Orlandini doesn't mince his words when it comes to the credit crisis

Here's a very enlightening excerpt from Enrico Orlandini's weekly missive, "Dow Theory Analysis", regarding the credit crisis:

"..For those of you who haven’t figured it out yet, the credit crisis and resulting bail outs had nothing to do with concern for the general public.

Two ex-Goldman Sachs men, the Treasury Secretary Henry Paulson and then President of the New York Federal Reserve Bank Timmy Geithner, got together and figured out a way to consolidate Goldman’s power and rid them of the competition at the same time.

They waited until early March of this year when things looked dismal and, in a blaze of cell phone calls between Geithner and Goldman (twenty-one in one day) it was decided that Lehman Brothers and Merrill would disappear, and Goldman would take over the lucrative parts of their business. Bear Stearns was already gone, so Goldman would be the power house and Morgan would get a bone or two thrown its way.

The failure of Lehman was the key though, as it forced Congress to commit to TARP money that would eventually fill Goldman’s coffers. Lehman drew the short stick even though they all were more or less equally leveraged.

Both the Fed and Treasury now clear everything through Goldman, allowing them to make trading profits on 89 out of 92 days in the third quarter, a phenomenal accomplishment to say the least. You, of course, paid for all of this, you have little or no knowledge of it, and you’re not going to receive a single benefit. Your taxes will be raised, you may lose your job, the currency you earn is worth less every day, and they may come and foreclose on your house. How do you like them apples?.."

Orlandini: We're heading into a long, cold and grim winter...

What follows is taken from Enrico Orlandini's latest weekly missive: The Next Shoe to Fall ( in Dow Theory Analysis) and although it doesn't paint quite a very pretty picture of things to come, it just hopefully might nudge some of you out there from your slumber into a sober awakening!..

Funny thing is, it also ties in rather nicelly with the latest Mises.org daily article called The Trouble with Democracy (which you can read HERE)

"... So that’s the long and the short of it. We are heading into a long, cold winter and we are all naked in the sun. As long as it’s warm we feel great and life goes on, but once the temperature drops we’re all in trouble. The problem is that no one sees, or wants to see, what’s coming and that is a real shame. Everyone says the US will enter a long period of sideways movement like Japan, but I wouldn’t hold my breath. Japan had reserves! All the US has is mountains of debt and poor leadership. I am old enough to remember the Kennedy inauguration, which means that I also remember Eisenhower and I experienced Johnson and Nixon first hand. I liked Nixon and couldn’t stand Johnson, but at least he took a stand and stuck to it. In today’s world I can’t see one decent politician in the United States and let me qualify that by saying that there isn’t anyone with a good message and great communication skills the people will listen to.

Back in the 1960’s we had some really great public speakers like the Kennedy brothers, Martin Luther King, and Medgar Evers and they all died a violent death. In particular Robert Kennedy had the communication skills and a message that played well to the American public. Is it an accident they were all shot? I don’t know but I think it served as a message to the next generation of politicians that you don’t mess with the system. On November 15, 1963 John F Kennedy gave a speech in Pittsburg saying he wanted to close down the Federal Reserve and he was dead two weeks later. I don’t know if that was just a coincidence or not, but I personally don’t think so. In any event it produced a system that punished original thought and anyone who wanted to challenge the status quo. Fast forward to the present and you see the fruits of that labor, a system bloated on debt and pork that violates its own constitution almost on a daily basis.

So many paid such a high price so Americans could enjoy the freedoms they so easily cede to the Bushes and Obama that it’s scary. Fortunately there is a mechanism called a market that is so big and so powerful that no one individual, group, or government can manipulate it for very long. The current manipulation has been going on for more than seventy years and involves the biggest transfer of wealth the world has even known. In 1913 the US was the richest nation in the world and most of that wealth belonged to the American people as a whole. Then along can a very small and select group of men, under the guise of the Federal Reserve and began to transfer that wealth to themselves and a few others. The result is the largest debtor nation in the world and an uneducated population that can’t compete. Along with the wealth went the entire production base of the US and now we are service oriented, meaning we sell each other insurance.

