Between the Lines

"The House of Representatives ... can make no law which will not have its full operation on themselves and their friends, as well as the great mass of society. This has always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together. It creates between them that communion of interest, and sympathy of sentiments, of which few governments have furnished examples; but without which every government degenerates into tyranny." --James Madison, Federalist No. 57, 1788

"There is a certain enthusiasm in liberty that makes human nature rise above itself in acts of bravery and heroism." --Alexander Hamilton, 1775


I have always been amazed at how most everything is looked at as either black or white by most people and especially analysts. Either the economy stinks or it is wonderful. Either economic data portends a MARKET CRASH or it heralds the greatest rally the markets have ever seen. The problem, naturally, is that the markets do not exist in a world of absolutes, of pure and simple; up or down parameters. To make it even more complicated, the multitudes of variables are always changing, but the most complicated variable of all is the weightings that applies to each one; it is rarely the same even during what seems to be similar times. They operate in shades of grey and never, ever go in straight lines. I bring this up because the current earnings season is coming to a rather underwhelming close, raising doubts, at least for me about the progress made in stock prices since last fall being decoupled from the underlying profits generated by companies. There is some merit to this concern because as of 2 weeks ago, roughly 400 companies in the S&P 500 had reported their quarterly numbers, but only 63% of them have beaten expectations. This is below the recent average of 70%, and should the trend stay constant, would represent the lowest "beat rate" since at least the fourth quarter of 2008. Yet the stock markets, having already surpassed the 2011 highs, are within spitting distance of surpassing the 2008 highs and probably beating the all time record DJII high of 14,200.

The mediocre earnings season does not seem to be dampening investor enthusiasm because, in typical black-and-white fashion, the return of risk appetite is overwhelming. Any fleeting thoughts that the market might be getting ahead of itself is immediately dispelled. What is lost in this type of analysis is the fact that the environment for earnings, does not go in a straight line either - companies may well have exited 2011 on a stronger note, but it is more reasonable to expect a degree of ebb and flow and so earnings may not meet the expectations of the analysts, money managers and/or the individual investors. The "Proof of the pudding is in the eating." This 100% rise over the last 2 years has occurred on record low volume and that, troubles me greatly. The $ trillions of sideline monies in the face of record optimism are not willing to come back to the markets. Why? The truth of the matter may be that the improving economy is not really improving at all, but is being juiced by a combination of QE's and manipulated Government statistics that is completely distorting the true picture. The General Markets, although up every week so far in 2012, tend to give investors the impression that the immediate past will extend far into the future. But, as anyone with even a modicum of experience can attest, this is not usually the case and I and THEY ARE NOT BUYING IT.

Estimates for the last quarter of 2012 are so optimistic that we wonder where, with at best a projected 2% GDP growth rate, all those forecasted earnings can possibly come from? Especially given the lowest worker participation rate since 1983, and the inflation rate, how can the economy produce those projected real earnings and GDP numbers?


Perhaps a far better explanation for the markets rise is (a) the year-over-year rate of growth in the US Money Supply(MS) y; which was reported to be about 14% and (b) December 2011 was the 36th consecutive month in which the YOY rate of MS growth was 10% or more, and (c) if the YOY rate of MS growth remained above 10% for two more months, then it would be the longest period of double-digit money-supply growth in US history. So how can we be in 'danger' of experiencing a serious bout of deflation, given that the US is in the midst of a record-breaking period of monetary inflation. Based on preliminary data for January 2012, the YOY rate of growth in US MS has accelerated to 15.4% over the past month. This leaves no doubt that a new US monetary inflation record will soon be set, which would be a better explanation for the booming optimism and rising stock markets: But one that cannot last. After all, we should have known that since it is exactly what Bernanke has been hinting at (without actually saying so) - so much for the FED's promise of a new OPENNESS AND CLARITY. If they are so open why does everyone argue as to what Bernanke is really saying?

