Goldilocks and the Bears

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson

IS OUR ECONOMY RECOVERING

OR SINKING INTO THE ABYSS?

All the GOLDILOCKS Bulls seem to forget that the BEARS always do come home.

We are continually being told by CNBC, Bloomberg, and most of the other major media outlets, that the money printing and deficit spending policies of the Obama Administrations have not only avoided the Great Depression (II), but that the economy is on the mend. If 70% of our economy is consumer related and the consumer has lost his job, his credit cards, and the ability to borrow against his house and with taxes set to rise dramatically, beginning in Jan. 2011, is it possible that the economy is ready to boom? I think NOT!

The Commerce Department has recently confirmed what I've been saying for months now: The economy is in shambles, there is no growth momentum and the next Bear Market leg is only being delayed by massive Government manipulation and is about ready to crash! As reported, our GDP grew at an annual rate of 2.4 percent in the second quarter. In my opinion, that is doubtful. That is down from the questionable 3.7% in the first quarter and 5% in the fourth quarter of 2009. What's more, two of the GDP's largest contributors are dead in the water. One is state and local government spending, which is bound to be further drastically reduced since states must balance their budgets. And the other is the end of the inventory buildup which, to date, was less than half the prior quarter's numbers. So, unless consumers go on a wild spending spree, there is likely to be inventory liquidation rather than a continuing buildup, which again confirms what common sense, has been telling us all along about our Government's manipulation of the numbers.

To further reinforce my manipulation claim, GDP figures for the past three years have been revised - downward in seven of the last 12 quarters - because consumer spending grew slower and home building fell harder than had been reported. This means that without a doubt, the Recession is worse than government officials portend it to be.

Bonds Aren't Buying This Stock Rally Either: They are SCREAMING "RED ALERT" just as they did going into the Fall of 2008.

However, something very unusual began in early July: The stock market began a sharp rebound, which should have been accompanied by rising interest rates (falling Treasury prices) as investor's perceived the "all clear signal" in the markets. Instead, while stocks rallied, Treasury yields continued to decline. Put another way: Treasuries (which typically act as a proxy for fear as investors pile into them whenever they're spooked) and stocks (which are a proxy for risk appetite and investors move into them whenever they think the coast is clear) are both rallying together. Something is not Kosher.

CAN CHINA PULL THE WORLD OUT OF DEPRESSION?

It's not hard to understand why someone who lives in China and whose job it is to report on China to the WEST, might report that the country's economic prospects are so spectacular as to all but preclude the possibility of a deflationary depression anywhere in the world, predominately in the USA. Most everyone is not really aware of the tremendous problems, both internal and external, that China faces. And the ones that do are still adamant that they are Chinese problems for which there are Chinese solutions. DO THE NATURAL LAWS OF ECONOMICS NOT APPLY TO CHINA?

People seem to forget that China's economy is only 1/4th the size of the USA and is an export dominated economy. China is no longer the world's low cost producer and they are losing millions of jobs to Vietnam and other lower cost emerging nations. The blind belief is that whatever exports are lost to USA and Europe will more than be made up for by going to other emerging markets in the Middle East, Russia, South Africa, South America and of course, Asia. All those countries put together cannot hold a candle to the buying might of just the USA let alone Europe, both of which are heading into a double dip recession at best. In the final analysis, right or wrong, China will do what it perceives to be best for China. But do not be delusional; the Chinese government is even more corrupt than that of the USA and Europe. Their real estate bubble (65% 0f earnings are required to pay home costs) is almost twice as large as was that of the USA's, which at its peak was 35% of earnings when it's bubble burst.

China is NOT a capitalist country, it is Fascist and its government is no more capable of managing a complex economy than the rest of the world, especially since their top economists and politicians have all gone to the same socialist schools (Harvard, Princeton, Sorbonne and the London School of Economics). For the last 25 years or so, they were looking like geniuses because they came from a per capita income of $500/year and were just opening up their economy to foreign investment and allowing private enterprise to flourish along side of Government Run enterprises. With dubious accounting practices and virtually unlimited borrowing power, almost everything they did looked right. That is until the Bubble Bursts (where have we seen that before?) But as the economy becomes more and more complex, China will run into the exact same problems that all developed countries do, only more so, since they still have almost a billion people still living in abject poverty with absolutely no safety nets.

ALTHOUGH THERE ARE STILL TREMENDOUS PROFIT OPPORTUNITIES IN CHINA, I FOR ONE WILL NOT BE COUNTING ON CHINA TO KEEP THE WORLD OUT OF RECESSION/DEPRESSION.

SENTIMENT INDICATORS

Sentiment indicators have reached levels in March and April that indicated high complacency and extreme optimism. Some put/call ratios fell to levels last seen at the highs of the stock market bubble in 2000.

