Keynes Re-Examed

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so" - Mark Twain

"When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."
Frederic Bastiat (Economist)

My missives are attempts to raise awareness of a broken corrupt system.

KEYNES REVISITED

It seems that even the great John Maynard Keynes, whose theories are now the basis of economic thought world wide, has himself been taken out of context and his theories completely bastardized to suit the consecutive gangs of thieves that have taken over economic and political thought the world over. In a paper entitled, The Great Slump of 1930, the godfather of interventionist ideas, very shortly after the publication of his famous book, "THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY" realized that there are limits to interventionist policies - that central banks cannot act alone and that only great creditor nations can be the source for sparking 'wealth creation" through deficit spending. Nowhere in any of his speeches or writings did he even remotely suggest that Socialism should replace Free Markets as the best system for a country to be run on.

On numerous occasions between 1934 and 1937, Keynes warned FDR to discontinue his vilification of Capitalism and American businesses if he ever expected to get the economy back on track. Yet here we are with Bernanke, a self proclaimed expert on the 30's Depression and Obama, vilifying every industry and company they can for what purpose? To gain political power? Or to look for an excuse for a government takeover? BP from the very beginning proclaimed to all who would listen, that they accepted full responsibility and would PAY all legitimate claims. Obama's response was that "he will be keeping his boot on the neck of BP" and the lawyers and politicians are out in force readying all sorts of legal action. The USA has stopped being a Nation of Laws and instead has sunk to the depths of MOB RULE; just the same as what happened during the French Revolution.

"The Central Bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an enemy to all banks discounting bills or notes for anything but coin. If the American people allow private banks to control the issuance of their own currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." -- Thomas Jefferson

With most countries already in competition to devalue their currencies, investors are becoming more concerned with the risk of sovereign defaults. The U.S. could be dangerously close to the point where the more the FED does, the worse the situation becomes. Quite frankly, having already played their interest rate, bailout, and QE cards, everyone is looking for the returns that these policy choices were supposed to generate. Should the FED recharge its printing press prior to achieving their desired effects, you bet that the economy and investors will not be responding well.

Even the mainstream press is starting to take notice, long after the trend has been well established. Ambrose Evans Pritchard dedicated a piece to the collapse in M3 growth, something that hasn't been seen in the US since the Great Depression. Monetarists the world over are frightened about this trend and with good reason. US interest rates are already essentially zero. The massive monetary and fiscal stimulus has been epic in its proportions. And all this has still not prevented the actual textbook deflationary trend we now find ourselves in. Given these undisputable facts, is it any wonder that there is doubt as to the possibility of a broad, well-grounded economic recovery? The bottom line is as M3 goes, so goes America.

The BIG Fiat Money Ponzi scheme was started back in 1913 with the creation of the FEDERAL RESERVE SYSTEM. However, as we all know (or should know), all PONZI schemes must eventually fail because regardless of their size, they all eventually run out of fresh money. The ultimate breakdown will show up in a US Treasury default. Watch out for it.

With the US still deep in Recession, it is possible and perhaps even likely that the US economy will be dealt a sledgehammer blow over the coming months as the full price for the European crisis might well be paid for in American jobs. Companies that employ European workers have virtually overnight gained a 20% labor cost advantage over US companies. This means they can lower their prices relative to companies employing American workers and grab big chunks of market share.

As the crisis in the Euro continues to develop, some are calling for parity between the Dollar and Euro by next spring. (Could happen a whole lot faster than that.) This would be about a 35% plunge in the value of the Euro compared to where it started from back in January and that includes China and any other country whose currency is pegged to the US Dollar. Say good bye to any chance of China revaluing its currency against the US Dollar, no matter what Geithner says. OUT SOURCING is likely to return with a vengeance especially when Obama's economic and taxing policies are taken into consideration. All of this is taking place in the midst of a global financial and economic crisis. However, with the ever increasing power of the Unions, things could still get a lot worse.

The economy is reeling, employment has not been growing and unemployment claims are rising even before the Euro's crash began. Yet, the so-called recovery remains a prediction of most economists and all government officials, none of whom had any premonition whatsoever two or three years ago that the current situation was even possible. They were all heralding the arrival of the New Paradigm.

