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Inflation, and I played chess with
Greenspan |
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10/31/2003
Some time ago I became
interested in the markets, so I needed to familiarize myself with the mechanisms
that were involved in their operation. Prior to that I had read some interesting
books involving some of the main cycles that existed and been proven in history
over time. That is the first concept to understand, the phrase. “Over time.”
It is one of the first concepts that can destroy wealth, because time does
different things in the investment cycle at different times. This point I
will come back to later.
The next concept is money and how it operates in the
flow of capital, what creates it now, and how the excesses of a fiat currency
are involved. I will come back to the discussion on money as a “store of value
over time”
Another ingredient is people, what drives them and how
the market is affected.
Then I will cover the mechanisms that major players use
to manipulate the market and why they are there in the first place.
What is a bull market or a bear market, how they fit
into the scheme of things. And where
I believe we are right now and a prediction of what is just around the corner.
Then comes GOLD, what it’s purpose is, how it
fits as a measure for equilibrium.
Right. Money. What it was,
what it is now. What it has been, and what it will be again.
“bad money drives out good money”
Gresham’s Law
Fiat money. This is the money that the Government
issues. We all trust it. The trust is this. You are guaranteed by the government
that a two dollar coin minted in 1967 will still be worth two dollars today.
However the first two dollar coin bought three loaves of bread in 1967, today
you would be hard pressed to buy one loaf. That is what a fiat currency does, it
allows inflation. It is “bad money” It has no store of value. Now
back in 1967 we, in New Zealand, moved from sterling to decimal currency. The
conversion rate was one Pound to two dollars. I know this because there was an
Act of Parliament that said so. Case proven. I know you are saying this guy is a
dipstick. Well I have a gold sovereign. It is worth one Pound or two dollars. I
know this because the Government said so. Now there’s a twist. This can’t
be, because the coin is gold. Well so what? The Government guarantees that two
dollars will always be worth two dollars. Ahh gotya!!! What you are doing is
trying to link two types of monetary systems. The fiat system as devised by John
Maynard Keynes and the old system that has worked for 5000 years, apart from
brief interludes where paper money has been tried and failed, the Gold
Standard.. Under the gold standard my third coin has a “store of value” It
will buy as many loaves of bread today as it would have at the time of it’s
minting. That is good money. You must understand the two types of money
and not confuse them. To do otherwise is woolly thinking. To quote Lord William
Rees Mogg, a very intelligent man who was the Chief Editor of the Financial
Times in London for many years, also the author of
The Reigning Error, and a acknowledged Gold Bug. “Inflation of any kind above zero is BAD”. Even at the piffling
rate of 3% for 10 years, what costs a $100 now will cost $134.39 ten years down
the track. And the government guarantees that $100 will always be worth $100.
Who’s getting ripped off here?
I will come in with a quote here from Sir Alan
Greenspan. Sir Alan is the now Chairman of the Federal Reserve in the United
States. The equivalent of New Zealands Reserve Bank. (Or is it?)
“Although the gold standard could hardly be, and not portrayed as
having produced a period of price tranquility, it was the case that the price
level in 1929 was not much different, on net, from what it had been in 1800.
[ 129 years of no inflation].
But, in the two decades following the abandonment of the gold standard in 1933,
the consumer price index in the United States nearly doubled. [ x2
] And in the four decades after that, prices quintupled [x5]
[Prices went up ten times]. Monetary
policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed
more than half a centaury of chronic inflation, appeared to confirm that fiat
currency was inherently subject to excess.”
Sir Alan Greenspan
19 December 2002
comment: Keep a close eye on
Greenspan.
The next quote is from Sir
Alan also:
This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is a simple scheme for the CONFISCATION of wealth. Gold
stands in the way of this insidious process. It stands as a protector of
property rights. If one grasps this, one has no difficulty in understanding the
statists’ antagonism towards the gold standard.
From the speech “Gold and
economic freedom” 1966.
This man is a “Gold Bug”
The last quote is from John
Maynard Keynes, the architect of the modern fiat [bad] money system. Please read
it very carefully.
“By a continuous process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their citizens. By
this method, they not only confiscate, but they confiscate arbitrarily; and
while the process impoverishes many, it actually enriches some....... The
process engages all of the hidden forces of economic law on the side of destruction,
and it does it in a manner that not one man in a million can diagnose”.
