Living on Borrowed Time

The great astronomer, Carl Sagan, who like me was a strong believer in skeptical inquiry, used to say, one of the saddest lessons of history is this: "If we've been bamboozled long enough, we tend to reject any evidence of the Bamboozle. And we're no longer interested in finding out the truth. The Bamboozle has captured us. It is simply too painful to acknowledge - even to ourselves - that we've been so credulous".

Yes, the bias is still very positive as the government's propaganda machine keeps pumping out favorable numbers, or at least a very positive spin of them and investors both large and small continue to be bullish to an extreme, as the market continues to inch its way higher on ever declining volume.

"YOU CAN"T FOOL ALL THE PEOPLE ALL THE TIME"

The Fed is actively pursuing what they think will be a market-based "wealth effect" - where higher stock prices is believed to encourage more spending by both individuals and business. The Fed has been successful in driving up stock prices thus far, but they seem to be losing the battle in maintaining bond prices. The BIG question is: How much longer before reality sets in?

The credit illiquidity that devastated financial markets in 2008-09 is about to re-assert itself. This suggests that the next phase of this Bear Market will probably begin with the Bull Trap snapping shut some time between now and the 1st week in January; as the market attempts to push through to a new recovery high.

Just as in 2007, liquidity is quickly starting to dry up virtually across the board, spreading from Greece to Ireland to Portugal to Spain with Italy not far behind. The cancer is also spreading into the European heartland to Belgium and France and engulfing the new eastern states as well. For the time being, the Euro's weakness is lending some strength to the Dollar, but can America be far behind?

In a normal and healthy up trending market, you would always have profit-taking sell-offs along the way that shake out the weak sisters as the market climbs a wall of worry. However, for the last year or so, at the slightest sign of a correction, Bernanke and his liquidity hose rushes in to stop any correction from developing (for fear that both the economy and markets will resume their downward spiral), all of which is not normal and can't last. For the last month or so, we have also seen an acceleration in group rotation with even the banks finally participating, which is a market ending sign.

There are serious questions regarding the scale of "QE2." Some are worrying that QE2 is smaller than they were hoping for; while others are worrying that QE2 will soon be followed by QE3. Since every Ponzi scheme must eventually come to a terrible end, how much longer can Ben keep his two Ponzi (Bonds & Stock) schemes going? That is why this skeptic keeps seeing ever increasing market risk that will probably result in the biggest BULL TRAP in history.

Economist Nouriel Roubini ("Dr. Doom") known for calling the housing market collapse (a year after I published my warning in "DENIAL"), suggested that the U.S. is a "fiscal train wreck" that could see the country face stagnation with slow growth, high unemployment, deflation and huge civil unrest.

Unemployment in the Euro zone, as in the USA, continues to be a major problem as unemployment surged to a 12 year high.

Japan, cut its 2011 and 2012 GDP estimates after the country's industrial production declined for the fourth month in arrow.

With continued problems in jobs, housing and flat government spending, you really need to step back and examine the prevalent risk to the stock and especially the bond markets. The rule may be,"The Trend Is Your Friend", but you must be mindful that TRENDS change so be watchful for that inevitable TOP.

BANKS

The banks' ultra low interest rate costs and the pairing down of their loan loss reserves have provided most, if not all, of their profits without the necessity of engaging in normal bank practices (like lending money). Although profits were up 11.5 % in the 3rd quarter, it compares to 135% in the 2nd quarter and the 49% in the 1st quarter. Moreover, non-financial profits slowed dramatically to 8.6% from 25% in the 2nd quarter and 52% in the 1st quarter. So as for their financial profits are concerned, they are decidedly unreliable since they are all due to the Fed's generosity; a payback for their complicity in monetizing the Federal debt.

SENTIMENT

Bullish Sentiment has shot up to extremes for both the little guys and the pros reaching levels last seen in December 2007. The main question is, "Can the economy really have bottomed and begun that cyclical bull market that they claim formally began in September 2009?" We are being constantly bombarded by all the great indicators by our one way cheer leading media economists and analysts. However, there are still a few questions that I would like to pose that no one seems to even want to mention, let alone discuss. Number one is the Bush tax cuts which, if not extended, will end up being the largest tax increases in history. Number two is the price of oil. It recently hit $90/bbl+ and should the world continue to expand, a move back to $140/bbl and more would end up being an even larger tax increase, resulting in a crash just like the last move to $145/bbl set off. Extending the ban on off-shore drilling for another seven years so that the country with the world's largest oil and gas reserves cannot access its own wealth dooms us to be dependent for our energy needs on the likes of Chavez and Iran. We might still be able to make it, but the tax increases don't stop there. The Obama Care new taxes have already started and continue to increase every year until they really take off after the 2012 elections. Take a look at your pay stubs and you will see how much health insurance costs have increased due to the new mandates already being imposed on insurance companies. The States are also looking for ways to increase taxes. There's more, but for the moment they have slipped my mind. With these facts already in evidence, can we really expect a booming economy and a further 20% increase in next year's corporate profits and stock markets?

