A Barrel of Troubles

The (common sense) Truth about Inflation...
If you think inflation is good for the economy, then why isn't Zimbabwe the wealthiest nation on earth?

There is no question that we now have a Barrel of Troubles (pun intended) from the DEVIL of INFLATION to the Deep Blue Sea of Recession come Depression. If all that was not enough, we have the oil rich Middle East ready to explode with a high probability of it all coming under the Influence and/or control of the fanatic Mullahs in IRAN. Lebanon, Gaza and Syria are already controlled by Hezbollah, with every likelihood that Tunisia and Yemen have already succumbed to Moslem extremist uprisings. Now Egypt, the lynch pin of the Arab world, is she about to succumb to Radical Islam and be the next domino to fall into step with the once secular but now Islamic Turkey? Anyone who believes that Egypt, a country that has never known freedom and has no active political parties, will suddenly morph into a true western style democracy must be smoking H. and living in a dream world. There is a now much higher probability that we will see $150 to $200/bl oil before we see a democratic anything, and that includes Iraq once the Americans pull out. Besides, the Muslim Brotherhood is already talking of preparing Egypt for war with Israel. Where will Obama and the USA stand should that war erupt?

WHAT ABOUT "NEVER AGAIN"?

DO THE Arabs and USA NOT UNDERSTAND?

BERNANKE IN DENIAL
These days, everyone around the world sees inflation rising...except our Fed Chief who remains in denial. By focusing on core CPI, which excludes the prices of food and energy, he completely ignores today's rising inflation. High food prices are already sparking protests riots across the globe,

The National Inflation Association reported that wheat prices are up 100% since June and warned that food and energy price inflation could lead to food riots spreading from Egypt across the world and even to the US. They believe that this is a further sign that massive inflation and potential hyperinflation is not only coming, but is already here. (Compare your own Bills for last year to this years) .

THE ECONOMIC HEALTH OF THE WORLD

A far more important measure of the health of the global economy is the Baltic Dry Index which measures international dry-bulk commodity-shipping costs and is seen as an excellent proxy for global trade and thus the health of the global economy. After a massive collapse, from nearly 12,000 to 666 in December 2008, it subsequently recovered somewhat in 2009. It then gradually fell in 2010 and it is down 8% last week alone and down over 41% in 2010. The continuing fall in the Baltic Dry Index strongly suggests that the global economic recovery is not as robust as claimed and that we may be on the verge of a double-dip recession or worse, stagflation followed by depression.

The scale of commodity price increases and growing inflation internationally will likely see US government bonds continue to come under pressure as the USA continues to monetize their massive liabilities, thereby further undermining the US dollar. Other developed nations face similar fiscal and monetary challenges, and their bond markets and currencies face similar risks.

DEBT and DELUSION

The US banking and financial leaders still believe the US can revive itself by more debt creation, printing money and stronger consumer spending. They do not have a clue of what REAL (non-inflated) growth and income means or where it comes from.

The entirety of any attempt to reduce the US Government Budget will come from the domestic, non-defense, non-entitlements. The money for aid to businesses and households as well as the amount dedicated to infrastructure will come from where? The same place that tax cuts for business will come from? In the name of National security the higher priority war machine is untouchable: Ironically, the security of the nation has been put in peril by unspeakable banker fraud, abandonment of industry, and neglect of infrastructure, not to mention the continued ignorance toward capital formation and the spoiled childish embrace of a consumption mindset. The current Administration will remain, wittingly or not, committed to gutting America, undercutting the middle class, and feeding the deterioration of the US Economy regardless of its rhetoric. The greatest potential for spending cuts is from the defense budget, for which the US Government spends more than the rest of the world put together. The maintenance of a Fascist Socialist Economic agenda will be steadfastly maintained; even though the only sure fire solution is the return to Free Market Laissez Faire Capitalism that our leaders, including the majority of Republicans, seem incapable of understanding that. They promote the very same Fascist Business Model that has contributed to the wreckage of every other country that has tried it in the past and that is now destroying our country as well. The victims are always the same; economic growth, rule of contract law, sanctity of private property, truth and the slow erosion of personal FREEDOMS.

The TRUE threat to the nation comes from the impunity of large scale financial crimes. NO EXTERIOR FORCE can bring down the USA but it like all empires of the past are always brought down its own self destruction of its morals, debasement of its currency and a complete corruption of its Ruling Classes both political and financial. Is it too late? We have at most 2 years to begin the FIX but as of now no one in power is listening.

