UNCOMMON COMMON SENSE
For People Who Think
Aubie Baltin CFA, CTA, CFP, PhD.
DOUBLE BUBBLE DOUBLE TROUBLE
"Common sense is not so common."
CAPITALISM THE UNKNOWN IDEAL
Price inflation is advancing on the cost side while economic deflation is killing us on the asset side. By calling the manipulated near 1% price inflation a good sign; they completely ignore the forces pulling the national economy apart. (Have they not been paying their bills lately?)
Economists have completely missed the true picture composed of two important parts engendering very different forces. The Bureau of Labor Statistics reported that 162,000 non-farm payroll jobs were created in March. But they fudged since more than half of them (81,000) were imagined, make-believe, new jobs created by phantom new businesses that the Labor Department pretended started up in March. That reduced that actual counted new jobs figure down to 81,000. Of that 81,000, 40,000 were temporary jobs, reducing the figure to 41,000. And the Government created 48,000 Census Worker jobs that will be eliminated within a few months, which means the real economy actually lost jobs again in March. With 150,000 new entrants into the job market in March due to normal population growth, this means the economy fell short by at least 157,000 jobs and their fuzzy math allowed unemployment to remain at 9.7%. A major problem is that Government has grown in size so much that it and has overtaken the financials as being the largest sector of the economy and continues to grow with reckless abandon.
Global financial assets have more than tripled since 1980, relative to GDP. In just this past decade, the volume of Credit Default Swap Contracts (asset backed bond insurance) increased five-fold in a span of four years and equity derivatives (stock index contracts) also increased nearly five-fold during the same period of time. Leverage has also exploded to a mind boggling degree. You would think that they learned something. But why should they since the Government guaranties them against loss? Tremendous flaws in logic, coupled with a complete lack of understanding of Free Market economics has resulted in misguiding the nation into a course that leads from one disaster to another. One crisis leading to another and another is now considered the norm.
The US Federal Reserve has overseen a vast expansion of the money supply for years. It has now risen to such an exaggerated size that it has become a disaster just waiting to happen. The tipping point will come when all the US Government deficits, US Treasury Bond issuance, and a tsunami of US bank failures lead to sharp rises in interest rates in an attempt to defend the US dollar, which will bring about changes in investment sentiment toward the US Dollar. At some point, all world players will attempt to exit at the same time. The US markets will not be able to clear and liquidate and thus will be unable to enjoy the fresh breeze of rebirth that is only inherent to capitalism. Financial markets unless backed by the Government, throughout the entire US economy are essentially frozen. A huge waiting game has emerged between the expectant beneficiaries of FED largess in their efforts to stimulate inflation and economic recovery. But in doing so, this will speed up the encroachment of Socialism as the Real US Economy continues to deteriorate until that last "straw" breaks the back of the Capitalist Goose that laid all those golden eggs.
THE STIMULUS AFFECT OF FIAT DOLLARS
It has been determined that the effect of a new dollar of debt today actually only produces 55 cents in economic activity (down from $2 to $1 where it used to be in the 1950's and 60's). So instead of stimulation, each Fiat Dollar now actually shrinks the economy. The engines of debt are totally dysfunctional as debt saturation levels have been reached: And yet they still refuse to learn as their only response continues to be to press the money creation pedal to the metal, making matters worse not better. Calling the manipulated 1% to 2% and climbing price inflation a good thing completely ignores the empirical evidence pulling the national economy apart. Its structural defects are not being repaired. Such uniform aggregate views actually point out the spectacular shortcomings of US Ivy League Economists who fail to recommend any meaningful remedies and are making things worse instead of better. As I have often pointed out in the past, this actually proves the spectacular shortcomings of the Socialists Economists that are completely lost as to what to do as slowly but surely their agendas are proven not to work. But like their political patrons, the facts do not seem to play any part in their analysis.
Financial markets are not functioning properly since interventions are the norm and accounting rules have been suspended. (What are the banks' real profits?) These rules are likely to be even further corrupted with the looming commercial real estate loan fiasco and expanding Fannie and Freddie (now that there are no longer any limits to their Government backing) may temporarily halt the slide), we have not done anything to solve our problems. This means that it is just a matter of time before one of two things happen: Either the stock and bond markets' crash resumes until we finally hit the lows around DJII 1,000, or they keep printing money to paper it over, eventually destroying the dollar and undermining the entire economy. The US Government is printing money and monetizing debt at an unprecedented rate and yet it cannot revive the housing market, cannot revive business lending, nor bring the banks back to solvency. The continuing infusion of new "Out Of Thin Air" money will accelerate until powerful inflation that can no longer be masked, breaks loose catching the Government and the nation off guard.
