UNCOMMON COMMON SENSE
For People Who Think
THE DEATH OF CAPITALISM
Aubie Baltin CFA, CTA, CFP, PhD."If you don't use your eyes for seeing, later you will use them for weeping."
January 1, 2009
WORLD WIDE RECESSION
As the recessions all over the world grow progressively worse, the cry for bailouts grow ever louder as the realization that a world wide DEPRESSION is becoming increasingly likely and the proposed solutions are becoming more and more Marxist. The Socialist, Populist takeover of the world's education systems has made sure that there are NO Economists from either side of the isle that even know what real Capitalism is let alone understand it. Throughout the world, Socialist bailouts are being pushed forward without a single thought given to the possibility that it has been ever increasing Marxist Economics that have brought the world to the brink of economic collapse, exactly as happened in the 30's. Capitalism is and will get the blame for the disaster that is about to befall us all.
The riots have begun. Civil protest is breaking out in cities across Russia, China, and beyond. Greece has been in turmoil for more than 3 weeks. The mood seems to have turned "pre-insurrectionary" to borrow from the Marxist handbook. Is this a foretaste of what the USA may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn three hundred million lives upside down?
We are rapidly advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on permanent Boom Times to mask a lack of democratic legitimacy may try to gain time by the usual Marxist methods: Trade barriers, saber-rattling, barbed wire, Marshall Law and WAR..
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost of at least 2% of world's GDP to "prevent global depression". "If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear."
A MOMENT OF REFLECTION
Has anybody bothered to stop and think long enough to ask the question: How did we get here? There seems to be consensus that our problems were caused by a combination of seemingly unrelated factors such as: (1) the FED flooding the economy with too much money and too low interest rates, leading to, (2) Too lax lending requirements as well as a complete lack of risk assessment. What else can we expect when you flood the banks and quasi bank lending institutions, whose job is to lend, with oodles of excess reserves? (3) Then we had the unintended consequences of government interference in the financial structure of the economy such as the (a) Deregulation by the elimination of Glass-Steagle, (b) the Community Reinvestment Act and (c) the moral suasion to give no money down, interest rate only liar loans in the government's attempt to spread home ownership to the lower classes. (d) Ever increasing government rules and regulations and (e) an ever increasingly complex tax system, some of which expires by the end of the year, so that entrepreneurs and businesses are not sure where they stand. Last but far from least, (e) LIMITING EXECUTIVE COMPENSATION: The salary cap of $1 million on Corporate tax deductions, led to the reliance on options as the preferred means of compensation and the associated stock manipulation and deal making instead of internal growth that followed (like buying back stock and using borrowed money at the all time high so they could show increased earnings per share and drive the stock price higher).
CONSUMPTION SPENDING IS NOT THE SAME AS INVESTMENT SPENDING WHICH PAYS FOR ITSELF. CONSUMPTION SPENDING, (the largest chunk of which will go to Imports) DOES NOT CONSTITUTE STIMULUS; ONCE SPENT IT'S GONE and all we are left with is a huge debt the must be repaid. WHAT DO WE DO THEN FOR AN ENCORE?
CONSUMPTION vs INVESTMENT.
There are two kinds of spending, consumption and investment. Income Tax cuts and/or credits to individuals are one shot affairs. Even if 100% of the money is spent, a large portion of it will end up in China and most of the balance will go to reduce corporate inventories that will not be replaced. All we are left with is a huge increase in debt with no means of repayment. Not to mention the possibility that a good portion will be eaten up by inflation, if not immediately, then later on as it infects total consumption expenditures for years to come.
DON'T CONFUSE WELFARE SPENDING WITH STIMULATIVE INVESTMENT
FREE MARKET CAPITALISM TO THE RESCUE
Any fool can criticize, so in order for you all not to consider me a fool, I will attempt to come up with a few capitalist solutions to our most immediate problems.
