The Medicine Becomes the Poison

"We must all hang together, or assuredly we shall all hang separately." --Benjamin Franklin, at the signing of the Declaration of Independence, 1776


We've had one heck of a party on Wall Street in the past few weeks. The Dow Jones Industrial Average shot up from 10,404 through 11,891- a gain of 1,487 points in just 22 calendar days; all based on the hoped for possibility of a deal being made to solve the Greek INSOLVENCY crisis. Of course I warned you all there were no deals possible based on details given. And whatever deals that did leak out, none produced any suggestions that would solve the root cause of Greece or any of the other PIIGS' problems and to tell the truth, there have been no proposed solutions for America either. Of course you already know all of this.

To this day, in both Europe and America, the realization that Socialism does NOT WORK and the only thing that could and would work is Capitalism to solve the world's problems has never even been discussed let alone suggested. Could it be that 70 years of the West's Socialist controlled education system has never taught what Capitalism is? So there are no politicians or economists of any influence who even know how and what Capitalism is and how and why it works.

THE MARKET GYRATIONS that we have been experiencing over the past few months have nothing to do with the false, hyped up numbers coming out of Washington; it has been responding to the misinformation coming from the politicians involved in trying to solve either debt crisis or that of Greece, Italy or Europe.


Yet we have all witnessed the extraordinary price rises underway in things like corn, wheat, cotton, sugar, cocoa, rice, oil and even lumber. In fact, earlier this year some inflation measures were posting the highest figures in three years and it certainly seemed likely that the Fed's decision to print our way out of our economic and financial crisis is coming home to roost.

Fast forward to this fall's rapid deterioration of both the U.S. and European debt situations, coupled with slowing growth in emerging markets that has brought the fear of a Double Dip Recession to the fore. One month of improving, government manipulated statistics does not really change anything except to suck more people's money into the GIANT BULL TRAP that, thus far, has been 2 years in the making.

Accordingly, inflation, after having been dismissed as a risk during the 2008 crisis, is now back. So now we have both deflation and inflation as chief concerns. This has played havoc with commodity prices. Virtually all major commodities remain elevated from year-ago levels, even if they have come off their mid-summer highs and yet the prices paid at the grocery store are still rising. So are Taxes and fuel along with all the other basic necessities for living.

In the meantime, the Federal Reserve continues to loosen the purse strings. While the $400 billion "twist" operation does not technically extend the Fed's bloated balance sheet (since the Fed is selling shorter-term paper in favor of longer maturities), its commitment to buy mortgage-backed securities does. Something on the order of $3 trillion (including QEs I and II, bailouts, etc.) has been pumped into the economic system since the March 2009 low and that is just in the U.S. While the European Central Bank, true to form, is lagging behind on its quantitative easing program, it fully supports easy money policies as a way of solving their excessive debt problems. The only question that remains is its implementation, given their requirement of needing approval of all 17 different country's central banks. If you thought that our domestic banks leveraging their assets was excessive, wait until you examine what the Europeans are planning; would you believe somewhere between 100% to 400%?


It is from here on that excessive unintended consequences of the actions of the last few years will be seen first. While the FED may well be wishing for a little inflation, history has shown that inflation is the economic equivalent of the "genie in the bottle" - easy to let out, but extremely difficult to control once free.

At press time, bonds continued to price Armageddon in the form of a deflationary spiral wrought by the balance sheet depression underway in the developed world. Equity investors have hit the sidelines en masse, with over $2.6 trillion sitting in money market funds earning a grand total of 0.02% per year. If that is not theft, I don't know what else to call it. At the same time, gold has been busily pricing the inflationary impact of the most extraordinary surge in monetary liquidity in generations into the system. The relatively minor correction (15%) in the early fall notwithstanding, gold's trading tells us that there is a Giant King Kong in the room being completely ignored by both bond and equity investors alike.

FAKE NUMBERS including, profits, inflation, company valuations, etc all due to the $'s shrinking unite of measure status and all those dollars sloshing around the system means that the FED is behind the curve of monetary policy. Moreover, real inflation is being understated, as it is not realistically accounted for in every statistic you hear about. Why? Because it does not include food, energy and most of all, real estate. Weak housing prices for the last several years are being used to suppress overall consumer inflation statistics. If you strip shelter out of the CPI numbers, it turns out that the prices of the other 58% of the calculation have been rising nearly twice as fast as reported. This "everything else but housing" inflation rate is running at a 4.7% annual rate and should you include increases in food and energy, you get an up to date True inflation rate approaching 9%. At the moment, inflation is off the radar, but it will not take much of a recovery in housing and/or the economy - to put it squarely front and center again. Even Rip Van Winkle eventually woke up. In fact, earlier this year some inflation measures were posting the highest figures in three years, and it seemed likely that the Fed's and Europe's decision to print our way out of the economic crises would come home to roost. The rapid deterioration of both the U.S. and European debt situations, coupled with slowing growth in Europe, the USA and in emerging markets, has also brought the fear of renewed Recession (Depression) to the fore.