THE USA AND THE WIEMAR REPUBLIC
The parallels are absolutely shocking between the US climate of 2010 and that of the infamous Weimar Republic of the 1920's:
- Bernanke monetizing the US Government debt after the Wall Street collapse is exactly the same as the monetizing of debt by the German Government after World War I. Both debt monetizations dragged on long past their supposed initial stop-gap measure stage, but the spending and debt continued just like the insolvency of the banks and the real estate crash continues.
- Political factions were deeply polarized then just like Democrats and Republicans are today. War Reparations were a huge factor in the German debt to cover ratio, just like Wall Street bank extortions and US Government nationalizations are a huge factor in conjunction with fighting 2 wars.
- The mass unemployment and home loss tell a tale about domestic economic and political crisis on both fronts. Back then, they missed the connection between the continued issuance of new paper money and the rise of commodity prices amidst foreign exchange rate volatility. Just like today, Bernanke fails to comprehend the link between monetary growth and the oil, commodities, precious metals, and stock market price increases.
- Both missed the connection between the continued issuance of new notes and foreign exchange rate volatility. There's more but you get my point.
QUANTATIVE EASING (QE)
Talk of reducing or eliminating QE is pure wishful fantasy. There is no way that Bernanke would take a chance of tightening in this economy. QE will just be pushed further and further down the road and we will never learn. Just recall all of his wrong past pronouncements such as the "contained sub-primes", the "Green Shoots", the "sound equity basis of Wall Street firms", etc. etc. The nation is in deep trouble and although the printing of new money has been proven to be wrong headed, it will still be urgently demanded and the printing and monetization will continue. The next round of QE in England is a certainty, (regardless of all the speeches) which will then be matched by the US. Threats of sovereign default and prolific money printing will spawn a global currency crisis with the US Dollar at the epicenter. Major portions of debt denominated in US Dollars will be determined to be next to worthless. The end result will be a US Dollar collapse, an event that I have mentioned in the past that is already "Baked into the Cake". It is only a matter of "when not if."
So why has "It" not happened yet? Would you believe, it's been the explosion of credit Derivatives exceeding $1.4 quadrillion that has so far prevented it. But alas, that too is a GIANT BUBBLE just awaiting a rise in interest rates (which may have already begun) that will Prick that Bubble and bring the whole house of cards tumbling down. So while the back door machinations covers $ trillions of leveraged losses, the fires will soon be treated with an accelerant, as both the US and UK Governments succumb to pressures and announce the second phase of QE: That will trigger the inflation that they think is so necessary, all the while vigorously denying the possibility of the hyper-inflation that will surely follow.
HOW NOW DOW?
THE CANARY IN THE MINE: Was Alcoa earnings announcement acting like the proverbial canary in the mine shaft; warning us about the real state of the economy? How can the economies be picking up the kind of steam that the politicians and one way analysts are calling for without the participation of such a basic raw material as Aluminum?
The markets will always do whatever they have to do to make the majority wrong. So today, the topping-out process is doing exactly the opposite of what it did in 2007-2008 when the US markets topped out first followed by the rest of the World a year later. This time around, while everyone is glorifying China and the Asian emerging markets as the next investment NIRVANA, China has made its highs back in August 2009. The Treasury Bond Market had its blow-off high back in October 2009 and the European STOXX and most commodities topped out this January. The world watches and waits with hope as the US Markets try to convince the majority that we are now back in a new bull market: But in reality the market is building its TOP so as to trap as many investors world wide as possible.
Analysts, economists and Investors and most of all, the Government are bullish and are only listening to what they want to hear, that which reinforces their opinions. We contrarians on the other hand, examine all the UNINTENDED Consequences, such as the effect on the economy of a slew of new taxes in conjunction with the Expiration of the BUSH Tax Cuts which will become the largest tax increases in history - All that in the midst of the worst Recession in 70 years? Many analysts are actually hailing the rise in oil prices as being good for the stock markets. They do not seem to realize the increases in GAS prices are tantamount to an insidious regressive tax increase: It broke the back of the Market the last time, why should it be any different this time?
