first majestic silver

Blowing Bubbles

January 23, 2010

"IRRATIONAL EXUBERANCE" It has been my contention since September that we are in a period that looks nothing like the past, but I was wrong. More and more it is looking like the second half of 2007 as the flood of money from both the Bailouts and Stimulus packages, while not doing very much that is positive for the economy, has definitely restarted the Commodity and Stock Market inflationary BUBBLES . To use backward-looking data to project the immediate future carries the risk of being very misleading. Stock markets around the globe have posted incredible gains since hitting what, in my opinion, was only a temporary bottom in March 2009. Sentiment-wise, we are back to the area of all time high IRRATIONAL EXUBERANCE (as measured by all Overbought/Oversold and Sentiment gauges) as Wall Street, the Media and most investors are back to a "business as usual" mindset. However, the US and global economies will face some serious headwinds this year. In fact, even bigger problems than last year still lie directly ahead. The Stock Market discounts the future; is that not what they keep telling us? Reading the economic TEA LEAVES of the unintended consequences of the recent and future government tax increases, starting with Obamacare, Cap & Trade, Expiration of the Bush Tax Cuts, on top of increased spending and deficits makes me believe that it is more and more likely that we are headed for a DOUBLE DIP RECESSION come DEPRESSION

In 2009, we witnessed central bankers around the globe injecting massive amounts of Fiat liquidity into their economies to avoid a Financial Meltdown and Global Depression (except for China whose stimulus package was four times larger in percentage terms than that of the USA, with most of it going into Real Estate). In the US, most of the stimulus went into bailing out their Frat Buddies, Unions and the too big to fail Banks and Car Companies with barely a dribble going to where it would have done the most good.

The immediate problem now becomes the natural INFLATION that always follows ultra low interest rates and massive injections of NEWLY PRINTED money; that must somehow be drained from the economy in order to avoid HYPER INFLATION and herein lays the problem - Bernanke, Geitner and the Government do NOT have any exit strategy, certainly not before the November Elections. Simply put: Government funding cannot remain the primary source of growth for much longer; especially since it's not working except for pushing even the manipulated inflation numbers higher. The cost of the support packages have stretched worldwide finances to unsustainable levels in most countries with little if any benefits to show for it. Europe is in even worse shape than the USA. We are about to come face to face with THE reality that $ocialism does NOT work.

NB: It is evident that the more certain people are that they have the correct view, the more they distort new evidence to suit their existing expectations. Being human, I too succumbed to this phenomenon for awhile. But my constant re-evaluation and re-assessment of my mistakes opened my eyes early enough so that it only cost us opportunity and not any real HARD money. Fortunately I picked every short term HIGH and it was our use of tight stops that kept us out of harms way, while our over concentration (75%) in precious metals kept us all in positive gains with the balance sitting in cash, waiting for these latest bubbles to blow up.


The risk of inflation and asset bubbles is intensifying in China since the Chinese are expected to pull the world out of recession. However their economy, being only ¼ the size of the USA, is not capable of doing this (please don't confuse me with the facts). Any slippage in China's growth or a BURSTING Bubble (beginning with Real Estate) will seriously damage confidence and be felt across the globe.

Everyone is betting that Chinese growth will save us all. And China is under pressure to live up to that reputation. So it's very possible the Chinese Government will not take the necessary steps to control capital misallocation any more than we have. The country's unprecedented liquidity and credit expansion already points to huge inflationary, asset bubbles and banking sector risk in the very near future. They will have to find the perfect balance between avoiding a major domestic crisis and keeping the Real economic expansion going. This is something that has never been done before. Is a Fascist Government any more capable and smarter than the Socialist-Capitalist governments of the West? We shall soon find out.

The BIGGEST Financial Weapon of Mass Destruction

America and the World are now sitting on the world's biggest ticking financial time bomb, largely because we've pursued some of the most reckless financial policies in history. This toxic asset is U.S. Treasury Bonds…specifically Treasury Bonds with maturities of 10 years or more. They're the world's most popular investment by far… and now they're about to turn out to be the world's most dangerous!


Buffett recently said that the coming inflation "has the potential" to be worse than the double-digit rates of the 1970s. And Jim Rogers, of the infamous Soros, Quantum Fund, warned that we are facing an "Inflation Holocaust."