I am more convinced than ever that gold is the right place to be. Should growth begin to pick up, at some point, all those dollars sloshing around the system will explode prices especially gold. Once again it means that the FED is behind the power curve of monetary policy. Moreover, real inflation remains grossly understated and is distorting every statistic you can think of.


Of course, Greece and now Italy are just the starting point of the crisis ...there are other indebted European nations that are in trouble, including Portugal, Ireland and Spain. Let's not forget that the French are scrambling frantically to hold on to their AAA sovereign debt rating.

Germany, the largest euro-zone economy, is fed up with having to repeatedly bail out their weak-willed neighbors. The Germans have their own economic troubles - and they are sick and tired of throwing good money after bad. The chances of Greece leaving the European Union, voluntarily or otherwise, are getting stronger every day. And once the EU starts cutting loose the deadbeats regardless of who leaves first, the departure of ANY Euro-Zone member will signal catastrophic cracks in the foundation of the European Union. Once it begins, the cascade effect could happen very quickly, perhaps even overnight.


My criticism of the mainstream media is not new. As an example: With regard to both the European and American debt crises, no one actually does their home work. They just report what the politicians say. The truth of the matter is Italy is "too big to fail" for the Euro-zone to be able to survive.

If any journalist, talking head, columnist, editor or news producer actually took out a calculator and looked at the pure numbers of the Italian debt situation, they would immediately come to the conclusion that Italy will not be able to be "fixed" in a normal or easy fashion and neither will Greece.

For example: Italy's debt load is expected to hit 120% of GDP by the end of the year. That number should be a Red Flag warning for anyone with any sense of history. No country has ever been able to climb out of that kind of debt hole without encountering a major default or hyperinflationary event. Given the empirical evidence, none of the PIIGS or the USA should be able to fix their financial problems without major dislocations and defaults unless, of course, you don't call forcing bond holders to take a 50% write-down of their bonds a default. Even then, all they have done is buy some time; nothing has been fixed. Not even this one small step has been done right, but thanks to those idiot journalists and analysts, the market rallied over 420 odd points in 3 days on nothing. The fact that thus far they are just digging a deeper hole was not mentioned.


It's been a tough year for Brazilian stocks thanks to concerns about the global economy. Brazil is rich in natural resources, so commodity exports are a big driver of growth there. Fears over slower growth around the world - and some think a recession looming - have hit commodity and natural resource-related stocks especially hard.

By many measures, Latin American stocks haven't been this cheap since the U.S. financial crisis three years ago. And while red-hot growth in emerging markets may have cooled for the time being, it isn't going away. The good news is that the dip this year minimizes further downside risk and many of these stocks are poised for a nice move when there are signs the global economy is strengthening.

Here is one beaten down Brazil stock that could be viewed as a value play, growth plays - or both. It could even be considered an income play and should be part of your watch and diversification list (this portion reserved for paid subscribers).


With investors fixated on the open-ended crisis in Europe, fretting about how it may affect their investments here in the United States, they may be overlooking another emerging trouble spot. Halfway around the world, the Chinese economy has begun to slow, and the duration and depth of the current slowdown could have a clear impact on the rest of the world's economies and U.S. stocks. (The Chinese (FXI) is down over 40% since I first warned you about it.)

In short, a soft landing would be well tolerated by the global economy. A hard landing could be devastating. Chinese government officials have begun to take steps to recharge the economy, including a cut in inter-bank lending rates, but they may have less control over this massive ship than they think. What makes you think that the Chinese understand Economics any better than the west does?


Recent data points out of China bring to mind the old adage that "when the United States sneezes, the rest of the world catches a cold." But this time, it's Europe that is making China reach for the Kleenex. European economies have slowed sharply in recent months, with most of them now in recession.

Across the continent, it looks as of the Euro Zone will contract by 0.6% in the fourth quarter. As Europe accounts for 30% of all of China's exports, making it the country's largest trading partner, it's no surprise Chinese factories are starting to feel a sharp slowdown.