Economic consequences of the
peace, 1929
The countries that have
suffered the effects of destruction are the likes of Brazil, Argentina and
Tanzania. If Roger Douglas and David Lange had not acted as they did New Zealand
would also be on the list. It destroyed those men, and the labour Party, but
they had No choice!!! The excesses of
Robert Muldoon, allowed by fiat currency, needed to be cleansed from the system.
Dr Donald Brash was given the job of defeating inflation. He was thrown in at
the height of the Kondrateiff summer. In this he was so successful that he was
one of the first central bankers in the world to achieve some stability.
The important thing to
remember is this. Keynes knew what he was doing, why he was doing it, and what
the results would be. I ask myself what was he doing it for when he knew the
results? I will approach this question later.
People and the Dilbert factor
I truly enjoy Dilbert, the
little office cretin created by Scott Adams. He has so many lessons to teach.
Dilbert believes that there are only two types of people; Engineers and Marketers.
For this exercise I will call Engineers makers, and the marketeers sellers. But
when you add them up they, as a group, become buyers. So now I will have a
little fun. In the normal economy makers and sellers are in equilibrium and all
the buyers have money to spend. This is all fine and dandy. But then the makers
begin to make too much stuff and the sellers stop buying stuff off the makers.
Oops, the makers have to do something real quick. They cut down on production
until their stockpile has been reduced. In the meantime a few bodies are out of
work and they are not getting paid, so they are not buying stuff. Now the
sellers are under pressure because no-one is buying the stuff the makers have
made. So a few sellers are out of work and can’t buy stuff. The result is that
the economy slows down. It will stay slowed down until the makers of stuff can
start to sell stuff again. This is a recession, a perfectly designed leveling
system, where stock levels come back in tune with the amount of money the buyers
have to spend. A recession is a period of time when inventory levels are
adjusted back to a realistic state. This is an example of a wave. It plays
itself out “over time”.
However, things get interesting. Someone makes a
new move, they shift the balance in the game, they move the rook. Enter the
Chinese. Now the Chinese can make things much cheaper than any one else. So at
home the makers of things have a problem. They have real competition. They have
to make a choice. In order to compete they only have a couple of moves. The
first is go out of business and the second is to make things of better quality.
Only there is nothing wrong with the stuff the Chinese make. Either way the
buyers begin to lose their jobs...... big time. This has the makings of a big
shift in wealth from one country to another, or from several countries to
another. This game has played itself out many times over the centuries, and each
time the shift of wealth has been depressionary. Another wave. Or I would say
here a tide coming in.
I now go to Lord Rees Mogg
and James Davidson and the book “The Great Reckoning”
“ All long term credit cycles end with asset crashes in the markets of
the leading economy. Measuring from crash to crash, the dates of the modern
credit cycles are as follows:
From 1720 to 1772.
52 years
From 1772 to 1825.
53 years
From 1825 to 1873.
48 years
From 1873 to 1929.
56 years
From 1929 to 1990.
61 years.” comment, that is when Tokyo
started meltdown
The actual time when the American markets tanked was 2000 or 71 years.
To continue
“The crashes and resulting depressions appear to be less intense and
traumatic when the end of the cycle does not
coincide with the shift in world economic performance.”
Did I just say something
about China being the recipient of lots of money because they produce stuff
cheaper? I gotta go scratch my head and swallow some pills.
Well I return to the little
cretin and people. Dilbert believes the following: “I will do as little work
as is necessary in order to get paid as much as I can. And, the money is
MINE.” Well I don’t disagree, self interest is in all of us. That is one
reason people lose money in the markets, they believe that they have made the
right choices, and that with “buy and hold” they will be safe. They ignore
the fact that the market is an evolving creature and that some places in the
waves are not safe. If you were fully invested in the market in 1929 and held,
you would not have got your money back until 1954. “Over time you lost
money” Particularly if you took inflation into account. The main reason
they fail is that they did not develop an EXIT STRATEGY when they invested.
People who employ “trailing stops” are partially protected when the market
tanks. Well, back to Dilbert’s theory of self interest. It goes like this.
