September 2007

Another rancid Whoopee Cushion breeze set Wall Street’s pennants aflutter yesterday. And forget about profiting from these stupid little rallies, since they are pretty much over before your data software has drawn more than a bar or two on the three-minute chart. Occasionally there are going to be variations. Like yesterday. There was the usual, psychotic frisson on the opening. But this time the rabid badger got second ‘wind’ late in the session, powering a 90-point run-up. But who could have been alert enough to catch it? Nearly 300 minutes of tedium had elapsed in the interim, presumably anesthetizing the brains of any traders whose eyes were glued to the screen.

Like all rallies these days, this one was about 95 percent short-covering, the rest option hedging and arbitrage. There was nary a bull in sight, save Kudlow. But who needs bulls when you’ve got a million bears who have been all too eagerly picking tops since August of 1982?

Re-Loaded for Bear

When the dust settled, Wednesday’s intraday DJIA high of 13916 had gotten within a mere 106 points of the record high recorded in mid-July. A move to new all-time highs seem all but guaranteed at this point, but who knows? Perhaps because expectations of this are by now universal, or close to it, there’s always the possibility Mr. Market will take an in-your-face detour. In fact, we can think of nothing that would vex bulls and bears alike right now so thoroughly as a swoon of 300 to 400 points. That would give shorts an opportunity to reload the gun they have pointed at their own heads while also throwing bulls off the scent.

If this scenario plays out, it would likely be too late to set up a spike on Friday to new all-time highs. Then again, perhaps we shouldn’t rule out the prospect of a 700-point short squeeze, since that’s what it could take to put a top on this 25-year-old bull market. We fully expect that the short squeeze that ends it once and for all will occur on a Friday since that’s the hardest day of the week to go home short ‘ or long. In the meantime, let’s see what kind of deja vu today brings. A 70-point pop in the first minute or so would be about right — followed by six hours of flag-building.

The chart below shows what the Fed is up against in trying to resuscitate a U.S. economy already dangerously glutted with debt. The dip at the right edge reflects a decline in money velocity to multiyear lows. What it implies is that the ‘multiplier effect’ of fresh credit is not working with nearly as much vigor as it did in recent years. When money velocity is high, and customers are ‘ so to speak ‘ queuing at the banks’ doors to borrow, it is possible for a single dollar of new deposits to engender dozens of new credit dollars throughout the banking system. Because banks are required to hold only a small fraction of each newly deposited dollar in reserve, the rest of it is available to be reloaned and further multiplied by bankers and their clients.

But this magical ability to create money from thin air only works to the extent there are borrowers eager to take advantage of it. Let borrowers become the slightest bit skittish, though, and money velocity plunges in the way the chart shows. The result is that lenders find themselves pushing on a string, unable to get customers to borrow.

We read that the Fed has gone all out to stimulate the economy, but the effect will be muted at best if consumers are reluctant to binge on credit once again. Far from binging, though, and with home prices falling across the U.S., we think consumers at this point are frightened at the very idea of going deeper into hock. As a result, they can be expected to ramp up savings in the coming months at an extraordinary rate, causing money velocity to fall to levels not seen in many years. What the Fed will do then is anybody’s guess, but in theory at least, if they can’t get consumers to step up their borrowing, they may simply have to give the money away.

Talk about investment hubris getting pumped to the max! Listen to what one market veteran, Amanda Sharp, told a reporter from the Wall Street Journal recently: ‘If we were to get a crash or correction, there would be a nice cleaning out,’ she says. Would that we all shared Ms. Sharp’s brash confidence as we await the inevitable day when the stock market begins, finally, to discount an incipient plunge into recession and the widespread deflation that has gripped the real estate sector. Neither prospect has had much of an impact on shares, at least not yet, but we can bet Ms. Sharp and her ilk have been sharpening their knives, waiting to feast on road kill.

The woman was not talking about stocks, by the way, but about art. She is the organizer of a highly successful London event called the Frieze Art Fair and presumably an ardent collector herself. You may have read that the art market is so superheated these days as to make the current surge in stocks and even ultra high-end real estate look as subdued as a 4-H bake sale. How does $19.1 million sound for a stainless-steel cabinet containing 6,136 handcrafted pills? That’s what Damien Hirst’s one-of-a-kind tchochka fetched at auction recently ‘ the highest price ever paid for a work by a living artist. As for works by famous dead artists, even some of the heavies ranked near the bottom of the Forbes 400 list might not qualify as serious bidders. How about $72 million for Warhol’s ‘Green Car Crash’?