The most amazing thing was that the cash level of mutual funds fell to a new record low in March and April 2010. Lower than in 2000 and lower than the summer of 2007, and we all know how those two events played out!

The importance of mutual fund cash is easy to understand. If all mutual funds are fully invested and have very little cash, there is not a lot of fuel to push the market higher. So when you see mutual fund cash levels come down, it's usually a sign of a topping market.

The scary thing is: What will the fund managers do if investors decide to take money out of their mutual funds? If for no other reason, just to pay their bills. Like they always do during a recession and in a declining market, they'll be forced to liquidate stocks, no matter what the market is doing.

INSIDERS DUMPING STOCKS LIKE THERE WAS NO TOMORROW!

Especially by the very people who are supposed to know best such as the Officers, Directors, CEOs and top executives at Citi, Chase, Morgan Stanley and Goldman Sachs as well as many other companies, who have recently begun dumping their stocks. For the week that ended on July 22nd, insider sales at 78 large companies exploded as ONE-HALF TRILLION DOLLARS was dumped onto the market in a single week! All In a blatant contradiction to the wildly distorted earnings reports that the media has been hyping and despite declarations being made by politicians and bureaucrats who claim that they have ended the Recession ... Any way you look at it, this is clearly a "NO-CONFIDENCE" vote - not just in these individual companies, but in the U.S. economy as a whole.

To make matters worse, Bloomberg reported that institutions increased the percentage of their portfolios in stocks up to 68% in July, the highest level in 15 months. This is a direct result of the irresponsibly low interest rates available and the White House says that lower-than-projected government spending will reduce the federal deficit to $1.47 trillion this year and a mere $1.42 trillion next year. I am laughing so much it hurts.

HOWEVER, Be Forewarned - Markets can remain irrational longer than you can remain solvent. Except for Gold and Silver, do NOT trade without using Stops.

Where the deflation crowd is making its biggest mistake is in believing the Keynesian economic theory that 'deficits don't matter'. Actually, deficits do matter as they are always inflated away. The two largest drains on the US budget are Social Security and Medicare. These and other unfunded liabilities exceed 50 trillion dollars - guaranteeing more monetary inflation.

It is a matter of historical fact that whenever a government embarks on monetary inflation, the end result has always been the destruction of the currency. There are no exceptions! So why are US Long Bond prices continuing to increase in price? Someone is buying them as fast as the US Treasury is printing them. That someone has to be the Federal Reserve. They are probably keeping most of the newly printed US T-Bonds off the market and off the record, most likely in the coffers of the EU, German and British Central Banks, while the FED is keeping their junk on our Books. After all, ENRON learned this trick from the government.

IBM just borrowed $1.5 billion at 1% for 3 years. I only have one question: Who in their right mind would make this kind of investment? This year's promised recovery in the second half of the year will feature a return to recession instead, thus stripping mainstream economists of any remaining credibility. The endless links in the chain are impressive by the clueless cast of economists that occupy the US and world's prestige positions.

Volatility is down again. Normally that would be a good sign, but October is approaching. So too are the big Tax Hikes and new Regulations from Congress on "Healthcare" and "Financial Reform." Should we not anticipate some significant selling pressure since it makes sense for investors to sell in 2010 in order to avoid the higher taxes coming in 2011?

If these economists had any skill or integrity whatsoever, they would notice all the real nasty economic signals delivered by basic data such as the sharp drops in the federal income tax withholdings, lower state sales tax receipts, lower trucker miles logged, lower total volume of electricity usage, and tremendously increased use of food stamps. They all scream recession for the US Economy. But those experts would call them lagging indicators. Merely pointing to stimulus funds, state budget plugs, liquidity programs, mortgage redemptions, and expanded central bank balance sheets totally misses the mark on effective economic forecasting. Their blindness to the economic distress is only exceeded by their disdain and contempt for the public. The absence of policy options will be soon become more apparent to all. Only dispensing printed money will be offered in response to the dreaded Deflation Card. If truth be known, it has already begun to be used. The failure of 0% interest rates to produce a revival is indirect proof that easy money was the cause of the banking collapse and credit crisis, and therefore cannot serve as the main tool toward their remedy. Doing more of the same and expecting a different outcome is INSANITY.

More Quantitative Easing (nice name for hyper-inflation): The first round involved $2.5 trillion. Ambrose Evans-Pritchard expects the next round to be a coordinated global $5 trillion initiative. Vast monetization of debt and sustained stimulus and rescue with phony electronic money backed by debt are the only options left to central bankers, or so they think,

When money is once again openly printed with utter abandon under official blessing, that is tantamount to sounding the death knell for the monetary system. The US economic decline will worsen from the destruction and shortages of legitimate capital. That will amplify attention to the rapidly debasing currencies, and push the price of Gold sky high. Watch what happens; what the next QE2 round does to the Gold price.

