September 24, 2003 -- My father was a very smart guy. He was a civil engineer, a graduate of Columbia. He graduated from Columbia in 1916, and immediately went to work in construction, which was his real love. Dad's first job was constructing giant radio towers in Chatham, Mass. When the Great Depression of the 1930s arrived, all construction stopped. Nobody was building anything. Projects closed down wherever they were. I remember the Empire State Building in New York in 1934, standing half-built like a great skeleton. I mean construction totally halted. Many halted because of bankruptcy. The Depression soured my father. He once told me, "I never knew a builder who didn't go broke. They all get too optimistic at the top."
During the Depression my father had to turn to management. He managed many Park Avenue buildings for the Tishman Company. Renting in those days was so difficult that if an apartment came up for rent, my father would go to the apartment and try to negotiate a lease. There was no fixed price. You negotiated, and if you were lucky your future tenant signed the lease.
My dad had one method which he adhered to and which he drilled into my head. "When you have a problem, Richard," he told me, "always get to the fundamentals. There's an answer to everything. You want an answer -- get to the fundamentals."
I've tried to follow that advice all my life. Which is probably why I keep emphasizing to my subscribers the importance of the primary trend of the market.
What fundamentals do I see now? Here are a few.
The nations of Asia, led by China, have wage scales far below US wage scales. Asia has a huge population, and that population is rapidly becoming educated. When I say educated, I'm talking about higher education. Check this out -- India now has two million engineers.That's right -- I said two million, and they work for a lot less than US engineers. The Chinese have one disadvantage compared with India. The Indians speak English. So the new Chinese policy is this -- starting with the third grade every Chinese kid starts learning English!
Therefore, the fundamentals are that Asia presents brutal competition to the US in world markets. Furthermore, Asia is flooding the world with cheap labor, cheap engineering, cheap tech, cheap products, and I don't mean shoddy products, I mean cheap products referring to costs.
This presents a mighty force for price deflation. For US manufacturers to stay in business, they must move their productive facilities to Asia and in most cases to China. This means more US jobs lost every day, every week and every month. And the irony is that China's biggest problem is unemployment. Their task is to put a million unemployed Chinese to work.
Meanwhile, the US is pressuring China to boost the value of the renminbi and make their exports more expensive. Is an upward revaluation of the renminbi going to happen with the leaders of China worried about the unemployed? You be the judge.
So here are the fundamentals. Asia is exporting deflation to the West. The US has the problem of offsetting unemployment and almost nonexistent pricing power. The US's answer is to fight deflationary forces with the all-out production of fiat money. Flood the system with enough liquidity, thinks the Fed, and somehow US business will recover, maybe even flourish and the forces of deflation will be defeated.
So the fundamental picture, as I see it, is bleak. The more persistent the forces of unemployment and deflation, the more the Fed will be impelled to fight those forces by generating more liquidity.
This liquidity has to go somewhere. So far it's been going into asset inflation -- the rising prices of housing and stocks.
But there's an Achilles Heel in the process, and the Achilles Heel is the US dollar.
So those are the fundamentals that I see in action. How do we fight those fundamentals?
We can put up tariffs against cheap imported goods coming from China.
We can accept a recession or a depression, which would bring US labor costs down.
We can let the dollar collapse to the point where US goods become competitive.
Of the three - the dollar-collapse, I believe, is the most likely to occur.
What other fundamentals do I see? The next one is the whole central bank and Federal Reserve system. This system went totally off gold and into fiat money in 1971, when Nixon closed the gold window. From that point forward the dollar was a fantasy currency, worth absolutely nothing in terms of intrinsic value.
The fundamentals here are that no fiat currency in all history has survived. The reason no fiat currency has survived is that they are all run either by politicians or by people who are controlled by politicians. As a result, there is no discipline in the production of paper currencies. The wholesale production of these fiat currencies heads them towards inflationary worthlessness, which is where the dollar is heading.
Here's a third fundamental. The dollar has been the world's reserve currency ever since 1944 at Breton Woods. Up to that time the British pound was the reserve currency, but following Breton Woods the dollar became accepted as the world's reserve currency.
Now Europe has come up with the currency which they want to become the new reserve currency, the euro. Almost every central bank now includes euros in its reserves. Thus, the US dollar now has a serious competitor, and one which central banks are including in their reserve mix. But if faith in the dollar recedes (as it is doing), central banks will move towards euros, probably some yen -- and gold. If acceptance of the euro becomes widespread, central banks will begin to unload their giant store of US Treasuries. If that happens, US interest rates will be driven up, and the US will be thrust into recession or worse.
So that is the third fundamental that I see. Everything else revolves around those three fundamentals.
Gold is "the fly in the central banks' ointment." Rising gold is an "offense" and a threat to paper money. As a result, the central banks and particularly the Fed have reason to fear rising gold. If gold creeps higher, the central banks can accept this, but if gold shows indications of a real bull market, the central banks will be threatened.
Thus gold-holders can expect continued attacks on the metal by the central banks of the world, even, ironically, as many of these central banks may be moving to accumulate gold (and I'm talking specifically of China).
China means to be the leader of Asia -- furthermore, China means Asia to be at a par with the US and Europe (actually, I believe China means to surpass the US and perhaps lead the world). And China has a weapon -- it's China's massive accumulation of US Treasuries.
The Chinese are very shrewd, and they are very aware of the power of gold. Over the last year the Chinese authorities have moved to allow Chinese citizens to accumulate gold. Moreover, China has recently established a gold exchange and a silver exchange. Only 2% of China's bank reserves are now in gold, and China is moving to increase its reserves of gold.
So while the US moves ever-deeper into debt, while Americans continue on their buying spree all the while saving literally nothing, the Chinese build up real wealth while saving at the rate of around 30%.
These are all trends that, as I see it, are bearish for America. While the US is wrestling with the "mysterious" forces of unemployment, tectonic forces are moving world power from West to East. In my opinion, the new "Age of Asia" lies before us, maybe three to five years before us, maybe less.
Now let's turn to the markets. I'm watching the Dow, which this morning is down --- to 9---. This puts the Dow -- points below the 9504 halfway point of the entire bear market. I've said this before, but I want to repeat it. I'll consider it bearish if the Dow cannot hold above the 9504 level, bearish under the 50% Principle.
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