Warhol Our Pick

While we have little doubt that Warhol’s iconic paintings will more than hold their own at auctions a hundred or even a thousand years from now, how many more greater fools can there be to sustain their current, vertical price trajectory? Esquire magazine once worked the numbers on Jackson Pollack’s best-known drip-fest, Blue Poles, estimating in the early 1970s that it would eventually change hands for trillions of dollars if the painting’s steep rate of appreciation in the 1950s and 60s continued. In fact, the work was last sold to the National Gallery of Australia for $2 million in 1973, and there it hangs, appraised at a mere $150 million-plus.

Ms. Sharp may be right about the emetic effect a shakeout would have on all of the second-rate stuff being snapped up these days by collectors with bigger money and pretensions than taste. However, we think she may be grossly underestimating how very bloated prices are for Picassos and Warhols. Indeed, at $50 million to $70 million per canvas, the best works have quite a bit of room to fall, especially if the global financial bubble pops. Will the owners of such works feel as passionate about them if they decline in value by 50 percent or more? We may get a hint in the coming weeks, since an unusual number of works are headed to auction. Our guess is that if prices merely fail to rise, let alone drop, the smell of fear will become as pungent in the art world as it already is in the bond houses.

We’re convinced that no amount of monetary stimulus can revive the real estate boom at this point, even if the Fed seems determined to try. But suppose we’re wrong and home prices take off again? Does anyone actually believe that that would lead the economy back to health? Of course not (Larry Kudlow aside). It would simply postpone a debt deflation that by now has become as likely as�the next recession. Keep in mind that when the Fed eased aggressively following the 9/11 attack, it required ‘only’ about $2.70 of new borrowing to create a dollar’s worth of GDP growth. These days, though, the figure is even worse — far worse –and has been running well above $8.00. What this suggests is that the task of getting consumers to aggressively ramp up the spending of borrowed money on big-ticket items is going to prove well nigh impossible. While the indefatigable and globally indispensable American shopper can never be completely counted out, it strains the imagination to think that he will be able to outrun the economic avalanche that has been gathering destructive momentum in the housing sector these last few months.

Even so, as counterpoint we offer another possible scenario from a friend of ours, John D., whose observations have been featured here before. John is in the commercial construction business in Southern California, and it never fails to astound us whenever we hear from him about how strong the industry has been, and continues to be, notwithstanding the collapse in residential building that has already occurred. John is not exactly an optimist, not by any stretch, but his forecast does leave a bit more room for an escape than ours:

A False Spring

‘I don’t believe a ‘housing boom’ is about to start,’ he writes, ‘but just enough good news to make people think the worst is over and that the price deflation is, or almost is, done. In California in the late 80’s early 90’s the housing recession was very nasty. I watched a house I bought for $265k go ‘up’ in value in a year and a half to $350k, only to be worth about 220k or less after the Northridge quake and everyone left town. I agree with you that we may one day see the Aspen [ski] house with no value, and the ultimate decline in price will make the 90’s look like nothing.

‘[But] there has yet to be a decline in commercial and industrial real-estate. The signs are out there, but vacancy rates are still very low in our area and the ‘For Lease’ signs are not on every corner. Lease rates for office and light industrial are still are at a premium. In the early to mid 90’s is was cheaper to buy an existing building then it was to build a new one. We still have a ways to go before we get there, though I realize the climate can change overnight in the leveraged world we live in.

Getting Out Now

‘My family, through a trust my dad set up, owns some mid-sized buildings in East Los Angeles, all three in the 30k square-foot range. We are in the process of trying to sell the buildings now, while prices are still high and there are still buyers, we just need things to hold together for a little while longer. One advantage is that we owe nothing on the buildings; they were all bought with cash in the 1990’s. At the same time, there is no problem leasing the buildings to quality tenants.

