UNCOMMON COMMON SENSE
For People Who Think
Aubie Baltin CFA, CTA, CFP, PhD.
February 17, 2013
THE COLLAPSE OF THE DOLLAR
HOW REALLY BAD ARE THE ECONOMIC FUNDAMENTALS?
The economic situation looks under control currently, that’s because
we are now in the eye of the storm. The longer this unbalanced
situation goes on, the faster and more severe the eventual collapse will
The main theme is that governments in the US and Europe have lost complete
control over their spending and borrowing, which must ultimately result in a
catastrophic crisis. Soaring debt accumulation, along with Europe Japan and
USA race to devalue will continue until some kind of crisis arises; either
internally or globally and when the markets blowup, it will bring about an
abrupt END to this charade. The 2008 crisis was not the final collapse.
The final chapter of the 2008 – 2009 meltdowns is still ahead of us. The
same trend is forecasted for the rest of the world and up until now it is
playing out almost exactly the way I have expected it to. Worldwide debt
stands at $220 trillion, a figure that when compared with world GDP of $62
trillion, shows a debt to GDP ratio of 350% and still growing exponentially.
Common sense should tell you that it is not sustainable.
THE CARDS HAVE BEEN DEALT
There is no stopping the Euro’s demise - are you protected? History tells us
that "Nationalism will emerge. Healthier countries will not see fit to spend
ALL their hard earned RESERVES to bail out their less responsible neighbors
who to this day refuse to make any adjustments to their spending." And money
will flow out of paper assets into gold and silver as debt creation
continues to gain momentum and spread to the public. (Gold and silver are
the only forms of money that governments cannot debase by creating
additional units of it.)
Treasury Bonds: They have always been and for the time being, still
are functions of a general flight to safety. An ever shrinking part of the
world is still looking at US Dollar denominated assets as safe havens even
though the US government is taking on an ever increasing amount of debt.
However, it is imperative to understand that the purchasers in the treasury
market are mostly the central banks themselves. Their intention is to prop
up fiat currencies by buying sovereign debt. What this really means is that
governments are taking on too much debt and turning it into currency. Most
people don’t see this process; it also remains unreported by the
mainstream media. This process, historically, is the final stage of a
country destroying its currency. Unfortunately, it is taking place on a
global scale, so it will undoubtedly result in an implosion of the whole
fiat currency concept.
Unfortunately I cannot tell you the exact timing of
the coming debacle.
Where do we stand today? The number of people with jobs (actually working)
as reported by the Government is up 2%, while the number of people on
disability is up by 15%. And yet the percentage of the population with jobs
is fast approaching the lowest figure in history: People living on food
stamps are up 44%, standing at 46 million currently. One in four
households lives on less than $25,000 a year.
Total debt has gone from 1.5 times GDP in 1980 to 3.5 times GDP today and
climbing. 2012 was the 4th consecutive year in which the US ran trillion
dollar plus deficits, with over $1.5 trillion projected for 2013 and
continuing as far as the eye can see: When unfunded liabilities are included
in the calculation (Medicare, Medicaid, Social Security which are
nonetheless debt), the debt per family stands at over $2 million. The
Government and the “Don’t Ask Don’t Tell” Media are trying to convince us
that things are improving. The path to the final collapse has been slowed
down by human nature. It takes a long time for people to change their
beliefs on something. Our global society still believes that paper
currencies still hold their value over time as they keep on accumulating and
saving fiat based money.
A stanch Left Wing compliant media is a phenomenal tool for fooling people.
Governments seem to be able to create as much currency as they want. But
COMMON SENSE tells us that there are limitations. Yes, they can set interest
rates at levels that signal to the market that economic conditions are fine:
Even when underlying conditions are deteriorating. Lending at a very low
interest rate gives the impression of a good creditworthiness. But that is a
false premise. Nobody in their right mind lends money at ¼% to 0 % interest.
