Peering Through the Smoke Screen

Thomas Jefferson wrote that "whenever any form of government becomes destructive" of citizens procuring for themselves "inalienable rights" to "life, liberty, and the pursuit of happiness," then "it is the Right of the People to alter or abolish it."

George Washington viewed politicians (and bureaucrats) as necessary evils whose powers must always be minimized. Special interest politics, which is to say all politics, "are likely, in the course of become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the Power of the People, and to usurp for themselves the reins of Government."


TERM LIMITS of one eight year term and one term only. Although not in the Constitution Washington tried to impose it by example and leadership. But nobody was listening.

In 1939, Treasury Secretary Henry Morgenthau conceded to Congress: "We are spending more money than we have ever spent before, and it does not work... After eight years of this administration, we have just as much unemployment as when we started... and an enormous debt, to boot."


One thing for certain is the complete and utter lack of both Political and Economic foresight of the Western Powers. How can anybody in their right mind believe that a simultaneous surging demand for Freedom and Democracy throughout all of the Muslim Middle East is somehow a good thing? This an area that has never known either and the only organized and well financed political party is the Muslim Brotherhood controlled by the Mullahs in IRAN, that offers the furthest thing that there can possibly be (Sharia Law) from either Freedom or Democracy. Can no one see that all of these insurrections, instead of being spontaneous, are highly organized even though there seemingly was a complete lack of leadership, and yet somehow the clerics are looming ever larger as each American friendly government crumbles? Before the overthrow is even half over, Muslim Ayatollahs are being repatriated to legitimize and lead any new government. It is Jimmy Carter déjà vu all over again, Just like during Carter's time today it's Hillary and the far Left Media that are the main cheerleaders.

THE THREAT TO PEACE AND AN ISRAELI/ARAB NUCLEAR WAR AND POSSIBLY A WORLD WAR HAS NEVER BEEN GREATER. I will not belabor this point; I am just suggesting you to think about it.


The propaganda machine has been cheering the 100% rise in the stock market as the Government dreams up phony statistics to justify it and convince you that the market is still undervalued. The consensus is that the markets have another 20% rise to go this year. IRRATIONAL EXUBERANCE is always the greatest at the TOP and always comes to a sorry end.

How could anyone not notice the closed up shopping centers, strip malls and scores of vacant stores and industrial buildings dotting the American landscape, including the dried bones of major chains like Circuit City. Without any meaningful increase in jobs, the Government stated the unemployment rate dropped from 10% down to 9% in the face of the Shadow Statistics claim that unemployment is closer to 20%. The nation's saving rate is now 5% above its 2007 rate. Did I mention that sales tax receipts are the lowest in 30 years? What about real estate? The construction industry, that at one time was 20% of the economy, has just started a new wave of foreclosures amidst continuing falling prices; what does that do to bank assets (collateral)? And what about the banks? Check the charts of the majors: Despite sucking on the Government and the Fed's hind tit, they still look like they are on the verge of bankruptcy. So ask yourself, how is it possible that the economy grew at a faster rate in 2010 than in 2007 when the unemployment rate was a then non-manipulated 4.7%? It is easy: By using a 1% deflator instead of a true 7% or 8% deflator, you can turn a minus 4% into a positive 3.4%. Oh I almost forgot; with all these huge corporate record profits being reported, how come Governments Income Tax Receipts are shrinking? They must keep 2 sets of books, since reported profits are not the same as taxable profits.


Even in 1945, with Germany's cities being turned into rubble, Hitler's propaganda continue to work until one day it suddenly stopped working. But by then it was too late to do anything about it. That is why sentiment figures as well as consumer confidence figures are still at record highs. Until one day when they crash, BUT by then it is too late. Wall Street, the Media and Government are still screaming "Buying Opportunity."