“My first interest is ME” “My next interest is my family” and “The
next interest is for the benefit of the tribe”. Remember that order! Think of politicians,
they think of “me” first. Then they think of the party. After that it is
what is ‘good’ for the country. And guess what, with fiat money they can
spend up large and have YOU pay for it through inflation. a la Sir Robert
Muldoon. Please, please bring back good money.
The other interesting thing
to look at is the human psychology when it comes to making money. It is one of
the seven deadly sins, avarice or greed. When people see a winning trend
developing they jump on board for the ride. Only they don’t have an exit
strategy because they are making money, and are definitely not going to loose
any. Well the dot com bubble was a classic example. The people did exactly what
Dilbert said they would do. Invest in dot.com. All the spare cash went into
shares. When the point was reached where there was no more money left to invest
there were no more buyers. Ooops it was time for the blow-off, and the market
started to retreat. The more it retreated the more sellers there were. The trend
continues until all the excess money has vanished. This is a bear market.
However when you get to the point where it is a “secular” bear market things
get interesting. The tide starts coming in faster.
When we speak of a
"secular" bear market, mind you,
we're describing the market over a
very long-term
period... as opposed short-term
rallies like we saw
peaking out on August 22nd. Secular
trends typically
last 5-20 years and consist of one
or more primary
trends in sequence. According to
work done by IM Vronsky
on the Gold-eagle.com website, there
have been 23 Bear
Markets during the last 100 years.
“Over time” in a secular
bear market the trend is down. So the
buy and ‘hold for the long term’ strategy is risky to say the least. Had you
bought in 1967 and held, you would not have got your money back until 1983, 16
years.. The primary bull market developing, as a result, is in gold, commodities
and bonds. Whether it be in bullion or shares the trend is up. Gold has always
been a safe haven in times of distress. The low in 2000 when the market tanked
was $US 254.00/oz, the present high is $US 388.00/oz. That’s a 40% return.
Lets go surfing
Just think of the beach.
There are quiet rollers coming in, just perfect for the kids to have a swim. All
of these waves are different, but generally “over time” it’s all pretty
consistent. On the surface of each wave there are ripples. Those ripples, in the
market are refereed to as ‘noise’. That is where Edwards and Magee’s book
is so good. Technical Analyses of Stock trends. It teaches how to interpret what
is going on over a timeframe, be it a week or a month and how to interpret the
trend patterns and turning points in the market. When you get it right you can
set up entry and exit points, and the
points of resistance and support. But think on, at some unknown time you will
get a rogue wave, and it upsets everything. The lifesavers stop sunning
themselves and have to go swimming. It could be corporate fraud, a bad earning
report or an act of terror. So you have to be prepared for that also and stay
light on your feet. The recent rescue in New Zealand was when the Government
(lifesaver) dove into the breakers and rescued Air New Zealand. And I might add
without asking me if I wanted to pay the account by way of inflation. Here we go
again, bad money to the rescue.
The common belief is to buy
and hold. The evidence does not support that assumption. In a bear market it is
said to be “buy and fold”. At different times within the cycles some
investment vehicles are better than others. A Russian economist by the name of
Kondratieff , in 1920, studied what was happening from research based on
history. He called these periods seasons. Ian
Gordon of Canaccord Capital in Canada laid it out nicely for us.
Spring
The start of inflation
The best investments are: Stocks. Real-estate.
Summer
Runaway Inflation
Best Investments are: Commodities. Gold. Real-estate/homes
Autumn
Disinflation
Best investments: Stocks. Bonds. Real-estate/Commercial
Winter
Deflation
Best Investments: Cash. Gold. Bonds(after interest rates spike)
All I will say at this point
is: The New York market tanked in 2000. Those that held have lost 7 trillion
dollars. That’s the amount of value that has been purged so far. AND the Dow
is at 7800, down from over 11000. The evidence suggests the following. For the
market to reach historical norms the Dow has to reach around 3800. But as we all
know normal is never there. The likely thing is for the market to overcorrect.
So where is the bottom?
Is it investment or is it mania?