“[The information you sent me] confirms a lot of what I already am seeing and do believe is ahead of us. I was reading another ‘deflationist’ (Tim Wood) who puts out a newsletter, and in his September issuer he sees a ‘perfect storm’ (my words, not his) coming. He has housing topping first and then commodities. He says commodities are the key, as reckoned by the CRB index. He is looking for the index to drop below its January 2007 low. If it does, then deflation is here; if it does not, and commodities continue to inflate, then the markets may continue to rise for a time.

Not Enough Euphoria

‘It seems to me that if the Fed successfully inflates assets, then we are moving into an incredible blow-off top that has never been seen. With all the euphoria over the 50-basis-point cut, it finally does seem like we are going to be seeing fewer doom-and-gloomers on CNBC. Everyone is going to be talking about their 401k profits in a few months — especially when the Dow hits your 15k target. Up until now there has not been enough euphoria, only caution everywhere you turn. It is going to take one more run-up to get us to the top.

‘I’ll bet we start to hear about a housing turnaround within the next month or two, with sales and closings up, etc All the jobs we have bid and which the owners have been holding back will probably go forward, and we will enjoy one last money making year. Everyone from business to the consumer is going to be leveraged to the hilt. Gold, silver, and the Dow will be at record highs, and then boom!! Nobody will know what hit them. I think it is time to sit on the sidelines, or to enjoy the final ride up and then watch out!

“It will be perfect. Hilary will be entering the White House and the people will be crying for socialistic government solutions! GWB and the do-nothing Republicans will be blamed, and the Clintons will be able to be the next Hugo Chavez’s of the world. (How depressing!). It’s the American people’s fault. We just can’t help ourselves. We must consume and spend — that’s the way we were raised. We live in interesting times, for sure.”

After pickpocketing widows and pensioners yesterday via a fleeting head-fake on the opening, DaBoyz turned Citi shares sharply south, wiping out half of the ill-gotten gains achieved two days earlier via a very nasty short-squeeze. The stock’s 2.5 percent drop does not bode well for the market as a whole, since the banking behemoth is the best proxy we have for the smoke-and-mirrors business that has come to define global commerce, such as it is, in the 21^st Century.

(Click on image to enlarge)

We’d raised the prospect here the other day of a DJIA rally to 15,000, but our heart was not in it, as you may have surmised. In any case, we remain duty bound to look for even the subtlest sign that the bullish outlook has come a cropper. That’s what seemed to occur yesterday, when, even with the larcenous head-fake on the opening, Citi failed to pierce the 49.00 high made at the nanosecond apex of Wednesday’s short-squeeze. Had that number been exceeded, the stock would have created a promising bullish impulse leg on the daily chart. Alas, it failed to do so. Similarly, the Dow Industrials needed to surpass ‘ but did not — July’s 14021.95 high to revitalize a bull market that looked to have received its coup de grace back in August.

Extra Inch

Analytically speaking, the Hidden Pivot method we use shares a simple but very useful rule with Elliott Wave Theory — namely, that a correction is to be viewed as a correction until such time as its starting point has been exceeded. In this instance, were a DJIA rally to surpass the old record high by as little as 0.01 point, that would suffice to redefine the entire rally from mid-August’s low as a bullish impulse leg. But until such time as the new high is achieved, the current euphoria must be viewed as little more than a bear rally. Of course, new highs from these levels lie not more than a day or two away, and so we would not offer long odds against such an effusion. A 255-point thrust is all it would take, and we will therefore leave it to other bettors to cover the ‘Don’t’ line.

Meanwhile, and loathe as we are to invoke rationality in our analysis of a stock market so obviously controlled by demons, we should point out that the forces arrayed against bulls at the moment do not exactly constitute a virtuous cycle. To the contrary, we are seeing the dollar price of energy rise vertically so as to offset the presumed inflationary impact of Fed easing. It doesn’t take a genius to see that more easing, ostensibly to stimulate the economy, could cause oil to reprice itself so dramatically as to all but negate the Fed’s intentions.

But let us put all such grim thoughts aside for a moment, that we might offer heartfelt congratulations to our Canadian neighbors, whose currency (aka the ‘loon’) has finally achieved parity with the U.S. dollar. For the first time in more than 30 years, prices will no longer be ‘Slightly higher in Canada.’ We should perhaps also offer up a prayer of thanks that it is not (yet) the peso’s parity for which we are congratulating a sovereign neighbor. We can only hope that such depredations against the dollar as would cause it to fall so far have yet to be imagined.

