None Dare Call It Reason

By: Rodney C. Cook | Wed, May 7, 2003
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Despite deteriorating economic fundamentals, the financial markets have been amazingly robust. The stock market, in particular, threatening to breakout in a case of outright bullishness. Dotcoms are sporting obscene multiples as once again the talking heads start counting eyeballs and cheerlead their employers' positions. But their most recent pontifications have a hollow ring. And the lines of probability are holding.

The big fraud settlement is seen by the masses to be nothing but a big fraud in itself. Steal billions, and you just have to kick a percentage back to the government authorities. And they will kick this back directly with subsidies for, ahem, new independent research capabilities, and indirectly by letting you account for this as a business expense. So the taxpayer subsidizes the government official's legal proceedings, and the fines themselves. So what happens to the damaged party? The little guy who was defrauded? Well, he can still participate in class action lawsuits, of course. Yea, right. And this is supposed to restore confidence to the markets and herald in the new bull? Sounds like a game of kick the can. And guess who's the can.

Culture of Treachery
A cynic could easily attribute these outcomes to a dark conspiracy. But in reality it is but a culture of dishonesty and denial, with a good mix of treachery. And you must have all of these attributes to be admitted to the club. But this culture club has not been greeted with a manic breakout. If they want a breakout, they will have to pay for it themselves. At least initially. And they may well prime the pump, if they can't get the unwashed masses to foot the bill. So far they have been relatively stingy in their efforts to create a false dawn. I am quite certain that the insiders would love to sell into a 2000-point melt-up in the Dow. And they are so close. But a reflation of this magnitude appears less likely by the day.

The much larger market for general shares is bumping its head at significant resistance. The recent rise in the face of fundamentals has more and more pundits, even those of the bearish persuasion, expecting a modest reflationary success. And they anticipate that shares will lead the way. There will likely be limited successes as the monetary authorities still have their tools of the trade: The Fed purchase of shares in direct Japanese style intervention has not yet been put in play. At some point it will be expected, and accepted. The end of the reflation efforts will be obvious to all when the purchase of shares by the Fed and its member banks shifts to gold shares. Or the in ground reserves of this great nation are monetized. Or re-classified. As deep storage gold.

But for now, the thinnest of strategic targets, gold shares have been taking pot shots. Institutional selling and shorting has dampened public enthusiasm here. I have had to pick a few musket balls out of my teeth myself lately in this arena. I save them as reminders that this is not your typical bull market. But the timing of any false dawn is unknowable. So I stay with the inevitable, and stay long the shares.

Many gold bulls are losing confidence. And they sell at the lows. This error is common. The gold bull does not resemble the familiar bull markets typical of other financial assets. This bull has a heavier load to bear. And investors using trading techniques that were so successful in multiplying the gains of last decade's bull in financial assets will likely not succeed. A more dogged and stubborn approach is in order. Stop losses should be mental. And below what makes you comfortable. Or they will be run. Buy and hold, with technically determined entry points will reap greater benefits than the impetuous trading strategies of yore. Gold is a store of wealth. One day to be expended on your life's dreams. Paper dollars should be viewed as a hedge against gold, rather than the other way around. A medium of exchange for your short term needs.

As the dollar continues to weaken, there seems to be less enthusiasm by the insiders to expend these dollars to battle physical gold. In a panic, certain naïve leveraged financial institutions well might, as gold prices must be kept down to perpetuate the game, and keep longer-term interest rates in check. After all, the House of Morgan, or others of its kind, appears to have derivatives yet to cover. But institutions with generational wisdom and cunning are accumulating at their expense. The demand for gold will be ultimately driven by hoards of foreign investors. Triggered by the old world merchant banks that have accumulated in anticipation. It is only the domestic investor that is easily influenced any more. So the moves by new "money" have been more timid, and tenuous. As panicked mobs can range far and trample any not close to cover. And they most certainly will.

Culture of Debt Plods On
And as in the peak of the 90s mania, paper shares must be purchased with paper dollars. So we need more dollars. Here the culture club has things a bit easier, as they can create these dollars. And they have. And they are. But to whom will these dollars flow so that they are expended on shares?

The all important mortgage market continues to be pumped. These dollars are created for the public at large by convincing them to sell the equity in their home to foreign investors. And they spend these dollars largely on foreign goods. So America's biggest export is still debt, followed closely by jobs. The globalist financiers have an endgame planned for the American "home owner" that cannot be pleasant.

The pundits and talking heads notwithstanding, the masses are increasingly wary of the financial markets, and are tending to mill about and even whinny a bit. Increasingly the buyers of shares are the traders and the institutions. Increasingly known to the public as crooks. So they will have to force the horse to drink by buying the shares for his own good. Using regulated, managed, captive money. How nice. You can see this now with the insurance companies, as their rates soar to cover loses. And the retirement funds, with their unfunded liabilities dragging down corporate sponsors. And to a lesser extent 401Ks, with their typically limited investment options. Increasing restrictions on IRAs should be coming soon. Privatized Social Security with strict caveats seems likely. A national retirement scheme consolidating 401Ks, IRAs, and Social Security would mark the end game.

The Buck Stops Where
But one thing about human nature. We can count on people to continue to do what they are doing, until they can't. Crooks will be crooks. Dupes will be dupes. The culture of the corrupt will continue to bleed the system, and the system will continue to roll up its sleeves. Until it turns white. And keels over.

As the monetary insanity marches on, we must continue to export dollars. Or the music stops. So our destiny and debt is now in the hands of those in foreign places. Places less susceptible to the sirens song. And they are less accommodating by the day, as the weakness in the dollar attests. So the froth created by the coming dollar waterfall will effervesce institution by institution and nation by nation. As these bubbles burst there will be fewer buyers of dollars.

So when will the foreign markets stop buying our dollar denominated debt?

When they can't.


 

Author: Rodney C. Cook

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.

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