The greed has been so extreme that it overflowed the shores of the US and permeated the rest of the world in the form of over-the-counter derivatives. Almost US $700 trillion worth of them! Those chickens will come home to roost this fall and it will be very messy indeed. The market will have its day and no amount of bad legislation will change that, and neither will the printing press. The only salvation will be gold, silver, and maybe the Swiss Franc. A couple acres of vegetables in a backyard surrounded by an electric fence won’t hurt either. While you’re at it don’t forget your own well and power source since most public utilities are antiquated and their employees may not get paid. Civil disobedience will be a real problem and I wonder just how far it will go. The Viet Nam demonstrations aside, Americans haven’t been really worked up over anything since the days of “Hooverville” and will react negatively once they figure out that they’ve been taken to the cleaners. Like all distortions, the repercussions are likely to be extreme and I suspect will lead to a new form of government.

Whether it’s framed after the US Constitution or not remains to be seen."

Orlandini talks about the "D" word....

Now here's a piece of what I call straightforward down-to-earth-one-plus-one-makes-two rational economic reasoning. It's from the latest Dow Theory Analysis by Enrico Orlandini:

".. I’ve talked a lot about deflation, so let me give you a simple explanation of how deflation works.

The Fed has been trying to grease the wheels of the economy with liquidity, or so it says, in an effort to get Americans back into stores and spending money. Yet every month 500,000 more Americans are unemployed. The current “official” rate is 9.5% and is projected to surpass 10% before the end of the year. The last thing you are going to do if you are afraid of losing your job is spend money on worthless crap, when you may need it to survive. You will service your debt for as long as you can, spend only on the basics, and save what you can. That’s why the savings rate has gone from 0% to 6% in less than a year. So you cut back on spending and that means store sell less. The store then cuts back on inventory and lays people off. The companies that produce goods for those stores cut back on production, buy less raw materials, lay people off, and in the end pay less taxes because profits fall. Everyone lays off employees and consumes less. This leads to even further cost cutting measures and that causes even bigger declines in consumption, and more jobs are lost and so on...

That’s a deflationary spiral, it takes on a life of its own, and that’s where we are now.

The Fed had one shot to stop deflation dead in its tracks, and failed miserably.

Now they will be forced to do one of two things: write off debt or print even larger amounts of money. Yesterday the administration sent off a trial balloon when Obama’s economic advisor, Laura Tyson, mentioned that we should consider a second stimulus plan. That in itself is misleading because we have already had three, maybe four, stimulus packages of one form or another.

It should be clear to a blind man by now that this is not the answer, but the administration persists, just as Bush and Paulson did. Again, I would love to know why.

The so called bail outs were never intended for the general public, so it should come as no surprise that they had little or no effect on the average consumer. Banks received the cash, but never wrote the bad debts off, so they really can’t loan. Aside from that, the banks never disclosed the amount of bad debt they really hold.

Current economic policy is more in the form of a hope and a prayer, and it’s been my experience that God does not answer that type of request."..

...and may I add, "Allelujah!!"

Orlandini: more than ever gold bullish!

Below is an extract from Enrico Orlandini's latest dispatch from "Dow Theory Analysis S.A.C.":

"...Now with respect to gold, I must admit that I am extremely bullish the yellow metal at this point in time. More so than I have been in a long, long time and I do not think my enthusiasm is misplaced. I have been following gold for nine years and buying gold since early 2002. I do so, not out of any emotional attachment, but rather because my technical analysis tells me that gold is going to rally up to US $3,000 by 2012 or 2013. I have expounded that belief for six years, as most of you are painfully aware. The funny thing is that as gold goes higher, the harder it is to convince anyone that it should be bought. Everyone loves to call a top to the bull market in gold and yet the top is not even close to materializing.

Until March of this year, the ride had been relatively smooth as we rallied from the 2001 low of US $252.50 to the March 2008 high of US $1,033.90. You can see the move up in gold's historical chart posted above. The biggest correction was a measly 25% and that made investors greedy and complacent, a deadly combination when placing money in any market. In March the markets took it upon itself to humble investors and remind them just who was boss.

