The Biggest & Last Bubble Still Inflating

ARE TREASURIES AAA JUNK BONDS?

Does everyone not realize that the Bond Market is much larger than the Stock Market and do you realize what Treasuries are now paying? Can they pay anything less than Zero? Do you also know that CDSs on Treasuries are now at 58 basis points, up from single digits and British Guilts are up to 86? If ours as well as the Bond Markets of the World are not the biggest and most obvious BUBBLE in history, I don't know what is. The Tulip Bubble, the South Sea Bubble and today's Real Estate Bubble that I called a year and a half before it burst are all just child's play when compared to today's Government Bond Market.

There has been speculation that the big holders of our Treasuries such as China, Japan, etc. will soon begin to diversify out of their US holdings. But that is not the real problem; they are locked in with no one to sell to and they are desperately trying to hold down their currency in a vain attempt to maintain their exports. The real problem as far as our Treasuries are concerned is what happens to their surpluses that are used to buy our bonds when their exports shrink and dry up as the USA and the rest of the world including China slips into Recession? They need whatever money they can get their hands on for their own economies. What will happen to the Bond Market when it too, like all bubbles, eventually blows up? FINANCIAL ARMAGEDDON?

NOTE: Trying to pick a top of an exploding bubble is just as hard and dangerous as trying to catch a falling knife (pick a bottom) during a crashing Stock Market. When the crash finally comes it will be so sharp and deep that it is not important to get short at the top. BUT start watching for your chance to get short once the top has been made. Being a little early s a lot better than being too late: Besides how much lower can interest rates go?

NEWS, HISTORY OR MISINFORMATION?

The Market has been reacting positively to every one of OBAMA'S appointments, but what have we really learned:

" You can forget about any change in Washington as compared to what was promised during the Election. But that will only be a big disappointment to the radical left. " So far, what we have been seeing is a recycling of the Clinton administration, which everyone is assuming will be ultra positive as they will bring back the Clinton era economy. Well, not so fast. Times are a lot different today from what they were back then. (a) Back then, the Cold War had been won and we had 12 solid years (perhaps too solid) of ever increasing Peace Dividends (b) For the last 6 years of Clinton's presidency, he had a true Conservative, Gingrich, and a solid Republican House and veto proof Senate. Today, Obama is facing a solid far left House and non-veto proof Senate both led by far left ideologues. I am sure he will find them a lot harder to deal with than what Clinton had to. (c) All his people that he has appointed so far are cut from the same cloth as the Bush Administration's is. They are all Harvard, Princeton and Yale Graduates steeped in Keynesian, Galbraithian Economics. What we are likely to get is just a lot more of the same as we have been getting for the last 16 years. But the times they are a changing and doing more of what got us into trouble in the first place will not only not work, it will make matters worse. For heavens sake, just look at Japan: Massive public works projects and zero % interest rates has only brought them 20 solid years of Recession, even though their population is not in debt as ours is. Will we ever learn? (d) And last but far from least, we have Paul Volker, the hard money man. Really?

We should not forget that Volker was appointed by Carter, not Reagan and it was Volker under Carter who brought us 14% to 20% inflation and 21% LT Treasuries. It was not until Reagan's Administration that Volker brought on the 1980-82 Recession and set the economy back on a course that gave us, by and large, 20 years of great economies. Now the question is: Was it Volker or Reagan who set policy? Even if it was Reagan, did Volker learn his lessons well? (I think not, as he would not still be a democrat if he had, but I will reserve judgment). But then again will Obama, Pelosi and Reid allow Volker to apply the lessons that he has hopefully learned while he was chairman and will Volker be able to sell the government on the idea that it would be better to put the brakes on immediately and have a controlled Recession NOW rather than an uncontrolled Depression later? Besides will he have time to also become the CAR CZAR.

Will the Real Obama Please Stand Up. Talk is cheap. So who and what are we going to get? The Primary's Far Left Ideologue or today's Pragmatist. I, too, will give him the benefit of the doubt and recognize that he had to say what he said in order to solidify the far left and win the primaries and now that he has won he has been moving right ever since. So far, he has shown that he has a lot more smarts than any Republican or Democrat has had for a very long time. But making speeches ie easy, his challenge really begins on January 21st when he must face reality. For now, He is my (our) President and I will give him all the support I can, including writing these letters. It is never too late to learn and I wish him all the Best and Good Luck in the world.

WHAT DO GE, GM AND GOLD HAVE IN COMMON?

