"Irrational Exuberance"

BLOWING BUBBLES

The last time the government forced rates down in the face of growing deficits was back in 1980 - the situation soon exploded and interest rates shot up, jumping from 6% to 17% in just six months with the prime rate hitting 21%. By 1983, mortgage rates were over 16% and yet the townhouse I bought for $150K in 1983 began appreciating $10,000 per month for more than 2 ½ years.

As of right now, the FED owns more than $1 trillion Treasuries, which already amounts to over 7% of Treasuries outstanding. More and more it is looking like the second half of 2007 as the flood of money from both the QE'S and Stimulus Packages, while not doing anything positive for the economy, have definitely restarted the Bond, Commodity and Stock Market BUBBLES. To use short term backward-looking data to project the immediate future is the sure road to the poor house. Stock markets around the globe have posted incredible gains since hitting a low in March of 2009 which, in my opinion, was only the 1st stage of the Bear Market. They have all already topped out or are about to do so.

The latest AAII sentiment survey shows the bullish sentiment hitting record highs - 63% bullish and only 16% bearish, putting us back to the area of the all time high for IRRATIONAL EXUBERANCE as Wall Street, the Media and most analysts are back to their "Bullish Business as Usual" mindset (a sure Bearish sign). Meanwhile, the public investors are still keeping their money in their pockets as witnessed by the ever shrinking volume in the face of steadily rising stocks and bonds. However, global economies still face ever more serious headwinds that in fact are even larger problems than were being faced in 2007. To compound the problem, speculation is also off the charts into new all time high territory.

In reading the economic TEA LEAVES, searching for the unintended consequences of recent and expected government actions; including increasing deficits plus the fact that 46 States are Bankrupt that are trying desperately to cut spending by laying off workers, cutting services and increasing State taxes because, they unlike the Fed's must balance their budgets: The sum total of which makes me believe that it is almost certain that we are headed for a DOUBLE DIP RECESSION, or worse DEPRESSION.

In 2010, we witnessed central bankers around the globe injecting massive amounts of Fiat liquidity into their economies to avoid a Global Depression (including 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 Obama's buddies, the unions, teacher pension funds and the too big to fail banks and car companies (UNIONS) with barely a dribble going to where it might have done the some good, Main Street.

The immediate problem now becomes the natural INFLATION that always follows ultra low interest rates and massive injections of NEWLY PRINTED money. Somehow, sooner or later, it must be drained from the economy in order to avoid HYPER INFLATION and herein lays the problem - Bernanke and Geithner do NOT have an exit strategy, as a matter of fact the $800 billion QE2 is barely one month old and they are already preparing us for QE3. Although I am sure they will come up with another new cute acronym for it, if the economy is progressing so nicely, why the need for any QE's? Simply put: Government funding cannot remain the primary source of growth for much longer; especially since it has not been working for years and is merely pushing the manipulated inflation numbers higher.

Europe is in even worse shape than the US as they have already instituted the first of many of their own form of QE's. We are about to come face to face with the reality that Socialism does NOT work.

NB: It is evident that the more certain people are that they have the correct view, the more they distort the 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 allowed us to make a few dollars, but more importantly kept us out of harm's way. Our over concentration (75%) in precious metals kept us all in positive gains with the balance sitting in cash waiting for the New Bubbles to meet their inevitable fate.

CHINA

The risk of hyper-inflation in China, now at 5%, and their asset bubbles, especially real estate, are intensifying and yet China is still expected to pull the world out of recession. Their economy, being only ¼ the size of the US, is not capable of doing this, even during the best of times (please don't confuse me with the facts). This is especially true since they are now raising interest rates in an attempt to slow down their economy and prevent their real estate market from blowing up. Unfortunately their actions, like ours, are working at cross purposes. (I guess they must succumb to the same Natural Laws Of Economics that we and Japan are experiencing) GEE, who would have thunk it? Any slippage in China's growth or a BURSTING Bubble (beginning with Real Estate) will seriously damage confidence and be felt around the world, especially in commodity prices. Just look at their Shangri Index (FXI) - it looks like it's about to lead the world stock markets lower; just like it did back in 2007-08.