Is the Dow on its way to new all-time highs? We wouldn’t bet against it at the moment, having exited a short position in Citigroup the other day just before it and a whole bunch of other stocks took off. A global leader in the smoke-and-mirrors business, Citi seemed like a perfect proxy for a stock market that continues to waft skyward on a turbocharged mixture of hot air and short-covering. Our colleague Bill Fleckenstein would seem to agree. Fleck notes that Citi’s structured-credit portfolio has put the banking behemoth in the thick of global credit angst, through such investment vehicles as its Beta Finance, Centauri and Dorada. Concerning just one of them, Beta Finance, Citi’s boilerplate notes that leverage is ‘only 14.24 times.’ ‘Thus, Citigroup, a leveraged entity, owns a gaggle of leveraged S&Ls,’ writes Fleckenstein. All of them, he says, are down close to 20 percent. Fleck’s complete article can be accessed by clicking here.

Whatever problems Citi eventually may face as a consequence of its exposure to the structured-credit world, investors appear to be blithely unconcerned at the moment. Yesterday the stock gave up only a dime of Tuesday’s spectacular gains, suggesting it may be consolidating for another thrust. If so, the rally would need to come today or tomorrow to keep the short-squeeze going. The chart below shows why. For a rally to achieve the status of bullish ‘impulse leg,’ we require that it surpass two prior peaks without a pause of more than a day. As you can see, Citi has exceeded one prior peak but not the second, 49.00, which it merely tied at the peak of yesterday’s rally. If the downturn continues today, it would imply the rally lacks guts and that short-covering had become more or less exhausted. Still, given our bullish forecast for the broad averages, we’re inclined to give Citigroup every possible benefit of the doubt.

So how bullish are we? Subscribers may have been shocked at the DJIA rally target proffered in Wednesday’s edition. The forecast will remain highly speculative until such time as the Indoos achieve a new record high. But that would require only a 155-point rally above yesterday’s peak ‘ hardly unthinkable. If you are the kind of bear who puts survival first, this is a good time to feather back the short selling. Our hunch is that the stock market will continue to rough up bears and that there will never be a comfortable opportunity to short the top. More likely ‘ inevitable, perhaps ‘ is that the ‘perfect’ short will come on a Friday in the final minutes of the session, with the broad averages in the throes of the most powerful rally that anyone can recall. Short then if you can, since the gap-down opening that is all but ordained to follow on Monday will be�.the nastiest that anyone can recall.

If so, the seemingly absurd rally target that we’ve furnished for the DJIA allows plenty of room ‘ not only for a memorably bizarre Friday, but for a few days’ worth of ‘preliminary’ short-squeezing earlier in the week to shake out the faint-hearted. We can think of no good reason for the DJIA to reach our take-no-prisoners target — but since when did Mr. Market need a good reason to do anything?

Although it was no trick to see yesterday’s Fed-induced short-squeeze coming, it took imagination to anticipate its rabid ferocity. We had advised shorting into any buying panic because it was bound to end with the question ‘Okay, what now?’ hanging over Wall Street. And so it has, probably, even if it takes a few more days for the lack of a satisfying answer to that question to touch off an avalanche of buyer’s remorse. It might even take another bloody short-squeeze like yesterday’s to set up a proper selloff, since the Dow Industrials will not be ready to do the Right Thing ‘ i.e., a 10,000-point death spiral ‘ until the very last ounce of panic-induced buying has been wrung from the bears. Assuming any still survive.

We dodged the bullet ourselves after coming in short Citigroup yesterday with some October 45 puts that had been acquired near the top of Friday’s rally. When we bought the puts, we believed our timing to be perfect, since entry came when Citi shares were topping just pennies from a promising Hidden Pivot rally target. Our position did become briefly profitable when Citi fell hard on Monday, but we should have learned by now that a day or two’s respite is about as much pleasure as bears are going to get from this now 25-year-old bull market. We exited the puts early in the session for about what we’d paid for them, intending to reshort the stock at higher prices. By day’s end, however, Citi was looking so feisty that we let the clock run out without shorting anew.

