Seven Lean Years

GOLD AND THE DOLLAR

I won't keep you in suspense as I am sure you all want to know about Gold and the Dollar. To be as succinct as possible, the Dollar may go up in the short run and its rally may even last a few weeks or even a month. Nevertheless it will only be a Dead Cat bounce: The US $ remains in a major BEAR Market and after listening to Bernanke's latest speeches he will be in effect doing everything in his power to continue to weaken the dollar, as his focus is on the economy and jobs. Not exactly what the FED was originally set up to do: Maintain the Value and Stability of the Currency. But as far as the Dollar is concerned his and Geitner's only policy is to simply try to talk it up. Believe or not the Government, the FED and the Treasury actually believe that they can INFLATE themselves out of their DEBT BUBBLE.

Exit Strategy: You got to be kidding. Each 1% increase in interest rates increase the Fed Debt by $250 Billion a year. And would trigger a Treasury Bond Collapse.

When it comes to GOLD, it is a completely different story. GOLD is in a Major Bull Market that has another 7 years minimum to run. GOLD has completed a perfect Elliott 5 Wave move when it hit $1227. However that 5 wave move was only Wave (3) of a larger degree WAVE (III) which after a Wave (4) correction, still has an even more explosive Wave (5) yet to go, to complete Wave (III)

The good news is that even that won't be the end of the GOLDEN BULL. Then after a 2 or 3 year Diagonal Wave (IV) Consolidation (correction) we would then still have Wave (V) to look forward to complete this entire Bull Market in GOLD sometime in 2017 or so. Keep in mind that in the last 1971 - 1980 Golden Bull 66% of the entire move took place during the last 16 days: The result of a combination of GREED and FEAR. My long term target still stands at $6000: So Don't Panic and just stay Tuned.

GOLD IN THE SHORT RUN

That explosive move into $1227 (pretty close to my year ago projection of $1250 by the end of 2009) was in itself an Elliot Wave 3ed Wave, with an EXTENSION in its 5th wave. All you Elliott Wavers should know thatExtensions, always pull-back to the beginning of the extension and are then ALWAYS DOUBLY RETRACED, either forming the beginning of a sideways 4th Wave Diagonal Triangle or the beginning of the 5th wave. So what ever you do. DO NOT SELL YOUR CORE POSITIONS. Gold might pull back as much as 10% but not for long. HOLD ON TO YOUR CORE POSITIONS.

GOLD DOES WELL DURING PERIODS OF BOTH FEAR AND GREED AS WELL AS DURING RAPID INFLATION AND/OR DEFLATION.

JAPAN: A HISTORY LESSON

Heavy government stimulus spending and near-zero interest rates did little to end their "lost decade" (now quickly becoming 2 lost decades) of stagnation and mushrooming debt. More than a few economists and lawmakers are now joining me in warning that the U.S. is heading down that very same path. However, most economists and politicians who agree with me seem to ignore the basic Laws of Economics, arguing that the differences between the American and Japanese economies and business cultures make America less susceptible to a prolonged period of economic lethargy. While the debate rages, both sides agree that Japan's painful experience offers the U.S. a lesson on how attempts at stimulus can go terribly wrong. More importantly, God's Natural Laws of Economics always will out.

Japan's bubble economy burst in 1990 and its tax, borrow and spend policies caused it to lapse into a lost decade. Struggling to regain its economic footing and manufacturing competitiveness, Japan is about to lose its standing as the world's second-largest economy.

David Wyss, Chief Economist for Standard and Poor's, warned that a "drawn-out period of economic stagnancy like Japan's is a possibility". Stock prices bottomed in Japan in 2003 but then hit an even lower low in 2008. Japan's Nikkei Stock Index, now still stands about 80% lower than where it was 20 years ago. In the meantime, Japan has managed to amass a national debt that is nearly twice the size of its $5 trillion economy, the biggest deficit, percentage wise of any major economy and that all took place while running huge Balance of Trade Surpluses.

The U.S. National Debt of $12 trillion, by contrast is only now fast approaching the size of the overall economy ($13.6 trillion). As staggering as that is, the ratio is half that of Japan's, but for how much longer? Our own government projects that our deficit will grow to (an understated) $21 trillion within the next 10 years and that is assuming a return to 4% average, annual real growth rates. Yet we all know how understated government projected deficits are and how over stated real growth rates are. Despite early signs of recovery and a strong (in nominal terms only) U.S. stock market rally, fears persist that the failure to generate new jobs could drag the economy back into recession or result in a protracted Japan-like period of poor economic and stock market performance.