The slow down in the world's economies have already produced record high inventory build ups in copper, zinc, etc and yet they continue to push higher registering new all time highs. China's unprecedented liquidity and credit expansion already points to huge inflationary and banking sector risk. They will have to find the perfect balance between avoiding a major domestic crisis, while keeping their economic expansion going in the face of rising interest rates and curtailed credit. 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? I don't think so, but 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. The toxic asset is U.S. Treasury Bonds…They're the world's most popular and safest (?) investment vehicle by far… and now they're about to turn out to be the world's most dangerous! After hitting 0% INTEREST RATES, there is now ONLY ONE WAY TO GO AND THAT IS DOWN. That includes Muni's as well as corporate junk bonds, so if you own any get out while the getting is still good.

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

A RECENT HISTORY LESSON

On December 29th, 1989, the 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 it closed at 10,638.06, just about 75% below that all-time high. During the early stages of the decline, there were two widely held views: The first was that the Nikkei, after a minor correction, would resume its growth and power ahead to 100,000. (Some Pollyanna also projected a DJIA of 36,000.) The second fantasy was that having started falling, it would rebound after hitting 30,000, then quickly lowered to 20,000. Will the Japanese experience be replicated as the world tries to emerge from its current financial crisis, 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.

PONZI SCHEMES

401KS, PENSION PLANS SOCIAL SECURITY AND INSURANCE: Although I rarely ever hear it 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 impending disaster. 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 rates, Keynesian policies and Anti-Business Laws and Rhetoric. This is exactly the same as what happened in th 1930's with the main difference being the greatly expanded scale of today's capital destruction. More importantly, is the much weakened position of the US economy as a whole.

Falling interest rates have a devastating effect on accumulated capital as it destroys it across the board simultaneously and stealthily. Nowhere is the erosion of capital more obvious than in the case of pension funds and real estate. 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 amounts of Toxic Assets are, like those of the Banks, being carried on company books at face value, inflating reported earnings. 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 soon to be bankrupt pension funds or just those of the unions? What about the insurance companies' RESERVES, what are they invested in?

Instead of analyzing the Great Depression and the more recent Japanese 20 year malaise honestly, instead of in the politically correct fashion, American policymakers have decided to follow Japan's leap into the Black Hole of zero interest rates. The predictable result will slowly but surely become catastrophically evident. The falling trend of interest rates (easy credit) was the unrecognized cause of the Great Depression, and in conjunction with a falling dollar, will be the main cause of our coming Depression as well. Do they believe that Nature's Economic Laws are different for us than for Japan or the USA in the 1930's.?

In Bull Markets, any gunslinger can make money; the dumber and more gullible make they make; until they give it all back, in spades. But Bear Markets - well they are a horse of a different color. Bears are much more dangerous and complex. Gone are the days of BUY and HOLD and collect dividends. Bear Markets bring on crashes followed by sharp rallies and all kinds of false signals and dashed false hopes, intertwined with all types of fraud and abuse from people and places where you would least expect it (Pension Funds, Social Security, best friends like Bernie Madoff, Government officials like Paulson, Greenspan, Bernanke, and Politicians ). Desperate times create desperate people.

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

  • A rapidly increasing aging populations (as is Japan's)
  • A massive and rapidly growing debt burden both public and private.
  • No sign of a bottom in housing and a Commercial Real Estate Re-Financing Bubble that is about 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 $800 trillion in interest and credit default swaps that are rarely if ever mentioned and worst of all, company depreciation schedules that are not nearly enough to replace companies' worn-out capital equipment or pay for new technologies.

INFLATION WHAT IS IT?

In all cases, inflation is a monetary phenomenon. In plain English, 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, and even though the economy is shrinking, as long as the money supply is increasing faster than GDP is rising even though prices may be declining, we would still have inflation. (Declining buying power of our currency)

THE BIGGEST DANGER IS OUR HEAD FIRST PLUNGE INTO SOCIALISM

Weimar, Germany entered into its hyperinflation spiral when its ratio of government borrowing to spending hit 60%. Today, the U.S ratio is approaching the 50% mark - that means that the U.S. Government is now borrowing over 50 cents of every dollar it spends - and the ever increasing government deficit spending does not yet include the newly passed $2 trillion spending increases and new $800 billion QE2, which 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 markets around the world are indifferent, climbing a wall of Irrational Exuberance fostered by Wall Street, Government and Media lies and misrepresentations of the economy's true situation.

