Rebound

By Howard Katz    Jul 27 2009 10:55AM

It is, I believe, a Chinese expression, “May you live in interesting times.”  Well, lucky us. We most certainly do live in interesting times. As of Friday, the U.S. dollar index closed at 78.89 (basis Sept.). The break point of the giant double top pattern in the dollar is 78 even in the cash market and 78.20 Sept. future. This difference of less than ¾ point can be covered in a day.

If the double top pattern is completed, it will project a decline in the dollar index to 68, which will be an all-time low in the dollar. This will propel gold above $1000 and cause a general rise in commodity prices.

That is to say, the entire financial world is hanging by a thread.  And this thread could break at any time including the next few days.

An argument is circulating among the gold community to the effect that gold will go up in both “inflationary” and “deflationary” times. It sounds as though we have all the bases covered.  If “inflation,” we win.  If “deflation,” we win.

Alas, it is too good to be true. No one can win all the time, and no financial speculation can go up in all eventualities. The purveyors of this good news are confused. And they are confused by the wrong use of concepts.

Concepts are crucial to the thinking process.  If your concepts are right, then the argument becomes simple, and it is easy to reach the correct conclusion. In this case, inflation and deflation are the wrong concepts and are confusing the thinking of these people.

From the American Revolution to the Civil War, a general rise in prices was called a depreciation of the currency. This is the correct concept, not inflation. Inflation means a going up as when we inflate a balloon. But in such periods, it is the currency which is going down. Nothing is going up.

The answer to the question about gold is that, when gold is money, it goes up when general goods are going down. When gold is not money, it moves up and down with general goods.  By carefully selecting certain periods from economic history, they can “prove” that gold goes up in any period. In general, when a currency depreciates (1933-2009), all other goods go up.  When a currency appreciates, all other goods go down (1866-1896). At the current time, gold is not money, and it will move up and down with average goods in our society.  Do not expect gold to go up in a period when average prices are coming down.

Alan S. Blinder, writing in Friday’s Wall St. Journal, states, “”Recent quarters have seen an almost unprecedented liquidation of inventory stocks…That, too, must come to an end.”  [“The Economy Has Hit Bottom,” by Alan S. Blinder, WSJ, 7-24-09, p. A-15.]  This brings up the central issue of the day and explains why we live in interesting times.

If we look at the so-called “recession” of 2000-01, then inventories play a key role. The word is in quotes because recessions, like witches, do not exist in spite of the fact that many people believe in them. This particular “recession” is described as “so-called” because it did not even meet the establishment criterion of 2-consecutive quarters decline in real GDP. In 2000, the nation’s media began to beat the drums for recession. “The consumer is going to stop buying,” they reported.

The media screamed so loud and so long that American business cut back on their inventories. The inventory decline (and the decline in production associated with it) finally led the BEA to announce 2 consecutive quarters decline in real GDP. The media happily announced their “recession.” There was never any decline in consumer spending. The entire “recession” consisted of businessmen cutting inventories because the media had told them that the consumer was going to stop spending

Worse, the BEA quietly revised its figures. If you go to the BEA web site and check out quarterly GDP data today, you find that there were not two consecutive quarters decline in 2000-01.

nominal GDP  real GDP

source: BEA web site

The media were quick to respond:

“No fair.  No fair. We worked hard for that recession. You can’t take it away from us. We want it.  We want it.”

And so it is to this day, dear people. The media now casually refers to “the recession of 2000-01” and just as casually tells us that a recession is 2 consecutive quarters decline in real GDP.

And so it was with the current “recession”, dear people. The media have been beating the drums calling for a coming financial crisis. The New York Times used headlines almost as big as Pearl Harbor and the moon landing. They scared the stuffings out of American business, much worse than in 2000. The chart below shows the decline in inventories in 2008-09.

Inventories are held because the businessman does not know the moods of the consumer. A fad for widgets may strike his customers next week. A local magazine may do an article on how nice and how fashionable it is to have a widget in one’s yard. The customers will descend en masse onto his store. “Where are the widgets? Give us the widgets.”  If the store does not have a sufficient inventory of widgets, then the customers will walk out of his store – over to his competitor. In 2001-02, Home Depot cut inventories so low that they suffered a 10% (same store) sales drop year to year. Low inventories = low customers.