THE FALLING MONEY SUPPLY PARADOX

The money supply continues to shrink and has now plunged to a pace last seen in the 1930's. The broad money supply (M3, which the FED no longer reports) has remained somewhat elevated because the US Fed still holds huge bank reserves due to US Treasury demand. Despite mammoth monetary inflation and outsized banker sustenance programs, the money supply continues to shrink at the Main Street level. The fiscal and monetary experiments are failing before our eyes, but "None are as blind as those that refuse to SEE."

When the M3 goes down, that is bad for the economy. US economic decline will worsen, resulting in a powerful demand from the Gov. and their flunkies, for a second round of Quantitative Easing, which will further amplify attention to the fast debasement of currencies and push the price of Gold sky high.

Crashing pending home sales foretell of continuing falling home prices: The mountain of unsold bank repossessed properties, being held in off balance sheet bank inventory assure continued home price declines. This in turn assures that the US economic decline will worsen, guaranteeing a powerful second round of Quantitative Easing. The actual reason why bank lending is so reduced and restricted is that most banks are either insolvent or carrying a huge burden of non-performing loans and impaired bonds. Extend and Pretend actually harms the banks in the future, since the loss would be less if taken today, but becomes ever larger the further out they are extended.

To make matters worse for the Banks and other Mortgage Holding Institutions, the courts have ruled consistently that "MERS" has no legal standing and cannot serve as the lever that removes a person from the home via foreclosure. Again MERS holds the titles, but MERS has no legal standing to transfer the home loans in the foreclosure process. The importance of the string of negative court decisions (State Supreme Courts) is significant in permitting home mortgage owners to defy the banks, not make their monthly payments even if they can afford to do so, and still remain in their homes without fear of foreclosure and eviction.

The U.S. Government's most-recent estimate of its own "unfunded liabilities" was about $70 trillion. Given that this huge sum greatly exceeds total WORLD GDP, the precise numbers are irrelevant. The U.S. Government is not only totally broke, but already burdened with a national debt which it is only capable of servicing by keeping interest rates frozen at 0%, and through "buying" most of its own debt (i.e. "monetizing debt"). It can't pay for one penny of these entitlements, let alone $70 trillion.

The Federal Reserve acknowledged the weakness of the economy and announced it would continue to monetize the United States' ever increasing debt, just as I have predicted they would do. WILL THEY EVER LEARN? Keeping long-term interest rates low and making sure that cash gets into the hands of Wall Street, instead of Main Street and the people is a sure path to disaster.

This strategy is obviously not working and continuing on with the same failing strategy qualifies as the definition for INSANITY!

HOW NOW DOW

Unlike all previous selloffs, Tuesday's opening 130 point sharp decline had an afternoon follow through and broke down below the bottom boundary of the rising Bearish Wedge that began on July 2nd. Any significant, further selloff tomorrow will confirm that Wave III has started. Rising Wedge patterns are very bearish especially when accompanied with ever shrinking volume on the rally legs; a sure sign that the rally is tiring and the pattern is concluding. The initial downside target is the starting point of the Rising Wedge, around 9,600 in the Industrials and 1,010 in the S&P 500. But that is just the first potential rest stop before much lower levels.

THE BEST STRATEGY FOR NOW

Start scaling into your Shorts by taking positions in FAZ, BGZ, TZA and ERY.

The only solution is a return to Free Market Capitalism.

GOLD AND SILVER

The fact that this market has been manipulated for so long is the only reason why investors can still purchase Gold and Silver at what will turn out to be unrealistically low prices. The fact that this 30 years of manipulation is now clearly failing is a warning that we will not be able to buy Gold and Silver at current, cheap prices much longer. DO NOT LOOK A GIFT HORSE IN THE MOUTH. From mid-August to mid-November is the most consistently bullish time for Gold Bullion.

BEWARE: Beginning in January 2012, buyers will be forced to fill out a 1099 and pay a 6% TAX on any Gold and Silver purchases of $600 +.

JUNIOR GOLD AND SILVER STOCKS

Just as the junior PM traders are ready to capitulate as they lose all enthusiasm for these speculative plays and dump their shares, the best and strongest seasonal buying opportunities are emerging. Mid-August typically marks the bottom of the CDNX's weakest season. But by the end of this month into September, the bottom will be in as it rallies back up through resistance forming the beginnings of what is usually a strong autumn rally and what this time could/should be an explosive Rally into new all time highs. BACK UP THE TRUCK !

 

GOOD LUCK AND GOD BLESS

 

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
uncommon@aubiebaltin.com
561-840-9767
The world’s largest gold nugget is 61 lbs, 11 oz and is on display in Las Vegas.

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