Too Big to Bail

"A fondness for power is implanted in most men, and it is natural to abuse it, when acquired." -- Alexander Hamilton

"Dependence begets subservience and venality, suffocates the germ of virtue, and prepares fit tools for the designs of ambition." -- Thomas Jefferson

WHERE ARE WE NOW?

• The Value Line Geometric Average peaked in 1998 and then made a double TOP in 2006;
• The Value Line Arithmetic Index peaked in May 2011, a Fibonacci 13 years later;
• The Real DJII (DJII/Gold) TOPPED in July1999 and the list of stocks making NEW ALL TIME HIGHS has been shrinking ever since;
• The Arithmetic DJII reached it peak on May 2, 2011;

Taking a broad look at the big picture, we see sure signs of internal WEAKNESS and the formation of a very large and broad top forming. Based on historic Elliot Wave and Kondratieff cyclical analysis, the Next Major Down Wave is projected to lose a minimum of 50%, similar to what we witnessed in 2007-2009.

The reality is that the FED will be seen to have very limited, long term capability of control highlighted by a complete loss of confidence, showing impotence when faced with CREDIT DEFLATION like we've never seen before.

OUTRIGHT DEFLATION

I warned everyone the last time that the ECB and IMF's 146 billion Euro bailout was only a stopgap measure and would fail, since none of the real problems were even addressed, let alone repaired. That is true for the latest bailout as well, which only managed to give the Euro and the European Stock Markets ONE day of relief. Have you noticed all the good (?) it's done for all the banks both here and in Europe?

Has the time finally come where they (WE) must address the rest of the PIIGS including ITALY? Since the problem is no longer one of a LIQUIDITY SQUEEZE, but is more of a structural problem that is not even been looked at yet, could it be marking the beginning of the end of the EUROPEAN UNION and/or the EURO? Are Europe and the US heading for outright deflation? To me, it all looks like a House Of Cards and just like all Houses of Cards, it must eventually come tumbling down.

I sure hope that you were not surprised by the latest GDP revisions to the 4th qtr 2010 and the 1st qtr 2011 because we sure weren't

THE LATEST ECONOMIC REPORTS

The whole world, but especially our American economists, financial analysts and media talking heads were completely surprised, shocked and overwhelmed by the financial news and job reports that hit us last week. That is, every one was surprised but US. Their excuses are running anywhere from the Japanese earthquake and tsunami to Republican intransigents, but again we know better. WHY? Because we concentrate on the BIG picture and especially on the unintended consequences of government actions. We study the effects of the rules and regulations that Washington imposes; the hidden tax increases and bailouts that the media does not report - all have unintended consequences. There is so much focus on making sure that the rich pay their FAIR SHARE and companies that are out of Obama's favor lose what are being called TAX LOOP HOLES. Let's not forget Obama Care that was rammed down our throats, even though 70% of the population was against it. Their unintended consequences such as new real investment and hiring have been paralyzed. As I have explained many times, these directives from on high, such as the stopping of all drilling in the Gulf, and the new emission regulations that come directly from the EPA all have their unintended consequences. The ban on drilling alone has cost us upwards of 200,000 high paying jobs and the list goes on.

THE LATEST JOBS REPORT

The Bureau of Labor Statistics reported that in the month of June, only 18,000 net new jobs were created. That means our Central Planners' policies have failed completely. The budget deficit was driven up and created no new jobs. Even the 18,000 figure is a lie; the true number is much worse. The Birth/Death adjustment in June was 131,000. In other words, the Labor Department took a wild eyed guess that 131,000 jobs probably were created by new businesses they think might have started up in June. Without that supposition, the economy actually lost 113,000 jobs. May's figure was revised lower to 25,000 new non-farm payroll jobs being created from what was originally reported as 54,000. But again, if you back out the 206,000 pretend jobs, May saw a decline of 181,000 jobs. So, for the two months of May and June, the economy lost 294,000 jobs. Then, if you consider we need to create 150,000 new jobs each month just to keep pace with population growth, this means the economy fell short of breakeven by 594,000 jobs. Not only are we not creating new jobs to get those who are unemployed back to work, but the situation is worsening.

TEENAGE UNEMPLOYMENT

Those of you who have teenagers have probably noticed that this has been a terrible summer for young people to find a job. The Department of Labor reported that a smaller share of 16-19 year-olds are working than at anytime since 1948. Only 24% of teens have jobs, compared to 42% as recently as the summer of 2001. So instead of learning valuable job skills like getting out of bed before noon, showing up on time, being courteous to customers, operating a cash register or fork lift -- millions of kids will spend their summer just hanging out and getting into trouble.