Not all that much anymore, but at one time they did. They stood out like the Rock of Gibraltar - Solid - something that you could count on that stood the test of time. What was good for GM was good for America. GE is the only one of the original DOW JONES stocks still left standing, but the stock has dropped from $55 to $12 and at this rate the question is for how much longer will it stay as part of the DOW JONES? Some of the Biggest and Strongest of America's and the World's Industrial Mighty have fallen by the wayside. Stocks like Bethlehem Steel and RCA, that were at one time the biggest and brightest, no longer exist. I won't bore you with the list of the ex Giants, Buy and Hold forever companies that are no longer in existence.

So, how are they related to GOLD? Very simple, they are not. Gold and Silver, unlike nothing else, have stood the test of time. Not only are Gold and Silver mentioned in the Bible as long as 3500 years ago, but their use as money also predates the Bible by some 2000 years. They may fluctuate in price, but the one thing that you can be sure of is that they will still be here long after we are all gone and they will continue to maintain their purchasing power. There is no other investment that you can buy and put away for your great, great grandchildren. You can rest assured that Gold and Silver, even though they are from time to time subject to Government manipulation and will therefore fluctuate in price (that means go down for short periods of time), will outlive their detractors and always provide the ultimate sense of power and assurance. They are the only ultimate money and therefore the only ultimate real store of wealth.

THE CAN'T LOSE BUY AND HOLD PHILOSOPHY HAS BEEN PROVEN TO BE FALSE FOR EVERYTHING EXCEPT GOLD.

MARKET MANIPULATION

Whether it is from the President, Congress or any of the Regulators, they all seem to want to blame our problems on either the lack of regulation or the lax, ineffective enforcement of existing regulation as the cause of the world's and our problems. Failing that, they all blame Capitalism (Even Greenspan has already tried that one). I can't count the number of Congressional investigations wasting 100's of millions of dollars looking first to place blame and then find scapegoats. Of course they can never find any because the real blame lies at the feet of Congress, which will never be investigated. You will never be able to permanently solve even the smallest of problems if you don't first identify the real problem. You must not confuse cause and effect and just go about trying to fix the effects and never get to the underlying problem, "The Workings Of Congress Itself."

THE LESSONS FROM THE SAVINGS AND LOANS CRISIS

The foundation of our present Financial Crisis properly rests at the feet of Congress, whose long term problems were initiated by the new rules that Congress created which led to the Savings and Loans debacle. The Savings and Loans were originally set up to provide low cost mortgages to people in their community. In order for them to be able to get the money to do that, they were given the ability to pay more for deposits than the commercial banks could, but in turn they were greatly restricted as to what type of businesses they could enter into. All worked fine for more than 40 years until the Government, like today, decided to manipulate the money supply and it was not long before interest rates started to soar.

So here we have an industry saddled with billions of 3% and 4% 20 year mortgages (back then, Banks and S&Ls kept the mortgages they issued) borrowing short term and lending long term. Even though they could pay more for their deposits than the Commercial Banks, they were restricted as to how much interest they could pay by the Usury Laws that were then in force. As interest rates continued to climb, it was not long before Treasury Bills, that had no rate restrictions on what rates they could pay, soared far above the maximum that the S&Ls were allowed to pay. But there was a catch: The minimum Treasury Bond anyone could buy was $10,000, thus precluding the small investor from buying them. A hue and cry came roaring out of Congress about the unfairness to the little guys so, in their infinite wisdom without a single thought given to any unintended consequences, they eliminated the Usury Laws Congress did not give a moment's thought to what would happen to the S&Ls once their reason for being was eliminated. In an effort to survive, the S&Ls were forced to take on high risk, construction and land loans on which they could charge a lot more interest in an effort to overcome their huge loses on their outstanding 3% & 4%, 20 year mortgages. The rest is history.

The solution was the creation of the RTC which was originally estimated to take 10 years and $2 trillion to fix the problem. It ended up only taking 3 years and cost the taxpayers $500 billion, Congress, in order to cover their tracks and divert the public's attention, had a few big show trials. They accused one of the Bush children who happened to be a director of a minor failed S&L, while whitewashing the Keating 5 (managed to convict Keating in a kangaroo court but he then had his conviction overturned on appeal). But no matter, his winning was off the front pages and so on they marched to the next debacle, never even bothering to uncover what the real problems were, let alone fix them.

THE WORLDWIDE FINANCIAL CRISIS & THE GLASS - STEAGLE ACT

Since Congress did such a bang up job of fixing the S&L problems, 15 years is just about the right time for a repeat performance. Especially since the real problems leading up to the S&L debacle were never addressed, so naturally the same problems have set the stage for today's crisis.

