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How to make money and prosper in the stock market in good times and in bad times.

Here is a stock tracking system based on price extremes - 'Over bought' and 'Over sold'.

Economic  Outlook

About 75% of the worlds monetary reserves are held in US dollars, making the US dollar critically important to the financial well being of every single citizen of the world. Did I overstate that? Perhaps yes, and perhaps no.

Once the USA continues to be pressured by the gathering forces of deflation the FED will continue to pump up the money supply while holding interest rates down. Currently Mr. Greenspan is considering whether or not to lower rates yet another time, to fight the forces of deflation.

The problem is that the Federal Government is running up a budget deficit of about one half of a trillion dollars in addition to a current account deficit of another one half of a trillion dollars. These two items are undermining the value of the dollar.

The Europeans are lowering interest rates in an effort to stop the appreciation of the Euro against the dollar. It is unlikely that they have the room to maneuver to the extent necessary, over a sustained period of time, to stop the Euro from becoming the reserve currency of choice. Put differently, once worldwide confidence in the dollar diminishes, the Euro will take it's place. The consequences are just about impossible to imagine with any degree of accuracy.

The FED has deflation on it's mind, and the politicians have re-election on their minds. Therefore debate no more - there will be lower interest rates, tax cuts, budget deficits, and current account deficits, credit creation and mortgage refinancing, in an all out effort to beat deflation and the Democrats. The costs are being distributed worldwide.

The insurance against consequences of currency dilution, budget deficits, and current account deficits is gold.

Although gold sells for about $365 an ounce the Federal Government values the gold in Fort Knox at $42.2 per ounce. The reason for this is that the FED does not want to draw attention to gold in it's role as a store of wealth, in competition with it's paper money.

To see the rate at which the US is accumulating debt click here

I lived through a period when the Government of my country, printed money on an unprecedented scale in an effort to re-distribute wealth, and create 100 percent employment even if it meant paying people to lean on a rake while pretending to cut grass and pick up leaves. At first the consequences were masked somewhat by a fixed exchange rate.

There soon developed a steady flight of capital and a thriving black market in foreign currencies. The response of the Government was to create a financial intelligence unit to seek out and arrest anyone suspected of exporting foreign exchange. When all of this started one Jamaican dollar bought one dollar and twenty cents of US currency. The damage done by that failed attempt to create an egalitarian society has never really been reversed and today one Jamaican dollar buys about one and a half cents of US currency.

In 1981 I bought a one acre lot of land for J$150,000, and today the annual tax on the unimproved value of the lot is J$320,000

The point I hope to make is that there are inescapable consequences attached to what the FED is doing in relation to credit creation and the promise that in the event that it becomes necessary in their opinion, they will not hesitate to turn on the printing press. The likely result will be the same as happened in Jamaica. The principles do not change simply because America will be printing what is currently the most widely held and trusted fiat currency in the world. Dilution is dilution and in this case the effects will be seen in the increasing amount of dollars it will take to buy an ounce of gold. As soon as a critical mass of people understand what is happening and begin to protect themselves and their assets the price of gold will rise rapidly, even in the context of the high inflation and rising interest rates.

The stock market has had an explosive bear market rally that looks and feels like the good old days of the bull market are back. So convincing has the action been that many who shorted stocks have been forced co cover their positions. This is, in my opinion, one more indication that the bear market rally is coming to an end.

Ninety four of the stocks that I track ended the week below where they were on September 21, 2001

The McClellan Oscillator ended the week at +101.98 and the VIX closed at 23.43, having opened the week at 21.95. The trend is moving away from complacency.

The primary trend of the market is still negative. The secondary trend while still positive looks to be weakening.

Regards,

 

Colin

June 06, 2003

 


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