Next we come to QE2. Since QE1 did not solve anything, except kicking the can down the road a ways and in my opinion, creating the stock market bubble that we are now in, what can we really expect from QE2 and is there a QE3 on the horizon as Bernanke has already hinted at? If the economy is so good, why do we need all those QE'S?

CHINA

Try steering through the hype: Inflation is exploding and is now up at (an under reported) 4.4%. Their real estate market is also in a Giant Bubble, even larger than was our own and they do not even have economists who are allowed to voice their opinions. Are we expected to believe that they can side step the trap that both Japan and then the US found themselves in as we followed Japan step by step into the Socialist abyss? It should come as no surprise to any of my loyal fans as I have been predicting this for over a year now. G-D only made one set of Natural Economic Laws and like it or not, we all must end up suffering their consequences for not following them. (Remember that old butter commercial, "It's not nice to fool Mother Nature.")

The most vociferous and ardent commodity bulls are also China bulls, and rightly so, given that the price gains achieved across the industrial commodity complex over the past 12 months can only be justified by making the assumption that China will continue its rapid growth. China's importance to the commodity world stems from the fact that the bulk of its growth revolves around fixed-asset investment, which means that the growth is commodity-intensive. The risk to the bullish case is that a substantial chunk of this growth in fixed-asset investment is linked to a building boom that, to put it mildly, does not appear to be sustainable. It is nothing new. China's current building boom ranks with the construction of Qin Shi Huang's tomb* as one of history's all-time great examples of mal-investment.

My reasons for being bearish on China and, by extension, on commodities, such as iron ore, copper and even oil is that they all rely heavily on Chinese demand. One of my reasons is that a lot of the residential and commercial buildings that have been built over the past few years remain empty, and yet new buildings continue to go up at a frenetic pace. There appears to be a complete absence of traditional return-on-investment considerations, especially in the residential property market, in that investors often have no intention of generating any rental income from the houses and apartments they purchase. Renting is thought to be pointless, because even if a tenant could be found, the yield would be so low that it wouldn't be worth the trouble. Instead, the thought is simply to buy a property, hold onto it for a few years, and then sell it for a large profit. In other words, in China today the "greater fool theory" is the predominant practice on a phenomenal scale. Check the FXI and tell me that it is in a Bullish Phase. Remember China led the market crash in 2008: Is it now leading the worlds' markets down once again?

NOTE: China's holdings of Treasuries have dropped from $2 trillion to under $800 billion: Most of that money has been used to buy up appreciating Commodities instead of holding on to their depreciating US $'s The Chinese will soon pair down their holdings to a point where they will stop buying commodities which will also mark the end of the commodities BOOM:

I have warned in past missives as to what will happen when you start a war with your banker who also happened to be holding all the cards.

If this bull trap rally lasts much longer, it will end up being Santa's biggest present ever - at least to those of us who take advantage of this last chance to get out and get short before the biggest bear trap in history slams shut.

WILL WE EVER LEARN?

Monetary inflation (QE's) is invariably the driving force behind today's major investment bubbles, the reason being that a steep multi-year upward trend in prices could never occur within an important sector of the economy (such as real estate) without a veritable flood of new money. This time around, there is little if any investor money coming into the stock markets. The new FIAT money and its price-related effects are not spread out evenly over the economy. Some prices always rise faster than others, which can set in motion a self-reinforcing feedback (an increase in price attracts investment/speculation that leads to an additional increase in price, etc.) that eventually reaches bubble proportions. If the money-supply growth that supports the bubble then slows or stops, the bubble bursts and the consequences of years of poor resource allocation come to the fore. Alternatively, if the monetary authorities decide to keep the money supply growing rapidly in an effort to postpone the 'day of reckoning', the eventual result will always be hyperinflation.

HOW NOW DOW

Markets remain in a dull and uninteresting UP SLOPING TRIANGLE ending pattern. Could this be the calm before the storm, which should end some time between XMAS and the 1st week of January 2011. Looks to me like the markets are putting in the third major top of the major topping process that began in 2000. Now is the time to evaluate the strategies you intend to employ to both protect and profit from the coming deluge. We are just like Noah who knew that the great deluge was coming, but did not know exactly when it would begin.

TRADING SUGGESTIONS

As much as my EGO enjoys picking tops and bottoms, at this moment in time the safest, best and most profitable trading strategies is to stick with precious metals trading. WHY? One thing for sure is because we KNOW what the primary trend is and if you stay with the primary trend, with just a little patience you won't go wrong. The last 10 years should have told you that.

However if you insist on the Trading Stock and Bond Markets, it is my considered opinion that we are facing a situation where the monthly, weekly, daily, 60 minute, 30 minute and 15 minute Full Stochastic are in overbought territory. We also have Bullish sentiment at or near record highs, which is as I have often explained in the past a very bearish indicator. We are also witnessing inter-market divergences, which is also very bearish. And the S&P is in a rising bearish wedge pattern. Put it all together and we are in the final stages of a MAJOR TOP culminating sometime between now and the 1st week of January 2011.