On December 29, 1989 the benchmark Nikkei 225 Average reached a peak of 38,915.87. Not even the gloomiest pessimist could have imagined what followed. The NIKKEI started falling and did not stop until one day it closed at 10,638.06, just about 75% below that all-time high. In the early stages of the decline, there were two very widely held views: The first was that the Nikkei, after a minor correction and having reached 40,000, would resume its growth and power ahead to 100,000. (Some Pollyanna projected a DJIA of 36,000) The second fantasy was that, having started falling, it would rebound after hitting 30,000. Will the Japanese experience be replicated as the world tries to emerge from the financial crisis of the past two years: Which we are still in, since we have not fixed any of the underlying problems? All we have done thus far is paper them over and slide them under the rug. Ignored problems do not go away, they only fester and get worse.


Although I rarely read it ever mentioned, a lot of pension funds went bankrupt in the 1930's and those that didn't had to drastically reduce their payouts while countless companies declared bankruptcy. And today like back then I have never heard a discussion or comment about this unmitigated disaster that we are once again not facing. However that does not change the fact that Our economy's CAPITAL and Accumulated Savings of all kinds has been seriously damaged and/or completely wiped out by Government manipulated low interest rate Keynesian policies and Anti Business Rhetoric. This is exactly the same as what is happening today with the main difference being the greatly expanded scale of today's capital destruction. And more importantly, the much weaker position of the US economy.

Falling interest rates have a devastating effect on accumulated capital as it is destroyed across the board simultaneously and stealthily. Nowhere is the erosion of capital more obvious than in the case of pension funds. The falling rate of interest frustrates and prevents the original schedule of capital accumulation from being met, forcing otherwise prudent investment managers into taking exorbitant risk. The massive amount of Toxic Assets are, like the Banks, being carried on their books at face value, so that by the time the damage is discovered, it will be too late to do anything about it and firms will go bankrupt in droves. Will the Government be able to take over all of their Pension Fund obligations or just those of the union's?

Instead of analyzing the Great Depression as well as the more recent Japanese 20 year malaise honestly instead of politically, American policymakers have decided to follow Japan's leap into the Black Hole of zero interest rates and the predictable result will slowly but surely become catastrophically evident. The falling trend of interest rates was the unrecognized cause of the Great Depression just as it, in conjunction with a falling dollar, will be the main cause of our coming Depression as well.

In Bull Markets, any cowboy can make money. But Bear Markets, well that is a horse of a different color. Bears are much more dangerous and complex: You can no longer play them just one way. Gone are the days of BUY and HOLD and collect dividends. Bear Markets bring sharp rallies and all kinds of false signals and false hopes intertwined with all types of fraud and abuse from people and places where you would least expected it (Pension Funds, Social Security, best friends like Bernie Madoff, Government officials like Paulson, Greenspan, Bernanke, Politicians, our President and anyone else in between).

The outlook is not good; in fact it is downright scary. Long-term issues include:

  • A rapidly increasing-aging population (following in Japan's footsteps.)
  • A massive and rapidly growing debt burden both public and private sectors.
  • No sign of a bottom in housing and a Commercial Real Estate Re-Financing Bubble that is just about set to implode.

I have just named a few and that does not include a whole series of problems that are so serious and dangerous that both the Government and Financial System are sweeping them under the rug (off the Balance Sheet), such as $500 trillion in interest and credit derivatives that are rarely if ever mentioned and worst of all, company depreciation schedules and interest received there on, that are not nearly enough to replace their respective companies' worn-out capital equipment.


The inevitable has finally arrived. The troubled U.S. commercial mortgage-backed securities (CMBS) market is fast approaching that critical stage that I have been warning you about. The loan delinquency rate climbed 42 basis points in December and reached an all time high of 6.07% of all outstanding mortgages; and the percentage of loans 30 days or more past due has climbed above 6% for the first time ever.

Weimar Germany entered into its hyperinflation spiral when its ratio of government borrowing to spending hit 60%. Today the U.S ratio has now crossed the 40% mark - meaning that the U.S. Government is now borrowing over 40 cents of every dollar it spends - and the ever increasing government deficit spending, not including the newly proposed new stimulus, is putting us into very dangerous territory. To make matters worse, the U.S. isn't in the worst shape of the world's many sovereign deadbeats. And yet stock market around the world are indifferent, climbing a wall of Irrational Exuberance (instead of a wall of worry) fostered by Wall Street, Government and Media lies and misrepresentations of the economy's true situation. Meanwhile, Gold and Silver, are consolidating in preparation for their next explosive move higher, Oil, however, is looking Tired and perhaps over speculated in, after all demand has been steadily falling; maybe signaling the onset of the Double Dip Recession?. The warning signals and implications are all being ignored by the very same liars mentioned above.

