Reading Between the Lines of the Economic and Stock Market Recovery

It is foreseeable that once this period of willful self-delusion reaches its apex; the citizens of this nation will make their voices heard and new economic and political theories will emerge to replace the old tried and failed, Keynesian self serving increased government power grab which is slowly but surely being discredited:
Dr. A Baltin


Before answering this question, let me point out that any change in Government Policy, whether it is spending, taxes or monetary (the FED) takes anywhere between 6 and 36 months before their full effects are felt. The reason for this wide spread is directly related to the length of time that each takes, first to implement, then for the public to react to the change and last but far from least, the time it takes for the changes to work their way through the economy.

This DJII rally to 11,000 is now being referred to as "The Obama Rally" when in actual fact nothing could be further from the truth. Obama has only been in office 9 months, not a long enough time for his "Stimulus" Package or any of his other proposals to even have begun to work, especially since only 20% or so of the Stimulus Package has been spent thus far. He however takes credit (responsible) for the Cash For Clunkers as well as the Real Estate Tax Credits, which took immediately as implemented.

Therefore, given the normal lags of any government changes in policy, should it not more properly be called the BUSH RALLY? After all, it was under G.W. that the first Stimulus Package was passed but more importantly, it was under Bush in latter 2008 that $12 trillion was injected into Fannie and Freddie in an attempt to save the housing and mortgage market. Then, of course, there was TARP ($800 billion+?) and last but far from least, there is the FED'S money creation as well as dropping interest rates down to 0-¼%: All of this occurred before Obama ever took office.

As far as the Current Recession is concerned, timing wise, could it not more properly be placed at the feet of Both President Bush and the new Democrat controlled Congress that took over in January of 2008 (22 months ago) inheriting an unemployment rate of 4.7%. For the next 2 years congress blocked every single Bush proposal, including any Tax cut proposals and both the stimulus and car bailouts, until they were changed to suite Pelosi and Reid. But all that is neither here nor there; now that Obama has claimed and been given credit for both the Stock Market and Economic recovery, he certainly will be given credit or Blamed for whatever happens from here on out.

The big questions are: What will be the effects be on the Economy should Cap & Trade and the Health Care Bill be passed; even though the Government has pushed off their implementation until after the 2012 elections? However, increased taxes, a falling US dollar and rising energy costs, all of which take money out of the hands of the public, will soon be going into effect, and long before 2010 elections. Don't forget there is also the expiration of the Bush Tax Cuts: We shall very shortly find out what kind of ECONOMIC RECOVERY and STOCK MARKET will soon be upon us.


Is it not amazing how the Government has put all the blame of our Financial Disaster squarely on the backs of the banks' pay practices, while taking absolutely no responsibility on themselves: Conveniently disregarding their Community Action policies forced on the banks or that too "big to fail" was a direct result of Clinton, Rubin, Greenspan, Paulson and Geitner eliminating the then 62 year old Glass-Steagle Act. Nor did they ever mention the roles of Chris Dodd and Barney Frank in the $12 trillion FNM and FRE failures and bailouts. Sure, let's now let the regulators and the people most responsible for our financial debacles write the new regulations, without any hearings as to what really went wrong. Great Idea?

To keep things in perspective, the DJII closing above 10,000 is almost exactly the level at which it closed at 10 years ago: No net progress in a decade. However, a dollar is worth a lot less now than it was worth in 1999, so in terms of inflation adjusted dollars, the DJII is really not worth much more than 6,000 depending on what real inflation rate is used.


Bush helped make us poorer by signing off on higher steel tariffs as well as tariffs on Canadian lumber and Chinese textiles. In 2009, Obama helped make us poorer by signing off on higher tire tariffs and a falling Dollar policy. Was this payoff to the trade unions enough or is there more protectionist trade policy yet to come? What will be the reaction of the rest of the world to our trade policy of allowing our US dollar to depreciate so sharply? Rest assured, there will be a reaction. Is there a trade war in the world's future as each country tries to devalue their currency in an attempt to maintain their exports?

Economic analysis has proven that trade creates wealth. The law of comparative advantage demonstrates that when we specialize and trade, we produce much more wealth, using the same resources. By embracing protectionism, we have adopted a policy that works against our own best self interest by encouraging destructive protectionism. Protectionism gives politicians of every stripe an opportunity to appease special interests, and can only be justified if one never heard of or doesn't understand "Opportunity Costs." Simply put, preventing trade means that we use more resources to produce less goods, which means less wealth for all concerned.