OIL AS A WEAPON
Oil has been used as a weapon against the West and especially against the USA since the 70's, without our government or media admitting or seeming to even notice the fact that it has colored our foreign policies to our detriment because of our pretence that the price of oil didn't matter, until recently. But now, it will surely matter, as Russia blackmails Europe into signing a European Pact in return for oil and gas. Their price will be the destruction of NATO as the USA is asked to withdraw its forces from Europe, including all of its anti-missile bases that we so foolishly attempted to place as a noose around the neck of Russia. Did we really think that Russia would sit idly back and just take it? There is more, but I don't want to belabor the point because it will actually end up being to our long term benefit.
OUR SECOND PEACE DIVIDEND will be coming exactly when our economy needs it the most: As we are forced to bring most of out troops back home and close hundreds of foreign military bases. Let's see how well Europe and the rest of our friends do when they no longer have the American military umbrella defending them and they all have to increase their defense budgets to defend themselves. Unintended consequences are not always negative. The question is will we use it wisely or will we squander it on Socialist programs that will only end up making the situation worse?
OUR OIL WEAPON
We all can see what happens to our enemies when the price of oil drops below $50. We can also feel what it means to us Americans as we benefit from the falling gas prices. It's about time we recognize our strength in OIL and start rebuilding our own OIL WEAPON. It's time we start drilling and prove up our vast oil reserves. Not only to negate the oil weapon of our enemies, but to keep our prices low in order to provide our country's ever increasing demands for energy that hopefully will last us into 2030. We should also move full speed ahead in installing and developing alternate energy as all of our other sources of energy expands and grows enough to make up for what will then be our dwindling oil reserves.
But of even greater importance, Developing our Energy Weapon NOW (both Oil and Nuclear) will create over a million new jobs without costing the government one penny. In fact, the government will take in $billions from selling oil leases.
IT IS NOT TOO LATE TO LEARN THAT ONLY FREE MARKET CAPITALISM WORKS AND WILL TRUMP SOCIALISM EVERY TIME.
INVESTMENT SPENDING IS STIMULATIVE
Investment spending not only creates consumption, but more importantly, it creates JOBS and by definition, increases productivity. Furthermore, it does not cost the government anything and most important of all, it is self liquidating. The investment process just keeps on rolling along until government gets greedy and interferes again by increasing corporate taxes.
THE STATEMENT THAT THE CONSUMER IS 70% OF THE ECONOMY IS A COMPLETE MISREPRESENTATION OF THE TRUTH.
WAGE EARNERS, which include the salaries of the owners of all companies as well as the companies themselves, are the consumers. If you want to increase permanent consumption, you must increase wages and employment - that can only be accomplished by profitable and growing companies.
ALTERNATIVE SOLUTIONS: REDUCE CORPORATE TAXES TO 20% AND INCLUDE A 100% INVESTMENT RIGHT-OFF BEGINNING IN 2010 TO EXPIRE IN 2015. Not only will it not cause a drop in government receipts, but it will actually bring about an increase in revenue. No, I am not crazy. At the rate we are going now, there won't be any corporate profits to tax. However, by lowering corporate taxes and giving an immediate 100% write-off for all new investment, we can turn this economy around and 20% of something is a whole lot better than 35% of nothing (that is not even taking into account the increase in personal income tax receipts from all the new jobs that the companies create). In the long run, profitable and growing companies will produce a lot more total revenue to the government than today's 35% corporate tax rates, which is something the government and their Socialist economists better wake up to in a hurry.. Need I remind you about the associated reduction in welfare spending? Oh, almost forgot, how about the increased competitiveness of our domestic industry. Instead of complaining about "outsourcing" and doing nothing about it, how about becoming pro USA companies and stop driving them off shore.
CAPITAL GAINS TAXES: At the rate we are now going, there will not be any profits to pay taxes on. As a matter of fact, by taking losses now you can go back 3 years and readjust your taxes, so by increasing the tax rate, the government actually ends up with less. REDUCE the rate if you want to increase government revenue and more importantly, entice entrepreneurs to take risk and create jobs here in America and not off shore.