There have over history been
some spectacular events in the market place. The Mississippi scheme. It ended
with a crash, people lost their shirts. The South Sea bubble, all hype and fresh
air, people lost their shirts. More recently we have witnessed the Dot Com
bubble and its crash from glory. These were all majors, bull market driven. The
interesting thing is that most of these manias have preceded a shift in monetary
wealth or economic performance. Did I just say China? Oh Ooo, hey America? Are
you losing your grip on things here? The Chinese have linked their currency to
the US dollar, so the free market forces do not have a leveling effect.
China’s growth rate is a smidgen over 8%. Boy are these guys making up for
lost time. And because they have their currency linked to the US dollar, the
market cannot acknowledge that fact. The market looks to make a profit without
the spectre of currency decline risks. Consider that there are 1.3 billion
people in China and 270 million in the US. That’s a lot of spending power for
one currency to be traded in. And people worldwide are exiting the US dollar. It
has gone from .89 cents for one Euro to 1.18 cents for 1 Euro. That trend line
is down. Through the Federal Reserve, money is being printed at the rate of
$500,000,000 a year. Sir Alan Greenspan is, on purpose, and
with deliberate care, devaluing the dollar, he will be exiting foreign
capital from the United States. Now here’s a new twist. Why should he want to
do that? Why has the Fed entered the market? Foreign investors in $US are paying
a huge price. Likewise the central banks around the world who hold $US as their
main foreign currency reserve. For example say a Federal Bank had about 70% of
their reserves in US assets, and that the $US value was $100,000,000 of those
reserves: then a 10% swing in the dollars valve would wipe out $10,000,000. Hey
guys, some of that was my money. I’m not happy. Sir Alan is making ME pay
for the excesses of the US. The producers of stuff that goes to the US are
receiving less dollars in their home country, and they’re not happy. Hey?? Sir
Alan????? What gives???? Did you shift the bishop? I think you are working for
your employers and not the people of the US.
We are in a deflationary
cycle, and the US is doing something different. Why?
More
to follow
The colour of man
GOLD
As you may have figured by
now, I like to see a trend line that’s going in the right direction. Up. So I
made a study of a few indexes and funds. A funny thing occurred. The name David
Tice popped onto my screen. The reason being that his Fund, The Prudent Bear,
outperformed every other fund in the US for 3 years. I made a bit of a study of
David’s methods. Guess what I found? This guy was into high class bonds and
gold. I had already figured that gold was going up and had bought some of the
lovely stuff. I was beginning to suspect something was up. The market had
tanked, China was getting the money, and gold was rising. I was suspiciously
wondering if indeed it was not the beginning of winter. I was consumed with self
interest, I had found a way to make a buck. So out came the charts again. I did
the gold vs Dow cross flow thing and found that indeed the number of ounces of
gold needed to buy the Dow was dropping. Aaah, a trend line going down is not a
good thing. Never mind I was onto a winner. I got my pencil out and scratched a
few lines and things to see where the trend would end up. I also found periods
where it took only 1 or 2 ounces of gold to buy the DOW. So with more
scratching, and extending lines and things it looked like about April or May of
2004 when the ratio would be one or two ounces. Ok, I had an exit plan.
The next thing I did was track gold prices over time. Guess
what? There were some converging signals, stated by highs and lows. These
intervals were very regular. So out came the pencil again. Yeap, May or June was
going to be it!! But hello, what’s this? The DOW could go to under
2000. Could that be the heart of winter?
Because I was interested in making a buck, I kept my eyes
open. The price of gold was doing funny things. Why? So I asked my New York mate
Sol. His comment was that the bullion banks were “shorting” gold. ( A short
is a seller, they do that via the New York Metal Exchange through Comex
contracts. They are derivative instruments) When the bullion banks decide the
price of gold is too high, they short the market to drop the price. So Ok, the
bullion banks were controlling the market as well as Greenspan. Woooo I was
playing with some well connected people. (I will, from now on, refer to the
bullion banks as the “usual suspects”).
The market is rigged
I was sitting here one day,
just watching the market. Looking at “puts” and “calls” and just getting
a feel for what the day was doing. Then all of a sudden the market changed and I
couldn’t figure out why. About ten minutes later who should pop up onto my
screen but Sol. So I asked him.
“Oh that, the Exchange Stabilization Fund has entered the market to hold
prices”. Say, what? This is supposed to be a free market. The laws of supply
and demand should apply. Who are these guys anyway? Looked terribly like a rook
move to me. Ok, so now I have to play against Greenspan, The Usual Suspects and
the ESF. It’s about time I shifted a piece, but which one? The only thing to
do was go back to the books.