Marc Faber, who publishes the Gloom, Boom & Doom Report said in a recent interview, "I am 100% sure that the U.S. will go into hyperinflation." Certainly not the Zimbabwe type inflation rate that reached 231,000,000 %. To put the current and future inflation rates into proper perspective; inflation in the U.S. in 1979 reached a (Government reported?) high of 13.5 %. This was a 500% increase above the 70-year average of 2.5%, and most of you remember just how bad the situation was back then. I have been warning for quite some time that Fed policies were sending us on a path toward inflationary destruction. Today, I am no longer alone in this thinking. But Government doesn't want you to wake up to it: So, as usual, they keep the reported inflation rate artificially low. Not only so that they can break their promises to seniors by not having to pay COLA on Social Security, but also because they don't want the general public to wake up and realize that for almost 100 years they've been stealthily stealing their savings and their wealth.

The Federal Reserve (FED), which was founded in 1913, is a non-Constitutional cartel of private bankers that has control over the U.S. monetary system. They are able to rape the public by paying off the politicians. They have ended up controlling the financial system to such a degree that financial profits represented almost 40% of all profits in 2007 and yet the Politicians vilified the Oil, Pharmaceutical and Health Insurance industries (the most competitive industries in the world) each of which makes a below average return on invested capital.

In the beginning, the Fed's policies caused a gradual but steady devaluation of the dollar, but lately it's been sharply accelerating and so is the Government's manipulation of the CPI. Ever wonder why things cost so much more when we are sitting on near 17% real unemployment? For example: In 1933, the Consumer Price Index was 12.8. In 2008, the same CPI was 225. In other words, that same basket of goods has increased from just under $13 to $225. That's what you call a devalued dollar. To call this "petty theft" is certainly a gross understatement.

So why does the Government love inflation so much?

  • Inflation makes a $1000 debt look like it's only $50.
  • In a democracy full of heavily indebted voters and businesses, the Government pursues monetary policies hospitable to debtors even as it coddles the special interests that lend to them.
  • Inflation finances social programs that voters demand while allowing politicians to avoid the politically unpopular alternative of raising taxes, enabling politicians to painlessly buy votes.
  • Inflationary spending is confused with economic growth, which is confused with economic health. Of course, GDP numbers are supposedly adjusted for inflation, but what does that mean if the inflation figures are misrepresented?
  • Inflation causes nominal asset prices to rise, such as those of stocks and real estate (creating Bubbles), instilling in the minds of voters the illusion of wealth creation even as the real purchasing power of their assets decline. How else can you justify a near 3800 point (Fibonacci 61.8%) rise in the stock market with unemployment rising at an understated rate of 500,000 a month? See what an injection of $13 trillion can do: But for how long will today's Bubble last before it too, like all bubbles, eventually bursts?
  • Maybe it's true that Bernanke, like Greenspan before him, could not see nor predict Bubbles forming or about to burst. After all, how many economists are now calling for any Bubbles being formed, let alone about to burst?

The FDIC just closed another bank, bringing the tally of US bank failures in 2009 to 106 (131 since the beginning of the Recession). Meanwhile, Credit Sights, which tracks this data, predicts that we can be no more than 10% of the way through this cycle of bank failures, which will make it the worst run of closures since the Great Depression.


China recently reported that her economy grew at 8.9%. Before you take this figure at face value, you must also take into account that China's economy is ¼ that of the USA and therefore their near $600 billion stimulus package would be the equivalent to a US stimulus package of $2.4 TRILLION.

When Beijing began distributing stimulus money to various industries, it resulted in land prices soaring throughout China. With increasing speculative investment in residential real estate, the market faces a surging Bubble that jeopardizes the country's long-term economic development. More than 70% of real estate investment in China comes from bank loans. There has been collusion between real estate developers, local government officials and investors who have acquired massive land holdings, then limited the supply and inflated prices, creating a Real Estate Bubble that is not sustainable in the long run. To make matters worse, 55% of homeowners are paying up to 50% of their income to own their home as compared to a World Bank maximum recommended rate of 20% and an American recommended maximum of 25-30%. When the US average went above 35%, the Real Estate Crash soon followed.

Beijing knows that one of the country's underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate. As housing prices continue to rise, a parallel trend is manifesting itself - rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that by the end of 2008, the average vacancy rate in Beijing was 16.64% and vacancies reached as high as 30% in some districts.