"It seems to me we are following along the exact same path that the Japanese took in their `lost decade' -- of running up huge government debts, raising taxes and restricting economic growth." I to have made similar observations as Wyss who has drawn comparisons between the stock market today and the 1930's. A furious rally following the crash of 1929 carried prices to within 18% of the pre-crash peak and investors were relieved that the worst was over for the economy and stocks - only it wasn't. Economic conditions had deteriorated and would continue to slide due to the heavy anti-business rhetoric and policies of the NEW DEAL(sound familiar) stocks then embarked on another leg down, losing an astounding 80%.

Most of the Wall Street Investors as well as the Government have a tendency to dismiss the 1929-32 climactic decline as irrational and see the current advance as the real deal and therefore a 1930's phenomenon that will not be repeated. They completely disregard the numerous economic imbalances that must be corrected and that this will be a sufficient drag on growth to produce "seven lean years" for corporate PROFITS and the stock market returns.

Major imbalances are unlikely to be quick or easy to work through. For example, we must eventually consume less, pay down debt, save more and encourage private capital Investment. That is the only way to readjust Global trade imbalances.

NOTE: Even J. M. Keynes recognized and warned against the anti-Business anti-Capitalist Rhetoric as the major cause of the extended Depression.

The feeling of being left behind in not reinvesting is nerve-wracking for us prudent investors to sit on the sidelines and watch 9 months of Rally with hardly any correction or pullback; you must have patience and wait for the IRRATIONAL EXUBERANCE to explode; but rest assured that before the end of January 2010 the market will provide the irrational with a very rational wake-up call.

"The housing crisis is NOT over"

I agree with Mark Zandi, Chief Economist with Moody's when he said "I think we're going to see another leg down." Mortgage applications for home purchases fell to a 12-year low and foreclosures rose to record highs in the third quarter, according to reports from the Mortgage Bankers Association. An index measuring November homebuilder confidence came in much lower than forecast and The Commerce Department on November 18th said residential building dropped 11% in October to the lowest level since April's all-time bottom.

The $8,000 federal tax credit for first-time buyers, extended by President Barack Obama on November 6th, drove existing home sales to a two-year high in September. At the same time, a 26-year high in unemployment is keeping many buyers out of the market and pushing existing owners into foreclosure. Like all Socialist measures they end up doing MORE HARM THAN GOOD by delaying the correction process from resolving the economy's imbalances.

The thing that drives business the most is capital Investment which in turn drives job creation," Donald Tomnitz, Chief Executive Officer of D.R. Horton, said "If we look at the macro economic environment, it's not good for us."

U.S. companies have shed 7.3 million jobs since December 2007, the largest contraction since the Great Depression, and the unemployment rate jumped to 10.2% in October, the highest since 1983, according to the Bureau of Labor Statistics. "You don't pay a mortgage with government manipulated economic output or a welfare check - you can only pay a mortgage with a regular paycheck."

Existing home prices probably will fall 12% this year to a median of $173,800, while the new home median price likely will tumble 8.7% to $212,000, according to a forecast on the Fannie Mae's Web site.

FORECLOSURE PLAGUE: NO CURE YET

The foreclosure plague continued to devastate. There were more than 360,000 properties with foreclosure filings - including default notices, scheduled auctions and bank repossessions - an increase of 7% from June and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes. In fact, one in every 355 U.S. homes had at least one filing during July. "July marks the third time in the last five months where we've seen a new record set for foreclosure activity," said James J. Saccacio, Chief Executive Officer of RealtyTrac. "Despite continued efforts by the Federal Government and State Governments to patch together a safety net for distressed homeowners, we're seeing significant growth in both the initial notices of default and in the bank repossessions." The jump occurred as several foreclosure moratoriums phased out. They were initiated by many states to give the administration's foreclosure-prevention efforts time to work. The modification and refinancing programs have met with less success than hoped.

They have actually made matters worse as the $8,500 credits attempts by the government to halt foreclosures and encourage artificial sales, has put a temporary prop under falling prices, encouraged new construction FORESTALLING the inventory clearance of a normal market from working and thus is prolonging the resumption of the market from correcting itself: Which is a pre-requisite for the economy's return to normal growth.

RealtyTrac statistics revealed that more than 87,000 properties were repossessed by lenders, effectively sending many families out of their homes. There have been a total of 464,058 repossessions - or REPOs in industry parlance - so far this year (through the end of July).

"We're seeing more option ARM resets, triggering defaults and more prime loans, which are failing due to job losses," said RealtyTrac spokesman Rick Sharga. "That is resulting in more filings on higher priced homes, for two reasons: 1). Option ARMs were typically used for more expensive properties; 2.) Borrowers using prime loans generally had better credit and were able to afford more expensive houses."