“It’s not what you don’t know
that will hurt you; it’s what you think you know that’s dead wrong, and that
can destroy your wealth”.
Dr Kert Rheinbacker ( Austrian School of Economics) 2002
Who employs Sir Alan?
Always being one to check
things out, I decided to do some study on the Federal Reserve in the United
States. So as I enjoy reading, I got the book “The Creature from Jekyll
Island”. It was so good that I forgot to turn the computer on for 3 days. This
is what I found.
The Fed was set up in 1913 by a few Banks. Hey! What’s this? The US
Government doesn’t own the Fed? So I had been playing chess after all.
Ok then, who owned the Fed. Guess what I found.
J D Rockefeller and Chase Manhattan Bank
William Rockefeller for Investment bank Kuhn, Loeb & Company
J P Morgan First National Bank of New York
The Rothschild empire of banks
All these guys are bullion banks!
That represented over one sixth of the world’s wealth when the Fed was
set up.
I had been playing with cents
and they had billions. Looked to me like the board was fairly well covered, but
what to do? The business of these guys was to remove me from my money. And
everyone else’s also. Their vehicle was the Fed and Greenspan. I was starting
to think that checkmate wasn’t too far away. The only thing to do was a study
on the way they operated. Well I found a classic ploy. They used my money to pay
for what they wanted. How so I hear you ask? The trick was first employed by J D
Rockefeller. He wanted to corner the oil market, so he set up a scheme whereby
he got all his competitors to build his railroad. Then he charged them huge
amounts for the use of the tracks. As they went bust, he bought them up. Smart
move.
“The US Federal Reserve system came into being because a “secret” group of
international bankers wanted a “privately owned central bank” so that they
could manipulate interest rates and the money supply for their own benefit”
John McCormack
WELL!!! What have we got
here? China growing like topsy, The rest of the world in deflation, and America
engineering inflation. Has
Greenspan been told to do something, for one simple reason? Get American banks
into a situation where they can better weather the approaching winter storm, and
get everyone else to pay through currency exchange losses. As the value of the
$US declines it will make America vastly more competitive in the world markets.
Countries with high exchange rates will become less competitive as a result,
making it harder to grow against the US and China. Now here’s the rub. Chinese
products will get cheaper worldwide as the dollar weakens. China is exporting
deflation to everyone. The classic signal for a Kondrateiff winter.
“I believe that banking institutions are more dangerous to our liberties
than standing armies..... If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by deflation, the
banks and corporations that grow up around those banks will deprive the people
of all property until their children wake up homeless on the continent their
fathers conquered.... The issuing power should be taken from the banks and be
restored to the people to whom it properly belongs”
Thomas Jefferson - The debate over the recharter of the bank bill, (1809)
Well hey guys, guess what has
happened. We have the IMF and the World Bank, sisters to the Fed. Three outfits
working to make money for the usual suspects. You see, these suspects have a
problem. They are tapped right out through their $72,000,000,000,000 worth of
derivatives as of April 2003, and the market is tanking on them. They know the
problem, and Greenspan has acknowledged it.
“No bank is too large to fail”
One of things I have learnt is that when Sir Alan speaks, it pays well to
listen.
In one of his reports to
Congress, Greenspan made to following comment after being asked about the
possible return to a gold standard. “I
have been recommending that for years” The assumption, by myself and others, is that gold in some
way, shape or form is going to come back into the worlds monetary system as a
break on fiscal irresponsibility. Now why would the usual suspects want to do
that? Now we have China, the United States heading for inflation, the usual
suspects making large amounts of money through foreign currency gains AND
telling the Fed what to do. Where does the self interest lie here? Well Dilbert
has an answer. The usual suspects come first, Greenspan comes second and the
rest of the world be damned.
Sir
Alan has stated that gold in some form is coming back, and that he is going to
retire when his term ends in June 2004. For some reason 2004 rings a bell. Now
what was it...... . Having been head of the Fed for several years, and knowing
what Dilbert knows about people, I can only assume that Sir Alan will deliver
the new plan for money (which will include gold in some way, shape or form)
before his tenure runs out in 2004. That will coincide with the peak in gold
prices, and the market bottom. He will get the kudos for saving America. He
knows he can’t do anything about China, as their currency is linked, but he
can engineer a situation where America is in a better situation than the rest of
the world when the “Day Of Reckoning” arrives.