Meanwhile, Gold and Silver, after a few weeks or so of consolidation, are just about ready for their next explosive move higher. Oil, however, is looking tired and perhaps over speculated in, after all demand has been steadily falling signaling the onset of the Double Dip Recession? But as long as the current rate of Fiat money creation continues Oil, along with most commodities, will keep heading higher while the warning signals and implications are all being ignored by the Pollyanna's until that one day when the Bubbles POP.

The much anticipated Gold and Silver correction (very healthy) was rather shallow, given the size and strength of the rally. Nevertheless, it was right on target. And as you might have expected, the short-sighted "hot money" first jumped on the band wagon late, which is usual and those Johnny come lately Gold Bugs then found all the stupid reasons they could to justify selling Gold.

The strongest, real reason for Gold's rise, aside from inflation is crashing Fiat currencies and ultra low interest rates (which reduces Gold's carrying costs to zero). Right now, real interest rates are negative and the resulting impact always produces speculation leading to asset bubbles, the latest ones being the bond, 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).

So the question is, "How long can real interest rates stay negative?" As long as real rates are negative, more and more investors will turn to Gold as their only safe heaven alternative as slowly but surely people realize that Gold has been the #1 performing asset for the last 10 consecutive years. In the 1970s Gold Boom, Gold's ultimate high was determined not by how low real interest rates fell, but by how long they stayed there. The big Gold correction in the mid-70s came when real interest rates and the dollar rallied for a while and that's exactly what's going on today. There's a general expectation that the Fed will begin to raise rates by the 2nd or 3rd quarter of 2011, which might make sense on paper, but only if you forget about mortgage rates, the wave of ARM resets, shrinking credit, stubbornly high unemployment and an exploding Federal Debt. A miserly 1% interest rate increase explodes the budget deficit by $300+ billion and wipes out all bank assets as their derivative losses explode.

BERNANKE'S HANDS ARE TIED

Despite Bernanke's and Geithner'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 and depress long-term rates as best they can by buying bonds and monetizing the debt. 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. Low rates are the key drivers of our Bond & Stock Market Bubbles as well as Gold's rise, which normally goes in the opposite direction to stock prices.

HOPE VS. REALITY

There are plenty of trumped up reasons to be bullish, if you are looking for reasons to be bullish. If you don't examine the underlying data, you can feel pretty good. The problem is that when we look past the headlines and delve into the data, there are more concerns than promises because the reported numbers just don't make sense. For instance, take the contention that consumer spending is rising; only if you ignore The Liscio Report that states that "sales taxes are declining." Furthermore, I also discovered that credit card lending dropped $17 billion last month, the largest drop in history. If savings are up and credit is down and with real unemployment in a range of 15% to 22%, where did the rise in consumer spending and corporate earnings come from? To add insult to injury, the public's savings have increased from near 0% to over 5%. So again I ask, where is all the additional buying coming from?

Remember, these numbers are mostly Government surveys and/or comparisons with a disastrous 2009. To further confuse and misrepresent the facts, they compare same-store sales for chains like Best Buy, which no longer has competition from bankrupt and closed Circuit City, as well as other chains and individual stores that have since closed stores or gone bankrupt, forcing buyers to the remaining chains. The key to watch is sales taxes. When they are rising, consumer spending and confidence is rising, but even then, rising from what? Record low levels? It does not look like a robust economic rebound to me." Nothing ever moves in a straight line, so one series of improving numbers mean nothing.

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.

HOW NOW DOW

IN A NUT SHELL 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, especially ours, are in or very close to the blow-off stage. You definitely do not want to be caught long when they BLOW OFF starts; because before you realize what is happening, there will be NO BIDS.

A REAL BULL MARKET REQUIRES EVER INCREASING AMOUNTS OF MONEY TO STAY AFLOAT. Yet our markets are going up on shrinking volume.