WHAT HAPPENS IF CHINA DUMPS ITS HUGE TREASURY HOARD? Just let Obama, Hillary, Schumer and Geithner KEEP SHOOTING OFF THEIR MOUTHS, threatening CHINA. Nobody in their right mind attacks their banker.

If you haven't already taken steps to prepare yourself for the coming inflationary storm (crashing currencies), NOW is the time to do so, before it is too late. Do not be looking at the current gift horse (Gold and Silver selloff) in the mouth. We are literally living on borrowed time as something MAJOR is brewing in the markets and it's NOT dollar positive. Indeed, Gold and Silver, will definitely be exploding in the not to distant future. (Silver with out perform Gold both up and Down)

HOW NOW DOW

Trannies fell hard and are drifting lower, while most other averages were flat, marking a 10th week of Dow Theory upside non-confirmation. The major stock averages are completing termination, topping out, patterns, ascending expanding wedges in the Industrials and S&P 500, and a Jaws of Death Megaphone in the NDX are all now nearing completion. These patterns may need another pop to finish, but a sharp decline is on its way. When tops take this long, and rallies extend this far without any corrections at all and every sharp opening selloff always end up closing higher as we have seen the past few months, this is all characteristic of a major top. I would not be surprised by a Black Swan event that scares the life out of the stock markets. Could Egypt be that Black Swan? The pieces are in place to facilitate a powerful decline, pieces that are typically present at major tops, like 2007, 2000, and 1987.

What more can I say about this market besides the fact that Helicopter Ben is determined to make stock prices go up at all costs and he has recently given himself another $800 billion to make it happen. So it's about time I stopped banging my head and wallet against the FED because Helicopter Ben isn't done yet. BUT I am not ready to go long in this market (except for selected positions in Precious Metals, Uranium and Rare Earths) in the face of a World Wide TOPPING OUT process which is now unfolding. So I suggest we continue to restrict ourselves from taking general Short Positions and stick to shorting stocks that have demonstrated definite topping out charts (this could most likely be the surest sign of the TOP).

THE MARKET IS LIVING ON BORROWED TIME

I said this before but it bears repeating. You do NOT have to catch the exact PEAK of this Bear Market Rally. It has to do extraordinary things to make it the biggest BULL TRAP in history. So even if we miss the TOP by 5% or even 10%, keep your powder dry - there will be plenty of movement on the downside for you to make your money. Your best shorting opportunity will come into the rally after a sharp 3 to 5 day Sharp Selloff.

GOLD

European sovereign debt yields are rising. Most commodities are steadily pushing higher with NYMEX crude up to over $93 and Brent up to over $103/bl. There are riots around the world primarily related to food prices as Wheat, Corn and Soybeans are approaching all time record highs. Did I hear anyone say inflation?

JP Morgan announced today that from now on they will accept physical Gold bullion as collateral: A sure sign of Gold's further re-monetization in the global financial and monetary systems. It is a signal that JP Morgan is having difficulty in securing Gold bullion in volume. JP Morgan is the custodian for many of the Gold and Silver exchange traded funds. Yet they will not accept ETF trust Gold as collateral, even though they run the trust.What do they know that we don't?

In October, the clearing house for the global exchange, CME Clearing - announced it will now accept Gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, Gold, grains, equity indexes and Treasury bonds. Given the current monetary macroeconomic and geopolitical risk, Morgan's move demonstrates how attractive Gold bullion is as an asset and shows Gold's increasing importance to the world's financial system.

HAVE YOU EXCHANGED YOU GLD FOR CEF YET? What are you waiting for?

Silver prices remain in backwardation, showing that buyers are willing to pay a premium for Silver delivered sooner rather than later. Both Gold and particularly Silver are getting increasingly vulnerable to a short squeezethat will propel prices beyond their recent highs. In the Gold market, there are some 80,000 short contracts, which is more than 30% higher than the average short position in 2010. Gold is vulnerable to hits during the time that China temporarily suspends its Gold buying program. China has found a way to purchase high volumes of Gold bullion at a discount. The discount is essentially the Eurobond sovereign debt discount, which might be in the 10% to 20% range in return for rescuing the PIIGS debt, but at a price of their forfeiture of their Central Bank's Gold. But unlike the illegal and immoral American (western) way of back door, behind the scenes dumping of Gold in their futile attempt of going against the trend, China is much more sophisticated politically and economically (because they have patience and concentrate on foresight). They are just stepping back, holding off on their Gold purchases and letting the market come to them. Meanwhile, they are off loading their (shrinking value) pile of US T BONDS (now down to $800 Billion from $1.5 trillion) in exchange for Euro Bonds with the promise of being able to exchange their Eurobonds for Gold.

