 Friday the 13th
David Chapman
It's Friday the 13th and most people will immediately conjure
up images of Jason in his hockey mask slicing and dicing horny
teenagers at Camp Crystal Lake. Of course the myth of Friday
the 13th is steeped in superstition as a day of bad luck. There
are even those who have a fear of Friday the 13th called paraskavedekatriaphobia.
It is itself a form of triskaidekaphobia or a fear of the number
13. There are numerous origins of the superstition from the fact
that there were 13 people at the last supper of Jesus Christ
who was in turn crucified on Good Friday to old Norse myths and
differences in the a lunisolar calendar that has 13 months to
the Gregorian and Islamic calendars that have 12 months.
Oddly the 13th
is more likely to be a Friday than any other day of the week
but that has not stopped Hollywood, those with phobias, strange
evidence that suggests that Friday the 13th is actually unlucky
for some and that businesses particularly airlines lose millions
of dollars in business because people will not travel or go to
work on the day. So in keeping with the spirit of the day we
thought it would be ideal to lay out some of the scary things
that are occurring in both the financial and political world
that could derail investors in the coming months and even now.
Of course if
you listen almost exclusively to Alan Greenspan and Kudlow and
Cramer of CNBC fame you might be excused for thinking that all
was normal and that despite short term problems the market will
right itself and inevitably move higher. Of course what all of
this is premised on is the undying faith many have in Alan Greenspan
that he will consistently and persistently maintain system liquidity
and provide the conditions to allow us to get through these problems.
So far it has
worked, witness the huge stock market rally in the markets in
2003 and the improvement in the economic numbers and despite
some sluggishness even some growth in employment. Despite the
weakness seen in the markets in 2004 and recent sluggishness
in the economy, the byword is to maintain a good mood especially
leading into the November elections and that we are continuing
a robust recovery. Further there is no bubble in the housing
market, the debt is manageable and interest rates will rise but
very slowly. Many others and we of course believe that this is
merely wishful thinking and the economy and the stock market
are so full of cracks and dangers that hiding the truth is just
irresponsible.
Of course for the authorities to tell the truth we would have
a financial panic of unprecedented scope. Wisely, we guess, they
leave the doom saying to pundits such as numerous others and
me to point out the cracks in the system and hope of course that
nothing untoward actually happens leaving our credibility in
shreds. We find that patronizing as it ignores the fact that
numerous analysts actually come from many years of experience
working for the very financial institutions, which we now criticize.
But that being
said one cannot ignore the power of the Fed and its abilities
to provide the liquidity and monetary conditions for the market
to survive. They cannot prevent a market collapse per se nor
can they save everyone from bankruptcy or prevent a sharp drop
in housing prices but they can contain it if it were to happen.
Even if we do not see conditions on the scale of the 1930's happening,
there is always the nagging feeling that it could under the worst
of conditions.
The stock market
rally of 2003 was fuelled primarily by huge monetary growth with
M3 growing almost consistently in the 10% range especially in
the first half of 2003. After a sharp slow down in monetary growth
late last year there was a further burst of monetary growth in
the first half of 2004. Thus far the rapid monetary growth coupled
with the ongoing low interest rate environment and no real shock
to the system has allowed the economy to show signs of growth,
provided a better business environment for profits and has helped
maintain employment levels with some employment growth. But in
terms of past recoveries it has been very anaemic.
But with the
stock markets falling now to new lows for the years and highs
almost consistently being lower than the previous high, as we
move into the traditional seasonal weak period of the year there
is some concern that we may have already seen the highs for the
year. Not only may we have seen the highs for the year but also
we may be headed significantly lower than most pundits are currently
expecting. The following is our economic reasons as to why the
cracks in the system may widen in the coming months. We follow
it with political risk.
Oil prices
have shot to the highest levels ever crossing over $46 per barrel.
While in inflation adjusted terms we are no where near the levels
we experienced at the time of the Iranian Revolution in 1979/1980
rising oil prices act like a tax on the economy. Rising oil prices
are an inflationary shock to the economy and they are an inflationary
shock to financial asset bubbles. Financial asset bubbles are
all built on the premise of ongoing low price inflation and a
low interest rate environment. The US imports over 50% of its
oil. Oil imports have hit record levels.
Interest rates
are starting to rise. While thus far the Fed has only hiked by
50 basis points it may not take a big rise to destabilize the
market. The housing market has been fuelled by low interest rates
and the big financial institutions and hedge funds use the low
cost of short-term money (controlled by the Fed) to speculate
in numerous financial instruments at a spread (carry trade).
Rising short term rates and as well rising long term rates quell
the housing market, make mortgages more expensive and spell the
beginning of the end of the carry trade.