FROM THE RIDICULOUS TO THE SUBLIME

China took a deep breath and the rest of the world let out a sigh - or so it seemed as China refuted claims that they were reviewing their Euro Zone Bond holdings, giving psychological cover for traders to move back into risky assets and away from U.S. Treasuries.

Is it not amazing how one sentence from China could so quickly move billions and billions of dollars out of the safe haven U.S. Treasuries and GOLD back into some of the weakest equities in the world. What else would you expect China to do? Europe is its biggest customer. China is between a rock and a hard place. They have bought the sovereign debts of their biggest customers, the U.S. and Europe, and now that the debt crises are seemingly unsolvable, they find themselves potentially holding worthless Bonds. But it would be worse it they had to shut down their manufacturing infrastructure because a Depression were to hit both Europe and the USA.

China's stock market is already into a second Bear Market. If China piles on more grief by shedding Euro Zone and U.S. Bonds, they would just be cutting their own throats, as a deepening Recession within the boundaries of their greatest consumers hurts them as much or more than taking bond losses. However, the ensuing rally was nothing more than a relief rally, relief that China is not going to discipline Europe in their time of trouble. It changes nothing as far as Greece, Portugal, Italy, Ireland, Spain and other troubled sovereign Euro Zone countries are concerned. These countries don't suddenly have greater abilities to enact strict austerity measures or build greater revenues to pay back their sovereign debts.

"DEATH CROSSES" IN CHINA AND EUROPE:
IS THE U.S. NEXT?

Let's once again review the stock markets of the largest economies in the world (i.e., Asia, Europe, and the U.S.):

Asia

China, Taiwan, Korea, etc. have already topped out sometime last summer. Since then, the Chinese equity market has shown great volatility and in March saw its 50-day moving average cross below its 200-day moving average. Whenever this happens, it is referred to as a "death cross", Indicating strong bear market conditions. For the year (2010), the equity markets in China are down 20% even with a recent rebound. From its Bull Market high to its recent low, this market has seen nearly a 30% drop. China led the US Markets on the way up and is now leading on the way down.

Europe

Much like the markets of Asia, Europe has also seen the dreaded "death cross" as the Euro Index saw its 50DMA sharply cross below its 200DMA in February. The Euro Index is down nearly 25% for the year. The Euro Index saw its Bull Market high in December 2009 and made its recent low last week, posting a 25% decline so far.

USA

The U.S. equity market is down less than 15% and remains in much better shape, though May has been a tough month. While the "death cross" is still a ways off, witness how quickly the 50DMA has curled downward toward the 200DMA which is still sloping upward. These two could cross fairly quickly without a strong bullish advance starting very shortly. The S&P 500 Bull Market high was made in the beginning of May and the recent low is showing just under a 15% sell off.

A HIGH PROBABILITY OF A SUSTAINED
U.S. BEAR MARKET

I have no reason to believe that this rally can't carry on until the traditional window dressing period comes to an end, but will the U.S. market be able to resume its strong up move and turn the other world markets up? I DON"T THINK SO! Probability is much higher for the U.S. to join the other two legs in a resumption of its Bear Market as the U.S. 50DMA crosses the 200DMA. There is too much damage to repair for the U.S. market to resume its Bull Market path and in my opinion, unlikely.

Let's compare the World Stock Markets:

China is clearly in trouble. The 50DMA and the 200DMA are heading down hard and while there has been a bit of a rebound; it looks like it's only a small breather and is still in a clear Bear Market.

This Euro Index enjoyed a nice bounce last Thursday (with China's permission), up an impressive 4%. But Europe has a long way to go to get back to its 50DMA and 200DMA. Once again, both moving averages are signaling continuing BEAR MARKETS that wasn't made any easier just because China officially said they are not reviewing Euro Bonds.

