first majestic silver

Smoke and Mirrors

July 1, 2011

"The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If 'Thou shalt not covet' and 'Thou shalt not steal' were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free." -- John Adams, A Defense of the American Constitutions, 1787

We are quickly catching up to that infamous "can" that keeps getting kicked down the road when it comes to the QE'S. Whether or not the Fed was successful in creating any growth or stimulating any amount of pent-up demand is debatable, but what it has been successful in, is provoking a great deal of speculative activity, pushing both the Bond and Stock markets up to widely overbought ranges. However, there was never any realistic prospect of creating a beneficial "wealth effect" for the economy as a whole; since none of the $800 billion QE1 or the $600 billion QE2 found its way to Main Street. The historical evidence is clear: The public only increases spending and their debt levels if the perceived increases are of "permanent income" -- not the one shot welfare type gifts. Wealth is driven by the creation of long-term cash flows through permanent jobs and productive investment, not by boosting the valuation of existing paper assets by the FED lowering interest rates, encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again, in the near future; if history is any guide).


If the economy starts to falter, as it seems to now be doing, the great expectations for another QE have become less likely, given the mood of today's Congress; hence the necessity for the government to create another crisis in a hurry. But the reality of seeing QE3 any time soon is far from assured.

Back in the 1930's it was the Keynesian argument that each $1 of government infusion would create $3 to $4 of new private Investment. However, there is overwhelming evidence that the reverse is true. Throughout the 1930's and WW2's massive government spending, it was not until 1947 that we got the 1st dollar of new private investment. We now know that it takes $2.5 to $3 of government spending to generate only $1 of new investment. TARP (QE1) and QE2 did NOT work - unless you call bidding up paper assets working -- which will make the Fed's political opponents object all the more strenuously to approving a new QE3.

"If QE1 and 2 were both dumb and costly, why would any sane person demand more of the same?"

The Fed is running out of ammunition and more importantly credibility. What we are seeing is the gradual abandonment of the Keynesian theory of "print money to save-the-economy" strategy, that never had a lot of logic behind it and has been proven to be wrong time and again (even some in high liberal academic circles have since come to the conclusion that the Keynesian "Create Demand Strategy" never worked).

In propping up both the stock and bond markets (by driving down interest rates to unsustainable low levels) the FED has only succeeded in making the average American's life worse (through a hike in the cost of real goods and services, especially food and energy prices). Does anyone really believe that the CPI is only 1.5%?

As a life long diabetic I know that, both the stock markets and the economy's sugar highs are due for the natural crash that always follows "Sugar Highs".

The risks are now extreme; not only because of psychological and sentiment risk, but the environment of the past few years has been one of massive government and Wall Street propaganda generated euphoria. Any return of fear and uncertainty, in conjunction with the US's weakened overall financial condition now being highlighted in the media all around the world, could bring about the Depression that I have been warning about: Unless there is a complete about face away from Socialism back to our Constitutional Capitalism.

It is too late?

Probably, unless a new dynamic leader emerges who understands Free Market Capitalism and is swept into power with clear, filibuster proof, majorities in both houses of Congress; a perquisite to implementing the sweeping changes that would be required to turn around the direction that the US has been going in ever since 1929. This is not a Democrat vs. Republican tirade: Both parties have been equally guilty. Even Nixon in 1971 stated that "We are all Keynesians Now" as he destroyed the last vestiges of the Gold Standard. The result Prices have been exploding and the US Dollar has been depreciating ever since.

In a solidly trending bull market, an investor can make any number of risk management mistakes and still pull through ok. In a climate like this one however, the same litany of once-forgiving mistakes can spell disaster although risk management is always important but at times like we are now in, it is a matter of life and death (in financial terms at least). Now is not the time to go it alone.

Lately the word, "crisis" can feel like an overused term. But the simple fact is that crisis is everywhere: There is a financial crisis in almost every economy around the world, a crisis in leadership and a crisis of faith in our government. War and terrorism is spreading across the entire Middle East and North Africa, and and.


Grave macroeconomic policy mistakes have been made by the Central Planners (government) and we are all going to pay the price. A massive decline is coming, shortly or starting later in 2011, or perhaps delayed into early 2012 if Bernanke can manage to get a large enough QE3. But the QE tactics are disastrous for our economy in the long run. They are doing nothing for households, small businesses or small banks, which are the backbone of our historically strong capitalist economy. Fifty three percent of all people either are receiving government assistance in America or are employed by the government. This is Socialism folks, not Capitalism and that is the problem. Socialist policies are coupled with an obsession to pump up a few large, mega banks and Wall Street to the tune of trillions of fiat dollars that do not find their way to Main Street but go directly to paying billions in bonuses, some of which is returned as political contributions.

In my constant search for reliable information, I was having lunch (my treat) with a real estate developer friend of mine and he related some startling facts. He told me of several successful housing construction companies, who like him, were large enough to have employed hundreds of people, maybe thousands if all aspects of construction industry are considered. On average, they used to build 200 - 500 homes a year, but are now down to less than 50 and are having trouble selling those 50, so they are buying the homes themselves and renting them out to try and keep their few remaining key employees and recoup some of their costs. That's a 90% drop in new home building, a far greater number than the lying government statistics that we are getting fed by the mainstream media and Wall Street.

Furthermore, he and these developers if they improve their land, with roads, water, and sewers, with the intent of selling lots and then building on those lots, since you can't build if you do not have the land and infrastructure - they get penalized for those improved lots by being reassessed for property tax purposes. In other words, he cannot move forward because the increased cost of property taxes makes his speculation on finding a buyer cost prohibitive. You can't rent improved building lots out, and in this ragged economy there are few buyers interested in building, so there is no cash flow possibility in land development.