Spend the next 2 weeks lining up the stocks that you want to short or instead you can start scaling in by buying puts on non-leveraged Index ETF's into every 50 to100 point rally into the 1st week of January, which is the maximum this final meandering rally is expected to last OR you can wait until next year. The coming crash will be so dramatic that even if you miss the first 10%, there will be plenty more left for you to profit from.

China's growing importance to the precious metal markets was underlined by the news that Chinese Gold imports have surged by more than 500% due to increased investment demand. Incredibly, China's Gold imports were five times higher in the first ten months than in the whole of last year. Imports hit 209 tons compared to 45 tons for all of 2009, according to the Shanghai Gold Exchange. Trading volume of Gold on that exchange for the first 10 months rose 43% to 5,014.5 tons. Chinese buyers concerned about inflation are looking to Gold as a store of value. Chinese people do not have trust in paper currencies due to their experiences with an authoritarian government and hyperinflation. Most of the 1.3 billion people in China only began to acquire and own Gold in 2003 as Gold ownership was banned from 1945 to 2003 and their demand has increased from a near zero base. This means that the increase in demand is very sustainable and will likely continue as their wealth increases and their concerns grow about an overheating economy, inflation and a housing bubble (all lead to further diversification into Gold). Nearly 16% of global Gold demand went to Chinese households between July and October this year, rising from the previous three-year total of 14%. Chinese consumers bought almost half as much Gold since the global financial crisis began in mid-2007 as all investors living in the West.

A major force driving this increase is an ever increasing fear of inflation. October consumer inflation in China hit 4.4% compared to a year earlier - faster than expected and the hottest inflation in 25 months. Since Gold is a traditional hedge against inflation, Chinese consumers - who have no access to overseas Gold markets and funds - are rushing to buy Gold coins, bullion and bars. All this is on top of China's existing cultural affinity for Gold. The Chinese are big savers, and their favorite way to store their money is in Gold.

Lion Fund Management has just won approval from the China Securities Regulatory Commission to launch the Lion Global Gold Fund, which invests in Gold-backed exchange traded funds (ETFs) overseas offering an easy, brand new way to invest in Gold. Other fund managers in China are itching to roll out new Gold stock and bullion funds. This should unleash a tidal wave of investor demand, just like funds such as GLD, GDX,GDXJ, etc. did in the United States.

The Turkish people also keep about 5,000 tons of Gold jewelry "hoarded" who knows how and that amount is increasing as the Turkish economy is rapidly expanding and the people see the metal as a savings tool because of rising global Gold prices as well as their fear of inflation.

Global investment demand for Gold of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades.

SILVER

Chinese demand for the 'poor man's Gold' is also surging. 18,900 tons of Silver went through the Shanghai Gold Exchange in November, higher than the total trading volume of 16,400 tons in 2009. It may trade as much 70,000 metric tons of Silver this year. The exchange traded 39,777 tons of Silver in the January to October period, an increase of 290% from the same time last year,

PALLADIUM

As a matter of fact, on November 30th the US Senate unanimously approved the coinage of a $25 face value Palladium bullion coin with a Mercury-head design and a weight of 1 ounce. Recently a new ETF was launched that is backed by physical metal and weighted 55 percent in Silver, 33 percent in Platinum and 12 percent in Palladium. This ETF is issued by ETF Securities Ltd. of New York, trades with the ticker symbol WITE on the NYSE.

GOLD

Gold is up another 29% this year and is heading for its 10th consecutive annual gain, the longest winning streak since at least 1920 in London. This is mostly due to the inflation demand for an alternative asset to protect against the debasement of currencies. In truth, bankers are greedy self-serving parasites whose dispensing of credit ultimately leaves societies, businesses and nations bankrupt on the gallows of compounding interest on debt that has now become so large that there is no hope for repayment.

As far as Gold and Silver are concerned, my last 10 years recommendations have not changed. We are still only a little more than half way through this Golden Bull Market. Do not sell out of your core positions. Use any $100 to $200 selloffs as a Golden Opportunity to buy more. My LT targets are still $6,250 Gold and $215 Silver. So, if you are light on Silver, buy more Silver as it will out perform Gold for the near future. I will be publishing a new list of recommended stocks sometime early next year.

 

 

GOOD LUCK AND GOD BLESS

STAY THE COURSE: All of my long term readers were not surprised by the shenanigans of the last few weeks. It was all discussed and called for in my last few letters. There are rarely any major surprises once you analyze recent political events with an open mind and without pre-conceived Ideological positions. The most frequent mistakes I usually make are ones of timing. I seem to continually underestimate the stupidity and ignorance of our Keynesian Economists and Politicians who are continuously lying to the public.

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