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." Alexis de Tocqueville

My principal concern is that a perfect storm is brewing, one that can kick stocks while they're down. Gold seems destined to supplant all major currencies both as a safe haven and probably a reserve currency as more insurmountable sovereign debt problems surface in the weeks ahead. The story is not yet complete. For all intents and purposes, we view the recent action in Gold as a game changer. All the more interestingly, wide spread fear has yet to put in an appearance, which I firmly believe that it will before the Golden Bull peters out.

THE OBVIOUS IS OBVIOUSLY WRONG

From time to time, we attempt to take the pulse of a sector or industry through the activity of corporate insiders. This is definitely not a timing indicator since the market typically lags insiders substantially and my intent is simply to illustrate the ridiculous attitudes of most buy side analysts; none of which own any of the stocks that they are recommending. It's been awhile since we checked in on the top issues comprising the Power Shares of the QQQ and I am not surprised by what I see. The last time I checked was back in January 2009 and NASDAQ was already well on the way towards the bottom. I only monitored the top eight issues, since two of the top ten (Teva Pharmaceutics and Research in Motion) are foreign companies and insider data is not available. There were a grand total of 250 sellers against four buyers, a ratio of 62.5 to 1. There were 47.7 MILLION shares sold and 9,700 shares bought, a ratio of 490-1. Well it's a lot worse now. The May 10th figures showed that there were 231 sellers and only three buyers for a ratio of 77 to 1. Shares sold were 59.8 million vs. only 15,200 purchased; an astounding sell/buy ratio of 3933 to 1, clearly indicating a complete lack of faith by the people who should know - corporate insiders. That certainly flies in the face of all the bullish analysts who report that they do NOT personally own any of the stocks that they are recommending. Perhaps most interesting of all, analysts are roughly just as positive on this group as they were back in March 2008 before a 37% collapse in price. At that time, 74.1% of recommendations were "buys" or "strong buys" and 2.9% were "sells" or "strong sells." As of May 10th, 77.7% of analysts' recommendations were buys/strong buys and only 3.6% were sells/strong sells. That's a definite a powerful SELL and/or Sell Short indicator.

THE S&P 500 is currently selling at a P/E of 18.29 and with a dividend yield of less than 2%; I am hard pressed to label these stocks as being UNDERVALUED. This is especially true when you consider that during the depths of the deep Recession lasting from 1980 to 1982, the P/Es hit below 7, while dividend yields reached above 6%. GM was yielding 10% back then; levels we've been nowhere near hitting at any point during this even more dark and dangerous crisis.

Even worse, the underlying economic problems that we have been plagued with remain largely unresolved, having been "kicked down the road" by a numbing amount of Government spending, made worse off with a large amount of meddling accompanied by growing record levels of debt and $ trillion deficits as far as the eye can see.

WHO IS AT FAULT? THE GOVERNMENT OF COURSE

I have commented on more than one occasion that "Making laws does NOT prevent crime". With the Government all hell bent in passing new regulations so as to prevent the banks and Wall Street from repeating their crimes that caused the near financial melt down, the following piece of information has come to my attention: "The lending criteria for the Government's mortgage renegotiation program is even worse than those applied by the sub-prime lenders leading up to our current mess. Specifically, under the Government's HAMP program, you can qualify for a new mortgage with a debt-to-income ratio of 60%. That means you can qualify for the mortgage even if making your mortgage payments would require you to spend 60% of your pre-tax income." Now ask me again, who is responsible for the Financial Crisis? The next crisis is already waiting in the wings. Congressional hearings are searching and blaming anyone and everyone they can think of, as each politician makes more speeches than they ask questions, and all the while the real culprits are never, ever investigated or even asked a question: The Congress itself. They are the real culprits and only TERM LIMITS of one term and one term only, can ever correct their ongoing corruption and out and out thievery.

IS THE REAL ESTATE MARKET CLOSE TO BOTTOMING?

The simple answer is not a chance. Again, let me refer you back to history for the answer. The average Real Estate crash takes an average of 10 years before it can even begin to recover and no Burst Bubble has ever remotely compared to the size and intensity to the one that we are going through now. Using the most optimistic data that it will only take 10 years to bottom and using 2006 as the peak of the bubble, we are looking at minimum of 2016 as the earliest target befor a sustainable BOTTOM could be made. So you tell me: Is IT TIME TO BUY?