The question is: If there has been so much monetary inflation over the past few years, why hasn't there been much more "price inflation"? The answer is obvious: The Government has been jiggling the numbers and outright lying to us for years. The above question is misleading, because it is based on the false premise that prices generally haven't risen by much in response to the growth in the money supply. The reality is that most prices have been driven by monetary inflation, especially Real Estate until 2008 and Gold OIL the stock market and commodity prices are now much higher than they would otherwise be. For example: Monetary inflation explains why the S&P500 Index, despite being 12 years into a valuation-compressing secular bear market, is only about 2% below its 2000 all time high in nominal dollar terms. It also explains why copper is priced at around US $4/pound and oil is priced at over $106/barrel, despite the economic problems in Europe, China, the US and Japan. It also explains why the soybean market, which for decades had a price floor at US $5-$6 and a price ceiling at US $10-$11, now appears to have a price floor at US $10-$11 (the old ceiling has now become the new floor). The fallacious idea that prices haven't risen by much is based on government manipulated price indices that purport to measure the economy-wide movement in prices. These indices clearly understate the extent to which prices have risen: Meaning that the actual amount of "price inflation" reported by the US government is grossly understated. Did I hear someone say BUY GOLD?

That being said, the response to such a large expansion of the money supply is not a surprise to me, because I am always searching between the lines for the truth. However, one of the dangerous characteristics of monetary inflation is that it is never possible to know, in advance, exactly how it will distort the price system. What we do know is that a large increase in the money supply ALWAYS leads to large price increases somewhere in the economy. The best we can do is make an educated guess as to which items/investments will be the main beneficiaries of monetary inflation.

The bottom line is that monetary inflation in the US is doing what it always does. It is boosting prices in ways that can't be predicted with complete accuracy by anyone, let alone by central bankers employing hopelessly flawed Keynesian theories. Although I accurately predicted the rising commodity prices, especially gold and silver, I have been sadly lacking when it came to the stock markets recently. Thank goodness for my policy of always using 10% trailing stops. So in actual practice, we still made some money since I accurately picked most of the short term tops and letting our trailing stops lock in some profits while getting us out of harm's way.


According to Credit Suisse: "The probability of The Largest Disorderly Default Loss in History Has Increased Dramatically". The best overviews of the never ending Greek soap opera (every soap opera eventually ends), although when it comes, the denouement is usually a whimper. In the case of Greece, it will be anything but. Yet listening to the daily cacophony from Europe's leaders and our media, who are clueless as to what is really going on, one may be left with the impression that there is a simple solution to the problem and Greece may be "saved... within hours." It can't. In fact, as of today, "I am left with a sense that the probability of delivering the largest default loss in history within 3 months has increased relative to doing so in an orderly fashion".


As a reminder, Credit Suisse (CS) was the one bank smart enough to choose to completely ignore day to day news flow out of Greece (as it is literally just noise with absolutely no clear signal). Wish we could say the same for our Government, FED, analysts and the media. As such, CS' "view remains that, in any case, the chance of a disorderly outcome sometime in the near future is high, so to that extent the immediate events are not really central to their or our point of view." Quite fascinating indeed, because they show to what extent an un-raveling economic and financial system will go to pretend that the number one unfixable problem in Europe is the lack of money and good assets available to be sold, reposed, pledged or otherwise monetized. The real problem is a bankrupt Socialist system that can no longer borrow enough money to keep the Socialist Party going. NOBODY IS WILLING TO PAY THE PRICE OR ACCEPT ANY CUTBACKS. As I have observed previously, at this point it doesn't matter for Greece- even if the country gets the second bailout, which will be used almost exclusively to recycle cash into the failing banking system. Europe will have a first lien on nearly 150% of its GDP. At that point, the country is both a de facto and de jure colony of the Troika. The longer the crash is delayed, the fewer assets will remain in Greek possession, and the poorer the population will be for the inevitable fresh start, with or without the Euro.

So meandering regurgitations aside, because all this has been said one hundred times already, here is Credit Suisse's latest attempt at a fresh take on events. "We are cautious about reports of the exchange running out of time: The March 20th binding constraint is a GGB maturity. Greece is sovereign and has run out of money; it can choose the timetable. The case might be different if the maturity were a US Treasury Bond (but perhaps not that much. Different)."

