The Kondratieff Winter & The Case for Gold
Anon
4 March, 2003
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966.
"There can be no question that the US economy is at its most critical juncture since the Great Depression of the 1930's. With both the cause and pattern of the present downturn diametrically different from those of prior recessions, it should be clear that past experience cannot help in accessing what is to come." The Richebacher Letter, October 2002.
"Sharp rise in US job losses adds to gloom." "Fears grow over faltering global rebound as Germany and UK also report bleak economic news." Front Page headline: The Financial Times Jan 11/12 2003 "US job losses increased sharply last month, adding to concerns about the weakening global economy recovery. The 101,000 decline in payrolls was the largest since February and surprised Wall Street... US job losses last year reached 181,000 the worst since the end of the 1991 recession. Losses in the manufacturing sector became more widespread. Makers of aircraft, cars, computers and films experienced some of the biggest percentage declinesin employment along with restaurants, bars, retailers and banks." Ibid.. The Kondratieff winter is here, and it is getting colder.
The economy has only just begun its slide into the Long Wave depression, and already excessive debt is leading to significant bankruptcies. As the recession deepens, and it will, the pace of bankruptcies will increase markedly. It is akin to a landslide that starts from a single rock dislodged from the top of a steep hill. Once the Kondratieff winter debt landslide is set in motion there is nothing that will stop it until it has run its course.
The primary purpose of a Kondratieff winter is to purge debt from the economy. That process is just beginning with collapse of companies like Worldcom, Enron, Global Crossing, K Mart, Florsheim Shoes, Formica, United Airlines, Conseca, GenTek, Mcleod USA, Williams Communications, and others, whose names escape me as I write this. By the time this Long Wave winter reaches its conclusion, considerably more sizeable US corporations, which are household names, will undoubtedly fail due to excessive debt. As long as the economy continues to prosper, large debts are manageable. When the economy slows down, corporate revenues fall, and debt becomes an onerous burden. This is compounded by the scarcity of capital and rising interest rates, as banks tighten their lending practices. For example, even though the Federal Reserve has now cut the cost of borrowing to its member banks 12 times in the past 11 months, the cost of borrowing to the telecoms has approximately doubled. Ford Motor Company paid a higher rate of interest in its latest debt offering in December 2002 than it did six months before, in spite of the 300-point basis rate cut by the Federal Reserve over the same period.
During 2002, more than 180 publicly traded companies filed for Chapter 11 bankruptcy, which led to the destruction of $368 billion in assets; a record. These failures included six of the 12 largest corporate bankruptcies in US history. And it has only just begun. Martin Weiss counts an additional 2,453 publicly traded companies, which are vulnerable to bankruptcy. These bankruptcies are closely following the haemorrhaging of US corporate earnings. AOL lost almost $100 billion last year. This colossal number is far greater than the total market capitalization of all the publicly listed gold stocks, which is about $70 billion. Several other major US companies are spilling red ink. According to Martin Weiss, technology companies listed on the Nasdaq have posted losses in excess of $190 billion over the past 12 months. This was sufficient to wipe out all of their accumulated profits of the past six years. The liquidation of excessive debt and a mounting tide of bankruptcies will continue, as the US economy falls into it's forth Kondratieff winter deflationary depression. There is perhaps as much as another $10 to $15 trillion of debt which must be erased from the economy before winter has run its course. This is a staggering amount and infers that the bleakest part of the Kondratieff winter is still far into the future.
These bankruptcies are beginning to significantly impact US banks. Following the Kmart bankruptcy, J.P. Morgan Chase suffered a $117.8 million loss and Fleet Boston Financial, a $119.9 million loss. Between May and October 2002, J.P. Morgan's share price had fallen a whopping 60.5%, which effectively sliced $46 billion from the firm's market cap. Excessive debt always has a major negative impact on banks. The Japanese experience should serve as a stark reminder of that fact. "This much is certain, whenever any society accumulates debt beyond its ability to repay, it is the creditors who are robbed." Hoppe, Donald. The Donald J. Hoppe Analysis, November 1983. P.138
Consider the following: "What would one have to think of a major US corporation whose finance arm with debts of $US 170 Billion while the company itself stands with a balance sheet net worth of $US 7.8 Billion (down from $US 19 Billion as of the end of 2000) and whose recent earnings covered less than half of its total interest burden? That US company is FORD. Some people have finally taken a look at the Ford balance sheet. Ford's commercial paper lost $US 6 Billion in four days."
"How could a company with $US 170 Billion in debt paper outstanding, with current earnings insufficient to service even half of this debt, and with a net worth of $US 7.8 Billion still have ANY commercial paper in the market place? Ford does." The privateer the-privateer.com Late October 2002 edition. (reproduced with permission).
Not only does Ford have this enormous amount of debt outstanding, but it also continues to add to this monstrous burden. The only thing that can save Ford from bankruptcy is a resonant rebound in the economy. Will that happen? Not likely, because most of the Kondratieff winter lies ahead of us. Anyway, car sales in the US are now stalling. "Shrinking car sales hint at consumer fatigue in the US Unnerved by job cuts and random violence, shoppers are not tempted by interest free loans." So the Financial Times reported on August 23, 2002. Jeff Barry, the sales manager at the Jacobs' Twin car dealership, which sells Ford, Hyundai, Mazda and Honda brands, said that in August his dealerships delivered 130 new cars to customers, but that this month its likely to be only half that number, and he said, "People are getting laid off daily. There's a vast majority of people who are worried about committing themselves to something they can't fulfill. The whole damned world is in turmoil."
The only means left to Ford, and many other companies too, is to borrow to pay the interest on its debt. Obviously, that cannot continue for very long. On October 23, 2002, Ford's debt rating was cut by S&P to two notches above junk with a negative outlook, which means that further downgrades are probable. October was the worst single month for the Three US automakers in four years. Car sales at Ford fell 36.6%. At GM, sales dropped 40.3% and even Daimler-Chrysler, which had not pushed the cut-rate financing deals was off 25.8%. According to Martin Weiss' Safe Money Report, "an auto sales bloodbath is in the making." December 2002.
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