A Psychotic Lunge

That doesn’t mean we’ve changed our minds about the stock market being an historical short sale somewhere near these levels. But we are not about to simply ‘lay ‘em out’ willy-nilly and let nature takes its course. Instead, just as we’ve been doing all along, we’ll continue to pick our spots, initiating shorts whenever it is possible to do so without risking more than nickels and dimes. We have yet to get our hair mussed even once in these attempts, and we aim to keep trying as long as betting on stocks’ return to the mean continues to offer such enticing odds.

In the meantime, we should view yesterday’s psychotic lunge, not as an indicator of impending economic strength or of recovery in the housing sector, but of the stock market’s most deeply ingrained pathologies. Manifestly unable to discount a crumbling economic picture, shares continue to hover aloft, waiting for some world-changing dreadnought to strike. We can only hope that we’re short the night before it happens, since selling stocks after the opening bell will be like trying to unload bulging cans of tuna in the wake of a botulism scare.

Place your bets, folks! We’ve heard good arguments both for and against a Fed easing today but think the odds favor the doves. One of our regular correspondents, Erich Simon, actually expect the Fed to tighten ‘ a very distant longshot, in our view ‘ and we have reprinted his comments at bottom. One middle of-the-roader is Don Luskin, an acquaintance from our PSE options-floor days who now runs a company called Trend Macroclytics. Don had an op-ed piece in the Wall Street Journal last Thursday headlined ‘The Greenspan Myth’. Expecting the essay to come down hard on the former Fed chairman, we were disappointed to see that it merely attempted to refute the widespread belief that Mr. Greenspan should be viewed as a hero for supposedly helping to prevent various crises of the recent past from turning disastrous: Long Term Capital Management, Mexico, the 1987 Crash, Russia and the 9/11 terror attacks.

Don makes a pretty persuasive case that Mr. Greenspan in each instance was too late with too little and that market forces eventually did the job, but the essay was less convincing in concluding that the Fed chief’s overrated heroism should not be invoked to push his successor, Mr. Bernanke, into an unwarranted easing. Don sees the U.S. economy as too robust at the moment to warrant Fed intervention, and on that point we would differ sharply; for, nowhere in Don’s tally of the U.S. economy’s supposed strengths does he even acknowledge the potentially grave troubles that currently beset the real estate sector.

Greenspan to Blame

Immediately below is the response we sent to Don. As Rick’s Picks readers would expect, it eschews the genteel politeness toward Mr. Greenspan that writing op-ed for the WSJ requires. We dispense with such niceties not only because Mr. Greenspan’s theoretically challenged brand of economics is an embarrassment even to the Dismal Science, but because we are convinced history will hold the man directly responsible for the collapse of the global economic system. Here’s the letter:

‘Greetings, Don, from your old PSE acquaintance. Speaking as a loose cannon from the subterranean newsletter world, I wanted to let you know that those who believe Greenspan to be either a fool or a liar, or a combination of both, are legion. How else to explain why a guy with an MIT degree in economics would speak of a capital investment boom at a time when household savings growth was negative? It gets worse: Championing the crackpot notion that inflated home prices constitute real wealth, the man emboldened household borrowers to venture beyond mere recklessness and toward the pale of metaphysicality.

Why Deflation Is Irresistible

‘Austrian-school theorists are too genteel to characterize Greenspan and his successor in the way that I and my not-yet-ready-for-prime-time colleagues would, but Richeb�cher et al. had an oblique way nonetheless of making the point by calling us back to the indomitable logic of Hayek. Ironically, a weakness of the Austrians is that they have trouble choking out the word ‘deflation,’ especially during such cosmic credit inflations as we’ve just experienced. But as far as I’m concerned, a ruinous debt deflation has by now become all but unavoidable, since it will be drawing its power from an as yet ‘unactualized’ derivatives-bubble whose notional value is currently estimated by the BIS at close to $500 trillion.