The housing
markets have been in a bubble now for the past two years despite
claims otherwise that the market is not in a bubble. This is
simply nonsense as in some areas of the US and elsewhere housing
and condo prices have shot up 50% or more over the past couple
of years. This is unsustainable and with interest rates rising
the market is vulnerable. Worse, numerous mortgages over the
past few years have been made on some of the worst terms we have
ever heard. Loans up to 125% of value have occurred and 100%
to 110% mortgages are not unusual. When the market crashes, as
it will, people will walk away from these mortgages leaving the
financial institutions with an oversupply. A Morgan Stanley report
has noted that they believe that 25% of the global economy is
infected by speculative exuberance in the housing market including
Australia, Britain, China, South Korea, Spain, the Netherlands,
and South Africa. Another 40% of the world economy there is a
threat of speculative bubbles in Canada, the USA, France, Sweden,
Italy, Hong Kong, Thailand, Russia and Argentina (Executive Intelligence
Review, August 2004).
The US triple
deficits of trade, budget and current account are simply unsustainable.
The trade deficit announced today was a record $55.8 billion
and is currently on target for a yearly trade deficit of about
$575 billion. Exports fell and imports rose primarily due to
increased oil imports and higher oil prices. Predictably the
US$ fell sharply and gold rose. The budget deficit also is on
projection for $400 billion. Taken together the US is adding
upwards of a trillion dollars a year in new debt. Much of this
debt is dependent on foreigners to finance it primarily Japan
and China. China, Japan and Asia in general are the major economic
competitors of the US. With a growing dependence on financing
coming from foreigners there is the risk that foreigners could
pull back or even sell their holdings if they begin losing substantially
on their holdings because of the combined rising interest rates
and a falling US$.
Hedge Funds
and the financial institutions of investment dealers and banks
increasing investments in carry trades and highly leveraged positions
and massive derivative positions leaves them more vulnerable
to shocks including rising interest rates, rising oil prices,
and the threat of terrorist attacks. It has already been determined
that hedge funds in particular were hit hard in the first half
of 2004 with the sharp drop in the bond market. They too have
been guilty of believing that the Fed will ride to the rescue
and maintain an environment of low interest rates and endless
liquidity in order to continue the leverage games they have been
playing. It would be one thing that if it was just the hedge
funds but the banks and the investment dealers are heavily into
the same leveraged positions themselves. Could the Fed handle
a financial meltdown across the entire banking and financial
system?
The consumer
is, as they say, up to his eyeballs in debt. Never in history
has the economy been as leveraged as it is today. It is estimated
that in barely five years the consumer has gone from a 93% debt
to income ratio to one of 115% and climbing. Most of it is mortgage
debt but consumer credit card debt is also at unprecedented levels.
Personal bankruptcies, defaults and mortgage foreclosures continue
at record levels despite the supposed buoyant economy. The consumer
is 75% of the economy and if the consumer is tapped out on debt
and can no longer buy the economy will falter. Retail sales are
showing some signs of faltering as the consumer is forced to
spend more on basics such as food and energy. While oil prices
may not yet have reached that point where it has a serious negative
impact we are rapidly approaching that point. If the cracks in the financial system
are vulnerable it is in the political sphere where the shock
may come that causes a financial panic.
Oil prices
are rising because of vulnerabilities of terrorist and insurgent
attacks on pipelines in Iraq and Saudi Arabia. Two thirds of
the world's oil supply is in the very vulnerable Mid-East and
there have been attacks in Saudi Arabia although not on the oil
facilities, attacks in Iraq and Iran also are potential flash
points. Oil prices are also being impacted by the ongoing bankruptcy
of Yukos in Russia (who supplies 2% of the world's oil) and in
Venezuela where a recall vote this weekend may leave Chavez in
power. There have been two previous attempts at a coup in Venezuela
but Chavez has managed to stay in power. According to polls the
recall vote will fail as Chavez remains very popular with the
electorate. The US has been consistently linked to coup attempts.
Iraq remains
on a knife-edge. The insurgency of the militia Muqtada Sadr has
the potential to turn into a full-scale civil war. No matter
what one thinks of Sadr he is a powerful Iraqi cleric with a
substantial following and they are fighting the US foreign occupiers.
As with all foreign occupiers throughout history they fail to
understand the people and their own history. There is a high
risk of serious damage to the Islamic holy site of the Imam Ali
Mosque as well as to one of the world's largest cemeteries of
Wadi Salam. This would inflame Muslims globally as it would be
seen as holy war. Imagine a comparable attack on the Vatican
or Arlington Cemetery. Turning Sadr into a martyr would accomplish
nothing. It was his father who fought the British during the
British occupation following WW1. Some states are threatening
to secede from Iraq, which in turn would trigger succession of
the Sunni Kurds, which in turn could trigger a war with Turkey.
The hand of Iran is increasingly been seen in Iraq supporting
the 60% Shia population. The government of Ayad Allawi is seen
as strictly an American puppet especially given his ties to the
CIA and eyewitness reports of Allawi personally executing prisoners.
Iraq, compared to the relative stability of Saddam, is in chaos
and threatens to get worse. Even the trial of Saddam is in doubt
as the chief prosecutor is being charged with murder. Mistrial
anyone?
There is a
risk of a clash with Iran. Rhetoric has been rising in the US
over the past several weeks concerning Iran's nuclear program.
That the credibility of the US with regard to WMD is completely
shot especially after Iraq does not seem to faze them as similar
arguments are being made as to why Iran is a threat. As well
there is some evidence that Iran is supplying Iraqi insurgents.