It is obvious what is going to happen. As business rebuilds its inventories, production will rebound. GDP will snap back as quickly as it fell. The whole “recession” of 2008-09 was a self-fulfilling prophecy. Businessmen believed it and so acted as if it were real. They cut inventories. This made it appear real. Similar phenomena have occurred many times in human history. Take the Salem witchcraft trials, for example. Many of the individuals accused of being witches confessed! That certainly seemed, to the people of the time, to prove the existence of witches. All human cultures have similar methods to reinforce the most absurd beliefs and convince the people of the time that these are absolutely true. Is our culture any different?

But the Fed will not correct the enormous amount of money they have created. The Fed works for the paper aristocracy. They are the counterfeiting department of government. They are now arguing that, if necessary, they can always withdraw some of the money from circulation. Let me see, when has the Fed ever withdrawn money that it has created? The last time was 1938.

And when has the Fed made it up to all the working people of America (like you, dear reader) for the fall in real wages which it caused by its large issues of paper money starting in the 1970s and continuing through last autumn?  This is the greatest decline in real wages in American history going back to 1623 (when the Pilgrims abolished communism in Plymouth, Mass.).  Why does the Fed call this decline in wages “economic growth?”  Why is it that before the Fed was created, the American working man increased his real wages by 60% over an average 30 year period?  And why is it that this incredible economic growth was achieved with zero price increases?  The answer is very simple. The purpose of the Fed is to steal from the people and give to the paper aristocracy, and this is the purpose of every central bank in the world.

No, the Fed is not going to withdraw any of its newly created money from circulation, not with Obama’s trillion dollar deficits looming as far as the eye can see. It is going to create more and more money. And this is going to cause more and more depreciation of the currency. As the currency depreciates, all goods purchased with the currency will, as noted, go up in price.

Most gold bugs emphasize that you must have your wealth in real goods (of which gold is the most liquid and most convenient for a number of reasons). But an important point is often overlooked. What of the young working man who has not had time to accumulate real assets? He will still be hurt by the Fed’s depreciation of the currency because wages never go up as rapidly as prices. (I found this fact discussed by the British Bullion Committee at the time of the Napoleonic Wars. They knew, over 200 years ago, that wages do not rise as rapidly as prices in a general depreciation of the currency. So how come the “economists” of today do not know this simple fact?  It is as though the world’s geographers no longer knew that the earth was round.

So if you are just an ordinary working guy with only the value of your labor to get you by, then you must adopt a different strategy. The wage competition from your co-workers (who do not understand that the currency is depreciating) will force your wages too low. The only defense you have against this is to start a small business. Try to choose a business making a product you know well. Then plunge into the sales end and try to do the best you can.  As the currency depreciates, you will be able to raise the price of your item, and this will protect you from the general fall in wages. Good luck.

Many readers who browse pro-gold web sites are expecting to find newsletters which recommend specific stocks, or commodities, and tell them when to buy and when to sell. This is certainly an important job of a financial letter. However, it is not the most important job.

You, and the rest of the people in the world, are being victimized by false propaganda, which emanates from the paper aristocracy and attempts to deceive you about what is going on in the economy and what your political leaders are doing about it. The purpose of this propaganda is to get you to vote for politicians who will support the paper aristocracy and to keep you from taking action to defend yourself from the depreciation of the currency.

For example, recently the New York Times increased its news stand price from $1.50 to $2.00 WHILE ITS PAGES WERE FULL OF PREDICTIONS OF “DEFLATION.”  Damn, if you are in a period of “deflation, the way to make the biggest profit is to cut prices, just like John D. Rockefeller did. It worked for him. If the business leaders of the Times don’t believe what is written in their own paper, then why should you?  And a few years earlier the Wall Street Journal did the same thing. You can debate whether this is stupidity or whether it is conspiracy. BUT YOU CANNOT ARGUE THAT IT IS GOOD JOURNALISM.

So at the One-handed Economist, I consider it a part of my job to give you the larger picture so that you will be fortified against many of these false ideas which come from the media. For this reason, my clientele is limited to the more sophisticated trader. The naïve will immediately believe what the media tell them. They will write me off as a kook because I disagree with the media. Sad.

But one man plus the truth is an army. And I am inviting you to join my army. No conscription here, just volunteers.  In fact you have to come up with $300 to join. If you are interested, then visit my new web site, www.thegoldspeculator.com.&nbs p; If you would like to see my weekly blog (on social and political topics), then visit, www.thegoldspeculator.blo gspot.com. (no charge).  Guaranteed to shock and offend.

Thank you for your interest.

Howard S. Katz

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Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31). Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002. His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures. This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.(Include both electronic and mailing address.)