory over Gore (or even before it). Second, Bush failed the markets himself when he fumbled the ball on the dollar by inferring that there ought to be concern about it in the first place. Third, even Clinton's Stuart Smalley impression (reaffirmation, for those of you who have never seen Saturday Night Live) on the Budget Surplus could not rally the dollar. Besides, it was quickly overshadowed by another failure on moving Mid-East talks towards peace. Oh, and lest we forget the great bond market manipulation in January, which did not work to support the stock market generally, but obviously helped some people (poker buddies?) sell large quantities of their stock to the public.

Perhaps it wasn't intended to come across that way, referring back to Clinton's rush to the press with the great news about the budget 'surplus,' but it did to us. Conceivably he was anxious to show Bush Jr. how it is done, spreading the optimistic word that is. Though from that perspective, it looks as if the markets just yawned. Are these the signs of a bear? We think so. But we also think that these are perhaps signs of something much worse, a major "up yours" to foreign investment interests in the dollar just before handing the reigns over to GW Bush.

The example of such blatantly unsupportable forward looking statements, no… more like assertions, by a person of the highest authority would be looked upon unfavorably if perhaps it was presented this way by any other leader in any other country, for instance, China, or Japan, or even Germany. Why do we tolerate this nonsense here?

The US Treasury et al have so successfully sold everyone the strong dollar policy that it has imprisoned and compromised our entire global economic foundation. You know, we do think carefully about making statements, which appear to be controversial like that. We will only make them if we believe in their basic truth, 100%. Furthermore, we have discussed this particular hypothesis in depth recently. In the event that you are not up to date, please refer back to The Quest for Economic Freedom, last week's issue of the GIC.

Those with the most dollars are going to do everything that they can, politically, to maintain the perception of value in those dollars, when the economics of money supply begin to deteriorate the purchasing power of the dollar (already begun). Thus, if you can see that truth in this case, then it must become somewhat easier to understand why we do tolerate this Presidential hot air. For we are all vested in the business of America today… the same dollars and the same hot air.

According to my Pocket Oxford,
The definition of Totalitarianism is:

Relating to form of government permitting no rival loyalties or parties.

I do not think that we are the only ones who can perceive the pervasive dogma, within the Clinton administration? I hope not. After all, just witness the US press corps rally behind Clinton's somewhat less credible but a little more optimistic viewpoint, versus Bush's more realistic outlook, for the US economy. Perhaps we wouldn't have to fear a stock market crash if public policies were not so upside biased in the first place? Maybe I am wrong. I suppose that time will tell.

Truth told, however, George Seldes observed early signs of the conditions fundamental for totalinarianism to develop in the US economy, as far back as 1942. And we might agree with him, since we too believe that public opinion is generally the most powerful force in America.

The change that has come over America is this: that beneath the uproar the press made in our early history, the motivation was not money and it was not commercial. Today the press is motivated almost entirely by the motive of profit for itself and its backers. This profit motive not only affects the handling of all the news about labor, "defense" strikes, wage increases, the whole problem of taxation, a large part of the legislation of state and nation, but it also affects the news of world events.

It is my claim that the press, which could be the most powerful force in making this country over into an industrial democracy in which poverty would be unknown, wealth equitably distributed, every man certain of the minimum requirements of decent living (as well as the four freedoms), has, on the contrary, become the most powerful force against the general welfare of the majority of the people.

-- George Seldes, American "muckraking" journalist, 1942

If you can get past the socialist connotations, you might find that in his observation, a free press is an essential component of democracy and free market capitalism. The fact is, our press works for who ever pays their bills, which in our economy, can be visibly tracked right up to the Federal Reserve Board Chairman, Alan Greenspan. Is it any wonder then that less than one third of all Americans believe what they see or hear on the news today?

The Consequences of a Strong dollar
In my August 16 Golden Bar report, Inflation versus Deflation, I submitted the proposition that it is impossible for deflation to happen in the United States on account that it is a net debtor. The obvious consequences of that new and privileged position, which for the historical record transpired during the Greenspan / Clinton era of monetary profligacy, ought to manifest as a long-term drag on economic growth and the relative value of the dollar. But you wouldn't know it by listening to the evening news. Ingrained in the American mentality is the perhaps arrogant belief that the dollar will always be worth more than anything else.

