The $64,000 Question


It's supposed to measure the total value of all goods and services however, how do you go about accounting for Government? So, just like estimating INFLATION, they measure the output simply by playing around with some kind of self-serving formula based on inputs. The end result is: If governments spend more - GDP just goes up. Unfortunately, over the last 75 years, the share that government represents of GDP has increased from 18% to over 50%. So what was initially a relatively minor problem has now become a major one.


Nowadays, improvements (just like when measuring Inflation) account for much of the increase in GDP. But how do you measure quality? Although we use market prices to value goods and services that too has become unreliable as more and more statistics become manipulated by government. As an example: Pre-crisis, profits of banks - which at one time represented 40% of all corporate profits - appear to have been just a figment of the imagination casting a new pallor not only on our measures of performance, but also on the value we placed on all markets and especially bank stocks and their underlying risk.


Are the GDP numbers being skewed by the ever growing influence of government on the economy? Are there green shoots really cropping up everywhere? How can the "Stimulus" be working if only 10% has been spent and the rest is not scheduled to be used until the middle to late 2010? I bring up these points to stress not only the danger in relying on government numbers in making projections, but to also emphasize the necessity in applying BASIC ECONOMIC THEORY in evaluating the NEW government proposals, laws directives and mandates when analyzing what the future of our economy holds.


We are being bombarded with numbers from all sides about China's renewed growth, but like all things, upon close examination and a little reading between the lines, we soon discover that over 80% is strictly due to the $586 billion stimulus China pumped into the economy. If it's anything like our stimulus and there is just as much politics there as here, what is the real state of the Chinese economy? Given the unreliability of Chinese government stats and that like Japan, China exports are 40-45% of GDP, we look to Japan, the world's second largest economy, to try and get a clearer picture of what is really happening. Last month, Japan suffered a collapse in exports of some 40%. The same held true for their imports that collapsed by 41%. Since both economies rely on exports, can China really be doing so much better? I believe that both China's and the USA's much touted growth is largely a reflection of government manipulation of the numbers.

Government money has never been spent efficiently, wisely or effectively, certainly not when it is spent in such a hurry. China's stimulus, like that of United States, solves nothing except that of postponing the day of reckoning. I find it "interesting" that many of the same analysts who deride the west for its shift toward Socialism and a government managed economy can, in the next breath, praise the Chinese Communists' skillful management of their economy. So much so that the Chinese economy, representing only 7% of global GDP, is now said to be capable of pulling the rest of the world out of its debt and economic crisis, even though they are doing it with debt and massive monetary inflation -GEE, who would have thunk it?

There is the real economy and there is the Pipe Dream propaganda version coming out of the government controlled media. It's up to you to choose who and what to believe.


May I remind you that both Greenspan's and Bernanke's intimate understanding of money and markets stems from their stints at the Federal Reserve. During this time together, they managed the U.S. (and the world) from one asset bubble to another (3 so far and 1 in the making) and are now working on the 4th Bubble-none of which they saw, understood or predicted. When it came to the biggest danger of all - DERIVITIVES- They both agreed that,"We have found over the years that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so." Never mind the fact that derivatives now stand at some $600 trillion and they are now the biggest danger that the world has hanging over its head. And yet to this day, neither one has ever offered a word of caution nor even a suggestion as to what should be done about it. Was it in fact the taxpayer who they had in mind all along as the ultimate RISK ASSUMER?

By all means let us reward Bernanke by giving him more unlimited power and appointing him to another term without any oversight, examination or discussion. Why not? Congress, the President and all their advisors don't even know what questions should even be asked. But not to worry, for sure Bernanke knows why Gold is headed higher this time around (especially in the face of all those failed attempts at manipulating Gold Lower). As to REVERSING COURSE, just in the nick of time so as to guard against the on slot of Inflation, while making sure that the subsequent rising interest rates do not bring about that most feared DOUBLE DIP RECESSION. Not to worry, he has all that experience in managing the FED and the Economy.

