This Week in Barrons – 10-20-2013
China’s Overthrow of the U.S. … it’s an ‘Inside Job’.
A couple of weeks ago, we talked about how the attacks on Gold have had a ‘dual mandate’.
- The first reason that the Central banks ‘beat down’ the price of gold was to help remove the concept of the ‘flight to safety’, which is historically common when a currency is being devalued. As much as everyone tells me that Gold is an old barbarous relic, the fact is – for hundreds of years, people flocked away from paper money every time that paper money was looking weak. So, to keep people from rushing into gold instead of dollars, they reduce the price of gold, hoping to make it unattractive. They also slander gold, and get Goldman to come out and say it's going lower – because no one wants to rush into something that is falling.
- But the second reason (in my opinion) is the more important one. Our new economic bosses, the Chinese, have expressed their extreme displeasure over the fact that they hold over $1 Trillion worth of U.S. paper, and each day that paper is worth less and less as the Fed QE’s us into oblivion. Everyone from Wall Street bankers to the Fed know that if China wanted to implode us, all they would have to do is sell their T-Bills ‘wholesale’ and the U.S. would be the proverbial ‘dead duck’. So here we are – the ‘Big Kids on the Block’ – and China could crush us like a bug without firing a single shot. Therefore, in order to calm the Chinese, we are giving the Chinese the ability to use large portions of their dollar denominated holdings to buy (with every gold attack) less-expensive gold.
These gold attacks normally come in the middle of the night, when massive sales of paper gold hit the market. I saw it again 10 days ago. In a very ‘thin’ overnight session, someone (no name or account number given) came out and decided to dump 800,000 ounces (over $1B) of gold onto the market in a single shot. Just think about that for a moment. If you needed to sell $1B worth of gold, and you knew that selling that much gold in one sitting would kill the price – would you do it? Of course not, you would sell it a little at a time in order to maintain its value, and your selling price. But, (in this case) the reason they're selling 800K ounces in one shot IS to purposefully drive the price lower. The price fell (just as intended), and was followed the next day by more selling.
Almost as a victory lap, the Chinese are becoming more and more boisterous concerning the absurdity of the U.S. Government. Just days ago, the Chinese outlet Xinhua came out with a scathing article, and the first line of the piece was: "U.S. fiscal failure warrants a De-Americanized World". The piece went on to say: “a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies. As a result, the world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites, while bombings and killings have become virtual daily routines in Iraq, years after Washington claimed it had liberated its people from tyrannical rule. Such alarming days, when the destinies of others are in the hands of a hypocritical nation have to be terminated, and a new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing. What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States."
Well there it is, in black and white. The Chinese want to be included in the new world reserve currency. The Chinese want it, demand it, and own enough U.S. paper to get it.
The attacks on gold are not because the economy is good, and no one wants gold any longer. The attacks on gold are because China wants to buy it at a discount. When the Chinese think they have enough gold, they will declare to the world that the U.S. dollar reserve must end immediately, and be replaced with a wider, broader basket of currencies in which their Yuan (Chinese currency) is a major player.
But, can’t the price of gold keep going lower (virtually) forever? No, it can't, because there’s only so much physical gold lying around. While the supply of ‘paper gold’ is unlimited (just like dollar bills), the supply of physical gold is not. In the past year I have seen the gold warehouses drawn down to very low levels. When the notices go out that NO more contracts can be settled with physical gold delivery, that is when the panic will set in, and NO amount of funny paper manipulation will stop the surge in gold. That is to say, when the available supply is sitting in Asia's vaults, the scramble to get the remaining inventory of gold will be an incredible sight.
Factually: all nations want economic stability and ONLY a gold-backed reserve is going to do that. But even with ‘percent based’ gold backing, the price of gold will have to be adjusted to equate to the money supply. With this adjustment, Jim Rickards (an esteemed economic problem solver) estimates that the price of gold will move to between $5,000 and $7,000 an ounce. And that is why I continue to buy gold and silver (which will soar in sympathy with gold).
Remember the market adage: ‘The market can remain irrational, longer than you can stay solvent.’ Patience is on your side on this one.