WE ARE IN A GOVERNMENT DEBT / BOND BUBBLE
Markets and people tend to go with the flow during a bubble. However,
history has shown that as awareness slowly but surely sinks in; people
suddenly wake up (usually triggered by a Black Swan event and move
extremely quickly (witness the LEMAN BROS. affair). We also saw this in the
last two bubbles. One year before the tech stock bubble imploded, everyone
expected the future to be better than the past, but in the blink of an eye,
the world was staring at a global depression. The same thing happened with
the housing boom in 2008. Everyone was convinced that housing prices could
only go up in 2007, yet one year later, the whole global financial system
was on the verge of collapse. But the world still had full faith in the US
Dollar and its Bond Market. Today, everyone believes in the safety of
government bonds and they are parking their money there, even though they
are not receiving any interest. Go figure. It is unknown when exactly the
coming crash will take place (but it will) and the world will wake up
suddenly, as their dreams become a nightmare… again!
HOW THE NEXT COLLAPSE WILL PLAY OUT
The structure of our financial system is a fascinating topic to explore. It
gives us insights to describe the anatomy of the coming collapse. The best
analytical framework explaining today’s system is described in “Currency
Wars” by Jim Rickards, published in 2011. The author explains how complexity
in our system has risen to the point where it shows unique characteristics,
the most important one being that the propensity for catastrophic failure is
an exponential function of complexity. In simple terms, it means that, when
the system doubles in size, the instability goes up tenfold. It means as
well that it requires exponentially increasing amounts of money (debt) to
keep the system growing. The framework is revolutionary in that it perfectly
describes today’s reality. Today, governments need more and more debt to
generate the same amount of GDP. We need to borrow more only to stay in
place but at the cost of a huge (almost certain) collapse of the system. But
more importantly, the problems have become so huge that there is no longer a
Lender of Last Resort big enough to bail anybody out.
The longer this process goes on, the faster and more severe the collapse
will be. Suppose the final collapse strikes in 2013/15. By then, the system
will have grown so complex, and the amounts of debt will be so huge that
there will be no way to control it - the crash will take on a life on its
THOSE DEADLY DERIVITIVES
As early as February 2005, I warned about both the size and the exponential
growth of derivatives, growing without any collateral. In fact, they are the
“complexity story”. What most people do not realize is that banks report
their net derivatives position (their long versus short positions) and only
the net position is shown as their risk. However, the gross position is the
real relevant number. To put things into perspective, the earlier mentioned
$62 trillion global GDP should be compared with the gross derivatives figure
which stands at more than a Quadrillion dollars of notional value. (How much
is a Quadrillion?)
A derivatives meltdown will play out almost instantaneously, which is why
they keep pouring money into Greece because a default of even one small
insignificant country, no matter how small, could be the Black Swan (
Lehman Bros.) that everyone fears, because it sets off a chain reaction of
defaults. When one big bank faces some kind of trouble and fails, the banks
with the largest exposure to derivatives (think JP Morgan, Citigroup,
Goldman Sachs etc.) will realize that the bank on the other side of the
derivatives trade (the counterparty) is no longer good for any of their
obligations. All of a sudden their hedged positions become naked positions.
The gross position becomes their net positions. The risk explodes
instantaneously. Markets realize that all hedged positions are in reality
not hedged anymore, and all market participants start bailing almost
simultaneously. (Bail to where or to whom?) The whole banking and financial
system freezes up. It might start in Asia or Europe, in which case Americans
will wake up in the morning to find out that their markets are not
functioning anymore; stock markets remain closed, money at the banks become
It is really impossible to forecast the exact trigger that will cause the
bubble to burst. What we clearly see today is that the fixed income (bond)
market will be the epicenter of the coming shock. A lot of derivatives are
hedges against bond portfolios, but most are against Sovereign Debt so the
crack could start with trouble in Treasury Bond markets for example as US
interest rates start rising or as no one except the Fed shows up for the
next Bond Auction. The first reaction will be the Fed buying up all bonds
that the US government is issuing, which would spook the markets instead of
calm them down. This would set off a chain reaction as all bond holders try
to dump their bonds.
Complex systems do not allow us (me) to determine things ahead of time. One
of the few things we know, however, is that the mother of all bubbles will
burst and that we created the conditions for this catastrophic failure.
You will then thank your lucky stars (and maybe me) that you have been
accumulating Gold Eagles and Maple leafs for the last 12 years..
TRENDS FOR 2013 & POTENTIAL TRIGGERS FOR A
- The erosion of the Petrodollar: Oil producing
countries start dealing their oil in other currencies (mostly gold) with
huge purchasers (think Iran, Russia, China, Brazil), resulting in a
lower demand for dollars and a huge increase in the demand for gold. If
central banks decrease their demand for US dollars, it would lower the
value of the dollar and make inflation and interest rates explode. We
have already witnessed the first sign when we forced Iran to start
trading oil for gold and their major clients jumped at the chance to
continue trading with Iran using gold to settle all trading.