CHINA (we all know) is a centrally planned economy and the key tenet of a planned economy has always been making sure the numbers reported meet the plan. Going through China's statistics and ascertain how they are calculated and what they really mean is beyond the scope of this commentary, suffice it to say that they all may not be what they seem. For instance, when the central government disburses money to state enterprises, this counts as increases in GDP regardless of what happens to the money. Likewise, shipments to retailers count as increased GDP whether it sits in inventory, never gets sold or is given away. In short, China measures their economy differently than we do so we really don't know what to make of the data or how to check the information the Communist Party is putting out. What we do know is that the massive monetary growth and rapidly increasing debt offers the real potential for an enormous destruction of capital. If the central planners can't contain things any better than we did, there could be some big and unforeseen surprises ahead.

There is ample evidence that China's massive monetary stimulus efforts are producing asset bubbles both within and outside China, much the same as Greenspan's policies did over the preceding decades. Does it not seem reasonable to assume that Bernanke and Geitner's massive mega trillion dollar monetary expansion over the last year or so and $ trillion projected deficits for the next 10 years or so will, at the very least, also lead to a series of bursting bubbles?

After the fact, everyone is in agreement that cheap money, greed and government policies are responsible for the financial crisis that shook the financial world to its core. Has China somehow discovered the magic balance between fear and greed; easy and tight money; inflation and deflation; and Keynesian versus Austrian economic policy? Are we not bestowing a bit too much faith on the Chinese Communist Party? If they get it wrong and the Chinese economic miracle blows up, which way does money flow for safety? The U.S. dollar or Gold?

China, which only yesterday was the lowest per-capita consumer of Gold in the world, is bidding to become the biggest by encouraging its population to all own some Gold. Some analysts are convinced that it will pass India - the top dog since forever - as early as 2010 as the world's largest owners of Gold. Clearly, China believes the country is strengthened if everyone holds some Gold………………………………………………………………………………

Does this suggest that a mania for Gold is in the making, which is now only in its formative stages?

Any way that you look at it, we are entering intense times in the financial markets and a reality check for the monetary system that has brought great advantages to the United States since establishing the dollar as the world's reserve currency. With the U.S. Government creating an unfathomable amount of debt in a very short period of time and China growing increasingly nervous over American monetary policy; it is only a matter of time before we experience a severe inflationary period. Those in power might be able to manufacture one last rally for the dollar and correction for Gold, but each attempt seems to be dwindling in both its potency and stamina. The "Hucksters" are literally running out of ammunition. Reducing your exposure to the dollar and protecting your assets with a sensible allocation of Gold and Silver seems like an obvious minimum safety precaution at this time.


It seems the US Bureau of Labor Statistics will treat the subsidy received by those 800,000 car buyers who bought a car in the "Cash for Clunkers" program as if the price of a car fell by $4,500. Really? Our tax dollars account for nothing? This does several things: First, It will decrease the inflation rate used to adjust the GDP for this quarter. Not the end of the world, but annoying. But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS. It is a good thing for me that I do not have to rely on my Social Security check to survive.


Lots of big-name money people and hot shot analysts are now saying that the worst is behind us. Warren Buffet recently came out with comments like, "we've stopped going down" and "we've hit a plateau at the bottom." Buffet, who is now turning bullish on the economy, doesn't expect a double-dip recession. Federal Reserve Chairman Ben Bernanke said that, "from a technical perspective the recession is very likely over at this point," and then we have San Francisco Fed President Janet Yellen saying that, "the recession likely ended this summer and the economy will likely expand in the second half of this year". They certainly know the first rule of being an ADVISOR: CYA

The numbers being released by the Government (if you believe them) also point to a very positive picture on the economy:
--- U.S. manufacturing expanded in August for the first time in 19 months;
--- U.S. retail sales were up in August by 2.7%, the most in three years thanks to the Government's "Cash for Clunkers" program. Also other sectors are starting to see demand rise.