Even though I do not have a clear out SELL SIGNAL; I have started to nibble on the Short Side by Buying initial positions in BGZ, TZA, and FAZ
Although my emphasis is always on GOLD I expect Silver to out perform Gold both up and down; so any thing I say about Gold also applies to Silver.
The $1100 price level has shown solid enough support since December to set the foundation for the next upward thrust to take place. The rising moving averages confirm the trend. Watch the 20-week moving average, which has offered support in the latest assault on price by the huge naked COMEX short positions as they continue to sell Gold without benefit of Gold collateral, with full impunity. If that does not convince you of Government manipulation of the market, nothing will. But the US Government is no longer big enough or strong enough to hold back the inevitable for much longer. When price inflation becomes visible for all to see, the effect on the Gold price will be something to behold (I may have to revise my 2017 $6,250 target upward)
Both the Governments and the Public are still in the DENIAL STAGE. The monetary crisis is only beginning to rev up, and it won't be that much longer before the world will seek GOLD as its last sanctuary of wealth.
If, as I expect, Gold and Gold stocks are only at the beginning of a second phase (Elliott Third Wave) of a bull market, we should see many more years of upside and countless opportunities to increase our wealth over time.
A bull market is not a sudden surprise event; it is an ongoing process that is not recognized by the majority until the final (Fifth Wave) Blow-Off. A bull market spends at least half of its time consolidating previous gains, shaking out the weak holders while allowing true believers to accumulate ever larger positions at ever higher but still reasonable prices.
The only time prices really explode is when we have a parabolic blow off top, like we had in Gold and Silver in late 1979/1980, NASDAQ in 1999/2000 and OIL in 2009. These blow off tops are very cruel and destroy investor confidence for the next 10 to 20 years. As of now, we have not even come close to a BLOWOFF TOP. After the blow off in 1980, Gold went into a twenty year bear market and NASDAQ, which is now in its 10th year since its peak is still 60% off its 2000 high. History Repeats! Learn from it.
Every few generations or so, the amount of money pouring into one investment (GOLD) shifts to a critical point. The last time it did this was in 1973 soon after Nixon abandoned the Gold Standard…and Gold went from $35 an ounce to $200 consolidating for a few years and exploding to $850…meanwhile stocks proceeded to have one of their worst periods ever; dropping from 1000 in Feb 1973 to 577 in Dec. 1974
For the first time in 36 years, that critical point has been reached once again. When the price of Gold rises dramatically, it starts to make Gold Mining companies extremely attractive - that point is usually reached when Gold starts to trade at a price that exceeds 5 X's the level of the Philadelphia Gold and Silver Index. We recently reached that point and from here on Gold stocks should really start to outperform the metal itself, as well as most other investments.
WHAT MAKES US DIFFERENT?
The one major thing that sets UNCOMMON COMMON SENSE apart from all the others is that we are constantly assessing the most recent actions of the Government, the stock markets and the economy as to how they will affect the economy and stock markets in the future. Just to prove my point:
The Washington Post has been babbling about how Obama inherited a huge deficit from Bush. Amazingly enough, a lot of people swallow this nonsense, including most Republicans. So once more, a short civics lesson is in order. Budgets do not come from the White House. They come from Congress, and the party that controlled Congress completely since January 2007 was the Democratic Party. They controlled the budget process for FY 2008, FY 2009, as well as FY 2010 and FY 2011. During that first year (2008), they had to contend with George Bush (who was not yet a lame duck) which caused them to compromise when Bush got tough on spending increases. For FY 2009, Nancy Pelosi and Harry Reid bypassed George Bush entirely, passing continuing resolutions to keep Government running until Barrack Obama took office. (Bush actually allowed Obama to take over soon after the election to ease the transition.) At that time, the Democrats passed a massive omnibus spending bill and an $870 billion stimulus package to complete the FY 2009 budgets. And where was Barrack Obama during this time? He was a member of that very same Congress that passed all of these massive spending bills and he signed the omnibus bill as President to complete FY 2009.
Let's remember what the deficits looked like during that period: If the Democrats inherited any deficit, it was the FY 2007 deficit, the last of the Republican budgets. That deficit was the lowest in five years, and the fourth straight decline in deficit spending accompanied by a 4.7% Unemployment rate. After that, Democrats in Congress took control of spending, and that includes Barrack Obama, who voted for the budgets. If Obama inherited anything, he inherited it from himself.