Interestingly, the dollar's putting in a pretty strong rally against the basket of competitive fiat currencies that make up the Dollar Index, The fact that most of the rest of the world's currencies and economies are in even worse condition than the US is really no consolation for anything but the short term. The era of tangibles versus invisibles is far from over. In fact, if we're right, it's really just getting started.


The much anticipated Gold correction was sharper and faster than even I projected. Nevertheless it was right on target. And as you might have expected, the short-sighted "hot money" and new, jump on the band wagon, Gold Bugs found all the stupid reasons they could to justify selling Gold.

One argument against Gold comes from everyone's favorite Maven, the nearly-nationalized Citigroup who, in a recent research report purports that, "There is no obvious relationship between the Gold price and inflation." As their evidence they use a convenient but flawed chart that only began in 1987 when the biggest divergence between inflation and Gold occurred. This was caused by the credit crunch, when across the board margin calls caused forced selling of everything that still had a bid. Especially Gold since GOLD ALWAYS HAS A BID.

The strongest Real reason for Gold's rise, aside from inflation, is low interest rates. Right now, real interest rates are negative and the resulting impact always produces asset bubbles, the latest ones being the stock and commodity markets. WHY? Because when real interest rates are below zero, cash and long term bonds eventually must lose money. In this environment, it's nearly impossible to find decent yields. As a result, savers and investors, pension funds etc., are forced to turn to other assets which offer returns above inflation, but are much more risky (Junk Bonds, commodities and thinly traded foreign and emerging markets). Historically, when real interest rates are negative, they turn to Gold. So the question is, "How long can real interest rates stay negative?" As long as real rates are negative, more and more investors will be forced to turn to Gold as their only safe heaven alternative. In the 1970s Gold boom, Gold's ultimate high was determined not by how low real interest rates fell, but how long they stayed there. The big Gold correction in the mid-70s came when real interest rates and the dollar rallied and that's exactly what's going on today. There's a general expectation that the Fed will raise rates by the 3rd quarter of 2010, which might make sense on paper, but only if you forget about mortgage rates, the wave of adjustable (ARM) resets, shrinking credit, stubbornly high unemployment and an exploding Federal Debt. A miserly 1% interest rate increase explodes the budget deficit by $250 billion and wipes out all bank assets as their derivative losses explode. But the strongest and surest reasons of all why they won't raise rates are the November elections. Did I hear anyone say FED INDEPENDENCE?


Despite Bernanke's and Geitner's "Talking Up the Dollar" speeches, there's no way the Fed can raise rates more than a quarter or a half point at most, which would be strictly for show. Over the past two years, we've watched as the Fed's response to every conceivable problem has been to slash short-term interest rates to zero and depress long-term rates as best they can. Meanwhile, just as I have been warning you, even the official inflation rate has started to climb and, depending on the source, the actual rate of inflation is much higher than reported. Basically, we're going to be in a negative interest rate environment for the foreseeable future. (They don't know any better) And extended periods of low and/or negative real interest rates have always led to asset bubbles. Recently, low rates are the key drivers of our new Stock Market Bubble as well as Gold's rise, which normally goes in the opposite direction to stock prices.

The Stock Market is hugely overbought and the coming sell-off will create massive FEAR and drive more and more investors into Gold. So, while the mainstream focuses on phony, artificially low reported inflation, they are completely overlooking the real catalyst for Gold's recent correction which is exactly that - a correction and a buying opportunity.

THE REAL DRIVERS OF GOLD ARE GETTING EVER STRONGER: INFLATION, GREED and most important of all FEAR, the strongest driver of all. You "ain't seen nothin yet" until you see a Bull market driven by both GREED AND FEAR.

I am completely baffled by the refusal of knowledgeable analysts to entertain the prospect of substantially higher precious metals prices, even when all the relevant fundamentals have been enumerated, explained and quantified,

THE MOST COMPELLING REASON TO WANT TO OWN GOLD is directly attributed to the massive increase in the amount of US dollars that are being created daily and will continue to be into the foreseeable future. That includes both the printing as well as the monetization of US Federal Debt, which is causing more and more people both at home and abroad to lose faith in the safety of the US currency.

The simple truth is that Gold is the only "real" money amongst the world's paper IOUs that are referred to as money and that are all backed by the sinking US Dollar.


In all cases, inflation is a monetary phenomenon. In plain English, what that means is that inflation is the creation of more money at a faster pace than the economy is growing. It brings about "too much money chasing too few goods."