- Expansion of the police state. The response
to terrorism and public riots and instability is an increased control by
the government; its happened all before (think Hitler Stalin and Chavez
today) (think internet monitoring, surveillance systems, etc). And most
important - an attempt to confiscate all the public’s guns. It creates
conditions for domestic turbulence via civil unrest, resulting in an
outflow of money and Rich people to other countries. The acceleration of
this trend has already begun to be visible in 2013. Look for a possible
government seizure of citizens’ gold and silver.
- State and local pensions begin imploding. States and
localities cannot pay off their obligations anymore and could go
bankrupt in 2013, resulting in a tanking municipal bond market.
- Threat of cyber war and cyber terrorism. The internet
being an insecure system, the next war could result in a breakdown of
the electronic system, which would spook the markets tremendously.
GOLD & SILVER – THE BEST STORE OF SAFETY AND
PROTECTION OF WEALTH
Precious metals are where we hide when we do not trust the rest of the
world. When things start really spinning out of control, everything could
potentially be destroyed, but the only things that cannot be destroyed are
gold, silver, platinum, food, oil and probably the mining stocks, among
other tangible assets. With a limited supply and availability, a massive
demand for precious metals will translate into exponentially rising prices.
The ongoing destruction of fiat currencies will become increasingly apparent
in 2013 -15. An increasing number of investors will understand that precious
metals are holding and increasing in value while other assets are not.
Central banks have already reversed their 30 year penchant for selling gold
and are already moving back into gold. China as the best example, imported
800 tons of gold in 2012. To put that figure into perspective: Their
official reserves were 1,000 tons. The same trend is taking place in other
countries (although on a smaller scale) like, for example, Russia, Brazil
and several Asian countries. This increasing demand will be a main driver
for higher prices beginning in 2013.
Downwards suppression of gold and silver prices (manipulation) can be the
only explanation for all the strange price action in 2012 and before. In
December for instance, huge amounts of short selling took place during the
most thinly traded moments (during overnight trading sessions when the major
markets are closed.). That is not how a market participant closes out a
large winning futures position because all the subsequent trades are
happening at lower prices. Commercial banks, together with western central
banks, actively try to depress gold and silver prices to validate the
existence of their fiat currencies. It has resulted in a controlled price
rise, instead of an exponential one. But their end is in sight. People and
investors need to look at these selloffs as an opportunity. A slow and
steady bull market makes it possible to accumulate the metals in a steady
way into weakness. At the start of 2013, the fundamentals justify much
higher gold and silver prices.
Another respected hedge fund, the Pacific Group, has decided to convert one
third of its hedge-fund assets into physical gold. The Pacific Group Ltd.,
which manages assets of over $100 Billion, believes that gold will continue
to rise as governments print more money to pay off debt. Thus, continues the
trend of some of the smartest money in the world diversifying more and more
of their holdings into physical gold.
“The way I look at it, gold is anywhere from being seriously undervalued
to being grossly undervalued,” We’re in the early stages of what in my
judgment will most likely turn out to be the world’s largest short squeeze
“Trust in central banks by other central banks is in great danger.”
The big news this past month was the initial announcement by Germany that
they would be repatriating their gold back to Germany and the political
rhetoric that followed.
“In what could be a watershed moment for the price and future of physical
gold, not to mention the stability of the entire monetary regime based on
rock solid, undisputed faith and credit in paper money, German
Handelsblatt reports in an exclusive interview that all official 3,396
tons of it is about to be partially moved out of the New York Fed, where
the majority, or 45% of it is currently stored, as well as the entirety of
the 11% of German gold held with the Banque de France, and repatriated
back home to Germany.” Andreas Dobret, member of the Executive Board
of the German Bundesbank, adding that, “The Bundesbank will remain the
Fed’s trusted partner in future, and we will continue to take advantage of
the Fed’s services by storing some of our currency reserves as well as
gold in New York.”
Seems to me like an attempt to calm the waters.