On the surface, China's export sector looks okay. Exports rose 10.9% in November, compared with a year earlier. That is if you believe the government's reported numbers. Yet even that's down from 15.9% in October. Exports may still be growing, but at a rapidly decelerating rate.

Speaking at a news conference recently, Iwan Azis, an official with the Asia Development Bank (ADB), told an audience in Hong Kong that "things are changing very rapidly -- not just weekly and daily, but hourly." The ADB lowered its outlook for regional economic growth in 2012 from 7.5% to 7.2%, but cautioned that the rate could actually be closer to 5% if European economies remain weak in 2012.

The wildcard is China, which is a major trading partner of virtually every other country in Asia. As China feels the effects of a receding Europe and America, its economy will need fewer intermediate goods that Asian neighbors provide, possibly setting up a vicious cycle of negative feedback loops. That's why these next six to eight weeks are crucial. Coming data points will reveal just how much of a slowdown investors should expect.

What does it mean for the U.S. economy and your stocks? Plenty! China is our third largest export market after Canada and Mexico, and we're on track to ship $100 billion worth of goods to China in 2011. That's up from $92 billion in 2010 and $69.5 billion in 2009. In fact, from 2000 to 2010, U.S. exports to China grew by 468%, which was more than eight times the 56% growth in exports to the rest of the world.

Items such as Caterpillar's (NYSE: CAT) excavators, Intel's (NASDAQ: INTC) processors, GE's (NYSE:GE) turbines, Smithfield Foods' (NYSE: SFD) pork products and Tiffany's (NYSE: TIF) jewelry are all selling in increasing volumes to China. Surprisingly, the increased demand for U.S. exports have been partially due to our weakening currency, but a slowing Chinese economy figures to blunt the steady export growth.

The psychological result of a slowing China could be even greater. That country needs to keep generating robust economic growth to keep its restive population placated. Many citizens are frustrated by a stifling and corrupt bureaucracy, but have tolerated this as long as job opportunities and wages keep rising.

Chinese policy makers fear an economic slowdown and a possible uptick in unemployment as it would spark massive social unrest. Moreover, China's banks are said to be carrying a rising tide of defaulting loans on their books, a trend that would be exacerbated by an economic slowdown. A troubled Chinese financial sector would have ripple effects around the world.

Right now, most Wall Street economists predict the Chinese economy will expand by 8% or 9% in 2012. That's starting to look unrealistic to me. If China's growth cooled to 7%, then the U.S. economy would take the trade impact in stride, as it seems to handle all kinds of global blows these days.

But a growth rate closer to 5%, which would lead to social instability and bank bailouts, is a scarier prospect, according to China watchers. This rate implies a global economy that will struggle to expand in 2012 as China had been expected to be the engine that powers global trade in the year ahead (highly unlikely).

This is just one more bullet that investors may have to dodge and if China indeed slows at an accelerating pace, then it may be time to reduce your exposure to stocks and start nibbling on some shorts.


As you all should know by now, I believe that gold will continue its slow and steady rise substantially ...and I expect gold stocks to do even better. David Einhorn, famed Hedge Fund Manager, also likes gold now. And lately he's been switching out of the metal itself and into gold mining stocks. Einhorn believes a "substantial disconnect has developed between the price of gold and the mining companies." He believes, like me, that "gold stocks are 20% undervalued and that whenever gold stocks have gotten this cheap, triple-digit returns have followed soon after."

It's happened three times in the last eight years. The longest it took to double your money was 13 months.

He reiterated buying shares of GDX; even though the shares of GDX are up 16% since he started buying. I also recommend buying shares of junior gold mining companies (through GDXJ - the junior miners' fund) since the junior gold mining companies were hit even harder than the major mining companies. Junior miners tend to deliver roughly twice the performance of gold - in both directions. Right now, junior miners have terribly underperformed and should rally dramatically once it is recognized that gold's bull market has returned. Although many of the junior gold mining stocks have soared, the dramatic discount is still there.

With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold's advance is somewhat delayed.





All of my long term readers were not surprised by the shenanigans of the last few weeks. There are rarely any major surprises once you learn how to analyze political speech with an open mind and without pre-conceived ideological positions. My most frequent mistakes are usually ones of timing. I seem to continually underestimate the stupidity and ignorance of our media, Keynesian economists and politicians who don't seem to know how to tell the truth. In most cases, "The Obvious Is Obviously Wrong" is the one thought that has kept me and will keep you on the right side; that and COMMON SENSE.

We are into the most trying times in our nation's history. We can either succumb to our Government's folly and go down with the ship or personally prosper. As always, the choice is yours.

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

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

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