But one big question remains unasked: How does the Fed raise interest rates without causing a double-dip recession? At some point, the interest rates we have today that are by far artificially too low will cause inflation to rise. Before that happens, interest rates will need to rise or we will be set up for another boom/bust. Does anyone wonder why if Bank Reserves are increasing sharply, why are they still not lending? Could it possibly be that lending 30 year money at below 5% is the next Savings and Loan crisis in the making? We all know that the reported CPI figures cannot be trusted, but does anyone really believe that the interest rates will not rise above 7% sometime during the next 30 years? As of now, neither Bernanke nor Geitner have yet devised an Exit Strategy. So, until we find out what that strategy is, any projections on the future are pure speculation.



Has anyone factored in what happens to the economy after both CAP & TRADE as well as a new HEALTHCARE BILL come into effect? Not to mention the effect of the elimination of the Secret Ballot when voting for Unions? The Unions already got Obama to initiate a fight with our largest creditor, China, over tires without our own industry even registering an un-fair trade or dumping complaint. What comes next? Does anyone really think that everything will be just "Business as Usual?"

THE BUSINESS OF FORECASTING: Have such poor results because all they do is project the recent past forward. That's like driving a car while only looking through the rear view mirror. Anything that requires a correction even a minor one is an accident just waiting to happen. Does anyone really believe that turning 40% of the economy into Socialism will have no detrimental affect, when we know through both empirical as well as theoretical evidence that Socialism does NOT work?


What will be the consequences of even $1 trillion (Government's own projections) a year in deficits as far as the eye can see, let alone a more probable $2 trillion once all of the proposed NEW DEAL programs go into effect?


We are already in the worst recession since the 1930's. Any economist worth his salt knows that it was the Government's NEW DEAL POLICIES that turned what should have been a normal recession into the Worst Depression in our history. Back then, not only did the USA have 80% of the world's Gold, but it was the world's largest Creditor as well as the Largest Exporter, (Yet we're the ones who started a trade war with the rest of the world by passing Smooth Holley). Today the picture is somewhat different. The USA is the world's largest debtor with the world's largest trade deficits. Our dollar is sinking like a stone and there has not been a Gold audit in over 50 years. Yet we are still looking to start a trade war.

I am sorry to say that DEPRESSION is already baked into our cake. It is no longer a matter of if but WHEN.


The stock market's recovery in percentage terms has been quite impressive (about the same as the 1930 Rally). One possible reason is that the 10-year cycle peaks this year. Therefore 2009, according to the 10 year cycle, should be a recovery year. But beware - cycles are not exact and a market sell-off always follows a market peak. NOTE: There are many cycles and there are cycles within cycles and every major cycle also has a half-cycle component. We must therefore consider that the five-year (half) cycle is on its way down at the same time that the 10-year cycle is peaking. This usually produces sharp sell-offs, mostly into December. Which is then normally followed by a reflex rally which coincides with a most common January rally. That would be your last chance to get out and go short.

Next year, the dominant cycle should be the four-year (election) cycle which in 2010 is DOWN and the 10-year cycle having just peaked is no longer up. The four-year cycle, also known as the business cycle is due to bottom next October. So 2010 should be a down year for both Bonds and Stocks, EXCEPT FOR GOLD AND SILVER and their stocks.


One of the cycles most Elliott Waver's and I are focusing on right now is called the Grand Super Cycle. This 120-year cycle is the major dominant long-term cycle but it, like all cycles, can be split into components. The 10-year cycle is one of them and So is the Kondratieff 60-year cycle and we are now in what is commonly referred to as the K-Wave, (which I have already written about, check my archives Dec. 07). The last time the 120-year cycle (also often referred to as the Revolutionary Cycle) bottomed was 1894 and is next due to bottom in 2014. When it bottoms, it very often produces a revolutionary change of both Economic and Sociopolitical significance. The final years of the 120-year cycle has always coincided with deflation and depression (WORLD WAR?) BE PREPARED!

Looking back into just our own history, we first find that the American Revolution occurred during the 1770s. The next time the 120-year cycle bottomed was in the 1890s, which coincided with a major depression and the U.S. transition from an agricultural to an industrial economy. This time around, the 120-year cycle is due to bottom in 2014 and I am expecting depression-like conditions between now and then. Based on what I see going on today, we may well see another revolution, which most logically will be Socialist with the government ending up in control over most major segments of the economy. It may even mean the end of the Free Market Capitalist economy as we now know it.