When Venezuelan President Hugo Chavez ordered the repatriation of 85% of the
country’s bullion reserves from European Banks, most of which was held with
the Bank of England, the move was dismissed as “unnecessary and expensive,”
with others accusing Chavez of acting out of paranoia.
The reaction to Germany’s decision to do almost precisely the same thing is
likely to be more muted so as not to start a stampede of other countries
seeking to mimic the Bundesbank actions. Germany is the second largest gold
holder in the world.
“This is a momentous development, one which may signify the end of mutual
assurance and solidarity among central banks because if the central banks
don’t have faith in one another, why should anyone else? Without trust the
system falls apart. In the end, the criminals always turn against each
other. This could be a sign that this end process is already underway.”
I would have to agree with this assessment by Zero Hedge, especially on the
heels of the “gold is money” announcement two months ago regarding the Basel
III Accord, which should have gone into effect as of the first of the year
(2013). Yet we haven’t seen or heard of any official announcement regarding
Taking into account the timing of these two events, how close they are in
proximity to one another, it appears to me to be very bullish for gold. Yet
the gold price for the moment seems to be caught in a very boring but tight
trading range with little in the way of news to drive gold or silver
significantly one way or the other. But this can and will change very
quickly especially once the charts give a definite buy signal. So far, just
as gold seems ready to break out to the upside, there is a sharp selloff
into the close of trading. DON’T LET THAT SCARE YOU. I would use any follow
up selling at the morning opening as a BUYING OPPORTUNITY.
I try to keep a balanced perspective on where precious metals prices and
everything else I own are heading and why. I try to think of everything I
can for each case and then look at which argument is more compelling at any
particular juncture. At the moment, the odds are stacked in gold’s favor for
moving higher in the bigger picture, but lower in the immediate to short
term due to governmental interference, which appears to be excessive as of
late. When this happened in the past, it was a sure sign that all the
precious metals would soon go higher. Especially as large holders (think
China) who buy in the money options and then demand delivery instead of just
cashing in their profits.
To think that the government intervenes in the precious metals markets
should come as no surprise as they lie and manipulate on just about every
piece of economic and financial data they report. To really understand the
specifics on how this is done, you should follow John Williams at his
www.shadowstatistics.com. I don’t talk much about government rigging of
markets because in the end anyone who tries to manage a market always loses,
but it is important to understand this is part of the process of being an
investor in an asset that is despised by the government.
When you are running a fraudulent fiat currency scam, a rising gold price
exposes the fraud and signals investors and citizens to protect themselves
from government devaluation by owning the metal itself. Politicians
typically hate gold or the thought of backing a currency with gold because
it keeps them accountable to the people. Ah, what a concept, keeping these
thieves accountable to us and not their puppeteers!
John Williams is one person who I trust completely in his analysis of the
precious metals markets and governmental statistical reporting. His
newsletter ShadowStats.com is worth every penny in bringing to light
government fraud on many levels. Once you read his newsletter, you begin to
understand you can’t trust anything that comes out about government
statistics in the mainstream media. It’s all just a pile of lies and grand
deceptions to keep the people in the dark.
Matt Taibbi, the reporter from Rolling Stone magazine said the following:
“The public has been lied to so shamelessly and so often in the course of
the past four years that the failure to tell the truth to the general
populace has become a kind of baked-in, official feature of the financial
rescue. Money wasn't the only thing the government gave Wall Street – it
also conferred the right to hide the truth from the rest of us. And it was
all done in the name of helping regular little people and creating jobs.
"It is," says former bailout Inspector General Neil Barofsky, "the
The bailout deceptions came early, late and often. There were lies at the
very outset, and others still being told four years later. The lies, in
fact, were the most important mechanisms of the bailout. The only reason
investors haven't run screaming from an obviously corrupt financial
marketplace is because the government has gone to such extraordinary
lengths to sell the narrative that the problems of 2008 were all
president’s Bush’s fault and have now been fixed. Investors may not
actually believe the lie at first, but they been overwhelmed by how
totally committed the government, Wall St. and the Media have been, to
selling it” Besides where else can the little people go?
Another item in the news is a series of statements that came from Boston
University Economics Professor Laurence Kotlikoff. He is worried about
America’s dire financial situation. “The situation is getting
worse and worse and worse. We are running a massive six decade Ponzi
scheme, and it’s fast coming to a real breaking point.”