Congress, led by Nancy Pelosi, in its infinite wisdom and completely devoid of economic literacy, pushed through increases of the minimum wage in stages to $7.25 an hour in 2009 from $5.15 in 2007. Anyone with a modicum of economic common sense ought to understand that raising the cost of hiring the young and unskilled while employers are slashing payrolls was not the right or smart thing to do. But not to place the whole blame on her; the Center for American Progress, the think tank for the Obama White House, recently recommended another increase to $8.25 an hour. Though the U.S. unemployment rate is 9.1%, these brilliant thinkers assert that a rising wage would "stimulate economic growth to the tune of 50,000 new jobs.'" So if the government orders employers to pay more to hire workers when they're already not hiring, they'll somehow hire more workers. By this logic, if we raised the minimum wage to $50 an hour we'd have full employment in no time at all. "Meanwhile, back on planet Earth in 2009, just before the last wage hikes, roughly seven million teens were working. Now there are less than five million with a job and paycheck." -- The Wall Street Journal

HOW IS IT POSSIBLE TO CREATE A REASONABLE JOBS CREATION STRATEGY WHEN WE CANNOT EVEN GET RELIABLE STATISTICS FROM THE GOVERNMENT? And where is our (watch dog) media throughout all of this?

Obama must be living in a dream world, if he thinks any one time tax break will get companies to repatriate their foreign profits, when America treats corporations and Capitalism itself, worse than any other nation on earth.

THOSE DEADLY DERIVITIVES

What about those deadly Derivatives that I have been warning about for 5 years that no one seems to even want to acknowledge let alone discuss? WHY? Does it make one an alarmist and/or an extremist? They are nevertheless simmering and hidden somewhere on the books of the major banks. While the world's banks, governments and their regulators sleep, there is $1,200 trillion of Derivatives pyramided against only $60 trillion world GDP. It is these very same Derivatives that US Banks have underwritten on the European PIIGS' Bonds to the European Banks that will bring the European debt crisis home to America. (Will the US taxpayer then be on the hook for another bailout?)

The 55th Bank of 2011 was closed this past week. Another danger that I have never seen mentioned are the dollar reserves of only $2.2 trillion that the FDIC holds against demand deposits of approximately $100 trillion. The paper game went out of control in the mid 1990s, and is getting worse every day with each bailout. In a world of finite resources, we are facing infinite electronic Fiat money creation. Another crisis (and crash?) is just a matter of time even without the EMU problems and the US government partisan lunacy.

Ours and the rest of the G-7's demographics are dramatically changing for the worse this decade and next, no matter what fudges and band aids are put together this month and next; the Social Security and Healthcare financial problems are get steadily larger.

INCOME TAXES (Factoid)

US tax revenues since the 1930s have been roughly constant at 19.5% of GDP over a wide range in marginal tax rates. That's right, federal tax revenue is about the same percentage of GDP whether the marginal tax rate is 28%, as during the Reagan years, or 91% under FDR. In the 1980s, when the top marginal individual rate dropped from 70% to 28%, the economy improved dramatically and gross federal income tax revenue increased by 91.3%; that created 45 million new jobs in the succeeding 10 years. The rich end up paying more when marginal rates are lower as the incentive to avoid and/or evade taxes is reduced or completely eliminated. But more importantly, GDP growth improves so dramatically, increasing net income tax revenue when tax rates are slashed (Elementary Supply Demand Economics).

THE COMING MELTDOWN

Two years ago, in the midst of the subprime market meltdown, I warned my subscribers that "the most recent financial crisis won't be the last." At the time, I wasn't certain exactly what form the next crisis would take -- or when it would strike. But Now We Know. And one other thing I'm certain about is this crisis will be worse than the last one, partly because the economies involved are in weaker shape now than they were back then and because even fewer "experts" and policymakers are anticipating it. So when it occurs, they will be utterly unprepared to deal with it, especially now that Washington is in a DEEP POLITICAL FREEZE. Fortunately, there is time to for us to prepare -- but there is no time to waste.

Swapping paper dollars for Gold and Silver bullion is the only strategy for individuals that makes sense. Silver and Gold mining companies all seem to be maximizing their mine's life spans as against maximizing current profits; by mining lower grade reserves, they are reporting less than expected earnings but extending the size and life of their mines. Given Gold and Silver's dramatic price increases, buying mining shares seems to me to be the best way of buying Gold and Silver at a significant discount.

HOW NOW DOW

It is my considered opinion that the cyclical Bull Market that began in March 2009 will top out in conjunction with the 6 and 12 year cycle "Tops", due to peak some time between now and January 2012. Perhaps another 300 to 500 point rally should be enough to snap the BULL TRAP shut and/or an increase in the debt ceiling in conjunction with an extension of QE2 (of course they won't call it QE anything)?

Due to the round the clock trading on multiple exchanges in conjunction with Quick and Program Trading and the tremendous amount of manipulation taking place by Central Banks throughout the world (each with their own particular agenda), it has become very difficult if not impossible to get reliable technical analysis in the short and intermediate terms. However the long term, which takes into account the fact that HUMAN NATURE never changes, still is and will always be able to give the astute analyst, who keeps a larger focus on the big picture, reliable readings against which he can decipher medium and intermediate term readings. This, in conjunction with Economic and Political analysis and brushing away all the propaganda coming out of our inept left wing media, can still produce reliable insights into what is happening beneath the surface.

As of today, there are large, long term patterns coming to a head that are giving early but clear signals that there is a major TOP due sometime between NOW and January 2012.