Since this unfortunate position of indebtedness occurred partly on account that the United States has had to help so many other less privileged nations and peoples (to adjust to the new dollar paradigm) over the years, perhaps some analysts think that economic value ought to incorporate virtue. Wouldn't that be nice? Actually, such perception could influence economic value, while it is true. But before you conclude that Bugos is going to argue for that case, think again. For the fact is that global perceptions of US handouts are anything but virtuous.

Indeed, a plausible case can be made that IMF and World Bank funding initiatives are primarily oppressive economic mechanisms intended to carry out multiple functions, to support the strong dollar. Three that come to mind are:

o The acquisition of political and economic influence or control over the resources of a developing country. This obviously includes labor.

o To promote a dependence on Fiat (dollar) handouts, as well as to promote a global political utility for the Fiat, and thus demand for the excess of dollars. Unfortunately, rather than encouraging real economic activity, which in the end might not find as much real use for dollars in say, Zimbabwe, the idea has effectively created welfare colonies all over the world.

o To quell the discontent and civil unrest that might otherwise result should these nations discover that American policymakers have been manipulating gold prices to falsify and tinker with global perceptions of the true purchasing power of the dollar.

Yet discontent and civil unrest is exactly what has been on the rise in these countries, and increasingly at the center of the debate are the activities of the World Banking organizations, whose meetings have been attracting near violent protest.

Furthermore, what of the consequences of the strong dollar, at home, in the United States? Good, no? After all, at the expense of living standards in countries that we don't care about, and at the expense of our own long-term economic stability, the government has empowered us with an artificially inflated (imperially enforced) global purchasing power, and thus, has encouraged us to indulge in a world-class extravaganza filled with magically inflating paper fortunes and dreams. So what if we have to pay higher taxes and finance unprofitable economic ventures in order to perpetuate this trip to heartbreak hotel… what a crock.

What's more, consider the expectations that have arisen (before the fall) out of the Fed's monetary scheme... perpetual prosperity and an invincible economy.

What else could drive US consumers to acquire ever more debt? Well for one, they are taught that all problems are solved with more money. And though our leaders insist that our good fortune is a matter of relative productivity and supply side economic growth, that argument is losing ground to ours, that there has not been any good fortune at all… only monetary delusion and obfuscation. As this grim reality sets in, the economic distress will turn into catastrophic financial stress.

Standard & Poor's credit rating agency has been warning that the next business cycle downturn will generate twice the bad debt that the last one did in 1990. And they are not assuming a hard landing. Thus, creditors will ultimately stop smiling and start collecting. US Corporations are going to have to pay employees with cash (rather than stock options) if only to avert the additional administrative costs associated with processing the added IRS and other garnishee(s) enforced on employees who cannot afford to pay their rent.

So if we continue to be right, the recession, which Mr. Bush alludes to, will be the best-case scenario, and the over investment in various sectors (and under investment in others) will take years to sort out. In doing so, the government will either react with deflationary or inflationary policies in their approach. If policymakers choose deflationary policies (interventions) to work with, the result will be depression because the excess malinvestment and consumption has been extreme. If they choose inflationary policies (also market interventions), on the other hand, the result will be massive inflation because at the root of the entire problem, which is the task of managing the value of way too many dollars, is way too many dollars.

The Free Press
Democrats (or the press) argue that Bush is already pursuing a deflationary course of action by virtue of his recession warnings. But the reality, as we have said, is that he is presenting his voters not only with the truth, but perhaps the most optimistic truth. What would happen to his credibility if he came out and told people that the good times are gonna keep rolling, if it turned out that the economy was headed for a deep "recession?" Is it more important that he influences false perceptions at the expense of his credibility? What if times get really tough? Who is going to have confidence in his policies if he is frequently wrong about the outcome?

Look, the job of a President is tough enough, and the press should respect that he is the first President in eight years to be telling us how it really is! Though maybe that has taken them off guard a little bit.

In any case, reports of the Massachusetts shooting last week are the result of how it really is. Many, many consumers have had smoke blown up their butts for so long now, that they have taken on an extraordinary amount of obligations. Truth be told, everyone is responsible for his or her own actions, but should blame be placed anywhere else, it should not be placed with the first President in recent US history to come into office bearing Diogenes' (Greek philosopher) lantern.

Sickening as all of this may be, the point is that the flaring up of media concern about difficult but truthful commentary like this, and the rising roar on Wall Street for an interest rate cut from the Fed, highlight the fact that our spoiled population will not stomach a deflation. This is a very important point, for the influence of the many is far more powerful than the influence of one President. In fact, it is historically counterintuitive to expect the administration not to want to satisfy the wants of the many, even if he has created them himself. Thus, as we generally begin to recognize that a downturn is inevitable, the pressure for lower interest rates and tax cuts will likely overcome the partisan agenda of the mainstream media.