CHEAP GOLD: So we, as individuals, have a choice. We can let ourselves get caught up in the Chinese trap, as our erstwhile Government will be, or we can take advantage of the situation and accumulate some cheap Gold NOW along with the Chinese. What does Rohm Emanuel always say? "Never let a good crisis go to waste" As usual, they are thinking at least 20 years ahead. The Gold and Silver price will rise soon enough for the patient minded as the physical market wrests pricing control away from the discredited Comex and LME.

NOTE: I do not trust J.P. Morgan or any of the other major banks. But it is JP MORGAN that I am really worried about since they control the GLD. So to be safe I have converted all of my GLD holdings into CEF. Not only am I now sleeping better, but CEF has been performing much better than GLD since CEF is 67% Gold Bullion and 33% Silver Bullion and Silver has been and will continue to outperform Gold both up and down.

Sure Gold was recently at a new two-month low (down a whopping 8% WOW) and the Johnny come lately Gold experts have come out of the woodwork trying to vindicate themselves for being bearish for the last 10 years. Prechter is bearish on Gold and Silver, so what, he has been bearish on Gold, Silver and the stock markets since 1987. But not to worry: We all heard the same rhetoric when Gold bullion fell from $725 to $575 in mid-2006 (a 20% correction), about the same time that I published my $6,250 by 2017 projection) and again in 2008, when Gold bullion fell from $1,000 an ounce in March 2008 to $750 an ounce in October of that year (a 25% correction).

(Being a simple man) My view on gold bullion is simple: The Precious metals have been slowly but steadily rising in price for more than a decade. Last year was a year many novice PM investors got into Gold stocks for their 1st time and they are now getting their 1st test of fire. Remember, all bull markets "do whatever they have to do to shake out all of the weak sisters" and Gold is no exception. How many of you succumbed in 2006 and/or 2008 or would have had you not been an UNCOMMON COMMON SENSE subscriber? From its peak of about $1,422, Gold is only off about 7%. Let's not forget that less than 1% (largest guestimate is 3%) of total world financial equity is invested in GOLD. Does that sound like a full blown over owned, over priced BUBBLE that has now come to an END? Besides, bubbles are created by government meddling in the economy and not by doing everything in their power to manipulate prices lower. Let me remind you that for more than 25 years, there was a widespread agreement among Western Central Banks and the IMF to continually sell Gold and it has only been in the last year or so that not only have they stopped selling, but that Central Banks all over the world, especially China, India and Russia now including Germany and France have started massive Gold accumulation programs.

THE DEAD HEAD FED

Officially, the Federal Reserve System had a dual mandate: Promote price stability and maintain full employment; two mandates that by definition work at cross purposes. No wonder they don't know if they are coming or going.

Now it has admitted to a third mandate. Let us examine the modern Central Bank propaganda that wants us to believe inflation is the increase in the general level of prices as defined by them using all kinds of mathematical chicanery, such as substitutions (jumping back and forth between rentals and ownership), omissions (leaving out food and energy), and reducing prices due to product improvements. All with the sole intension of confusing the public, so as to avoid paying COLA clauses on Social Security, Pensions and a myriad of other inflation adjusted contracts. But most of all, convincing us that the economy is growing when anyone with a ½ a brain knows better.

INFLATION is in all cases a MONETARY PHENOMENA: It's simply an increase in the money supply at a faster pace than growth in GDP. Rising prices are but one of three possible symptoms of money supply inflation. The second is speculative bubbles. And the third is an unstable economic structure.

This third symptom is probably the least understood. Increases in the money supply seduce entrepreneurs into investments that appear profitable, but only because of artificially low interest rates. As soon as interest rates are forced to reverse course; due to rising Inflation- these "malinvestments" become obvious and are forced into Bankruptcy. When the economic boom brought about by the Central Bank's money supply increases comes to an end, a recession begins. The larger the money supply growth, the larger these malinvestments imbalances are that will sooner or later have to be corrected. Up until now, speculation has been concentrated in both the commodity and stock markets. Just examine the charts of the sure thing, HOT emerging markets such as India, China, Brazil, etc. They have all topped out and are now leading the world markets down; just as they did in 2007 and 2008.

