Sat Aug 23, 2003 Looking Back at the Week That Was Author: Jim Sinclair
The current strength in the equity market will not survive the release of economic data that proves the much ballyhooed economic recovery is nothing more than smoke and mirrors.
The first crack in consumer spending or housing will set the bulls not simply back but into a vertical dive from which they won't easily recover.
The dollar rally, which was manufactured by Federal Reserve Treasury Secretary Snow and his minions, has adopted the appearance of being based on a significant and sustainable economic recovery in the U.S.
In actual fact, the bulk of our GDP growth involved the least productive economic stimulus there is - war. Without the war in Iraq, the GDP would not have achieved a 1% growth figure.
You only have to look at lumber prices to see how the occupation of Iraq has impacted different segments of the economy. Plywood mills in the United States and Canada have been working flat out to meet construction demand for military and civilian purposes at increasingly higher prices.
The profit recovery for reporting companies in particular has mostly been a product of firing employees, overworking existing employees and squeezing suppliers.
The most disturbing element in this quasi-economic recovery is the Federal Reserve-sanctioned practice of people borrowing against their home equity to fund the purchase of consumer goods.
Borrowing long term to purchase non-durable goods that deteriorate in value over time is so stupid that it's shocking. Stated another way, the Federal Reserve's support for increasing debt on your home to support an economic recovery will go down in history as the peak of total madness at the highest levels.
It will be second to the almost criminal stupidity of the Fed statement that: "Derivatives have benefited the US banking system by allowing the transfer of risk from the few to the many." Follow this assertion with the Exchange Stabilization Fund's practice of always working the equity futures on the low to non- existent pre-opening volume in Europe to prevent a final and much needed shakeout in the U.S. market, and you will see how hellish things could become when it all starts to unravel.
On top of that quicksand foundation for an economic recovery, segments of the equity market have returned to the helicon days of old while insiders in many of these high-flyers are exercising stock options and unloading their positions like never before.
There are deep and serious problems lurking just beneath the surface. Financial news reporters continue to ignore the mismatch in the interest rate criteria of all derivates, the disaster in the bond market, the probable extreme drop-off in mortgage financing to come, the problem of leveraged income funds, the unreported and under-estimated liability the US auto industry has for unfunded retirement and medical benefits, and the fact we haven't really seen a final credit washout which is common to the bottom of all bear markets.
That leaves this big equity rally vulnerable. Bad economic news is certain to surface in the not too distant future. With the public brain-washed that we are in a long term, sustainable economic recovery and the spin doctors starting to believe their own BS, the end game appears to be in sight.
Conclusion
Gold had a good week but equities sure didn't look that great. Let's see what gold gives us this week because I believe we could be in for a surprise. Here are the charts for your review.
