Is Friday Nov. 13 Destined to Be “The Turn” Date?

Minutes before I was ready to go on the air with my radio program I received a call from my long-time good friend Ian Gordon, who predicted the market would peak on Friday, Nov. 13. In addition to his usual work, Ian was basing his views on the core of work carried out by W.D. Gann, a brilliant market forecaster in the past who is known for his analysis of cycles and trading patterns in equities as well as commodities. It remains to be seen if this Friday, Nov. 13, was the top of the B wave up. If it turns out to be so, it would be very consistent with Dr. Robert McHugh’s latest views that we are very near the end, based on Elliott wave patterns and a host of other indicators. The market has seen a moderate rise from the 13th, but still believe it is close.

Dr. Nouriel Roubini, who is perhaps the most famous economist of our day, recently wrote an analysis of our global bubble economy in which he suggested that the dollar carry trade may well become the next bubble to collapse and send the global economy reeling once again. Of course that fits very well with Austrian economic thinking, in that the carry trade is an artificial market manipulation caused by the enormous pumping of the U.S. dollar into the global economy. Whereas another deflating economy, namely, the Japanese economy, provided a cheap source of global borrowing for many years, with interest rates continuing to be held at zero it is not difficult for us to see how our monetary thieves are now making cheap funding available to the global economy at this point in time. And as Austrian thinkers know, when you pump enormous amounts of money into an economy, it results in mal investment. In other words, capital is put into inefficient businesses, with the result being that most of them provide poor returns on investment, and over time, a growing number become insolvent and incapable of servicing their debts. 

Bryan Rich of the Weiss Group pointed out this past week that the Fed, the Bank of England, and the European central banks all retained an extremely easy monetary policy. Many people think these banks should start to raise rates because: (a) They think the global economy is on the mend and they fear inflation will return; or (b) They think an asset price inflation will result as new bubbles are formed.

In fact, I believe asset bubbles are definitely being formed already. Check out the 52-Week Global U.S. Dollar Liquidity Growth chart below. Note the first bulge of liquidity growth that peaked in 2000. That was the fuel that drove the equity market to its highs in 2000, before that stock market crash. Why did the market crash? It crashed because of enormous amounts of “mal investments” into such industries as dot-com frauds and telecom debacles. Too much money pumped into the economy too fast, pushing interest rates to artificial levels, thus leading to bad investment decisions. Bad employment of capital meant that companies had bad returns on investment. Yet the debt from which that money was created did not go away.

Now check out the second hump in the chart on your left. Note that this time, the annual 52-week growth rate of money jumped up to about 21%. This force-fed money, created out of thin air by Alan Greenspan’s Fed, was the cause of the housing bubble. Forget “greed” on the part of bankers. Greenspan loaded huge amounts of money into the banking system, such that banks flush with cash kept entering into riskier and riskier loans. Why? Because the banks are charged with providing the best return on investment possible. If they sit idly by while Greenspan pumps money into their coffers, they lose their jobs. The economy simply couldn’t absorb so much capital that was not real capital anyway, because it was created from nothing by our central bank. It was not saved or real capital but phony capital, which diluted the real capital that came from savings. 

So we ended up with the housing bubble that created a much, much bigger problem than Greenspan’s first bubble shown on the left side of the chart above. But now, the mother of all bubbles is being inflated. While the peak of the housing-fueled bubble hit about 21%, this current bubble has been holding at about 40% since the Lehman Brothers collapse caused the Fed to panic and our government to throw everything sacred to capitalism out the window, simply to protect the rich folks, who, in effect, own the system through their ownerships of the Federal Reserve Bank.

This enormous amount of capital has created what is arguably the biggest and baddest bubble ever in our country’s history. Nouriel Roubini and most other economists are not being fooled by the 3%+ GDP number proclaimed by our government. Whatever growth there is, it is phony and not real free-market growth. Our belief is that all this is doing is fueling another bubble that will make the next downturn even worse than the one we had in the fall of 2008. In other words, we have no trouble seeing the underlying roots of what Dr. Robert McHugh is predicting on the basis of a host of technical indicators.

So what should the Fed do now? If it tightens credit, it would most likely throw the economy into an immediate plunge. It would be very painful. In fact it would be a lot more painful than if Greenspan allowed the economy to suffer a serious recession in 2000-2002. He chose to chicken out and pump up another bubble, that being the housing bubble that has resulted in a much, much worse situation of indebtedness and insolvency now.  Now it’s Bernanke who has also chickened out once again. He has pumped up the growth in liquidity to around 40% per year annually, which is leading to the inflated commodity prices and stock prices that are unsustainable. Why are they unsustainable? Simply put, they are not based on real economic growth, which would produce sustaining cash flow. They are bubbles, and bubbles by definition are prone to collapse, because in the aggregate, total debt is growing exponentially while income, at best, is growing in a linear fashion. (Check out the chart above that shows red line debt growing exponentially while GDP (income) is growing in a linear fashion.) 

One of these days, there is going to be one final deflationary implosion that sucks the life out of the establishment. At that time, there could well be a revolution. If we are lucky and we get a bloodless revolution that leads toward a return to true free market economics—the kind espoused by Ron Paul and other Austrian economists, our country could have a bright future once again.

I personally am not terribly hopeful for that outcome, much as I desire it. Why? Simply put, Americans are not only ignorant about economics; they are also spoiled rotten by a standard of living that has been passed on to us simply because we are enjoying the spoils of our empire. 

The trouble is, as John Perkins pointed out on my radio show and as Catherine Austin Fitts also pointed out, the parasitic behavior of our ruling elite is bleeding us dry with debt. Not only has this pattern been employed overseas to suck commodities and raw materials away from third-world countries, Americans themselves are now being given the same treatment. The old saying that the rich get richer and the poor get poorer has never been truer than it is now. Unfortunately, I fear we have only started to see the beginning of a declining living standard, at least for the American empire.  

Jay Taylor
Gold Investor