The real issue remains the ECB's exposure to the BOG. Protecting that (i.e., ensuring that Greece does not systematically default via introducing a new currency) becomes the bottom line, as the latest Flash explored. Since my objection to leaving EMU is that its corollary is systematic default, bank nationalization and the like, once the latter problems are a given (a situation towards which we seem to be heading rapidly in Greece), then the cost of the incremental step of introducing a new currency becomes less. The economy would subsequently euro-ize but potentially at a different cost level. The effect of the delay would have been to transfer the cost from Greek citizens (who by now have moved substantial sums of money and other movable assets out of the country, providing in fact a source of subsequent financing that makes the equation even more attractive) to the ECB. The core has a very serious problem and the probability of a major 'Crash' is rising. I remain very cautious about the long-term sustainability of the debt with or without a restructuring, but even if by some miracle a final solution is agreed to, that will not be the end. It is just the beginning. WHO is next? Italy, Portugal, Spain or Ireland? And what about the rest of Eastern Europe or even France? Do you think that America and the rest of the world are immune? How much confidence will the people still have in Fiat Currency and then what? BUT the biggest problem of all and one which nobody is even talking about are the 1000's of trillions of dollars of outstanding CREDIT DEFAULT SWAPS (CDS) that would come due, that no bank has fully accounted for on their books.




The entire 2012 presidential election could well hinge on one number: the unemployment rate. Here's my prediction: Sometime around July or August, the official unemployment rate will dip below 8.0%. At that point, Obama will say that "unemployment is lower than when he took office" and will try to ride this one statistic to re-election. That theme has already been launched with the media touting that the January's unemployment rate was the "lowest in years. What Obama and the media won't tell you is that the unemployment numbers have two built-in, huge, fudge factors that are hiding the real unemployment situation .

Firstly, the numbers are "seasonally adjusted," which is why the actual number of employed persons could decrease from December to January by 737,000 and the government can report an increase in total employment of 847,000. I'm sure this "seasonal adjustment" figure is very complicated and requires hundreds or perhaps thousands of highly trained bureaucrats to even understand, let alone calculate it. Let's move on to the second fudge factor:

The "labor force participation rate."
Simply put, the labor force participation rate includes those who are working and those looking for a job. This rate defines the "civilian labor force" which is the basis for the unemployment rate. Apparently, if you are so discouraged by the NON-Recession that we are in and you quit looking for a job altogether, you are no longer counted. And you effectively cause the unemployment rate (%) to drop. Go figure.

From January 2005 to January 2009 (during Bush's last term), the "participation rate" changed very little (65.8% to 65.7%). In just three years under Obama, the labor force participation rate has reportedly dropped to 63.7%. This two percentage point drop brings the participation rate to the lowest in nearly three decades and makes all the difference. If the participation rate had stayed the same, even using the "adjusted" employment numbers for January, the unemployment rate would have been 11%. If the labor force participation rate dropped 1% to 64.7%, the adjusted unemployment rate would be 9.7%. If we use the non-seasonally adjusted numbers and a static participation rate over the past three years, the unemployment rate looks even worse. Obama can't get re-elected at 11% unemployment or 9.6% unemployment. He needs that number to be under 8%. So they count a smaller and smaller percentage of the population as actually being in the workforce. In an all out effort to get RE-ELECTED


The VIX - which acts as the market's "fear gauge" - surged 20% higher last month... well on its way to the expanding volatility I've been calling for. But as we've seen lately, just as the VIX appeared ready to break out to the upside, the market smacked it back down. Who was it that smacked it back down?

As you'll notice, volatility has been falling since last October. This makes sense, since the VIX tends to soar when the market drops and vice versa. Since stocks have been moving higher, it's no surprise volatility has moved lower.

But notice that the VIX has drawn out a falling-wedge pattern. This occurs when a stock makes a series of lower highs and lower lows, but the distance between each high and low gets narrower. When this pattern occurs, the stock usually breaks out to the upside. And that is exactly what the VIX did last month. But subsequently, the VIX gave up a good portion of last week's gains. Folks might now be tempted to ignore the breakout and look for reasons to increase their optimism. Have no fear, Wall Street and the media will supply them with plenty of reasons.

Most of the time, when a chart breaks out to the upside of a falling-wedge pattern, the initial move is sudden and violent. That's what we saw with the VIX and its 20% rise. But then the chart comes back down to retest the breakout level of the wedge (NORMAL) before reversing course and heading even higher.

However, I suspect that what the VIX is starting to do right now is rather than setting up just a normal Sell SIGNAL, it is further reinforcing the setting of the stage for the Biggest BULL TRAP in HISTORY by resuming its down trend and making ALL TIME NEW LOWS commensurate with a NEW ALL TIME HIGH (maybe even above 14,200).