However, GOD works in mysterious ways. The coming revolution could be that the American people wake up, shake up the government in 2010 and 2012 and move back towards our Constitution and Capitalism. It's now all in the hands of the people. Is there a Leader that arises out of the ashes of Depression?


For almost 5 weeks now, I have been looking for a major TOP and a resumption of the Bear Market, but all the market has done is produce a series of minor pullbacks as it edged ever higher and has become more and more overbought. Presently, it is trying to break out of a rising wedge formation, the opposite of what we would normally expect with that kind of a bearish formation. This kind of behavior continues to supply us with evidence that bull market rules still apply for the time being, but watch out.

Many market indicators are overbought and topping, presenting us with yet another setup for a TOP, but bull market rules say we shouldn't count on it just yet. A small pullback is more likely. To be sure, all bullish assumptions will ultimately prove wrong when the final top of this rally arrives, but trend following models have kept me from pulling the trigger prematurely.


Finally, and perhaps most importantly, the masses are jumping big time into equity options on the call side. This is a MAJOR warning sign to me as retail option traders rarely if ever walk away big winners.


Both Government and all of Wall Street are expecting Great Earning as comparisons with last year will be easy to beat. Some analysts are projecting as much as 5% rate of GDP growth for the 3ed Qtr (with anywhere between 10% to 17% unemployment; really?) With expectations so high the very best numbers have already been discounted into today's prices; so whether or not they are achieved the market will head DOWN. If the numbers are disappointing the market will CRASH.


Although I remain on my 3/9/2009 buy signal, PERSONALLY I am out of all my long positions and I have taken some initial short positions by buying BGZ, TZA, and FAZ and the only longs I still own are all in GOLD and SILVER. I have not yet purchased any options.



It seems to me that the days of buy and hold, hoping for long-term gains in stocks are over; except for Gold and Silver. Long-term investors who are worried about what's going to happen in the next few years should definitely have a major portion of their savings in Gold and Silver.

As most of you know, I have an extremely aggressive long-term price objective of $6250. I also have what I think is a conservative upside target in Gold of $1250 for this year, even though the 10-year cycle for stocks in general is peaking. Since Gold often moves in the opposite direction to stocks, that's usually been good for Gold, although some analysts are saying that Gold is overbought on both a short and a longer-term basis. The last time that the major 10-year cycle peaked, Gold exploded. Check and see how well Gold did in the Fall of 1989 and, of course, 1979. At both those times, I was ultra bullish while the same bears of today were bearish back then as well. This recent little sell-off could be your last time to buy cheap.

As you all should know by now, UNCOMMON COMMON SENSE is not a day or even a short term trader especially when it comes to Gold (which will shortly become the ultimate source for safety not only for the average investor but for governments as well). Some governments, through the Bullion Banks, have for many years cooperated to hold down the Gold price, but some may have stopped selling, and some may have even started buying. The Russians are reported to have bought 300,000 ounces in August. The Chinese want to buy the entire 403 tons of IMF Gold that is up for sale as well as expressing their intentions not to chase, but to buy Gold on dips. And who knows if the Gold on the books of the Central Banks around the world and especially at Fort Knox is all still there since, like the FED, they refuse to do any audits.


It seems to me that a disconnect has developed between the price of Gold and the US dollar. The major long-term problems we're facing are both Inflation and Depression and although it may sound contradictory, Gold will outperform regardless of what happens. Historically, the two best times to have owned Gold have been during Hyper-Inflation as well as during Hyper-Deflation. Why? Because Gold, during the worst of times, is viewed as a safest of havens, especially if both Economics and Politics are clashing, like they are today.





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Aubie Baltin CFA, CTA, CFP, PhD.
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Palm Beach Gardens FL. 33418
[email protected]

Minting of gold in the U.S. stopped in 1933, during the Great Depression.

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