We could be in a DEPRESSION, but as long as the economy is shrinking and the value of the currency falls faster than the decline in prices, you would still have inflation.


Those who are wedded to the idea of a "V-shaped" recovery became excited over last month's jobs report. Unemployment rose by only 11,000 jobs (if you did not look at the underlying numbers or ignored the household survey). The consumer confidence surveys have begun to rise nicely. The Index of Leading Economic Indicators has now risen for six months in a row. Productivity is up and surveys indicate that consumer spending is up. GDP growth in the fourth quarter is expected to be in the 3%- 5% range. (How do we accomplish that while working at 75% capacity?)

These are all reasons to be bullish, if you are looking for reasons to be bullish, If you don't examine the underlying data, you can feel good. The problem is that when we look past the headlines and delve into the data, there are more concerns than promise because the reported #'s just don't make sense. For instance, take the contention that consumer spending is rising, but only if you ignore The Liscio Report that states that "Sales taxes are declining and the current survey is showing even worse numbers." Furthermore, we also discovered that credit card lending dropped $17 billion last month, the largest drop in history. If savings is up and credit is down and with real unemployment in a range of 15% to 17%, where did the rise in consumer spending come from?

Remember, these numbers are mostly surveys and/or comparisons with a disastrous 2008. To further confuse and misrepresent the facts they compare same-store sales for chains like Best Buy, which no longer has competition from bankrupt Circuit City, as well as other chains that also had competitors that have since closed stores or gone bankrupt, forcing buyers to the remaining stores. The key to watch is sales taxes. When they are rising, consumer spending and confidence is rising, but even then, rising from record low levels well below any level in previous recessions. This certainly does not indicate a robust economic rebound. Also remember Nothing ever moves in a straight line.

Martin Feldstein was quoted as saying that "the recession is not over. Indeed, if you look at past recessions, it is not all that unusual (8 out of 11 times) for there to be positive GDP quarters in the midst of an ongoing recession".


The Futures Bond Market is pricing in rate hikes beginning this fall. I highly doubt a politicized Fed will hike rates with stated unemployment over 10% ahead of the November elections. We are going to have a very easy monetary policy for longer than most observers think and this will blow the bubbles up ever larger.

The Fed has painted itself into a very tough corner. Raising rates in a high unemployment environment is risky. Bernanke thinks he knows (but doesn't) what happened in 1937. But by keeping rates too low for too long, they risk increased asset bubbles bursting less than 3 years after the last ones. And that is on top of an understated Federal Budget deficit of over $1.5 trillion which will not make matters any easier.

As we face the next crisis - and we will (there is always another crisis) - we will find that the causes of the last ones have not been fixed. We still have banks too big to fail, the credit default swaps or any of the other $1.2 trillion in derivatives are not on an exchange and/or forced their holders to mark to market or put up any collateral. We not reinstated Glass-Steagal. Barney Frank's bill is a joke and we are keeping in power the very same people who missed and/or caused the problems the last time around and the list of bad policies brought to you by lobbyists grows ever longer. The current bills all look to me like they were written by the lobbyists of all persuasions. What that all means is we will have to face the exact same problems only worse since they were never addressed in the first place. Can we really expect that a bunch of politicians, made up of lawyers and housewives, will be able to fix problems that none of our current well known economists like Grubman, Feldstein, Volker, Bernanke et al, do not fully understand themselves? It is the same old story: "Don't just stand there dummy, do something." But that is another story for another day.


The TREASURY Bond Market has already made its highs and there is only one way for it to go - DOWN. Start accumulating TBT on weakness.

The World's Stock Markets, including ours, are in or close to blow-off stage bubbles. You definitely do not want to be caught long when they BLOW because before you realize what is happening, there will be NO BIDS.

START taking some initial short positions or buying 3 month Puts of the short ETF's like QID, SDS. You can also take a short on CHINA FXP and/or OIL DUG.

As for GOLD, it is in a Wave 4 correction. Price wise, it may have reached its lows but could go as much as $100 lower, time wise; it still has a ways to go. Look to accumulate stocks and Bullion as they pull back to support levels.. Only liars and fools buy at the LOWS, so don't blow this buying opportunity even though time wise the correction is not yet over. DO NOT CHASE BUY ON WEAKNESS


DO your home work: Buy into weakness near support levels or on breakouts to new all time highs:



DO NOT FORGET TO USE STOPS on leveraged positions




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

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.
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