Economic performance being the prime prerequisite for bureaucratic advancement, gives local officials the incentive to generate as much revenue as possible through land auctions. This has created an unheard of level of collusion and corruption among government officials, real estate developers and investors. And we think our corruption is bad? Any dramatic drop in land values could send shock waves throughout their economy leaving Beijing with few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term, while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Do you really expect that the Chinese Communists can manage expanding Bubbles better than we could?

Every Ponzi finance scheme works as long as asset prices are rising. But once the Bubble is pricked, both the creditor and debtor are left with declining asset values as the Bubbles blows up. However, even Socialist economists of yesteryear marveled at the mania in the collective mindset of private citizens and their elected representatives that produced such Bubbles. The most famous of these economists was Irving Fisher (1867-1947) who, in 1933, wrote about this problem of over-indebtedness. Whether it is the USA or China, today's exercise in government spending is, of course, an exact replica of the Japanese experience from 1989 to the present. Their debt to GDP ratios has gone from about 50% in 1988 to about 208% today, yet their nominal GDP is no higher than it was 20 years ago, and their employment stands at twenty year ago levels.


While it takes a very smart and emotionally stable man to learn from his own mistakes, it should be a lot easier to learn from the mistakes of others: Notably Japan from 1989 to the present. Yet the economic advisers of Clinton, Bush and Obama have refused to do so. Or do they all think that the "LAWS" of economics are different for us than they are for Japan? The promise of Government reviving growth through increased indebtedness and zero interest rates is an impossible premise. The Natural Laws of Economics cannot be suspended indefinitely.


Unlike China or Japan, our imports are approximately 13% of GDP and exports are only 10%, so to even think that a falling US dollar can seriously improve our economy by increasing exports is only believable to someone who thinks 2 + 2 = 22. However, a sharply falling dollar will definitely increase inflation.

The declining dollar may provide some positive results in terms of our trade balance, but any feeble positive changes will be more than offset by the declining world economy and will definitely be insufficient to offset all of the negative forces stemming from rising Taxes, Energy and Medical costs not to mention our increasing Debt and Deficit Budget levels.

Tax increases (the biggest policy mistake of the 30's) reversed any positive growth rate that Sharply lower Interest rates and massive Government spending did for the economy from 1929 to 1933 and drove price levels and economic activity crashing back down again. Are we now due to make the same mistakes and relive that same fate?


When we calculate the Dow in Gold terms, there is no rally, just a slow decline. For example: In 2000, Gold hit a low of roughly $260 per ounce. The Dow in January 2000 stood about the same as it does today. So, if we take this as a measure: 10,900 (Dow January 2000) / $260 per ounce = 41.9 ounces was needed to buy the index. Today at 10,900 DJII and $1,050 Gold, it takes only slightly more than 9.3 oz to buy the DJII.

That is why there is a danger in believing that the current stock rally is actually as positive as the raw number may indicate. It is not. Since 2000, the U.S. dollar has fallen by approximately 38%. The Fed and US Treasury have been slowly destroying the buying power of each American dollar for over 95 years. That is why even though the median income has not moved for nearly a decade; buying power has collapsed making Americans poorer and works in favor of Big Debtors and especially the banking elite.

The earnings reporting season often marks the end of the market trend into the expected (leaked) earnings announcements. A reversal then tends to occur during the last week of reporting. Given that markets tend to rally into expiration week, the odds favor a stock market peak either into expiration day or the following week. The recent rally has been very speculative, favoring risky assets over the past few months. I'm sorry if you missed some profits by my getting you out too soon after catching the market's March lows, but don't compound my error by chasing gains into these high risk times in risky assets. We're at the start of a cyclical seven years of lower than normal returns and share prices have moved too far ahead of economic reality. The market is NOW due for, at the very least, a serious correction at best and/or a resumption of the Bear Market at the worst.


This simple fundamental common sense truth has kept me/us from going short prematurely in spite of how bearish I am on both the economy and the stock market. Our Short Money is still in our holster while we sit back and wait for the appropriate time as we count all the money we are making on our precious metals positions. The bottom line is that the US stock markets are very overbought and ripe for at least a very sharp sell-off. You can try taking some initial positions on BGZ, TBZ and FAZ. If you like, you can try to protect some of your profits on your Gold and Silver positions by shorting the XLB or buying some puts on it; it usually out performs common stocks to the downside by 2:1.