On November 9th, the government and the financial establishment made it clear that they are declaring war on the precious metals. They are about to find out that this time they are not up against just two Hunt brothers, but the brotherhood of all of humanity who is turning its back on this failed centrally planned financial system and returning to an honest, free-market money.

THE FED HAS LAID THE CORNERSTONE FOR ANOTHER SEVERE RECESSION

The current economic cycle is built on both the Fed's biggest percentage and absolute largest increase in its monetary base in history in their failing attempt to keep interest rates near zero. Fed Chairman Bernanke made a rather pitiful impression during a recent CNBC interview. Steve Leisman announced he would ask a few hard-core questions. To some extent he did. But he did not ask how money printing could ever create wealth - or employment. He also didn't ask how anyone, besides the " Free Market", could ever know the "right" interest rate(s) for a whole world economy. Nor did he bother to ask about the Fed's role in pumping up the housing bubble. But he did ask how Bernanke could claim QE2 was a success since both interest rates and commodity prices have risen since he first announced QE2. Nor did he ask, if the economy is recovering so nicely, why the need for QE2 and the hint for QE3?

Bernanke's response: "Our Policies have contributed to a stronger stock market just as they did in March 2009, when he initiated the first QE. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus." So finally it is official. The Fed has secretly adopted a third mandate by aiming directly at making stock prices rise via its quantitative easing policy. Obviously, Bernanke and his Harvard brain trust haven't learned a darn thing from two successive bubbles and their aftermaths. Do they actually believe that this time they got it right? Or are they just too dumb to know any better?

HOW TO PROTECT YOURSELF AND PROFIT FROM THE FED'S INFLATIONARY AND DESTRUCTIVE LONG-TERM POLICIES

First, look into adding Gold/Silver to your portfolio. Gold is currently in a normal and healthy correction, and it might not be over yet. But in light of the Fed-induced unstable economic structure that's bound to collapse, buy CEF, a Gold and Silver (Canadian) closed end fund (listed on the NYSE & TSE) that invests 67% of its money in Gold Bullion and the 33% balance in Silver Bullion.

GOLD and SILVER

Gold and Silver may be marginally lower in all currencies, but recent action suggests we may have seen a capitulated selloff and are in the process of bottoming out. Physical demand remains robust and both jewelers and investors are using the sell off as an opportunity to buy on the dip. Demand for US Silver Eagles exceeded the 1986 monthly sales record by nearly 50% with 6,422,000 one ounce Silver bullion coins sold last month One day last week saw another 50,000 Silver Eagles sold showing demand for Silver remains very strong.

Premiums for Gold bars in Hong Kong and Singapore remain at the highest level since 2004. While Chinese New Year demand seems to have ebbed, they are simply being astute traders bringing down prices so that they can buy more lower. Meanwhile, wedding season in India is next month and Indians will accumulate on the dip as they always do. Gold imports in India, the world's largest consumer of the precious metal, rose 18% in January to 40 tons. Indians buy Gold, and increasingly Silver, at religious celebrations and weddings and use it as a store of value and as a dowry.

Should we encounter another bout of deflation and a double dip recession in the US and global economy, we could see a sell off in commodities - at least in the short term. BUT THAT SELLOFF WILL NOT INCLUDE Gold and Silver. Because of safe haven investment and store of value demand, Gold and Silver will perform well, just as they did in the deflation of the 1930s, during the inflation of the 1970's and during the recent bout of deflation (2008 - 2009) and as they in the current and ongoing global financial and economic crisis.

STAY THE COURSE: All of my long term readers were not surprised by the shenanigans of the last few weeks. It was discussed and called for in my recent letters. There are rarely any major surprises once you analyze recent political events with an open mind and without pre-conceived ideological positions.

The Federal Reserve is now blowing UP the biggest bubble in recorded history. When it pops - as eventually every bubble must, millions of Americans will be financially devastated... But others will have the opportunity to get Much, MUCH Richer. Is now the time to try and sift through all the BS and misinformation all by yourself? Is now not the most important time of your life to be able to read between the lines in the search for the TRUTH?

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
[email protected]
561-840-9767