REMAIN ON DEFENSE

Back in September 2009, I commented on the strong correlation between the Shanghai Composite Index and the S&P 500, noting that the Shanghai was the leading index of the 2007-2009 Bear Market, as well as of the subsequent recovery. The Chinese economy, growing at a 10%+ annual rate, appears to be the "obvious" reason why the Shanghai Composite should keep charging ahead of the S&P 500. Then, in spite of the upbeat economic news from China, a funny thing happened on the way to the "SURE THING BANK," the Shanghai Composite ran out of steam in August 2009. After spending a full eight months going sideways, forming a symmetrical triangle top, the index suffered a decisive downside break on April 16, 2010, 10 days before the S&P 500 topped out.

At its May 21st low, the Shanghai Composite retraced 50% of its previous advance. Like it or not, the Shanghai market, like the Chinese economy, has become a leader for the rest of the world and righ now it is pointing down.

The group of sentiment indicators that I follow and often refer to, had correctly anticipated the recent market setbacks. After signaling excessive levels of bullish expectations in the weeks prior to the April 26th top, they are now neutral. This is normal since they only give signals at extremes. However our fundamental/monetary indicators, courtesy of the expansive monetary policy of the world's central banks, remain "stuck" in the overly bullish zone of plus 53%. (contrary sell indicator)

The downgrade of Spain, while not a major concern at this time, should still not be overlooked. Economic and debt failure in Spain would be far worse than what we saw in Greece given that Spain's nominal GDP in 2009 was at $1.44 trillion, ninth in the world and more than 4 times the size of Greece.

The Euro currency used by the 12 countries in the Euro Zone has been sinking against the Dollar and is at a new four-year low. This means that U.S. made goods and services become more expensive to consumers in the Euro Zone and this could impact export growth for U.S. goods and services as well as reduced profits for US companies with large operations in Europe. With further layoffs to come.

European experts call for stagnant growth in the EU in 2010 and 2011; much slower than the U.S. and other industrialized regions. I also fear that the trillion dollar financial bailout package in Europe was not large enough and will negatively impact forward growth in the region, which is dangerous for everyone.

In a recent report, the Organization for Economic Cooperation and Development (OECD) predicted that the world's rich economies will slow in the first half of 2010, and expect growth in the U.S. and Japan to exceed that of Europe. Slowing in Europe will also impact China, as the two regions have become major trading partners similar to that of the U.S. and China. That same report showed that manufacturing had slowed in China in May. The concern is that the situation could impact China, which has heavy exposure to Europe.

Europe and the attempt at avoidance of an asset bubble in China will likely result in increased slowing in both the Euro Zone and China resulting in a continued drag on the rest of the world's economies. Recovery thus far has been neither robust nor genuine. In the U.S., jobless claims still show no signs of easing and the U.S. Conference Board's index of leading indicators, which estimates future economic trends, has been on the decline again. Deflation is suffocating all life out of prices, threatening a Japan-like "lost decade" in North America.

It seems that rallies in equity and credit markets were most likely artificial and nothing more than a mirage brought on by Government intervention in their attempt to put on a positive face on the entire economic situation.

HOW NOW DOW

This past week, we heard a number of speeches from both Bernanke and Geithner painting quite a rosy picture, enough to generate a 300 DJIA point rally. But, there are still a number of questions that remain unanswered and the worst part is how few besides me are even asking the questions: Certainly not the media or even the financial press.

  • Why is the M3 money supply dropping? A new boom cannot possibly develop without a rising money supply and increasing private investment.
  • Can we still have a booming economy when we are about to get hit with the largest tax increases in history beginning with all the Obama Tax increases such as Cap and Trade and Obama Care taxes and then culminating with the expiration of the Bush Tax Cuts on January 1st, 2011? After all that, we still face untold amounts of tax increases coming from the States (from sales taxes to property taxes to all kinds of new service fees on water, garbage collection, telephone, electricity, school, fire and rescue, etc.) Can that much money be withdrawn from the Private Sector without severe consequences?
  • Even J.M Keynes warned FDR against the vilification and takeover of private industry. There was zero net increase in private investment from 1930 until 1947. Even World War II did not halt the Depression. Could it be that Bernanke, the self proclaimed expert on the Depression, did not learn these lessons?