The
other reason I know gold is coming back is that in June of 2003 a group of
Islamic nations are going to start settling trade balances with the gold dinar.
That trend is likely to continue. They have no need for the World Bank or the
IMF, so are therefore uncontrollable. They are going to trade with “real”
money, not depreciating greenbacks.
“Lack of money is no problem. Lack
of an idea is an obstacle”
Ken Hakuta
“Gold-backing is anathema to banking cartels and socialist politicians. Cartel bankers want a government sanctioned and protected exclusive
right to charge interest on fiat money that they loan to governments and
commercial borrowers. Socialist politicians want essentially an unlimited spigot
for government spending for they accrue and retain political power through
controlling and channeling government largess spending.”
Author unknown
Where does government self-interest lie?
Comment: the bullion banks
are buying gold, a safe haven in times of distress. They are doing it through
foreign currency gains and manipulating gold to their benefit. These guys have
lit the fire and the room is warming up.
“A democracy cannot exist as a
permanent form of government. It can exist only until voters discover that they
can vote themselves largesse from the public treasury. From that moment on, the
majority always votes for the candidates promising the most benefits from the
public treasury, with the result that a democracy always collapses over loose
fiscal policy”
Alexander Tyler 1773AD
Do we want to end up like Argentina?
Well now we have a real
problem. It’s winter. The usual suspects are making money out of me, and
individual governments. Thus, in the belief that “free” markets do exist, we
will continue to be screwed by the usual suspects. Get this, Sir Alan has an exit
strategy, the man is a genius. I for one appreciate his intellect. It’s time
to move the king. Surf’s up, and there’s a deep cyclone on the radar screen
way out at sea. Time to batten down the hatches.
Definition of Depression
A recession is a market
downturn inside the borders of a specific country. It is for the purpose
of inventory readjustment. The definition of a depression is a recession
globally. To wit: inventory creation is reallocated towards another country
producing cheaper goods and/or services. It is deflationary and labour cost
lowering. The purpose of a depression is to purge debt. The greater the preceding inflation, the larger the debt
to be purged is going to be. This is a tidal wave, where all the forces
of nature and economic law join together at “one point in time.”
Now I come to fractional
reserve banking. The cash that is held by a bank is known as the
fractional reserve. The balance is loaned out
in multiples of the fractions. It is a risk taken by the banks as people
never want all their money at one time, until there is a depression. Then there
is likely to be a “run” on the banks. Next comes the domino effect. In order
for the banks to get the cash lent to them
by the people, as deposits, the banks start calling in the loans they
have made. The market tanks as there are too many sellers. Bingo, you are in a
depression. Depressions also occurred
under a gold standard, so it is mass psychology that drives the market.
People put bad memories out
of their minds. I went looking for what happened in the Great Depression of the
1930s. I spent four hours in a city library and found nothing. It was a bad
memory, best forgotten. Depressions occur over the period of a lifespan, all
“hand me down” information is forgotten or buried. The other thing is that
we had “The Great Depression” and learnt lessons from it, “so it
could never happen again”, hence the Kondrateiff seasons. It is only when the
lessons learnt have been forgotten that we can arrive at winter. The key point
is this, the worlds leading economy must be affected, and the numbers being
stacked with regard to debt in the United States are huge. It is avarice that
drives the markets, and ultimately fear that will destroy it.
There are some huge market
forces working out there. John Maynard Keynes was instrumental in putting them
in place. I feel sure that this is what he meant by all the forces of economic
law being on the side of destruction. The human cost will be profound if no
action is taken. The welfare system is at risk. Consider the implications when
there is a transition back to a “gold cover clause” or a “reserve ratio”
if we are not prepared. This must be done before April 2004.
Allie Oop 04/04/2003
Note, In May 2003 Sir Alan
accepted a new term as Federal Reserve Governor, the Dilbert principal has been
at work.
This Essay has been written by Alan Lunt, to get in touch with him send emails to allies1111@netscape.net and we will forward them to him
