INTERVIEW WITH DENNIS GARTMAN May 24, 2006 Dennis Gartman has been in the business of trading since 1974, when he started as an economist for Cotton, Inc. and learned the commodity markets from the ground up.. from the hard packed ground of Lubbock, Texas, to the flat fertile ground of the San Jaquin Valley, to the alluvial ground of the Mississippi Delta. From there he went to NCNB in Charlotte, N. Carolina for several years, and from there to the CBOT's bond pit until the mid-1980's, when he began writing The Gartman Letter. According to Dennis... "I've traded the spot dollar Yen at 245 and 90; I've seen Fed funds trading at 21% and 1%; I've watched the long bond yields go from 6% to 15% and back to 4%. I've witnessed the Dow move from 475 to nearly 12,000, and I survived the Bear Market of '73-74; the Crash of '87, the Russian/Emerging Market/LTCM Crisis of the 90's AND the Dot.com Bubble. I've seen the Nikkei move from 10,000 to 40,000 and back again. I've lived through "beans in the teens"; wheat at $7/bushel for the twinkling of an eye; sugar selling at prices so low that they took delivery of the sugar and sold the burlap sacks it was delivered in. In other words, I've seen it all, and there's still more to be seen! How lucky have I been?" GV: Dennis, what do you think is the Fed's propensity and/or need to surprise the markets with an end to the "measured" tightening? DG: The Fed's duty is to be both soothing to the markets, and confusing... a most difficult task indeed, and one I do not wish upon anyone. The Fed needs to keep the market's soothed and reasonably comfortable most of the time, for that keeps the wheels of the banking system oiled nicely; but it must also strive to inject just enough discomfort to make certain that the market is never fully complacent. Given that the Fed has erred, I think, in making 25 bp increases in the funds rate fully expected by everyone, it needs, badly, to create a sense of modest confusion. That would best be served by "pausing" at the next meeting, and then moving rates 50 bps higher at the meeting thereafter. GV: Can you provide some insight into the public participation in the commodity markets via the long only funds, and the effect of those funds upon the cash market traders of the world? DG: The public is not really all that involved with the commodity long only funds to the extent that Wall Street believes it to be. Heretofore, most of the participation has been on the part of endowment funds, pension funds and the like, who've been precluded from dealing in the commodity markets directly but now find an avenue to become involved via the long only funds and now the ETFs. The advent of these funds have made life rather difficult for those who've "lived" in the cash market, putting contango or carrying charge into markets that might otherwise have gone into backwardation... for example the energy market. WTI has remained in contango even as prices have moved markedly higher, which those of us who grew up watching the movement from contango to backwardation for signs of real tightness and for confirmation of the health of the bull market, was confusing. The urge to sell into the strength in the crude oil market, therefore, was much higher than might otherwise have happened for many of us saw the continued (and widening) contango and thought the crude market to be improperly prices many dollars lower. GV: Do you think a bear market is developing in equities?. DG: Yes, I do think a bear market is beginning in global terms, signaled first by the collapse of the markets in the Middle East, and then followed hard upon by the markets in Asia, Europe and N. America. Had the markets in Bahrain, S.Arabia and the Emirates have tumbled on their own, we might have been able to call them a one, or two or three-off event; but when the markets in Asia, Europe and N. America began breaking well defined uptrend lines at the same time, that line of reasoning very swiftly became suspect. GV: Your trading rules are quite famous. Can you discuss why you feel they are important and why one needs to follow them? DG: As for rules, as society needs laws to keep itself orderly, so too must a trader have rules he or she can abide by to keep him or herself orderly also. We are human beings functioning in a market environment that can be uncommonly irrational at times, and we can break our own rational trading styles when that happens. When it does, we need our "rules" to keep us sane; to bring order out of the chaos that surrounds us. GV: Can you elaborate on why you pay attention to tax revenues these days as the truest indicator of the economy's health? DG: Tax revenues have become my favorite economic indicator for the very simple reason that I've never met anyone, anywhere, who's paid taxes on business or work they had hoped to do; people pay taxes on the business and work they have done and been paid for. The US government, in the modern computer driven world, where businesses spring up in homes and small office at a moment's notice, miss these jobs and miss these employers; but those businesses and employees have to show up in the IRS data via taxes paid. In the past, taxes paid and GDP tended to run rather closely in tandem. That seems reasonable, and it was; but since the mid-90's, taxes have risen far faster than GDP and I explain that by the creation of new jobs that fall below the Labor Department's ability to find them and/or to estimate them. The problem with tax revenues is that they are at best coextensive with economic activity; they are not predictive. GV: Do you believe in the imbalances of trade argument that is being used as a reason for a lower dollar? DG: I have no respect whatsoever for the balance of trade data... either from the US, from foreign governments, from the IMF, or any other organisation. The reason is that nations are excellent at counting the things that come into their ports from abroad, for they may