In a nutshell, what Obama is saying is I inherited a deficit that I voted for and then I voted to expand that deficit four-fold since January 20th, 2008. I only mention this so as to emphasize how the process works and what we should expect going forward, so we can then factor it all into our projections. Did I not hear somewhere that "The Truth Will Set Us Free?"
The great sovereign debt crisis that I've been warning you about has leapt across the Atlantic and is already starting to eat into the United States. Already, billions in municipal bonds are in default across the nation. New York, California, Florida, Rhode Island, Massachusetts and many other states are exhibiting the same symptoms that pushed Greece to the brink of default: Huge deficits ... accounting tricks to hide debt ... the use of risky derivatives to make up shortfalls ... and millions of workers counting on benefits that states will not be able to pay are all going on strike in a fight against cutbacks.
The New York Times recently reported that, in a desperate attempt to avoid their inevitable day of reckoning...
- New Hampshire literally stole $110 million from a medical malpractice insurance pool ...
- Colorado is trying to seize a $500 million surplus from a state workers' compensation insurer ...
- Connecticut has tried to create its own magic accounting rules ...
- Hawaii has decided to change the definition of the English word for "week," cutting schools down to four days ...
- California has re-jiggered the entire yearly calendar, forcing companies to pay most of their taxes long before they're due, and ...
- Some fiscally sick states have already used the new health care law as a quick shot in the arm - they're counting the money they're supposed to get even before Congress appropriates it.
All that is on TOP of the banking disaster AND the Federal budget disaster, and the sovereign debt crisis!
Make no mistake: We are facing a debt crisis and future currency meltdown of biblical proportions. This is the crisis that will impact every major asset class - driving some sky-high in value and crushing others. Once again, unprepared investors will be skinned alive. But those of us who see this hurricane headed our way and take the proper precautions can ride out the coming Storm; safeguard our wealth and also have the chance to multiply it several times over.
BENEATH THE SURFACE
Beneath the surface of the market's steady advance, dramatic changes are taking place. While the S&P 500 Index hangs near bull market highs, having risen 4% this year and 66% from its 2009 bear market low, four of its 10 most-valuable companies - Wal-Mart, Apple, JP Morgan, Chase and Berkshire Hathaway - weren't among the top 10 at the market's peak in 2007. This reshuffling may provide clues as to which companies and industries will lead. "It's a changing landscape," revealing changes in the market's mega leadership including: The rise of Apple from underdog to titan. It appeared close to collapse 10 years ago but is now the fourth most-valuable company in the S&P 500, beating out Warren Buffett's Berkshire Hathaway and General Electric (which like Citi is in my opinion technically bankrupt). Should "CARDCHECK" be implemented? What will happen to Wal-Mart when they are forced to become unionized? And what will happen to No. 1. Exxon Mobil should CAP AND TRADE become the Law of the Land? Is it any wonder why Exxon languishes as OIL pushes past $87? With the new rising values comes a richer price evaluation: Apple trades at 22 times its earnings of the past 12 months vs. 15 for Wal-Mart and 16 for Microsoft (earnings multiples that historically have always signaled stock market peaks). As little as three years ago, the kings of the hill were the banks, now they are being surpassed by technology. But technology has that habit of suddenly and rapidly changing. Remember RCA, the introducer of radio and TV, is no longer with us.
"The market is usually more about optimism than reality. But somewhere along the way, "Fear" along with Reality always creeps into the forefront: So where are we now?
THE UNCOMMON COMMON SENSE WAY IS BEING VINDICATED
Verizon (many more soon to follow) recently announced that it is taking a nearly $1 billion quarterly charge against earnings due to it increase in costs directly related to the new Health Care Law. This is amazing. Multiply this by tens of thousands of businesses, and you can see that this law is a disaster for our economy and for the future of STOCK PRICES AND "JOBS." (These announcements are but one of the unintended consequences of ObamaCare and Sarbanes Oxley which, of course, Congress has exempted itself from the need to follow either Law).
GOOD LUCK AND GOD BLESS
Market action from March 2007 to March 2009 and especially during the last 12 months, highlights quite succinctly why extrapolating today's Government actions into the future is so important and powerful for your overall investment success. I apologize for not seeing the obvious NEW BUBBLE being created with the $ trillions injected into the Banks. During the last three years, I have showed you all how to incorporate Contrarianism into your investing by pinpointing the best contrarian investments that can both protect you and make you money during times of adversity. If you're serious about investing, you don't want to miss out on the information revealed by UNCOMMON COMMON SENSE.
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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 and 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.
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