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October 01, 2003

Rats
by Rodney C. Cook

I missed the all excitement. Gold hit new highs, for a short while at least. I left two Fridays ago for remote Idaho to work on the cabin. I even left the computer at home as I occasionally like the perspective offered by being out of touch. So unknown to me, gold began to soar the next morning.

Still camping in the unfinished cabin, I went to sleep under the dust protection of an expedition tent. In my sleep I must have heard the pack rats scratching about, as the e-trade television commercial flashed into my head: the one where the heroic financial advisor finds bankers scurrying about like rats in the basement of the family home. Suddenly awake, I could hear clawed creatures scurrying across the plywood sub-floor. Scrambling out of my sleeping bag and staggering out of the tent, I quickly dispatched one of the invaders. This little banker must have been a sub-prime mortgage broker betting wrong on the direction of yields: He was the slowest in the pack.

Figuring that in morbid fear the other pack rats had scurried down the framing and out the few remaining foundation openings, I went back to sleep. But I had underestimated the persistence of pack rats facing winter. Suddenly awakened by the scrambling once again, I chuckled to myself. Like bankers in the face of Kondratief Winter, these little fellows will be persistent where there are assets to plunder. And like many of the usurers, these rodents will just as certainly perish.

The next evening found me sealing off the remaining openings in the foundation, and improvising a box trap to hasten the demise of these less worthy beings. I could visualize one of these rodent-like creatures peering out through the cracks in a box that had unexpectedly dropped from the sky as it tried to steal some extra cheese. But in my dreams that night these surreal images morphed into the face of Dick Grasso peering out of the television box, pleading his case on Kudlow and Cramer. And once again, I was suddenly awake. Listening this time to the desperate sounds of attempted escape.

Funny how the subconscious works, linking the seasonal assault of mountain pack rats to matters of finance. The population of rats has grown quite nicely over the Kondratieff Summer. Now there are too many. And they appear to have infested every nook and cranny. They are nibbling on the assets squirreled away in mutual funds and in corporate retirement funds. The biggest are gorging on the fruits of insider information. And they are persistent. No wonder when you can pilfer several million with just a few minutes advance notice on the discontinuation of the 30-year bond. The financial fodder provided by record summer yields, has likely created a population explosion beyond easy comprehension. Even as the perp-walks and trials mount, me thinks we are a bit naïve as to the extent of the infestation. Because rats scurrilously pursue their plunder in the dark, I suspect that where they have not been found, they are only hiding. But this population size will be reduced to well below its equilibrium level once again. Only a modest number of rats will survive the Kondratieff Winter by plundering the assets of others.

When I returned from the cabin late Thursday, I logged on and saw the big percentage drop in shares. But needless to say, physical gold looked most excellent until that moment when I had climbed into my decrepit old pick up for the drive home, when it plummeted. The chat rooms were all still quite active on the subject, with lots of renewed pessimism for precious metals and their shares. So I reluctantly opened up my portfolio to check for damage and my browser to check for rat sign.

Surprise, surprise. Not bad at all. The portfolio was down from a 42% gain to a 39% gain. And gold was up nearly a 10 spot. Damage was primarily to the shooting gallery shares on parade on the CNBC ticker: Rat sign. The Swiss announcing their sales program: Rat sign. So, I concluded that we had merely gone from overbought in the shares to something more in line with the price of the metal.

But many still believe that the dramatic drops as seen on Thursday and Friday are harbingers of continued declines. Not by themselves, as any technical damage was short term. The primary bull trend is well intact. Even a rather painful pull back from here would not break this primary trend. The secondary trend may turn down at this point; however, not if the more recent pattern of near term support on pullbacks is maintained. The speculation has been that this is increased investment demand from Middle Eastern and Asian concerns. What could change that?

Well, the international cooperation among our global monetary authorities in moving to firmer policies supporting floating currency regimes may have some subtle side effects. The Chinese appeared to have offered overt concessions on the Yuan: Rat Sign. And by virtue of recent price action the Japanese have done so on the Yen: Rat Sign. So the US dollar will be allowed to depreciate, presumably in a controlled and coordinated fashion. In the current game of competitive currency devaluations the US dollar has gained some ground. But this process will likely cause Chinese and Japanese monetary authorities to buy fewer dollars and dollar denominated debt. One would expect that they would increase gold purchases. Unless there will be tacit cooperation on this front as well. Did Mr. Market pick up on this possibility as gold approached new highs for the trend?

So the price of gold the next few weeks will shine light on whats up with those king rodents in the IMF. On the surface this little plunge appears to have been a fairly typical technical correction. Engineered by lesser rats nesting among in the crawls spaces financial institutions close to the commercial shorts. If we get a countertrend that takes us toward primary support levels then the rodent population is likely still quite large. But one by one the traps are springing. Winter winds grow, just as many of the pack rats have found themselves boarded out. And the rat-catchers lamp has illuminated beady eye shine in the rafters of the House of Morgan and of American Barrick. At some point in the not-too-distant future the malnourished pack rats feeding on currencies will resort to cannibalism. And gold will soar. Things are not going well at vermin acres.

Rodney C Cook, Ph.D.

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

Copyright © 2003-2006 Rodney C. Cook, Ph.D. All Rights Reserved

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