Then comes the inevitable correction. Gold fell from the 1,033.90 high, all the way down to the 681.00 low posted just last month, and that is a 45% retracement of the entire bull market. A significant correction to say the least! Immediately after the 681.00 bottom was posted the gold price moved back up over 700.00 and began to build a base, most of which has occurred close to the 38.1% retracement level at 735.80. As you can see below in the daily chart, a range has been established that reaches from the 720.20 support on up to the 760.60 resistance.

You can also see that price is being compressed into a tighter and tighter trading range and in a bull market the odds favor an upside breakout.

Currently the December gold futures contract is moving toward the top of the range trading up 13.70 at 749.70. It is rallying in spite of a good rally in the dollar and bond market, and in spite of the fact that almost all other commodities are down in negative territory. I am looking for a move and a close above the important 772.70 level.

Once that happens then I think gold will move back up to tackle the old all-time high at 850.00 yet again. For the first time in a long time the P & F chart for gold has a bullish price target of 825 and although it may not seem like much, it is a step in the right direction.

In conclusion,

we are suffering from significant deflationary pressures where everything loses value. When that happens, folks tend to search out a real store of value and that would be gold. The yellow metal is the world's oldest store of value. Other countries have a long history of this and Americans will follow suit. I have no doubt that the US government will try to outlaw gold at some point in time, just like they did back in 1932. They will also implement other measures in an effort to pacify Americans, but sooner or later they'll catch on and that is when the real trouble begins. Social unrest and civil disobedience will come to the surface as people look for their rights, they so carelessly gave up. A struggle for power will ensue."

Enrico Orlandini: Gold, Where to Now

By Enrico Orlandini
Jun 6 2007 9:30AM
www.dowtheoryanalysis.com

I have been following gold for better than twenty-five years and I’ll have to admit that I don’t recall seeing investors this discouraged in a long, long time. Maybe never! I think a lot of it has to do with a complete misunderstanding of what constitutes a bull market as well as how it functions. I read/been sent any number of commentaries about gold over the last month describing how the bull market is seasonal and May markets the time to sell. Others like Steven Hochberg of Elliot Wave fame have come out and stated that gold is due for a severe decline that will take price down to US $450.00. This is not the first time Mr. Hochberg’s made such a claim. He was wrong before and I’m here to say that he’s wrong now. Then there’s just pure fabrication. I skimmed an article the other day claiming that the well known gold analysts, the Aden Sisters, called an end to this leg up due to a technical failure. I had just read the article in question entitled “The Bubbling Metals” and the Aden Sisters made no such claim. When it comes to gold, misinformation is the rule rather than the exception.

If I use my clients as a gauge, you can cut the gloom with a knife. I am the first to admit that this leg up has taken a lot longer to get underway that I had anticipated, but there is no “Great Book of Gold” that you can thumb through in order to come to a quick and easy answer. Therefore I take pen in hand and try to smooth out some of the bumps. First and foremost, you must understand just why we have a bull market in gold. The reason is actually two-fold:

• Presently there is no currency in the world that is backed by anything other than a ‘promise to pay’, and
  
  
• All the world’s major economies are engaged in a printing war in an effort to have the cheapest currency. A cheap currency leads to cheap prices for exports.

With respect to the latter, the printing party actually originated more than a decade ago in the US and was later adapted by the Japanese in particular and the rest of Asia in general. Europe jumped onto the bandwagon somewhat further down the road. Currently there is no major economic power whose money supply is increasing at less than 10% per year and the US’s money supply is now increasing at a greater than 14%/year clip. That is an amazing figure for the world’s biggest economy.