During that same lunch, I also discovered that several high up individuals who work for the Federal Banking Regulators have chosen to take early retirement. They did so just to get away from the terrible environment they have been working in due to all the 1000's of idiotic new regulations being passed by an ignorant U.S. Congress who have no understanding whatsoever of the true causes of the meltdown. Congress simply threw in1000's of pages of senseless new regulations, of course never examining themselves as to their culpability in creating the problems in the first place. These laws are so bad that the regulators are getting out before they get blamed for the coming disaster.

The down payment and repayment cash flow requirements, as well as other increased underwriting requirements, make it almost impossible to get or give a loan. Small town bankers, the backbone to America's community economic growth, are scared and intimidated by senseless Congressional Laws that are virtually shutting down our economy. You won't hear this in the media, nevertheless it is happening. This is just one of the many reasons why I have been calling for history's biggest BEAR TRAP preceding a multi-century crash starting in the not too distant future.

It has been the large, too big to fail bankers, Wall Street corporations and politicians who think that they are above the law that are responsible for the dire situation our country is now in. So Congress has decided to throw new laws and regulations at anyone and everyone to cover up their own misguided, greedy mistakes. Then, in order to both cover it up and assure their own re-election, the Central Planners have the audacity to give trillions of dollars to those same firms in QE1 and QE2 while providing nothing but scraps for households, small businesses or the 5000 small community banks.

The DOW has been down for six weeks in a row. Apparently most money managers feel that the end of QE2 is going to kill the market/economy. So they are selling and asking questions later. BUT, this week is options expiration and in my opinion, we can expect a 200-300 point intraday Dow rally going into the expiration. IF IT DOES NOT HAPPEN, THEN CONSIDER HOW WEAK THE MARKET REALLY IS.

Like it or not, the slowing down of the economy will translate into reduced earnings, regardless of the majority of analysts glowing up beat earnings projections: Which according to Kudlow is the mother's milk of rising stock markets.

LINKEDIN was probably the one and only IPO to have doubled in price on its 1st day since 2007 and has probably signaled the end of what everybody has been calling a Bull Market. At the Last peak in 2007 117 IPO doubled in price on their 1st day.

WATCH OUT FOR THE BULL TRAP; that it does not trap you.


Gold/Silver stock investors are panicky!!! BUT, should they be???? Parabolas by definition must sell off sharply, but from which point. Silver first reached the beginning of a parabolic move at $30 or $35 - should you have sold out then? In hindsight you should have sold out at $49, but hindsight also has told us that timers are never the big winners (witness 2006 and 2008). Then like now, not knowing the exact highs or lows, In my missive "Sell In May & Go Away" I also recommended selling 3 or 6 month call options against your long Gold and Silver positions. All those who have listened are laughing all the way to the bank. Now may be the time to be looking to buy back any of your short options that are in danger of being exercised and/or take profits on your long Puts on Silver and/or Gold.

The only ones who make money by consistently trading are the brokers.

Should you panic and dump now: Only if you have a financial death wish. Now is the time to make your buy list and accumulate your favorite stocks into any further individual weakness. That is what I am doing now and will send out my list to subscribers with the July 1st letter. Remember, we are only 2/3 through the Golden Bull Market with the most explosive 1/3 (5th Elliott Wave) still to come. Stay with Aubie!


It never ceases to amaze me how everyone who can say 3 waves up interspersed by 2 waves down call themselves Elliot wave experts and then promptly apply other technical analysis to their EW readings to make them say what they want. They don't realize that Elliott Wave must stand by itself since it is the only system that is NOT a trend following Technical forecasting system.

Just look at the weekly $HUI $GOLD Charts. Gold stocks are more oversold than at any time during the last 24 months. Either Gold collapses or the stocks rally and are now giving you the best buying opportunity since 2008. How many times do I have to remind you that Gold is a market unto itself and is not correlated to any other market; except for short periods of time.

Similar to 2008, we see that the Gold stocks are falling against Gold, yet Gold is quietly strengthening against Oil, Industrial Metals and the S&P 500. The real price of Gold began to strengthen across the board in September 2008 and it was only a month later that the sector bottomed.

Gold and Gold stocks are starting to move in the right direction. As the economy stalls and the equity market peaks, more money will move out of risk assets and into Gold and then the Gold shares. We are already seeing the start as Gold is firming in relative terms. There may be a bit more weakness in the Gold stocks, but ultimately this summer should post a major low and the Gold stocks will be in a fantastic position heading into 2012.

According to the 'real' Fed Funds Rate from data supplied by the Federal Reserve, it shows 'real rates' to be negative (-3%), and heading lower. According to the Gibson Paradox, whenever 'real rates' are negative, Gold is accumulated by those who are interested in wealth preservation. It should be noted that the data supplied by the Federal Reserve is 'massaged' to suit their own best possible outcomes. If we were to use data supplied by John Williams of the 'real rate' would be negative -8%. This means that anyone with money in the bank at 1% is losing 7% while paying income tax on the 1%!

SILVER: uses a formula that was used by the government up to 1980 and his calculation shows Silver would need to be priced at nearly $400 to match the purchasing power of $50 in 1980.

The mismanagement of economies by Keynesians, guarantees that the monetary inflation that is now above 10% per year will continue to provide the liquidity for Gold and Silver prices to continue to rise.

Harry Truman once said, "I never give them hell. I just tell the truth and they think its hell."

"I always tell the truth and only the ones who refuse to listen think its hell" Aubie


If you need cogent analysis and clear reasoning; if your time matters as much as your investments, then UNCOMMON COMMON SENSE is the service for you. My job is to find you the best of the best, making sure your radar is pointed at the critical issues and weeding out all the noise so that you can make an informed decision.

We are coming into the most trying times in our nation's history. Is now the time you want to be going it alone?

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

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