We just had A Bradley model turn date on December 26th. There is also a Fibonacci turn window due with in the next 2 weeks. We have a confirmed Hindenburg Omen. My long term, Elliott Wave count for the Wave 2 (or Wave B) contra trend rally from the March 2009 low is near completion. The monthly, weekly and daily Full Stochastic are way overbought and as I have already pointed out, Bullish sentiment from Pros, Investors and Mutual fund managers are all at or near all time record highs, and Mutual Fund Cash is near all time record LOWS. all of which are consistent with major tops.

The Biggest Bull Market Trap in history is about to snap shut trapping all the irrationally exuberant Bulls, sometime during the next few weeks.

You can START taking some initial short positions on BGZ and TZA or buying calls on the short ETF's like QID & SDS. Into any 100 to 150 point rallies You can also short CHINA by buying puts on FXi, which seems to be leading the Parade down just like it did in 2007.

GOLD

The stock market is hugely overbought and the coming sell-off in the bond and stock markets 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 GOLDEN buying opportunity.

THE REAL DRIVERS OF GOLD are INFLATION, GREED and most important of all, FEAR ARE GETTING EVER STRONGER.

THE MOST COMPELLING REASON TO WANT TO OWN GOLD is directly attributed to the massive increase in the amount of US Dollars and Euros that are being created daily and will continue being created into the foreseeable future completely debasing the US Dollar. 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. 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 except for the short term. The era of Gold is far from over. In fact, if we're right, the really explosive part of Gold's BULL MARKET is really just getting started.

GOLD and SILVER are in their Taking A Breather stage. Price wise, they may have reached their lows, but time wise it looks like January or February 2011 at the outside. Look to accumulate stocks and Bullion on weakness. REMEMBER, only liars and fools buy at the LOWS, so don't blow this buying opportunity even though time wise the correction might not yet be over. DO NOT CHASE: BUY ON WEAKNESS.

LOOKING INTO THE NEW YEAR

Bernanke thought HE had the power to manipulate interest rates. But something funny happened on the way to the markets. It turns out that in the end, the REAL masters of the Bond and Stock Markets are the investors - who had only been letting Bernanke think he was the one in charge.

So far, since Bernanke revealed his newest dollar-printing scheme, 30-year Treasury Bonds have lost 9 percent of their value and the popular I Shares Barclays 20+ Year Treasury Bond ETF (TLT) has declined 15 percent in value.

So why have the Treasury and Bond Markets confounded the Fed?

Simple: Investors are Gullible, but not dumb. YOU CANNOT FOOL THEM ALL THE TIME. They know that the Fed's out-of-control money printing and Government spending can only gut the value of every dollar they invest in U.S. bond markets. Adding insult to injury, the Obama Administration and Congressional Republicans have cut a deal to make the budget deficit FAR Larger, requiring even MORE money printing. The same is true for the U.S. dollar: It plummeted 8.8 percent between early September and early November it recovered some of its losses before diving again This is precisely what I have been warning you about for many months: EXTREME volatility provides an explosion of profit opportunities and with them, greater risk for those not paying attention or trying to follow the markets.

The U.S. Dollar is scraping bottom, flirting with its LOWEST levels of the year: Is this the beginning of the greatest dollar disaster in American history ?

Food prices are on a rampage: Will agricultural commodities continue to skyrocket in 2011?

Oil prices continue to edge higher: Will we see new all-time highs in black gold? Or will economic woes in Europe and the U.S. send oil prices careening lower?

Economies and stock markets in other emerging markets are still near their highs: Is now the time to buy emerging market ETFs? Or are these countries overdue for corrections that WILL create major buying opportunities for you in 2011/12?

 

THE SECRET TO SUCCESSFUL INVESTING IS "KEEPING ONE'S HEAD AND WALLET WHILE ALL AROUND YOU, OTHERS ARE LOSING THEIRS."

 

 

HAPPY NEW YEAR

 

GOOD LUCK AND GOD BLESS

Give yourself the investing advantage by getting a special 5 month $169 TRIAL subscription today.
The one year (13 month) subscription is still only $329 and a two year subscription is only $449.
CURRENT SUBSCRIBERS can buy a one year extension for only $249.

To subscribe, simply mail a check for the required amount to:

UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
uncommon@aubiebaltin.com
561-840-9767
18 karat gold is 75% pure gold.

Gold Eagle twitter                Like Gold Eagle on Facebook