It has recently come to light that the newly opened Visitor's Center at the Capital buildings in Washington, DC which was originally budgeted at $71 million, came in 3 years behind schedule at a final cost of $661 million. It didn't make the national news or the front pages of any newspapers, but then again, why should it? This is nothing new and is in fact quite common for all government programs coming out of Washington. So I ask myself, why should I expect that Obama's proposed massive infra structure rebuilding programs will be any different? Unless you want the same type of cost increases to infect the government's infrastructure programs, then we better get rid of Davis-Bacon. This is the law that mandates that only unionized companies can Bid on government contracts. Not that unionized companies are so bad, but there are not enough of them and as long as this law is in force it means NO COMPETITIVE BIDDING. I just gave you an example of what happens. Unless we get rid of Davis-Bacon, there is no way the government could possibly spend $3 trillion in the next few years as there are just not enough unionized companies out there. Or maybe they can. Using the same ratio as the Visitor's Center building, $3 trillion will get us no more than $300 billion worth of reconstruction, which will be at least 3 to 5 years behind schedule. Paying off the Unions for their political support is exactly what FDR did and created the biggest job destruction programs in history. Let's hope Obama is not only smarter than congress but is also as smart as he is being portrayed to be and can learn from the mistakes of others. Or is he really just an eloquent puppet who strings are being pulled by the Anti-American far left?
FLOODING THE BANKS WITH MONEY
If the DOT.COM and REAL ESTATE Bubbles were caused by the FED's massive pump priming, why should we expect that continuing to do more of the same will produce better results? Does everyone not see that the Booming Government Bond Market Bubble, now $13 trillion and growing fast; is only within a ½% of coming to an end? When it bursts, the bubble and the resulting damage will dwarf every other bubble in history. Why is everyone rushing headlong into Treasuries, locking in negative returns for as long as 30 years? Hasn't the Bursting Bubbles and the MADOFF fiasco taught anybody anything?
RE-CAPITALIZING THE BANKS SO THEY CAN LEND can best be accomplished through increasing Interest Rates. Let the banks start offering FDIC INSURED 7% CDs and see how much money floods in from all over the world. That would be money that the banks could lend at reasonable rates and adjust for risk exposure.
The recent CPI report revealed that consumer prices plunged by a bone-chilling 1.7% in November alone. If it continues at that pace for a year, it will be a 20% deflation - fully twice the plunge in consumer prices that we saw during The Great Depression (1929-1946). No wonder Fed Chief Bernanke panicked. No wonder he slashed interest rates to a range between .25% and ZERO! But even Bernanke's desperation play doesn't have a snowball's chance of ending this Depression spiral we are in. Doing more of what got us into this Socialist mess in the first place is insanity. Can't they see that $8.5 trillion of Socialist pump priming is not working?
Bernanke is addressing the wrong problem!
The fact is we didn't get into this mess because interest rates were too high. Nor are we experiencing a debt crisis because of too FEW debts and not enough borrowing and spending. Clearly, we got into this mess because everyone - from banks to companies to consumers - have too MUCH debt and are now scared to death, canceling purchases, hoarding dollars and de-leveraging like never before. The key: The cheap money the Fed is providing may buy us some time. But it cannot buy CONFIDENCE! Restoring confidence takes a long, LONG time, even if we were following sound policies for all to see. But without a sound game plan, banks won't resume lending. Nor will consumers or businesses resume borrowing, investing and spending like before. Besides, who wants to lend money at 5% interest rates? The Government can't do everything. Ask China or Russia
THE OBVIOUS IS OBVIOUSLY WRONG When both Democrats and Republicans all agree on massive spending, you can rest assured that they are both wrong. I am simply amazed that there are NO Free Market Economists being heard. Am I the last one standing?
Deflation is now a reality. Therefore, it's more crucial than ever that you get the answers you need to survive and thrive in the year ahead.