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‘In the meantime, the rapidly metastasizing mortgage crisis — the mention of which would have undermined the rosy logic of your op-ed piece — is reason enough for us to expect such countermeasures as a 25 to 50-basis-point easing [on Tuesday]. I could be wrong about this, but if I am, it will probably be because Bernanke understands that any reaction perceived by Wall Street as half-hearted ‘ i.e., a fleeting short-squeeze of the DJIA ‘ would fatally give away the game. If the Fed does ease, though, and an unimpressive short-squeeze results, I’ve advised my subscribers to short it till their heads cave in.’

Erich Sees Tightening

And here’s that hawkish letter from our erstwhile bird flu correspondent, Erich Simon:

‘For all of the reasons I’ve enunciated, I continue to hold fast to a rate increase. I’ve been doing my nightly rounds of the Asian press for the H5 Juggernaut and have uncovered even more evidence that there will be no rate cut on Tuesday.

‘Never mind Tuesday’s being down days to shake out the Puts on Option’s Expiration Weeks, especially significant this triple witch, and more free money for crony corrupt capitalism. I have been losing money every expiration for years now and have cut my exposure in that arena to just about nil. But my last remaining contracts appear to be set to expire worthless, and it will take some time (on the short side, but maybe not that long the way things are shaping up)before I recoup and begin a new out-of-the-money strategy in preparation for The Big One.

‘I am not alone in my analysis, joined by the few remaining diehard bear realists. But I feel confident as one of the last of the breed that now, with all the short side money depleted, the Fed has no more favors to grant to its greedy, belly-stuffed social circle, while the balance of Amerika (sold over the years, part and parcel to foreign interest) goes down in flames.

‘Most telling, Paulson is telegraphing that the ride is going to get bumpy. Greenspan is out telling of his misgivings and credit inflamed maelstrom now come home to roost. Bernanke is keeping a respectful distance, ready to drop the hammer. Greenspan is even waving the inflation card! Given this concerted game plan, why on earth would any rational market observant think that there is going to be a rate cut… (and then a hike?), especially when any ’salvage’ operations can be accomplished through the discount window, foreign bank/currency support of the dollar, and the old stand-by, going into the bond pits and buying long bonds to inject liquidity. Also, these markets are now so distorted with their high PEs (a replay of March 2000) made all the worse by the ever growing telegraph of recession, so much so that a rate cut would be laudable!

‘A rate cut now would invite the worst of the worst, the failure of what little structure remains of this global incongruity.’

A Greenspan Anecdote

The BBC recently interviewed economist Michael Hudson concerning his former employee, Alan Greenspan. Hudson’s take on the Fed chairman fleshes out some of the points I’ve made above and further explains why Greenspan should be reviled rather than lauded:

Somewhat against my wishes, the interviewer insisted in starting the program with my anecdote about how I was designated to fire Mr. Greenspan in 1966. I was Chase Manhattan Bank�s balance-of-payments economist at the time, and was writing a study of the balance of payments of the U.S. petroleum industry. Chase and Socony Oil Company each had paid $10,000 to finance the study, and Socony had insisted on bringing on Alan Greenspan. My boss in the Economic Research Dept., John Deaver, worried that Greenspan was so eager to get business by giving the client what it wanted, that few people had much confidence in his statistics. Greenspan was supposed to make statistics on US oil company capital investment. What he did was take a rough approximation ­ based on total worldwide investment. He told his two statistical assistants (Lucille Wu and one other) to assume proportionality.

“It�s all implicit,” she said. By “implicit,” she meant, assuming that European and Near Eastern depreciation rates and other tax laws were identical to U.S. laws, obviously not the case. Mr. Deaver and I were invited up to David Rockefeller�s dining room, who told me to inform Mr. Greenspan that unless he could provide specifically U.S. numbers ­ and/or be forthright about his assumptions ­ we would have to exclude his numbers. (Socony�s rep. was a friend of his, and I think they made sure he got paid as their favorite business lobbyist de jour.)

A Lobbyist for the Rich…

Mr. Greenspan was an economic lobbyist for the rich, for large corporations and for Wall Street. That is the job of a Federal Reserve chairman these days. Like a good criminal defense lawyer or the �expert witnesses� they hire, a good lobbyist makes a cover story believable. Mr. Greenspan crafted a myth that many people wanted to believe. The myth was that people ­ just about everyone ­ could get rich by going into debt, to buy property whose prices were being inflated by Federal Reserve policy of lowering interest rates and deregulating the financial sector to usher in a period of “wild finance.”

