Through A Looking Glass Darkly
"We are spending more money than we have ever spent before, and it does not work. After eight years, we have just as much unemployment as when we started and an enormous debt to boot."
-US Treasury Secretary, Henry Morgenthau, May, 1939
I forget who first said it, but it was, "A $ million here a $ million there, pretty soon we are talking about real money." It took approximately 20 years before it became "A $ billion here a $ billion there….." and it wasn't very long before "A $ billion … "became "A $100 billion…" Now, virtually overnight while no one was watching, it's become "A $ trillion here a $ trillion there…" Are we still talking about real money? And are we still not looking? We are certainly not trying to do anything about it.
International markets are forming major Bearish Topping Patterns. A warning that a Worldwide Cataclysmic Economic and Stock Market collapse is directly ahead.
HOPE vs. REALITY
Thanks to the endless barrage of Government feel-good propaganda, most citizens have no idea how disastrous the country's fiscal, monetary and economic problems truly are. Nor do they perceive the rapidly increasing risk of a totalitarian nightmare descending upon the American Republic. According to the Federal Reserve's most recent report on wealth, America's private net worth was $53.4 trillion as of September 2009. But at the same time, America's debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the people's net worth. That comes to $389,610 from each and every citizen. And that's not counting State, County and Municipal debts and deficits, which are additional and already elephantine in many states (e.g., California, Illinois, New Jersey and New York) and still growing at alarming rates nationwide. In addition to the Federal Government, dozens of states are already bankrupt and sinking deeper into the morass every day.
Since everyone in the private sector must cut back while their taxes are being increased up and down the line (from their phones to car registrations to Beer and Soda all the way up to income taxes), how about an across the board freeze on all Government hiring? Government employees earn on average double of what the private sector earns. Why not institute a 5% pay cut on all Government full time employees earning $75,000 or less and 10% on those earning $75,001 and more. This would apply to all pensions both present and future. All Cadillac Health Care plans would also be cut back to an average plan that the rest of the population must live with. This too would apply to all plans taken over by the Government due to company bankruptcy.
Forget about Greece and all the problems of the PIGS countries (that's Portugal, Ireland, Greece and Spain). If you haven't been keeping up with the financially unstable "sick men" of Europe, their problems are minor when compared to those of America. And they are not fighting any wars.
We are headed for a terrible reckoning, right here at home. We have spent like drunken sailors-$7.2 trillion in new debt-with little if anything to show for it. If Washington grabs control of health care, 33% of the GDP will have been nationalized in less than one year. The "official" number for our debt load is $12.3 trillion, but the nasty fact is that it is OVER $100 trillion, if you count our Social Security and Medicare obligations.
In the mind of most economists, especially Bernanke, Camouflaged Default, in the form of the total debasement of the dollar, is now his only option.
To begin with, we are facing a Chinese slowdown in growth or possibly even a Recession, due to their massive over-capacity and resulting unemployment as factories shut down, due to a huge shrinkage in their exports.
Secondly and what would be much more Dangerous is a possible Chinese banking system meltdown, similar to what happened in the USA. Both are brought on by the exact same reasons: Massive Speculation brought on by easy credit and ultra low interest rates that are now causing ever increasing amounts of bad loans. China's huge stimulus spending (4 times larger than the US stimulus in relation to its economy's size) in their efforts to avert a similar Bust in Real Estate caused even more massive overbuilding and huge land speculation.
If all that is not enough to shake your boots, perhaps even more dangerous will be the FED'S attempt at an exit strategy from their QE, without crashing both the Stock & Bond markets as well as the Economy.
Consumer Confidence plunged in February. The reading fell to 46 from 56.5 in January, a clear indication that things are getting worse not better. The massive number of unemployed and what is worse, of long-term unemployed, means we are seeing millions of people falling from middle class status into poor. But what is also reflected in this confidence number is the fear that what has happened to others can happen to you. The result is cut backs both in spending and investment as we migrate from Capitalism to Socialism under this Central Planning Government.
WHAT ABOUT THE HOUSING AND GDP NUMBERS?
I warned you all back in January that the Government's economic statistics were unrealistic; they were either complete fabrications or they were borrowing from the future, which must then be paid back. Well, the future is NOW! My guess is that all the fabrication was done in their mad rush to pass health care.
THE FDIC IS INSOLVENT
The FDIC reported that its reserves fell to a $20.9 billion deficit. They will now have to replenish their reserves through fees on banks, and borrowings and grants from the Central Planners. As of year end, there were 702 Federally Insured Banks on the FDIC's "problem bank list." That is one in 11 banks. As I have been warning you, commercial real estate loans are now going bad at alarming rates. This is the next major blow to hit banks and our economy. Meanwhile Nero fiddles, while Wall Street and the mainstream media sing his tunes. 140 banks were shut down by the FDIC last year and 20 have been closed so far this year. That means one out of 10, not one out of 11 is now in trouble.
WHO ARE THE OSTRICHES?
