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 Market:
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.
Tips:
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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