Professor Elam

Last Bull Standing

There
is only one bull market left-gold. While the news made much of the Dow hitting
10,000 lately, it was there in 1999, and has crossed that mark numerous times
since. Let’s take a look.

Financial
markets bottomed in 1982 as then FED Chair Paul Volcker hammered inflation back
with high double-digit interest rates. The right move was to lock in
non-callable 12% Treasury bonds, sit back, and collect the interest.  Bond prices peaked as stock prices
bottomed.  Gold entered a 21-year
slide from  $800 to less than
$300.   Remember that Richard
Nixon removed gold backing from the US Dollar in 1971.  This allowed the Dollar to float
against other currencies. It also allowed virtual unlimited printing of Dollars
by Congress. Dollar creation was no longer restrained by the amount of gold in
Fort Knox. Yet the Dollar still reigned as a Reserve Currency as outlined in
the Breton Woods agreement at the end of World War II. Now fast forward from 1982.

Financial
markets peaked in final dot.com frenzy in 2000. People were lining up to buy
companies that had no earnings but lots of promises.  Gold collapsed to less than $300.   Markets had come full tilt, and the Dollar reigned
supreme. The Dollar Index hit 120.

The
financial bull market ended with the dot.com bust. Since then the Dow has been
from 12,000 to 7,000 to 14,000 and back below 7,000. All the bets on the stock
market have fared badly. How bad? 
Reports are now surfacing that most major retirement plans have not made
any real returns the last ten years. Indeed, many retirement and endowment
funds lost as much as 25% in the meltdown last fall. Promises to retirees will
be very hard to keep.  As usual
most funds are thinking yesterday’s stock market, not today, gold market.

Government
response has been predictable, wrong headed, and arguably made things worse.
Governments have simply spent more money. Franklin Roosevelt was never able to
stimulate private job creation; it took World War II to do that.  This administration is much more
interested in creating new social programs than stimulating business. And so
money goes to government enterprise as real job creation, the kind that pays
taxes to pull the government wagon, shrinks.  That unreported tier of unemployment including those who
have given up looking for jobs now tops 14% in several states. Sending more
money for unemployment benefits is not the answer.

How
bad is it?  We have a report from
three prominent CPAs that the City of Houston is broke and will probably
experience bankruptcy proceedings. What next, do Bellaire and  West University do a leveraged buyout
of Houston, perhaps underwritten by River Oaks?

The
stimulus package has found its way into the stock market.  Friendly Goldman Sachs appears to be
buying the Dow Industrials that last half hour, yet the Transports and
Utilities fail to confirm these new Industrial highs. I cannot locate a single
private sector job created by the stimulus.

Remember
the Dollar is the world reserve currency. And so the price of oil, copper, you
name it, floats higher on an ever-shrinking Dollar. We suggested $80 oil and
here we are. What next?

Remember
our template for the future is the up and down of the 1970s.  The Dollar appears to have a temporary bottom.
If 75 holds on the Dollar Index, we may see a move to 82. This would
temporarily depress commodity prices. We peg support for oil prices in the high
60s.  November 9 now looms large as
a turn date for many markets. Fewer stocks are up and the market is buying gold
on pullbacks.   We are not a
buyer of anything at this point.

Our
bottom line at this point would still be for a pullback in equity and commodity
prices in November and December. Renewed dollar weakness after that would
support higher prices into the spring, particularly for, yes, oil. But frankly
such predictions at this point are premature. The price of oil is a thin but
vast slick floating on a sea of fiat Dollars. A fiat Dollar is one that has
value because the Government says so, not because one can trade it in for gold
or silver.

One
prediction we can safely make is the next financial crisis. States, like
Oregon, Michigan, and California, and then cities like Detroit and Houston, are
broke and beyond floating on borrowed Dollars. They may be able to paper over
the reality until next summer, but that day of reckoning is coming.