Iran is part of Bush's Axis of Evil along with Iraq and North
Korea. Further Russia is cementing ties with Iran and is providing
them substantial assistance. Russia itself is planning a huge
increase in military expenditures in the coming year. Russia,
unlike Iran and Iraq, does have WMD and can deliver them in 45
minutes. The Russians have become increasingly concerned about
the growing US hegemony in Central Asia and the Middle East in
control of the oil supply and the proximity of US military bases
to Russia.
No matter what
one thinks of the Orange alerts there is a risk of a terrorist
attack. Trouble is being warned of its coming leaves it open
to manipulation and far more questions then there are answers.
The conclusion that it is Al Qaeda almost seems too simplistic
given the ongoing warnings. One feels as if we are being set
up to fail. Amongst the warnings are sources that say it is from
Osama Bin Laden himself. There has been considerable capital
spent on trying to prepare the American public that a terrorist
attack not only could happen but that it will happen. Plans have
been set in place to cancel the elections including what legal
steps are necessary. The thought that the elections could be
cancelled is being met more with a yawn then with outrage as
the major media play their role of asking the question in a matter
of fact manner. A terrorist attack triggering Red Alert could
in effect turn the US into a military dictatorship. This is not
to discount that it can't or won't happen. Indeed we almost seem
to be guaranteed that it will. The bigger question of who could
be behind it will be met with the pat answer of Al Qaeda because
that is the answer we are being prepared with. This isn't to
say it won't be Al Qaeda but that constant warning raises the
question of who benefits and why. But no matter from where the
attack comes from, the stock market would swoon and the financial
system would be destabilized in a manner worse then it was at
the time of 9/11.
An over leveraged
economy, rampant speculation, the threat of terrorist attacks,
sharply rising oil prices suggests one should just hunker down
and stay out of sight. Indeed a pundit even suggested maybe I
should just slit my wrists and go. Of course that would be foolishness
in the extreme. Not that we are immune here in Canada but whatever
the worst case scenario envisaged is undoubtedly no where near
as bad as say those directly impacted in a terrorist attack or
the people of Iraq caught in the crossfire.
We are showing
two charts [chart
1 - chart 2] both of which we mentioned
on a recent ROBTV appearance. The first is the chart of the Tokyo
Nikkei Dow 1990-1995. We bring your attention to the consolidation
patterns seen in 1991/1992 and again in 1993/1994. These were
drifting patterns after rallies that followed sharp drops in
the market. The rallies that followed the sharp drops looked
impressive but ultimately they failed and the market fell to
new lows.
Similarly the
markets of the early millennium demonstrate comparable patterns.
We have always been struck in the similarity between the collapse
of the Tokyo Nikkei Dow of the 1990's and the current market.
The giant topping pattern of the summer of 2000 played out as
a drifting triangle until it collapsed. Similarly the drifting
pattern of late 2001/2002 was a drifting pattern that collapsed
into the financial crash of 2002.
Once again
we are seeing this listless drifting pattern in 2004. Many believe
that the rally of 2003 was a powerful first leg rally of a new
bull market. It is not. It was a corrective rally fuelled by
the easy monetary policies of the Federal Reserve. It saw little
or no corrections. Now we are drifting aimlessly but with a series
of lower highs and lower lows. These patterns that have characteristics
of descending triangles ultimately collapse to test the previous
lows and probably see new lows.
We are now
coming perilously close to breaking the downside of the pattern.
If we do we will collapse first to the S&P 500 960 area then
most likely to the lows of 2002 and possibly even lower. It is
time to batten down the hatches if you have not already done
so. The oils and the golds could or should thrive in this environment.
But others will suffer. It is now Friday the 13th and the real
scary part may be about to begin. Haaa Haaa Haaa Haaa Chhhh Chhhh
Chhhh Chhhh!!! (Theme from Friday the 13th The Movie).
August 13,
2004
David Chapman
Email: david@davidchapman.com
 David
Chapman is a director of the Millennium Bullion Fund.
The opinions,
estimates and projections stated are those of David Chapman as
of the date hereof and are subject to change without notice.
David Chapman, as a registered representative of Union Securities
Ltd. makes every effort to ensure that the contents have been
compiled or derived from sources believed reliable and contain
information and opinions, which are accurate and complete. Neither
David Chapman nor Union Securities Ltd. take responsibility for
errors or omissions which may be contained therein, nor accept
responsibility for losses arising from any use or reliance on
this report or its contents. Neither the information nor any
opinion expressed constitutes a solicitation for the sale or
purchase of securities. Union Securities Ltd. may act as a financial
advisor and/or underwriter for certain of the corporations mentioned
and may receive remuneration from them. David Chapman and Union
Securities Ltd. and its respective officers or directors may
acquire from time to time the securities mentioned herein as
principal or agent. Union Securities Ltd. is an independent investment
dealer and is a member of the Toronto Stock Exchange, the Canadian
Venture Exchange, the Investment Dealers Association and the
Canadian Investor Protection Fund.
________________
321gold Inc Miami USA
|