Just as in the USA, British INFLATION is being masked by their government as the figures in the UK as well as internationally under estimate real inflation. Increasingly, many economists are concerned that official statistics are misleading and hide the true increase in the cost of living. But they cannot hide the increases in food prices. A double-digit jump in food prices pushed China's January - CPI to 4.9%, driven by the 10.3% jump in food costs. The Chinese inflation data appears to be even more misleading and manipulated than that in western economies as their reported Producer Price Index rose to 6.9%.

All governments are attempting to manage consumer's perceptions regarding the significant increase in the cost of living as their fiat currencies are steadily being debased. But they can't hide the increases in the cost of FOOD. And now fuel?

China joined India, Indonesia, Thailand and South Korea in boosting interest rates as Asian policymakers sought to cool the economies that are supposed to be leading the rest of the world to recovery., Despite three interest rate hikes and six increases to the bank reserve requirement, China's January inflation numbers continued to show uncomfortable increases amid rapidly rising wages, and a DANGEROUS 10.3% increase in the cost of food. Additionally, the Chinese government also revealed that it had been quietly dumping U.S. Treasury Bonds over the last two months and hinted that more selling is on the way.

Largest bond fund cuts US government holdings

In January, PIMCO (the world's largest bond fund) sharply cut its exposure to US government-related debt, before US bond yields rose this month to their highest level in almost a year.

It has been such a very long time since we have had even a 2 day selloff that the possibility of a selloff has vanished from the collectivist mindset. Professional hucksters happily saw the markets rise persisting way out into the indefinite future so that a 20% up move for 2011 is a sure thing. Naturally fundamental reasons are coming out of the woodwork to try and rationalize the current sentiment.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophic collapse of the currency system involved." ~ Ludwig Von Mises

REGRESSION ANALYSIS: Newton's basic Laws of Motion: Action and Reaction.

At current levels, both the S&P and NASDAQ are stretched further above their 200 day moving average than at any other time during the last 10 years. "The further a market stretches in one direction, the faster it snaps back once the forces of nature set in. The FED'S QE2 and the threat of QE3 are stretching these Laws of Physics, but they can only do that for so long. Just as the flood of "out of thin air" money unleashed the 2002 to 2007 bull rally in the vain attempt to abort the Recession and Bear Market, it was however also directly responsible for the severity of the Economic and Market Crash of 2007-2009. What will it do in 2011?

Last April's rally was pushed more than 2 standard deviations above its 200 day average by the torrent of QE1 "out of thin air" money. Thus the correction when it finally came was much worse than it would normally have been.

QE2 has now driven the market even further above the 200 day than in April. Unless the laws of action and reaction have been repealed, we should soon see, at a minimum, a violent regression to the mean and possibly much worse: The end to this cyclical Bull Market and the next down leg in the secular bear.

Last Tuesday was a 90% panic selling down day. It came in spite of massive deep pockets buying intervention, presumably by the Plunge Protection Team and Co. with QE2 funds, buying all markets strongly in their attempt to prevent an all out collapse. The market still fell hard in spite of their efforts, which just goes to show that once the Bear Market re-starts and Wave III of its second major down-leg begins, there will be no stopping it.


"The U.S. currency has been losing exchange-rate value against the other major currencies (Australian Dollar, Canadian Dollar, Japanese Yen and even the Euro) during this period of mounting political instabilities.

During the next 3 months, we should see the dollar continue its collapse down into the 3 year cycle low, perhaps unleashing a currency crisis. This will drive a massive surge in inflationary pressure that will poison the fragile recovery (if there really is one) and send the global economy back down into the next Recession come Depression. This Recession should be much worse than the last one as it will begin with economic conditions much weaker than they were in 2007.

The last time the Fed tried their Keynesian nonsense, it produced a brief period of Phantom Prosperity by creating MASSIVE real estate and credit bubbles that nearly brought down the World's Financial System. But it did create jobs. Not only have the problems not been fixed, but what they have done will actually make it all worse just as SARBANEYS OXLY has done (witness the takeover of NYSE). This time the devastation will turn what would normally be a severe Recession into a Full Blown Worldwide Depression.