Throughout history there have always been a group of investors, better known as the smart money, who have made a habit out of buying cheap and selling dear any significant bull market. This so-called smart money gets that way by paying very close attention to things like M-3, balance of trade, fiscal deficits, and so on. When they sense that things may get out of balance, they take the appropriate position, and wait for the inevitable. It should be mentioned that they are almost always the first ones to arrive and they are very, very patient. In the year 2000, the smart money noticed the staggering debt in the US, a world flooded by liquidity, and the very cheap price of gold. Being smart, they did the only thing they could do given the set of circumstances they encountered. They decided to accumulate gold and they went about their business as quiet as a church mouse. That for all intents and purposes was the beginning of phase 1 in the bull market for gold. In this historical chart for gold

You can see the bottom in late 1999, the retest in 2001, and the slow grinding methodical rise that followed and has continued relatively unabated until today. This first phase in the gold bull market continued roughly until December 2005 when gold closed above US $490.00/ounce which happened to be the last significant high way back in 1988.

I should mention that all major bull markets consist of three phases. As I’ve already mentioned, the first phase is where the smart money takes a position and by looking at the historical chart, you’ll see that it lasted five years. That’s a lot of accumulation! I would also like to point out that gold traded as a commodity during that initial phase and followed a certain pattern. One of the patterns had to do with seasonality: a rally from September to May and a pull-back throughout the summer. Just because a certain pattern prevailed during one phase doesn’t mean that it will dominate in the next phase. Once gold broke above the old US $490.00 high, it entered the second phase of the bull market and that is generally the longest of the three phases. Did you catch that? The second phase is almost always the longest; that means six years or more! The second phase features institutional buying where the Merrill Lynch’s of the world jump on board. Since gold is a special case, it is also highlighted by a transformation: gold ceases being a commodity and becomes money. Why would gold become money? It’s really not a complicated explanation. There’s just way too much worthless fiat currency floating around out there and more is being Eventually people catch on and look for something tangible that they can get their fingers on, and there is nothing more tangible than gold. It’s stood the test of time and it’s recognized in almost every culture around the world. Why I can take a gold coin to a tiny little Andean village at 15,000 feet above sea level, with no electricity or telephone, and somebody will recognize it for what it is.

So here we are, about two years into a six year second phase of a three phase bull market for gold. The third phase, when it finally comes around, will feature the kid who cuts your grass telling you about the great gold stock he just bought. It is the shortest of the three phases and is also features the blow-off to the upside. It will be the most volatile and the one where the price surges the most. If I were to guess, I would think that phase two will top out at US $1,200 to $1,600 and phase three will reach US $3,000 per ounce. And that is if the dollar doesn’t fold up its tent and go home. If that happens, all bets are off and gold could go to the moon.

That’s all well and good, but the average speculator wants to know what’s going to happen this week and not the next decade. Take a look at this weekly chart for gold and I’ll then I’ll give you my thoughts:

There are three things that you can take away from this chart and here they are in order of importance:

• There is the bottom band of a long-term trend line (long red line) that has held up for three years and it remains intact.
  
  
• If you look at the red and blue trend lines, you’ll see that gold is being compressed into a tighter and tighter trading range. Given the fact that this is a bull market, you have an 85% chance of seeing the break out to the upside.
  
  
• Look at the pair of horizontal green lines that I’ve drawn in. These define a period of consolidation that has lasted almost sixteen months.

So when I add these three up, what do I get? Simple! You get a market that is on the verge of an upside explosion that will not only catch most speculators by surprise, but it will catch them on the sidelines trying to chase it on the way up. The next question is: when is this upside explosion about to begin? Here’s my answer: it already has. Precisely, the move up everyone has been waiting for began on May 24th when gold bottomed at 651.50 and bounced of the red trend line. It is now shaping up for its third and final run at good Fibonacci resistance at 695.5. What’s more gold will not only break through 695.5, but will run through the May 11, 2006 high of US $730.40 and up to a minimum of $775.00. That’s been my price target for six months but personally I can’t believe that gold has spent this much time building a base to rally another one hundred dollars. No, I suspect we built this base in order to support a run up to the all-time high of $882.50. It only makes sense when you stop to think about it. Just about everyone and their brother have thrown in the towel and that’s what a gold bull market does best. It sucks you in when you have no business buying and it pushes you out just when you should be in. Next stop, gold at $775.00!

Dow Theory Analysis SAC
ebo@dtanalysis.com
Lima, Peru
June 04, 2007