Although I am expecting a Break Out Rally to new highs, there are no guarantees, which for me is much too dangerous to play at this time. It takes a very special trader who can change his/her mind on a dime. So for the time being, KEEP YOUR SHORTING POWDER DRY! If we get a rally due to the raising of the debt limit, (which is no real solution) use that rally to short into. This top will be a multi-century top. It will also produce that "BULL TRAP" to end all bull traps that I have been talking about, leading into the worst Bear Market declines in recorded history. Remember nothing in nature ever goes in a straight line, so there will always be numerous short and intermediate term rallies and selloffs in between major moves.

The first major Down Wave could last 3 to 5 years. There will no doubt be corrective rallies along the way. Once you get the major direction right, market timing, if played correctly, will present fantastic trading opportunities at least during the first stage of this coming Bear Market, which could last anywhere between 10 to 40 years. But Beware: As this Bear Market begins, there will be questions regarding counterparty risk, similar to what was happening in 2008-2009, only much, much worse as banks and financial institutions all over the world begin failing. If history is any guide, there is the strong probability that we will also witness the beginning of World War III. If you must trade, stick to trading Gold and Silver and/or VERY SPECIAL situations.

GOLD & SILVER

India's Gold and Silver imports surged 200% to $17.7 Billion in Q2 and Chinese Bullion demand is also surging. Furthermore, the important long term factor of robust global and massive Asian demand should continue to help drive the price of Silver and Gold to much higher levels.

China's growing number of asset managers has recently been approved to raise $70 billion for allocation overseas and they are also seeking additional funds to invest in Gold and precious metals as soaring inflation spurs interest in alternative assets as a way to protect wealth against steady rising inflation.

Massive and continuing demand for Gold and Silver in China and India, along with their steady shrinking of their US Dollar holdings is not being covered by the Media.

GLOBAL SUPPLY AND PEAK GOLD

Meanwhile, growing global demand is being confronted with anemic supply increases - highlighting the real possibility that peak Gold is much more a reality than peak Oil. Kingsgate Consolidated's Director, Gavin Thomas, a highly respected mining expert, believes that the peak of Gold mining has been reached. He told Bloomberg that Gold production has not increased in spite of the price of Gold nearly tripling over the last 10 years. As demand was increasing, the grades of Gold mined and the number of large discoveries has been steadily falling.

Simplistic and superficial analysis of the demand for Gold continues, despite the availability of excellent research clearly showing why Gold and Silver are safe haven assets and offer very important diversification opportunities in these uncertain times.

5 BULLISH REASONS FOR BUYING GOLD NOW

1. Gold is near the bottom of a cycle.
2. History and Elliott Wave says the next move should be UP Big!
3. The Market is entering its most favorable and consistent seasonal rally period.
4. Central Banks have reversed course and plan to add to their Gold hordes.
5. South African Production Continues to decline and the political climate for adding new investment is deteriorating.

Gold's recent price action has only served to reinforce my estimated long term bullish projection target of $6,250/oz.

The correlation between the Gold price from 1968 until 1979 and from early 2000 until today is an amazing 89.65%! More specifically, the correlation from 1975 until April 1979 and from January 2008 until today is an astonishing 97.83%. This suggests that Gold will reach an ultimate top of $6,000 plus per troy ounce before reaching any bubble stage. Remember prices always overshoot both on the upside and downside. Gold and Silver are not (yet) in bubble territory, and large gains remain, especially if world monetary and fiscal policy continue in their present vein and fundamental supply-and-demand trends remain unchanged. As far as change goes, it is my estimation that most changes will be for the worse (better for Gold), given the government's history of making idiotic policy changes.

Seasonally the poorest two months for the precious metals are traditionally May and June. One of the best months, where Gold's average move has been 15%-20% through the end of the year starts in August. So July seems to be an excellent month to start accumulating your favorite PM stocks along with bullion. (I must sound like a broken record.)

NOTE: BNV and other Peruvian companies' share prices have suffered from the recent election of a left-leaning nationalist government as Peru's new president has raised a lot of uncertainty about the future of mining royalties and taxes in the country. This could be particularly hard on Buenaventura, which is among the world's leading Silver and Copper producers, and the world's sixth-largest producer of Gold. Political uncertainty has hit Buenaventura hard and investors are apparently expecting more bad news. Though its shares post a below average P/E ratio and pay a 1.5% dividend, could all of this bad news have already been discounted? After all, left leaning does not make him a Chavez.

Can I be any clearer? Right at the June bottom, while one gold bug after another were falling all over themselves to turn Bearish, we went shopping, sold our (insurance) long puts on the GLD and covered all of our short calls that I had previously recommended selling against our long positions. I apologize for being computer illiterate and not getting out my buy list to you fast enough. But have no fear; we are in for a BIG move. A debt limit deal may give an explosive up move into year end don't miss this buying opportunity that we now have. Stay Cool and Stay with Aubie.

 

 

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Aubie Baltin CFA, CTA, CFP, PhD.
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