Mr. Greenspan sponsored the confusion that increasing asset prices constituted �wealth formation.� It was not the kind of wealth that Adam Smith meant in The Wealth of Nations. Posing as an enemy of �inflation,� he tried to make people love one particular kind of inflation: asset-price inflation. The distinguishing feature of asset-price inflation ­ the bubble ­ is that it raised the price of property relative to labor�s wages. This put the class war back in business ­ this time a class war by the financial sector against industry as well as against labor. It took more and more take-home wages to buy a house or a retirement income.

1) As the most vocal cheerleader for the Bubble Economy, Mr. Greenspan was more responsible than anyone else for loading the U.S. economy down with debt, leaving a legacy of negative equity in his wake. For almost the first time in history, people thought that they could get rich by borrowing to buy assets that were rising in price. This was the essence of America�s Bubble Economy. Mr. Greenspan made America LOVE inflation ­ at least, asset-price inflation. The myth that he created was that people should treat their houses like a piggy bank. But borrowing is NOT like drawing down a bank account. It leaves a legacy of debt ­ that must be repaid. And while prices for real estate and stocks may go down, the debts remain in place. Lowering interest rates enabled a larger debt to be carried, by a given rental income. Lowering down payments, and even giving “reverse mortgages” where banks agreed to lend borrowers the interest, is what Hyman Minsky called the “Ponzi phase” of the credit cycle.

…and a Tax-Raiser

2) His main role as economic lobby for his financial clients was anti labor. Although he claimed to support cutting taxes to “spur markets,” he played a major role in raising taxes for most wage-earners. He did this as head of the Greenspan Commission in 1982. The rhetorical ploy he suggested was to pretend that Social Security and health care should be treated as user fees, not as part of the overall budget. This freed the wealthiest tax brackets from having to finance Social Security for the bottom 90 percent of the population. Mr. Greenspan happily approved the Bush tax cuts of 2002 ­ but later, professed to be shocked, shocked, to find that there was gambling going on and the cuts on the higher tax brackets led to a large budget deficit, and recommended that the government cut back Social Security and medical care expenditures to pay for the tax cuts that benefited the upper brackets ­ his constituency.

3) In the above respects, Mr. Greenspan was the architect of dollar devaluation, by flooding the economy with low interest rates. He put short-term stock speculation and bank lending over the dollar�s long-term stability. But then, finance always has lived in the short run. The �pro-Greenspan� man on the interview was Ron Susskind of The Wall Street Journal, author of The 1% Solution. He gave a pretty balanced judgment on Mr. Greenspan, and said that after all, he had created a lot of wealth for a lot of people, and increased home ownership. True enough ­ but also a lot of debt and subsequently, foreclosures. Mr. Susskind made the good point that Greenspan praised Clinton, virtually as a good Republican for listening to Treasury Secretary Rubin and Mr. Sommers. True enough!

I wish I could have mentioned another anecdote. A few years ago the Minneapolis Fed asked me to write an article on Mesopotamian debt cancellations. I did, and was paid nicely for it. They had an artist draw up a really good diagram. But at the last minute, they cancelled the whole issue ­ not only my article, but the entire issue was junked. I asked why. There was a bit of embarrassment, and my contact told me that Mr. Greenspan had asked them to do a survey asking their subscribers who the greatest economist of the 20th century was. Mr. Greenspan apparently was disappointed with the result. �Do you mean, that he wasn�t Number One?� I asked, somewhat naively. There was almost a one minute silence. Finally I broke it. �I see,� I said.

We’ve been enthusing about gold one rally at a time for more than a year, but it may be time to loosen up and imagine bigger possibilities. Our minimum upside objective has been 736.80 ever since the December Comex contract was trading in the low 690s. However, someone in the Rick’s Picks chat room asked an obvious question the other day: ‘What then?’ We responded initially with a somewhat timid target of 768.90, but we’re starting to think that this target, too, deserves a ‘What then?’