Surprise, surprise, JP Morgan's London commodity arm announced that it would begin accepting Gold for margin deposits. Could it be that they need Gold to cover their outstanding short positions? Is this perhaps the first step in the re-introduction of Gold as money?

I usually never comment on other analysts but one that I once respected, is now after falling off trying to jump back on the bullish Gold band wagon again by attacking Elliott Wave and in so doing he is also attacking me. As you all know, Prechter was the first public Elliott Waver after R.N. Elliott and co-authored the book that is now the Bible for Elliott-Wave, and someone who had the absolute best prognostication track record for 10 solid years (1978 - 1988), but has been wrong on both Gold and the Stock Market ever since. The reasons for this have nothing to do with Elliot-Wave Analysis. Yet this self proclaimed analyst ignores me and all the other Elliott Wavers who have been "Right On" for years. It was I who first predicted $1250 Gold by year end 2009 and a final goal of $6250 after a 16 to 20 year Bull market back in 2006. I have also called all the major pullbacks since then and except for selling options from time to time against our long positions, I have kept my readers fully invested in Gold and Silver since 2001; mostly due to Elliott-Wave. I also have an equally good track record when it comes to the general market. Elliott-Wave is the only non-trend following system that there is and that allows one to trade using 2 or 3% stops. So please pardon my diatribe.

More and more analysts are finally (after an 8 year bull run) waking up to the fact that we are in a Major Bull, not a trading, Market for Gold and Silver. But no need to worry just yet as many are now trying to hop on and take a ride on the GOLDEN BULL, they still represent less than 5 % or 10% at most of all analysts. The majority still hates Gold and don't even mention Silver as most are still clamoring to jump on board the new equity Bull Market Bubbles the world over. In other countries such as Europe Canada and Australia, that are not suffering a currency crisis, interest there is only minimal and mostly speculative. However things are changing as more and more institutions are beginning to take positions in precious metals and their stocks.

The Government and their Wall Street analyst lackeys keep on insisting that there is no risk of inflation in the short term. But that's the key is it not? Who buys Gold for the short term now days and what do they mean by the short term any way? Gold's four-digit price tag is less than half the inflation-adjusted high it hit almost 30 years ago. According to Bloomberg, Gold's all-time, inflation-adjusted high was reached in 1980 when the metal hit $873, or $2,287 based on today's dollar. Keep in mind that the $873 peak in 1980 was a classic speculative blow-off top. Back then, Gold had soared 66% in just 14 trading days and only stayed up above $850 for one day.

In the absence of any other alternatives that are realistically able to retain value over the long term, all of the major and long term holders of bullion have no incentive whatsoever to sell. If anything, the reasons for acquiring Gold in the first place are the very same reasons, if not more so, for hanging onto it now. So the normal price suppression effect of profit taking is to a large degree non-existent. As for using P/E Ratios in pricing Gold stocks, that has not been useful in the past and I doubt it will be in the future. What seems to be overlooked is that any increase in the price of Gold goes straight to companies' bottom lines and more importantly, increases the value of their reserves as well as expanding those reserves as lower and lower grades of ore that heretofore were not profitable to mine, become increasingly profitable. Even most tailing ponds (waste) are becoming profitable, expanding the life of their mines. Another key factor is the expectation that fiscal and monetary policies will seriously weaken the US Dollar. Further and as long as the US is hell-bent upon letting the dollar sink to free-market levels, Gold will rise and P/E ratios will climb further until there is a change in the major economic fundamentals and the near universal expectation of higher Gold prices is reversed. If one had relied upon P/E ratios, they would have avoided Gold shares during the last six years and still do. Percentage wise, the best performers are junior exploration companies that have no earnings and thus no P/E's.

Over the last several months, Silver and their stocks have outperformed many of their Gold peers. Silvercorp Metals (SVM) and Mag Silver (MVG), my 2 favorite silver miners, are up by more than 25% during the last few months. You can accumulate then into any 10 to 15% weakness.


Now that Gold has broken out above $1050, exactly as I expected, continue to follow my same old advice: Accumulate on weakness (2 to 5 day sell-offs). For those of you who have no positions yet, START SCALING IN NOW. If Gold should pullback to $1000, which I doubt will happen, instead of panicking and selling into fear, REJOICE and do not look a gift horse in the mouth - you will have just gotten a golden opportunity to buy more cheaply. We are definitely in a world monetary expansionary Bubble that will drive inflation first and then deflation. Gold does well under both conditions.





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Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
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Gold is one of the most recycled substances in the world.

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