Perhaps then, we will see the ownership of information "dissemination services" like CNBC by the biggest, if not the most important, corporation in America, in a different light.

If journalism were pure in America, journalists would be all over the lies that have been told by Mr. Clinton and Mr. Greenspan, and organizations like Judicial Watch, GATA, and even SafeHaven, would not need to exist. And again, we are not saying this off the cuff either.

We are too aware that inflation is too much money, not the CPI; that current economic measurements of GDP are at best, another measure of money supply; of the differences between the subjective and objective utilities of a currency; that there is no "real" budget surplus; that the buying back of long term treasuries is an illusory and temporary phenomenon, perpetuated by the bullish implications on government bourses of an extrapolation of capital gains receipts ten years out; that the role of money creation increasingly rests outside the mandate of the Fed, and rests squarely with Government Sponsored Enterprises such as Fannie Mae and other financial intermediaries that are used by the banking system today to perpetuate the reckless credit expansion. And finally, but especially not least, we are all too aware that inflation is a very long term "process" of the redistribution of wealth and taxation.

Thus, as we wrote to you in June, we know all too well that the United States economy is evolving (or has) into "A Nation of Storytellers". And the entrepreneurial distributors of these wonderfully optimistic stories are the mainstream press. So maybe it is not so ironic that Bush is getting an earful for telling the truth. Maybe it should be expected in a country that doesn't tolerate truth.

But whether or not we are right that dollar policy is oppressive, clearly it is not perceived to be virtuous today. Everywhere but in the United States of course.

A Shifting Psychology in Stocks
Remember when there was this sense that the game used to be, "how to get them all in?" That doesn't exist anymore does it? It "feels" (no NLP here, I promise) more like, "how to get them all out." So here is a project for your consideration: use the technique of covariant perception to gauge when the former psychology comes back… that will be your real bottom. But I think that is years away for most stocks.

Suddenly, market prognosticators everywhere are telling us that the Nasdaq is the last place you want to be in this market… where were they in January? Most of them were telling us the exact opposite. Certainly, we are beginning to see that a good case can be made for a decent bear market rally (in the Nasdaq) in the New Year, but that may in fact be the problem. You would think that, by listening to some analysts, there is perhaps too much pessimism in the market place, but you would be wrong.

Most broad sentiment indicators, including the put/call ratio and investors intelligence, will still generally reveal much bullish hope. How do the two diametrically opposing observations reconcile? Could it be because the bullish sentiment, which shows up in the "data," is broader than the anecdotal evidence you are able to sample from your average TV broadcast? I don't know. A good project for me (like I don't already have enough to do) would be to take this data apart and determine what the influences are. It could also be that the bullish sentiment in these indicators is such, because it underweights the Nasdaq relative to the stocks in the Dow or the NYSE composite. But before you get too excited about a potential buy signal, consider that the Dow and the NYSE Composite have yet to sell off, meaningfully.

After all, we're headed for an economic slowdown, right? Indeed, many investors are already starting to talk of a recession. Why then, do such large multiples still exist on the blue chips if people should be discounting recession? Oh yes, because interest rates are supposed to come down. Looks like the discounting process has yet to discount recession, though it has already discounted (considered) an interest rate cut.

Furthermore, if interest rates do not come down, the blue chips will not be able to break out of their two year long sideways trading ranges and likely collapse as the last source of real liquidity in the equity markets.

If, on the other hand, the FOMC cuts the psychological interest rate, we think that the most likely outcome is this:

The psychology will turn bullish and drive the Nasdaq higher immediately, but the market will shortly thereafter find that newly created liquidity is not moving into the equity market, generally. The new owners of the "soft" money will find it is in their economic interest to exchange it for things that have been inflating, rather than deflating. When the psychology runs ahead of the liquidity, you know what happens… the owners of the new "psychology" use leverage to anticipate the new liquidity… Oops, and ouch. The bounce in the Nasdaq will precipitate a crash in the Blue Chips.

For better or for worse, that is our professional opinion. So, we are looking for the following headline to appear in newspapers everywhere by the end of January, with or without an interest rate cut:

Was That The January Defect?

1. See Jude Wanniski's report, "The Real Reason for the 1987 Stock Market Crash."

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