Dr.Kotlikoff calculates that the real government deficit is enormous and
growing exponentially. “It’s $222 trillion. Last year it
was $211 trillion. We grew the deficit by $11 trillion in one
year,” He also says, “We are actually in worse shape than
any other developed country. “Ben Bernanke is playing with fire here
because we could easily have a tripling of the INFLATION level.”
Independent economist John Maudlin recently said it this way “the newest
changes to the tax codes are full of pork barrel spending:“These
giveaways of taxpayer money make my blood boil. We're not yet at the
endgame of the government's wasteful spending, as they have yet to even
address the problem “Washington's debts are going to explode and crush
us; they're also going to distort the free markets for years to come.”
Overall, we have to consider the fact that government and their central
banks are very adept and convincing us that their way is the only way: But
the fact remains, THAT IT WILL AT SOME POINT BECOME NO LONGER TENABLE–
In my mind, the long term reasons why precious metals will go much higher
continue to grow on a daily basis. The idea that governments and their
central banks will reign in their wanton ways and actually balance a budget
or tell the truth is beyond believable at this point. We know what they will
do at each and every financial hurdle they face, which is to lie, cheat, and
steal and blame everyone else but themselves, while creating more and more
Fiat money and deny any negative effects of their own behavior.
Historically this has been done by many different groups of politicians and
banksters throughout the world, always with the same sad results. I know
that in investing, timing and patience is everything, but trying to pinpoint
the exact timing of this disastrous conclusion to this ongoing financial
calamity and debacle is not necessary, as long as you take possession of
your precious metals and keep them out of the grasp of the Banks.
You should notice that although I have been calling for a rally to new all
time highs for the last several months, I recommended building up you cash
and buying gold into2 or 3 day 100$ Selloffs. I also only recommended a very
few special buys such as DDD at 40 now at 70. Once the PM’S are safely in
your possession, just sit back and enjoy the ride as much as you can while
the circus show of smoke and mirrors continues. In the end, you’ll be very
right and a lot richer than you are today. Plus you will have built up your
cash to take advantage of the coming crash when the timing is right.
HOW NOW DOW?
The uncertainty around the Fiscal Cliff continues to frustrate markets,
keeping moves mild with a lot of back and forth daily moves but with steady
progress to our anticipated new all time highs. Stocks should see vertical
trends that are significant. I am still expecting the Jaws of Death pattern
to be completed sometime during the first half of 2013. My best estimate at
this time would by the middle to late March 2013 - we should see that final
top maybe as high as 15,000. Volatility should then rise dramatically and a
long stair step decline should begin the multi-decade BEAR MARKET.
GOLD & SILVER
Rush to Safety: Americans buy half a billion dollars of gold and
silver in January. There are no fundamental drivers for the almost
daily and intraday back and forth wild swings, except for the market
manipulation by the Bullion Banks, which they cannot seem to maintain.
The Bank of Korea increased gold reserves 20% last month to diversify
investments, boosting holdings for the fourth time since June 2011 and
underscoring increased demand by central banks. “Gold is a physical, safe
asset,” the Bank of Korea said in the statement. The precious metal “is a
way of diversification, which helps reduce investment risk in terms of our
foreign-exchange reserves management.”
Russian Finance Minister Anton Siluanov speaking to reporters said that gold
is seen by Russia’s central bank as a “rather stable” asset amid global
monetary easing. The world’s biggest energy exporter saw gold and foreign
exchange reserves rise to $524.3 billion in the week to Nov. 23. Central
banks in South Korea, China and Russia realize that gold bullion is a safe
haven asset, one that the western world does not yet seem to appreciate.
The HUI's Weekly Full Stochastic is now at oversold levels, which has
happened only 6 previous times in the past 5 years. In each instance, the
HUI rose at least 100 points. Once we get a new upside breakout in the HUI
the next strong rally should also begin for Gold. There is also a strong
possibility that Gold has bottomed. If it has not, the next strong support
level would be around 1,640ish.
DO YOU HAVE THE COURAGE OF YOUR CONVICTIONS?
GOOD LUCK AND GOD BLESS
We are into the most trying times in our nation's
history. We can either succumb to our Government’s folly and go down
with the ship or personally prosper. As always, the choice is yours.
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Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
forget to include your email address as well as your phone number.
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
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