What cataclysm are Greenspan and Snow setting us up for?

5:55p ET Thursday, March 4, 2004

Dear Friend of GATA and Gold:

An excellent quot;Getting Technicalquot; column by Michael
Kahn in Barron's is appended, but you really should
read it at the source, where it appears with some
very telling charts:

a href=http://online.wsj.com/article_barrons_email/0,,SB107834794607445663-http...
IJjgINmlaV3npuqaICGaKmGm4,00.html

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

The Charts Show Inflation's in the Cards

By Michael Kahn
Barron's
March 3, 2004

From time to time it pays for any stock market investor to
take a step back and really try to figure out what is going
on in the broader markets.

We have looked at intermarket forces, which most people
might label quot;economics,quot; to see how one market or asset
class influences the others, and we concluded that
conditions now support a rise in interest rates and the end
of the cyclical bull market in stocks. Support, however,
does not mean such a change is imminent.

Economists might say that rising interest rates mean it
costs more to borrow money to fund business activities
and purchase big-ticket consumer goods. That, in turn,
affects earnings and then stock prices. Perhaps that is
true most of the time, but it sure was not true over the
past few years as interest rates fell and so did stocks.
The market decided to do something different, and when
you are in the investment business, the market is the
boss, not economics.

But the boss has changed back to disliking rising
interest rates, as it has in the past. This year, the stock
market has been hanging on every word uttered by
Federal Reserve Chairman Alan Greenspan, looking for
any clue that the Fed will tighten and bump interest
rates higher as the economy improves. He has been
clearly hawkish with regard to fighting inflation, yet
continually reports that inflation is nowhere to be
found.

The markets beg to differ.

The Commodities Research Bureau index of 17
commodities futures prices, a long-time barometer
for that asset class and a notorious antibond indicator
(the bond market does not like it when commodities
prices rise) has been in a bull market since October
2001, and last December it broke a two-decade long
declining trend line (see Chart 1). Just this week, it
eclipsed the 1996 peak and touched a level not seen
since the early 1980s. Considering where it came from,
this has been one powerful move!

(CHART 1 IS HERE)

But most commodities are priced in U.S. dollars, and
since the dollar has been falling in a big way since early
2002, the pundits have dismissed the commodities rally.
After all, if the value of the dollar is falling, prices of goods
in dollars will have to rise, even if supply and demand are
steady. That's right out of the textbook.

With the big change in the dollar over the past month, it
then follows that commodity prices would fall back a bit,
and indeed gold has suffered a significant decline. But
platinum, copper, crude oil, and soybeans have not, and
neither have most of the other component commodities
in the CRB index.

If we take a look at the CRB index from the European
point of view, we can see what the pundits were talking
about last year. Sure enough, the CRB priced in euros
was trading in a range and arguably with a bearish bias.
But last month something changed, and suddenly price
inflation in the commodities world is very real. The trend
of a falling CRB priced in euros, as well as in many other
currencies, that began in late 2000 has now been officially
broken.

(CHART 2 IS HERE)

This does not bode well for bonds, but acting on this one
bit of technical evidence alone is not prudent. The delays
in intermarket analysis can take weeks or even months,
so all we can really take from this analysis so far is that
the end of the rally in financial assets is now a possibility
in the not-so-distant future. We have seen this manifested
in the rotation away from growth stocks into value stocks
and from technology to defensive sectors.

So, if rising commodities prices and rising inflation are not
good for bonds, the next step is to take a look at that
market. There we can see the benchmark 10-year Treasury
note's yield still locked in a giant triangle pattern. It found
support at the bottom of that pattern, meaning that it is still
in position for a major breakout. The trend line shown was
drawn from the January 2000 peak in interest rates, and if
it were broken, it would signal an important change in the
market.

(CHART 3 IS HERE)

We'll leave the rest of the analysis to the reader, as rising
interest rates in the magnitude implied by the chart (a full
percentage point vs. just a fraction), would pose a problem
for all financial assets. And by default, they would be good
for hard assets like precious metals and real estate.

But just to assuage any feelings of panic, the return to the
hyperinflationary days of the 1970s is not in the charts at
this point. A long-term view of rates shows that there is a
nother trend line drawn from the more important peak set
in 1994, when the bond market suffered a very strong bear
cycle, that is above the current yield level. This suggests
that the major long-term declining trend in interest rates is
not yet in jeopardy.

But again, when we are deciding what to do with our
portfolios in 2004, hard assets appear to be the better bet.

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