Investors seem to be sticking their heads in the sand and ignoring the real dangers. I guess we can't blame them with all the false and misleading information flooding the airwaves! Stocks are priced as if we were still living in the heyday of the late 1990s. The S&P 500 is selling for 21X forward earnings-well above the historic average even though it's fallen by nearly 1/3 over the past 10 years I cannot really explain this mass delusion. Perhaps it is a malady of the imagination, incurable by a few lone voices of reason - it apparently must run its course. This time around is the most dangerous in our history as it may lead to self-destruction.
The SPX is still staring up at the 1,110 area, which marks a 61.8% Fibonacci retrenchment of the Jan. 19, 2010 high and the Feb. 5, 2010 low. Finally, VIX watchers should take note that the CBOE Market Volatility Index (VIX) has declined to record lows; flashing A Great Danger Sign of Irrational Exuberance.
HOW TO PROFIT FROM CHINA'S NEXT MOVE
Since the March 2009 low, both economic and fundamental news on the state of the economy have played a major role in fueling the market rally. Most of the positive news on the economy came in the form of upward stock market action simply because the news was less negative than the prior month and/or year. Meanwhile, earnings estimates -- the one number Wall Street can really "control" -- was constantly beaten by firm after firm. It should have made earnings season a positive time for the market, but it only stagnated. While most companies beat their estimates, most did not beat their revenue estimates. This meant that cost-cutting, inventory and creative bookkeeping was the reason for their good earnings, which will catch up to them probably in their next earnings releases in May. SELL IN MAY AND GO AWAY will come early this year as the astute can read the writing on the wall. This is especially true since cost-cutting shows retraction, not expansion, and should not be viewed as a positive thing. Expansion shows growth and economic recovery; while retraction shows continued recession.
HOW LONG CAN THE PHANTOM EARNINGS PERSIST?
In my opinion, companies who beat estimates through employee layoffs, cut backs on their R&D, maintenance, and equipment replacement is both extremely negative and dangerous, certainly not anything positive that should encourage the purchase of their shares. Obviously, led by Wall Street's Propaganda, the market disagreed with me. While almost all companies reported numbers that beat expectations -- very few actually did so by increasing their sales as opposed to reducing their costs and expenses.
WHERE DO WE GO FROM HERE?
Personally, before I try to look forward, I start off by looking at where we are now and how did we get here? Then, I examine Government policies (especially New Regulations, New Taxes and New Spending) and compare them to a similar situation period in the past and examine what the effects were of those similar governmental actions. In this vein, I have come to the conclusion that today is most similar to 1930, only the US economy is in a much weaker state today than we were back then, when we owned most of the world's Gold and were both the world's largest exporter and largest creditor nation. Yet we are embarking on almost the exact same governmental action that only served to bring us into a Depression.
WHAT WILL TODAY'S POLICIES RESULT IN?
It is a little known fact but true nonetheless that Socialist policies have never worked and that only Free Market (Capitalist) policies can pull us out of the quagmire that the USA is now in. Spending our way out of Recession by increasing our debt can't possibly work since it was excessive debt and spending that got us here in the first place. Continued deficit spending will definitely make the situation worse.
Natural Economic Law as well as empirical evidence tells us that increasing taxes LOWERS TOTAL revenue Inflow. UNLESS we cut our ever expanding budget deficits, we will be well on our way to a Weimar Republic type Hyper-Inflation, Depression. Obama, like FDR, will turn what should have been no more than a 2 or 3 year Recession into a 16 to 20 year Depression. The only chance we have is for Obama to read the polls and reverse his policy initiatives by stopping Cap & Trade, Healthcare and Card Check dead in their tracks. If these three proposed policies are implemented, just as they were in the 30's, they will translate into a MASSIVE TAX INCREASE and there will be nothing we can possibly do to stop the coming DEPRESSION.
WE NOW KNOW CHINA'S MOVE ... WHAT WILL OURS BE?
China has decided that it is going to put the brakes on its economy. It has already raised interest rates and taken several steps to slow down their bank's ability to lend. China is making every effort to prevent their real estate bubble from imploding. With these measures, Chinese demand is sure to slow which will lead to lower imports and especially lower commodity prices and less profit for U.S. companies doing business there. This is a major problem because the only U.S. companies that showed any reasonable sales growth did so because of Chinese demand. Shut down that demand and earnings get shut down as well. The perennial Bulls may claim that these companies will make up the shortfall in sales in upcoming quarters elsewhere, but not me, since we already know that U.S. sales have been decreasing. And the latest news out of Europe shows that they have big problems of their own.
U.S. DOLLAR IN THE SPOTLIGHT
Now that the U.S. dollar has come off its lows: The news out of Europe concerning the credit crisis in Greece -- not to mention Spain, Ireland, Iceland and Portugal has weighed heavily upon world currencies and has particularly impacted the Euro, causing a flight to safety… into the U.S. dollar. However the strengthening dollar is not a positive turn for U.S. companies' overseas sales and earnings.