My biggest question is, "While we are being bombarded with all those ROSY projections from Wall Street, the Media and Government, no one seems to have factored these looming problems into their projections." And I always thought that markets were discounting mechanisms - Silly ME.

WHAT CAN WE AS INDIVIDUALS DO NOW?

It doesn't matter whether you are for or against Israel, a nuclear attack in the Middle East could lead to World War III or failing that at least a minimum rise to $250/bbl oil which would lead to a World Wide Depression (in the past, this has always led to a world war). Politically, I don't know what to do apart from calling your Congressman and letting him know your feelings. This is not meant to be a political letter; it is a financial letter that attempts to analyze political events and policies as to their effect on stock markets, currency and of course, GOLD. Since I have been looking for a coming Depression and a sharp and steady rise in Gold anyway, you all know what I am recommending.

BUY GOLD and SILVER on weakness pending an explosive move upwards and short the Market by buying Contra ETF's or their calls on any rally back to the DJII 10,250 to 10,450 areas. I have just bought some 6 month calls on USO (the Oil ETF) and I intend to buy more on a breakout to new highs or on pull back to the $70 level.

HOW NOW DOW

Stocks are now at a precipice. The conditions, political, technical and economic are ripe for a crash. This does not mean that a crash will start tomorrow, but the risk of one occurring is much higher than normal. Every thing that I look at suggests to me that the markets are very vulnerable. Over the last two months, we have seen eight 90% panic selling days and five 90% panic buying days. After 15 months of bullish markets and a measly 10% correction, the Market should be ready to rocket upward. But that is NOT the case.

Head & Shoulders tops that started back in November 2009 in the major markets all over the world are nearing completion with downside targets that are down right scary. Looking at the markets another way shows possible technical patterns that are eerily similar to October 2007 through Feb 2008 (that is a declining wedge with a waterfall conclusion). To put it all into plain English, it sure looks to me like there is a major sell-off dead ahead. The Master Manipulators also see what is happening and will be pumping cash into the market as fast as they can which could delay, but not prevent the coming plunge.

Thursday's rally came on sharply lower volume and Friday's came on even less volume and was probably an Elliott Wave 2 corrective bounce to the almost perfect Elliott 5 Wave sell-off of Wave I.What was telling about Friday's market action was not only did volume fall off on the price rise, but the advance/decline line and numerous other secondary indicators also worsened into the rally, which hints that the small rally over the past week was corrective and is tiring. This suggests that it is do or die for the Plunge Protection Team: They must buy the market hard Monday morning in what could be a last ditch attempt to trigger short-covering rallies. If they fail and end in an exhaustion move into mid-day, lookout BELOW.

Look to buy Contra ETF's and/or their calls should the market begin to selloff.

NOTE: there are NO sure things, so look to scale in and use protective stops. Do NOT invest all of your money at one time. Almost forgot, buy 10 calls of USO (Oil ETF) to start, just in case my political readings on Israel are correct.

GOLD

I have nothing new of any significance to say about Gold that I have not already said except to reiterate my medium term projections of $1,450 to $2,450 by early next year at the latest. Besides, there are so many new GOLD BUGS coming out of the woodwork every day that should cover anything you may want to know. Have you all noticed that the first $10,000 GOLD projection has appeared. Should my war in the Middle East fears prove to be right, then my long term target for Gold of $6,250 is grossly understated.

 

GOOD LUCK AND GOD BLESS

 

Market action from March 2007 to March 2009 highlights quite succinctly why projecting the Consequences of today's Government actions into the future is so important for your overall investment success. During the last five years, I have demonstrated how to incorporate projected consequences of government actions and contrarianism into your investing by pinpointing the best contrarian investments that can both protect you and make you money during times of adversity. If you're serious about investing, you don't want to miss out on the information revealed by UNCOMMON COMMON SENSE.

 

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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
78 percent of the yearly gold supply--is made into jewelry.

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