We don’t need to tell anyone that bullion’s price action has been more than a little encouraging lately, and that there are good reasons for this. For the first time in decades, gold is moving strongly higher not because some world-shattering geopolitical event such as the 9/11 attack, or the U.S. invasion of Iraq, has spooked it, but because of a more generalized fear that the financial markets are in deeper trouble than anyone knows how to fix. Nor can they be fixed as far as we’re concerned, and so the forces pushing gold higher at the moment should not be expected to abate any time soon.

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That said, we remain skeptical of predictions that gold’s price eventually will surge into the stratosphere (meaning upwards of $2000 an ounce). Although that’s not inconceivable, the odds it will happen must be weighed against the prospect of a worldwide credit deflation that completely wipes out personal savings. And that is exactly what will occur when the $500 trillion (per BIS) derivatives bubble collapses, as it someday must. The implosion would draw its very power from the deleveraging, or marking to market, of the entire, very thinly collateralized $500 trillion edifice of credit money.

Squatters in Aspen

In the wake of such a catastrophe, we will see bread lines in towns where starter homes now sell for $2 million dollars. Run-of-the-mill Aspen ski chalets listing these days for $10 million will be sold for back taxes once squatters who have been burning furniture to keep warm have been evicted. Impressionist paintings that fetched eight-figure sums will go for low six figures, and ‘priceless’ Bugattis will change hands for less than the current price of a lowly Porsche. Is it unreasonable to speculate that in a world whose economy has been reduced to beggary, gold will fare much better?

Let me explain. Although we fully expect bullion to hold its purchasing power (and then some) relative to all other classes of assets, we don’t expect nuggets and Krugerrands to command the astronomical premiums that some evidently expect. A spectacular price spike in gold could conceivably occur when the panic to exchange intrinsically worthless dollars, euros, d-marks, yens and sterling for something ‘real’ hits full-bore. But anyone who has been hoarding gold for that day should think twice about sitting on it further, since, once the panic subsides, the global economy will be a smoldering ruin, incapable of engendering, much less sustaining, a speculative mania in gold or any other type of investable.

Loaves for Krugerrands

While gold bugs are hardly irrational to view bullion as the ultimate hedge against financial collapse, they need to acknowledge the possibility that if the disaster is as bad as some of them have already imagined it will be, there’s going to be precious few assets left to protect. Instead, there may be only precious loaves of bread to be exchanged for Krugerrands.

For make no mistake, the financial endgame we face has the potential to make the 1930s Depression look like a picnic. Consumer borrowing and cash-out refi’s were non-existent back then, and America, with an economy that was 30% agricultural, was literally living off the land. Nowadays, and for the last few decades, we have been living more and more off the cleverness of financiers who have found ways to create nearly unlimited sums of borrowable money from thin air. We predict that all of this ‘money’ will cease to exist one day because of an epochal lapse in confidence broader, even, and more devastating than the one that precipitated the Great Depression. When angry mobs move on Wall Street and the banks as they did three generations ago, only to discover they have been financially wiped out, who will be the buyers of gold for the mythical price of $10,000 an ounce?

Green Light for Gold

In the meantime, from a technical perspective there is no reason to hold back on gold as an investment, since it has been doing all of the right things on the charts. Pullbacks have consistently failed to reach their Hidden Pivot targets, reversing in most instances near the predicted half-way points of their CD follow-through legs. And for two, Comex contracts keep making bullish impulse legs in all time frames, from the one-minute bars right on up to the hourlys. As long as such rallies continue to surpass the required two prior peaks in whatever time frame is being considered, we can infer that the bull is in no great need of rest.

And that is what we are currently witnessing. The upshot is that, faced with a daunting peak at 732 made 16 months ago, December Gold is acting as though it will require only a day or two’s worth of running room ‘ i.e., 15 to 20 points ‘ to make the leap. As far as we’re concerned, it’s not a question of whether it gets through, but when. We don’t expect this feat to take more than 5-7 days, nor do we think it will be a long wait for a follow-through that reaches a minimum 760.00. And what then, you might ask? We’ll reserve the exact number for subscribers, but let’s just say the Hidden Pivot target we have in mind is well north of $800. Since it will not be a straight shot, our forecasts will continue to reference swing highs and lows the whole way up. Long-time Rick’s Picks subscribers should need no convincing that these numbers will be sufficiently accurate and reliable to use for swing-trading, scalping and adjusting long-term positions.