Can't the Government get it through their thick heads that the only solution to the housing crisis is to clear the overhanging supply of homes and JOB CREATION brought about by real economic growth?

CELEBRITY BANKRUPTCIES MAY HIT 1.4 MILION

"Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by December 31st as jobs are lost and loans are harder to get," according to the American Bankruptcy Institute.

"More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34% more than in July 2008," the ABI said in its latest report on August 4th. The increase came after a 36.5% rise in personal bankruptcies nationwide in the first six months to 675,351, according to data collected by the National Bankruptcy Research Center.

"Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year. Debt problems don't stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million. Also last month, con man lawyer Marc Dreier's luxury Manhattan condominium sold for $8.2 million, 21% less than what he paid two years ago."

"Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co. reported more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. CEO Jamie Dimon said he doesn't expect the credit card business to make a profit this year or in 2010 and the company increased its loss projections for prime and subprime mortgages."

CHINA

The Chinese absolutely hate the Obama/Geithner/ Bernanke easy money policy that is driving down the dollar to ease America's debt burden and increase U.S. exports in an attempt to steal exports from the rest of the world. They're not going to sit idly by and take it laying down.

That's why President Obama and President Jintao never addressed this key rift between the world's two largest trading partners in their joint statement, citing only "past agreements" and no new ones. The reason is clear: They couldn't come to any agreement on the looming currency war that's being fought behind the scenes. UNFORTUNATELY CHINA HOLDS ALL THE CARDS.

China's 20% appreciation of its currency has cost it $400 billion on its $2 trillion hoard of US Treasuries The Chinese are not going to be played for fools as the falling dollar makes their trillions in Treasury Bills worth less daily, causes their exports to shrink and is fast creating a form of U.S. currency protectionism the Chinese will not stand for. China's chief banker says that it's the U.S. currency policy that needs to change-and not China's!

The Bible Teaches; you cannot change other people, you can only change yourself.

Unfortunately OBAMA is either not a Christian or if he is, he has already testified that he was not listening to his Reverend for the last 20 years.

GOLD vs. EVERY OTHER INVESTMENT

EVALUATING JUNIORS: Juniors should be evaluated like stocks were during the good ole dot.com days: If a company had earnings, there was always the traditional way of evaluation: But if a company was in their early dreaming stage and had no chance of being profitable in the near future, traders and investors would come up with all kinds of ridiculous ways to justify lofty prices and bid them up even more. That is actually quite common throughout life. The anticipation is always much greater than the realization, no matter how great the eventual realization actually turns out to be. BUY ON THE RUMOR SELL ON THE NEWS. That's why the worse a company was fundamentally, the better its stock price did in the short run. SELL INTO THE NEWS because no matter how great the news is, there is always a let down.

Although a few Gold analysts as well as every other analyst you see traipsing across your TV screens are already calling a top, it is mostly the same bunch who has been calling a top on every breakout since 2001 when Gold was selling for just $300. They will eventually call the top correctly, although I expect it will be a few years and a few thousand dollars from here. If you are tempted to listen, check their records. What have they been saying during the last few years? If they could not foresee either the top or the bottom of either Gold or the Stock market before, what has changed to suddenly have made them so smart now?

DO NOT LOOK A GIFT HORSE IN THE MOUTH

On Friday GOLD sold off as much as $35 at one point and yet it closed down only $15 after 8 straight up days breaking out to new all time highs. Because Dubai couldn't pay its bills, Gold has lost its SAFE HAVEN STATUS and the US $ rallied because it suddenly regain its status. Give me a break! Nothing has changed or if anything, it has only changed for the better for GOLD and if there are any forced liquidations to meet margin calls (not on gold) that will be an excellent opportunity to buy GOLD and Silver Cheap. DON'T PANIC KEEP YOUR HEADS. If gold rallies on Monday you can sell 2 or 3 month calls against your long positions and or Buy December PUTS. Should we get a 10% sell-off in Gold the PM stocks sell-off will be even larger. Make sure you buy into that sell-off.

HOW NOW DOW

Wall Street tells you it's the beginning of a new Bull Market and stocks look great. Don't believe it. And whatever you do, don't bet your money on it. Look beneath the surface of the so-called recovery and you'll see enough trouble brewing to make the sub-prime market meltdown of 2008 "look like a walk in the park."

I have been looking for this market as well as the rest of Worlds markets, including China to TOP OUT for the past mouth or so. Maybe Friday was the STRAW THAT BROKE THE CAMEL'S BACK. I should have a clearer picture by Wednesday. Meanwhile stay with last week's strategy. If I get confirmation of a Break Down I will let you know. Mostly likely you will recognize it all by yourself. So Far keep your powder dry for now.

 

 

 

 

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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