eventually cast tariffs upon imports; but they have proven to be collectively horrid at accounting for the things that move out. Hence, the IMF says that the world runs an imbalance of trade deficit with itself on a regular basis. Secondly, the correlation between trade deficits and currency valuations are specious at best. Here in the US I've lived long enough to see the dollar rally for years under during Mr. Reagan's term in office, and yet the imbalance of trade worsened annually. I've seen the dollar falter as the trade balance also worsened. In Japan, I've seen the Yen rise as the Japanese trade surplus rose, but I've seen the Yen weaken materially as the trade surplus rose also. One can say the same for Germany when there was a German mark, and for England since the end of World War II. On balance, one is better forecasting where a nation's currency is going to go by knowing which team shall win the NBA championship than what its trade data shall show. It is a waste of one's time.... utterly and completely, although one will indeed sound wise beyond one's ken if one spouts concerns about imbalance on trade and current account ad nauseum. GV: How much weight do you assign to fundamentals as a trader, these days? Would it be valid to say that due to the vast amount of liquidity sloshing around, funds are momentum trading any instruments and just following whatever the latest flow happens to be? One example being some commodities where prices have more than doubled but physical usage has remained steady. DG: Regarding fundamentals and technicals, I say that I am happy to "steal from both schools," and do want to try to understand, to the best of my ability, why a market should move higher because of the fundamentals of supply and demand firstly. Then... and very importantly... I want to see that my bullish (or bearish) view is actually being manifest in price. I may be bullish of something from a fundamental perspective, but if the price is not rising... or as I like to say, is not moving from the lower left to the upper right on the charts... I'll stand aside. Fundamentals and technicals do indeed work together; but if one moves first it is always the technicals. GV: What specific fundamentals do you look at when analyzing currencies. DG: I've really no answer for this question. I'd like to have an answer, but after thirty years of watching markets, I've none that I can rely upon. GV: What are your three and six month forecasts for eur/usd and usd/jpy and why? DG: The trend for the US dollar, at the moment, at least, is downward, and thus the only logical conclusion is that I have to look for the dollar to trade lower 3 months, 6 months, 9 months, 12 months and beyond. I have no other way to think about the market than to believe that the current trend shall obtain into the future... until it stops. Given what I perceive to be a marked propensity for international investors and central banks to divest, quietly, of US dollar denominated assets and to invest, quietly in other assets, the trend will likely accelerate to the downside. Can the EUR trade to 1. 35 over the course of the next several months? Certainly... indeed easily. Can the Yen trade to "par" or beyond? Even more certainly and even more easily... especially as those involved in the carry trade find themselves in an ever more untenable position. GV: What is the outlook for the fed high on funds, peak of oil/gold and what is your favorite stock sector? DG: I can make the case, as the Fed over-shoots and responds in delayed fashion to the growth in the economy, that the Funds rate can trade to 6%. Having traded funds at 21% and beyond in my career, a "mere" 6% fed funds rate seems rather modest actually. As for oil/gold, I can readily imagine that it shall take 15-17 barrels of crude oil to buy one ounce of gold at some point in the future rather than the recent 8:1 and rather than the present 10:1. History is on the side of believing that at the present levels, crude is inordinately expensive and/or that gold is relatively cheap. Given that the ratio has been well above 25:1 in the past two decades, the fact that it has risen from 8 to 10 suggests that a shift of consequence lies ahead. Were I advising an oil producing nation on how to handle its reserves, I'd certainly be advising them to sell what crude they could as swiftly as possible and accept payment in gold. GV: Do you expect the USD to start to trade in tandem with bond prices as it did in the early 80's? DG: I expect the dollar to at times trade in tandem with the bond market, and at other times to trade in contravention to it. I've been around long enough to have seen them do that in the past, and I hope to live long enough to see them do so in the future. GV: Those of us who have been around for a while remember a dollar market that had �no limits� and the central banks could only control via draconian moves in interest rates and heavy intervention. Is there any risk of a return to those conditions? DG: No. GV: Where will the persistent and very large U.S. external deficits lead us over time. Is there a limit on how much the external markets can absorb? One day will the US wind up owing several trillion dollars to both Japan and China, and does it matter? DG: I think the most over-hyped fear in the world is that the US cannot continue to have large imbalance of trade and/or of budget deficits, for indeed we can and likely we shall. As long as the dollar remains the world's reserve currency (and it will remain so as long as the US remains the world's dominant military power, for it is military power that protects, ultimately, the position of the reserve currency nation. Once military power dwindles, another reserve currency nation must arise to take the other's place. I do not see that happening in my lifetime), it will have the ability to run deficits on budget and trade forever. That is the lesson of history. GV: Dennis. Thank You.