"You've Got To Know When To Walk Away…" Both investors and advisers are excessively bullish: strengthening the overbought argument: The main point being that investors need to be extremely cautious when playing either from the bull or Bear side, by either using hedged options strategies or using tight stops. The next pullback may be a great buying opportunity or it could be the beginning of a very ugly summer.


Warren Buffett has once again reaffirmed his opinion about gold's "significant shortcomings." He said that gold is "neither of much use nor procreative." He also suggested that gold was a bubble and compared it to the internet stock and housing bubbles. "While the majority of the world's investors and the public were chasing Real Estate; today; less than 2% own any gold." His thoughts regarding gold are a rehash of similar negative views on gold repeated in recent years. Once again, he shows he does not understand gold and real diversification. He does not or chooses not to understand gold as a safe haven asset in a portfolio or more likely he's acting as just a "shill" for the administration. FYI Buffett is considered to be a Capitalist, which he is definitely NOT: A CRONEY CAPITALIST yes, which is an oxymoron. Since a Crony Capitalist is in reality a Socialist( Fascist) which is the furthest thing away from being a Capitalist since a Capitalist is a synonym for FREEDOM and would have nothing to do with a Central Planning Government. The less informed continue to have a blinkered anti-gold bias. They continue to focus solely on gold's nominal price and assert that it is in a bubble. It's not even close to being in a bubble. It is directly related to the FALLING US Dollar: .Although It will end up being in a bubble, but not before 2017 and over $5,000+ /oz. and especially since most gold holdings are NOT on margin. Bubbles are always precluded by record margin buying: Such as Zero % down or real estate.

HOW CAN GOLD BE IN A BUBBLE WHEN LESS THAN 2% of the world's investible funds are invested in GOLD?

The uninformed refuse to see gold as a form of financial insurance in a diversified portfolio. This is changing slowly with a very gradual growing appreciation of gold's importance as a safe haven asset in a world of massive paper and digital Fiat money creation and in a world where each country is trying to devalue its currency in order to improve their exports. They are all in a RACE to the bottom. Continued monetary creation seems to be the only game for as far as the eye can see.

Even Kramer is now bullish on Gold. But notice how few questions he gets on either Gold,Silver or their Stocks.

There's no doubt about it, the stock market had a fantastic January, February and March. But here's the bad news: Companies in the S&P 500 that released their earnings reports in January (with 49% of S&P 500 companies reporting so far) have had their worst performance since the economy supposedly rebounded (source: Financial Post). Just 46% of those companies have beat market expectations-the lowest reading since the third quarter of 2008. (What should you have been doing back in 2008?) Many companies were citing increased input costs, a new general economic slowdown worldwide and the Euro-Zone credit crisis as factors that affected their earnings reports (sound familiar?)

While it will take a few more weeks for most S&P 500 companies to have the visibility required to make more reliable forecasts for the current year, many analysts are now expecting that revisions to the S&P 500 earnings will be mostly to the downside in 2012.


ETFs are just paper: But there's two ETFs that are not just paper. In fact, owning units of this ETF: PHYS (Pyse) SPROT Physical Gold Trust And ( PSLV) SPROT Physical Silver Trust gives you the right to actually take delivery of your gold and silver if over $100,000. And although they trade on the NYSE and TSE, they are Canadian Corporations based in Canada and all their assets are held in solid Canadian Banks in Canada out of reach of Obama's and the IRS's grasp.

More and More people are losing faith in both Government and their currencies -

We are in the most trying times in our nation's history. We can either succumb to our Government's and the World's folly and go down with the ship or protect ourselves and personally prosper. Do you really think the time is right for you to be going it alone? As always, the choice is yours.





As my contribution to ease some of the pain during these hard times, I am offering a Spring Special to all old and valued subscribers to either renew or extend their subscription for only $349 for a full 2 years. OFFER Expires April 30th.


To encourage new members to try a Trial or Full Subscription, I am offering the A 5 month Trial Subscription for only $99 or a full 12 month Subscription for only $249. To subscribe, Call as we accept most major credit cards OR simply mail a check for the required amount to:

Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
[email protected]

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.

Gold's special properties mean that it has a greater variety of uses than almost any metal.

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