MARKET MELTDOWN LOOMS
Don't believe the hopeful numbers, another market meltdown looms - we are in the midst of The Mother of All Sucker's Rallies. For those who aren't fooled by it, some tremendous Short Selling opportunities await you.
I have checked the charts of every major as well as most minor stock exchanges and every one is in the process of forming a massive top. Most now only require a break of their neck lines to confirm a massive Head and Shoulders top. They are not a pretty sight unless you are a SHORT SELLER sitting in cash just waiting for a Break Down confirmation.
STICK with our program of the last few letters: Make sure that you maintain your stops. The only sure thing is that: The markets will do whatever they have to do to make the majority wrong. Should the Stock Markets drop down to a new reaction low, I will issue a SPECIAL BULLETIN to all subscribers. In the meantime, prepare your shorts list and get short as soon as you see a confirmed high volume sell-off.
Despite the rosy picture the White House wants you to see, the economic reports over the next few weeks will show beyond any doubt that America's easy-money policy has failed to jump-start the U.S. economy, failed to create meaningful jobs growth, and failed to create sustainable GDP growth. This easy money policy has increased the national debt, added $ trillions to the deficit, and laid the foundation for the Gold panic that will soon sweep around the world.
The shocking truth is that Bernanke's monetary policy and Obama's spending spree will soon be triggering a Stock Market Melt Down and a Gold buying panic of historic proportions. The long-term results are so disastrous that China, Russia, India, Brazil and others are creating their own "Gold Standard" by selling dollars, buying Gold and conducting cross border trade without the use of US dollars.
GOLD AND THE DOLLAR
Gold has been the best investment of the 21st century, outperforming stocks, bonds, cash and real estate. History teaches that shortly there after, following each of the last six 10% corrections, Gold prices have exploded for an average of 36% PER YEAR since 2003.
It is estimated that 98% of Americans have never seen, let alone held a Gold coin. Yet Gold is much more than just money or an investment medium; it stands for liberty and throughout history has often enabled the escape from tyranny and death.
THE IMF'S GOLD AUCTION?
It was recently reported that India is "set to be a buyer" of the 191.3 tons (6.74 million ounces) of the IMF'S latest proposed Gold sale Does anyone really believe that China will just sit back and let India steal this pot of Gold right out from under their noses again?
Whether or not a bidding war is set off, there is one thing that is for sure; every time there are any IMF sales, a buying spree always follows. When India bought 200 tons of IMF Gold last November, instead of the expected (by the know-nothings) sell-off; Gold rose 14.2% in 4 weeks. What happens if this time around there is a bidding war not only between India and China, but with a few other countries as well as some big money players thrown in? Pure speculation maybe, but this sale has not been pre-arranged. It's an open market sale and there's only so much to go around. Let's not forget all the exchanges that have huge short positions with not enough Gold in their vaults to make good delivery? In the past, IMF sales always tend to mark bottoms and floor traders now consider $1,054 as a floor in the market because that was the average price India paid for the 200 tons they bought last time around.
IS GOLD LOSING ITS LUSTER?
Isn't Gold supposed to be the ultimate hedge against global instability? It used to be, but global wealth is now so massive that the Gold market is thought to be NOT Big Enough or Liquid Enough to accommodate the world's wealth or so they think - But $5,000 or $10,000 Gold would be. Nonetheless, at present there is no other currency that can replace the US Dollar. A return to a GOLD STANDARD has always been thought to be devoid of reality and just a Libertarian Pipe Dream. Gold has always been both a play on inflation as well as a play on a bloated U.S. dollar collapsing against other currencies under the weight of quantitative easing and deficit spending. There has to be something to collapse into. At the moment, the Euro has its own troubles and the YEN, like Gold, is too small.
Gold is still the only answer, just as it has always been over the millenniums. It is the best store of wealth. Investment flows will shortly return to the yellow metal as currency default fears increase. Asians have always been big believers in Gold as a store of wealth and protector from inflation and there are now signs that the Indian public - the greatest buyers of all - are beginning to return to the market as the public comes to accept that higher Gold prices are here to stay and that prices will only continue to increase. China, with its huge sovereign wealth fund, is also hedging its bets with a big investment in the SPDR Gold Trust (GLD, since their percentage holdings of Gold Reserves is miniscule as compared to most other developed countries. Any return to Gold investment in the West should see another sharp upturn in the price of Gold.
WHAT TO DO NOW?
Continue on with our program of buying from our lists on weakness and when Gold breaks out to a new all time high, Back Up The Truck.
I have spent my entire career identifying major trends; looking to help others as well as myself to profit from them. These are trends that will be happening in the near future; trends that most analysts and investors notice only after they have already been well established and we have made the majority of the easy money. In my newsletter, "UNCOMMON COMMON SENSE", once I uncover potential changes to the major trends, I then present specific, actionable recommendations that will help you profit even during the worst of times and before they become obvious to everyone else.
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Aubie Baltin CFA, CTA, CFP, PhD.
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