The equity markets certainly did not want to hear anything about a pull back last week. The markets received the excuse they needed to push themselves higher when Congress ‘struck their deal’. On Friday, we witnessed the Nasdaq making a 13-year high, and the S&P pushing to an all-time high.
The irony (of course) is that we are setting these highs at the very time the Federal Reserve is so worried about the economy that they can't even ‘taper’ off their money printing stimulus. Why is it that we need our Fed to print gobs of money, when the stock market is telling us that things are ‘better than good’? Oh yes, the stock market is no longer a reflection of the economy. This week the market isn’t even much of a reflection of corporate earnings – considering the way they torture the accounting to virtually ‘create’ earnings out of thin air. Therefore, if the fundamentals are basically useless, then the only thing that matters is free money from the Fed, and the desires of the Wall Street banks. We’ve seen that the new Fed Chair, Ms. Janet Yellen, is ‘all in’ on the idea of using excessive money printing to create jobs. Forgetting the fact that it didn’t work in 2009, 2010, 2011, 2012, or in 2013. Her answer is that they just didn't print enough money!
My point is that there's no real barrier for stopping the market from putting on an absurdly strong run for the remainder of the year. There's no reason why the market can’t exceed 16,000, 17,000 or even 20,000. And here are some reasons:
- The true state of the economy doesn't matter.
- Corporate earnings are ‘basically’ what they say they are (because GAAP (Generally Accepted Accounting Principles) is no longer a viable guide).
- And the Fed is willing to "Do the Draghi" meaning do what ever it takes to create inflation.
Then nothing is stopping the market from putting on a show that equals the insanity of the Japanese stock market of the 80's?
Factually, (in the technical, big picture) there is a pattern growing over the past decade called ‘the Jaws of Death’, or ‘the Megaphone’. Each and every major market crash in U.S. history has been preceded by this chart pattern. It is my guess that whatever blow off top this market puts in over the next several months, it could very well fulfill the pattern and start us on the big decent.
If we do NOT get a big, year-end rush higher, it is only because ‘the powers that be’ don't want one – not because they lack the backing of the Fed to do it. I think we are still on track for it, but I just didn’t count on them starting it last week. We are already at all-time highs on the S&P, and we have got 2.5 months to go until the New Year. Are they going to run us that far – for that long? My guess last week was that we would end the week with the market up nicely so that we could go into the weekend with the political hacks talking on the news shows about how wonderful things are. That happened, but what about this week?
I think that we weaken this week, and see some form of pull-down. The idea of ‘too much, too fast’ comes to mind, and a bit of cooling off is certainly warranted. So I think it is still possible that we get a couple weeks of sub par action, maybe some sideways and down. That would set us up for a nice ‘perk-up’ in November, and an all out sprint to the finish line in December.
This week I tweeted a list of stocks that I’d be interested in if they exceeded certain thresholds. The list that I published follows, with their current prices in parenthesis: VLO > 37.20 (39.00), CERN > 55 (55.77), DDD > 56 (56.96), SNDK > 63.40 (68.62), WWW > 60 (57.52), FDX > 116 (125.83), HCA > 47 (48.83), INVN > 20.50 (21.16), AKAM > 53.20 (52.15), MMM > 122 (122.91), FCX > 34.50 (35.00), WLT > 16 (15.20), and HES > 81.40 (84.06). As you can see, with the S&P setting an all-time high, they all virtually exceeded their respective thresholds except for AKAM and WLT.
My current short-term holds are:
- CIEN – in at 26 (currently 26.99) – stop at entry,
- CERN – in at $55 (currently 57.77) – stop at entry,
- HES – in at $81.40 (currently 84.06) – stop at entry,
- LRCX – in at 52.49 (currently 53.79) – stop at entry,
- WNR – in at 31.51 (currently 33.74) – stop at entry,
- SBUX – in at 77.50 (currently 79.45) – stop at entry,
- SIL – in at 24.51 (currently 12.92) – no stop
- GLD (ETF for Gold) – in at 158.28, (currently 126.87) – no stop ($1,314 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 21.10) – no stop ($21.87 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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