My short term projection is that this cyclical bull that we were in has now probably peaked. But a last ditch attempt to hold back the tidal wave could possibly hold the market up until early April. And just like the last time; the down turn is being led by the "sure thing" Emerging Markets just as I have been warning you they would. To make matters worse The FED in their "Infinite Wisdom" Keynesian Ideology of trying to get something for nothing; will bring about a currency crisis and a massive surge in global inflation. Only this time we will all pay a price that is several degrees higher than the last time.


During last week's Congressional hearings, the Chairman would admit to no connection whatsoever between Quantitative Easing and soaring food and commodity prices. "Blame the weather", Bernanke suggested, "or credit the economic recovery...or both. Whatever the reasons, it is not a dollar effect, it's a growth effect," Mr. Bernanke explained. Furthermore, the Chairman pointed out, "As people's diets become more sophisticated, their demand for food and energy grows."

Translation: It's their problem - don't blame me. At his hearing on Capitol Hill, Fed Chairman Ben Bernanke comments reflected his belief that GDP growth causes inflation: Without the Media or Congress questioning his assumption. I'm surprised at how complacent the stock market remained in the face of obvious pressure building on the CPI. If the Fed doesn't react to a rising CPI by tightening policy, Treasury yields will begin soaring and inflationary psychology will take root. However, if the Fed does react by ending QE2, what will happen to the stock and bond markets should be obvious since both markets are running entirely on fuel from the Fed. Today's misplaced faith in the omniscience of the Fed will eventually fade, and when it does, the market will (CRASH) return to intrinsic value very rapidly. The day trading robots and speculators counting on a "Bernanke put" will all try to squeeze out of that same small SELL DOOR at the same time. Hopefully, all us patient investors have learned not to try to climb aboard an exploding rocket running out of fuel. Using the most robust, back-tested historical valuation models, the best estimates of fair value for the S&P 500 that I've seen is somewhere in the range of 800-1,000 - 25% to 40% below current levels. My personal estimates are significantly lower. WHY: Because markets always overshoot their true valuations. The higher they go to the up side, the lower they will fall on the downside.


The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A Huffington Post review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another. "Try to publish an article critical of the Fed with an editor who works for the Fed," says [James] Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable. When the Fed creates money out of thin air for example, it is out and out fraud. It is trying to get something for nothing. It is distorting the facts and encouraging mistakes. It surely will be punished. When? How? We can take a guess, but it's not for us to say.... There's no gaming the system. There's no pretending. There are no quick shortcuts...and no guarantees. And even if this isn't true, you're better off believing it anyway.


On Thursday, February 17th, Silver took out its former 1981 high. This record didn't stand long because on Friday, February 18th, took it out again with another new post 1981 record high. Seeing the price of Silver move from a 30 year high, to a 14% correction, and then snap back to two new 30 year highs *in only 33 trading days* is an impressive display of power by Silver. The US Treasury Bond is the final asset bubble, but a very harmful one. Its bust will ensure an economic depression, and an explosion in the price of Gold and Silver and even crude oil. Gold is guaranteed to rise by double and Silver certainly much more. Not if, but when the US Treasury Bond Bubble bust occurs, the Gold and Silver prices will rocket to breathtaking levels. In precious metal bull markets, Silver outperforms Gold.

At the peak of the last precious metal bull market in January 1980, it only took 17.4 ounces of Silver to buy one ounce of Gold. Thereafter, the ratio turned and started climbing higher. By February 1991, 101.8 ounces of Silver were needed to buy one ounce of Gold. Silver was trading at only $3.50 per ounce, down 93% from its previous bull market peak.