DANGER: TAKE HEED: Dubai: A single currency backed by a common economic agenda and a unified monetary policy could make the Gulf a strong regional economic bloc, OPEC BANKING The single currency is a huge opportunity for the Gulf region to make its economic clout felt in the international arena. Creation of a strong currency supported by nearly 50 per cent of world's oil wealth will prove to be a major stabilizing factor for the regional economies," said Dr. Saidi, Chief Economist of Dubai International Financial Centre. Besides attracting foreign investments, analysts say, a strong currency could become a key factor in preserving the region's financial wealth and help recycle oil wealth within the region. Analysts believe the current global economic environment presents an ideal opportunity for the creation of a strong common currency that could emerge stronger than many international currencies such as the dollar, euro, yen and sterling. "The Gulf common currency, supported by the region's resource wealth, could become a major reserve currency attracting global reserves into the region. It could also help regional financial centers emerge as global financial centers competing with others such as New York and London," said Dr Saidi.
THIS MAY OR MAY NOT COME TO ANYTHING, BUT CAN YOU IMAGINE WHAT IT WOULD MEAN TO AMERICA IF IT DID? THE OIL WEAPON IS MORE POWERFUL THAN ALL THE WORLD'S ATOMIC BOMBS PUT TOGETHER.
DONT YOU THINK IT'S TIME WE DEVELOPED OUR OWN OIL WEAPON? Or do we enjoy being continuously BLACKMAILED?
HOW NOW DOW?
I am sending this letter out early and not as complete as I would have liked it to be because I think I saw the end of the B wave of the A,B,C, up side consolidation of the giant Wave B on Monday. Unfortunately I was out all day Monday and did not see it until yesterday. Wave C could last 1 to 3 months and go up as much as 1,000 to 2000 points. The most prudent action is to continue to build up your cash positions and payoff DEBT by selling into the rally. However for traders, the start of Wave C should be a Tradable Rally. Speculators can either buy options or the double ETF's, but whatever you do, you must use stops: DO NOT TRADE WITHOUT STOPS. Don't ever let a trade turn into a big loss.
NOTE: THIS IS NOT THE START OF A NEW BULL MARKET.
This coming year is going to be very bad for the dollar in the long run. While there are some (not I) who think the dollar will win by default versus other currencies, in fact they will all lose versus Gold. A good point to keep in mind is that this time China, Japan, Britain and the Oil producing nations will NOT be around to mop up the $2.5 billion (soon to be $6 billion) daily needs of the US Treasury as they will need all their reduced surplus funds for their own economies, given their tremendous drops in exports.
We may have just completed a 5 wave Elliott Wave I; so we could be in for 2 to 5 weeks of weakness in Gold and the seniors. Keeping in mind that we are in a LT GOLD BULL MARKET that still has many more years to run, you may want to consider selling at or slightly out of the money options on some of your positions to generate some income while you're waiting.
EXAMPLES : AEM $50 sell Feb. 50 Calls @ $6 for a 13% return in 52 days
ABX $35 sell Feb. 35 calls at $4.50 for a 15%.return in 52 days or a 1955 annualized You could also buy the Jan $84 put on the GLD for $2.50, which would give you 17 days of protection for only $2.50. Mean While Continue to accumulate (buy) Juniors on weakness.
HAVE A HAPPY, HEALTHY & PROSPEROUS NEW YEAR
GOOD LUCK AND GOD BLESS
Aubie Baltin has spent his career identifying major trends in the markets - and helping others to profit handsomely from them. He identifies the trends that are happening today; trends that most analysts and investors notice only after they have already been well established and the majority of the easy profits have been made. In his newsletter, "UNCOMMON COMMON SENSE", Aubie has the unique ability to uncover changes to the major trends before they even begin and then presents a goldmine of specific, actionable information that will help you profit even during the worst of times. Make Aubie work for you, by subscribing to UNCOMMON COMMON SENSE at the still low, discounted Holiday Rate.
I am EXTENDING the Holiday Special until Jan. 15 for subscribers only: A two year subscription extension is only $339. The one year subscription is still a reasonable $199 at which time prices will increase to $269.00 and $469: Don't forget to extend your subscription now before the January price increase.
UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.
Email this Article to a Friend