Back then, Silver was "dirt cheap", but it would not get any cheaper, despite everyone and their mother being Bearish. Silver turned the corner as value oriented buyers started to ask themselves, is there any downside?. Since then, the price of Silver has been generally rising, and has been doing so faster than the spectacular rise in the price of Gold. The result is a long-term downtrend in the Gold/Silver ratio. In other words, since 1991, Silver has outperformed Gold. But Gold was safer, so I emphasized buying Gold. Hindsight says that I wasn't so smart. But smart enough that we all made a ton of money. I knew about CEF back then, but did not buy any. Oh well, I hope you were all are not expecting perfection.

Three weeks ago, the ratio touched 45.0. It was the lowest daily and weekly close for the ratio since February 1998. The Gold/Silver ratio fell by nearly 50%, so that only 41.3 ounces of Silver were needed to buy one ounce of Gold. Silver was clearly outperforming Gold, just like it has been doing over the last several months - as shown in the above chart by the remarkable drop in the ratio.

The ratio has now reached an important point. It is breaking through support, which is illustrated by the lower red line on the above chart. Several previous attempts to break through support have failed, with the result being that for many years the ratio has continued marking time within a trading range bounded by the parallel red lines.

One can never be sure how the markets will unfold in the future. But I expect that the ratio will finally break through support in the not too distant future.. If I am right and the ratio knifes through the low 40s, there is no clear short-term target. Given the accelerating momentum that would be generated and Silver's bullish fundamental factors- like its unprecedented backwardation - a drop to at least the low 30s seems highly likely, but I don't rule out the possibility of the ratio falling even lower. So for the time being, GO WITH THE FLOW, concentrate your new buying in Silver and Silver stocks: And in Gold stocks making new highs.


What else is new? With this latest LOW VOLUME 2 day rally correcting last week's 3 day sharp selloff, traders are left to ponder whether the recent weakness was just a minor correction in an on going Bull Market OR will it lead to a much larger correction or even the resumption of the Bear Market. Unfortunately there is no easy answer. This dilemma is what makes trading difficult and separates both the amateurs and most professionals from their money. The best traders take the path of least resistance. Stick with proven winning trends, which for us have been buying Gold, Silver, Platinum, Palladium and Commodities. Why these? Because the one thing we know for sure is that until June at least, there is a new $100 billion a month of fiat money pouring into the system, which is sure to produce further INFLATION. Since our game plan has been working so well, let's stick with it until we have confirmation of our sell signal and that a 10% to 20% correction is practically assured. In order to get that confirmation sell, we need the DIA to break below 117.48, SPY to break below 126.90, QQQQ below 54.90 and IWM below 78.40. Until then, we will stick with our winning positions, keep some of our powder dry and wait. DON"T FORGET TO MAINTAIN ALL TRAILING STOPS. The markets, because of the Government, Wall Street and their captive Media are taking the upheavals in the Middle East, North Korea, Ireland, Portugal and Europe as if only good things will be the result. The burgeoning inflation, steadily rising interest rates and falling stocks markets of all the hot emerging markets see nothing to worry about on their Fascist road to Nirvana. They are just having minor consolidations. What could go wrong? We have Democracy busting out all over and the Iranian war ships are just on a good will tour to wish all the newly emerging Mediterranean democracies Good Luck.

The balance of the letter as well as Specific stock selections and trading strategies are reserved for subscribers.




STAY THE COURSE: All of my long term readers were not surprised by the shenanigans of the last few weeks. It was discussed and called for in my recent letters. There are rarely any major surprises once you analyze recent political events with an open mind and without pre-conceived ideological positions.

The Federal Reserve is now blowing UP the biggest bubble in recorded history. When it pops - as eventually every bubble must, millions of Americans will be financially devastated... But others will have the opportunity to get Much, MUCH Richer. Is now the time to try and sift through all the BS and misinformation all by yourself? Is now not the most important time of your life to be able to read between the lines in the search for the TRUTH?

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Aubie Baltin CFA, CTA, CFP, PhD.
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The naturally occurring gold-silver alloy is called electrum.

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