The Glass-Steagle Act was a product of the 1929-32 crash and was passed in 1933. Its main GOAL was to prevent incestuous relationships from developing between Investment Banks, Institutional and Retail Brokers, Money Managers, Insurance and Mortgage Brokers (by merging into one entity you would eliminate all normal risk assessment that takes place between buyers and sellers of completely separate companies). It was also supposed to protect the integrity of banks. Do you realize that at one time, brokers such as Merrill Lynch did not own or control their own mutual funds. Everyone, except maybe Congress, knows that Chinese Walls do not work and are not worth the paper they were written on. I realized that by my second year in the business while working for Merrill Lynch. Even though I had a PhD and was making $200,000, I was just an R/R sitting in a huge open room and sharing a secretary with 2 other salesmen. Everyone in the Underwriting Dept was a VP or above and had both private offices, secretaries as well as expense accounts. You can well imagine who the Research Department worked for and they even passed a "quite period" law whereby Research could not say anything until 90 days after the underwriting was completed. The salesmen had to sell the new issues Blind. Of course they gave you information sheets (with no letter heads) that you could use as talking points, but you could not show them to anyone, especially not your clients.

Well the ban against mergers and conglomerations within the financial community stood the test of time and worked for 65 years until Rubin was appointed Treasury Secretary. With Clinton's ear, he and Paulson and the rest of their "Frat Buddies" donated enough campaign money and managed to convince Clinton to get rid of Glass-Steagle along with a number of other rules such the up-tick rule and ban against naked-shorts, etc. Low and behold, a frantic pace of mergers soon began and behemoths like Citi Group soon arose that were so big that one hand did not know what the other was doing. Their presidents and directors were only interested in the deal and growing the size of their companies. Since they could not possibly understand the ramifications of the myriad of new, leveraged products that were being created, 75 years of stability came crashing down in less than 10 years. Do I have to remind you just how much money based on phony "Mark to Model" profits were made in only the last 5 years of their hey day? Now we expect this very same group of "frat buddies" who created the mess we are in to fix it by giving them a blank check and unlimited power to make new rules (for whose benefit) and they should supervise the application of those rules? I must be very stupid because I seem to be the only one who thinks that there is something not quite Kosher in Denmark (Washington and New York).

As early as 2004, I started warning everyone who would listen about the growing danger of Unregulated Derivatives when they were just approaching a measly $1 trillion. Now that they have amounted to upwards of $600 trillion, it only takes a 5% error (which amounts to $30 trillion) to bring the whole financial system crashing down. This is exactly what Glass-Steagle was designed to prevent.

CORPORATE DIRECTORS and THE THREE MONKEYS

How much longer will we continue to allow directors to avoid responsibility by using the THREE MONKEY excuse (they saw no evil, heard no evil, know no evil) and yet they still get paid? It is about time we started holding directors accountable for their actions. Rham Emanuel, Obama's new Chief of Staff, was a Director of Fannie May during the Franklin Raines era when he declared profits of $5 billion and was awarded bonuses of $90 million. When he was later forced to restate the books and the $5 billion in profits turned into $ 5 billion in losses, he resigned but took the $90 million with him and became a financial advisor to Obama. His Chief of Staff claimed that he was only a Director for 18 months, collected $230,000 in salary and said that "he did not know nothin". He too, was one of the three monkeys. Wow! Let us hope that this is one of the changes that Obama will be looking into.

WHAT IS HAPPENING TO GOLD AND SILVER

The size of the paper markets for currency and commodity futures is huge. If you look at Gold, Silver and currencies, the ratio of underlying assets to derivatives is 100 to 1. In commodities, it's probably 40 to 1. So you have all these paper assets being sold back into the market. Basically, it looks like everybody is trying to get to the exits at the same time. The only question remaining is: How far along are we in this liquidation process?If you look at Gold and Silver, there has been unprecedented demand for small Gold and Silver products at the same time that these leveraged positions are being liquidated. We've seen very little liquidation on the COMEX as most are taking place in the over-the-counter market. This makes sense since that is where the leveraged money was operating. But there is no one who knows how much there was at the start of the liquidation and no one knows what's left. However, once we get to the end of the de-leveraging, you will see a divergence between Gold and Silver on the one hand and industrial commodities on the other. Even today, we see very strong demand for physical Gold and Silver globally; so I think Gold and silver prices will soon spike sharply higher, possibly as early as mid December or early Jan/08. Roll out the printing presses, the bailouts have just begun, with everyone from automakers to airlines to cities and states getting in line for a government handout and that is just the beginning. The total bailout tab thus far is estimated by Forbes to be $5 trillion and you ain't seen nothin yet. This will eventually lead to a hyper-inflationary scenario. Some respected analysts are predicting the bailouts could push Gold to somewhere between $1,500-$2,000 within the next 3 months. That is about right - it usually takes them about 6 months to two years to catch up to my projections and they are not completely there yet. However, I am certain that once this baby starts to fly, watch out!

Today's deflation is not going to protect us from the inevitable worldwide monetary inflation caused by the huge amounts of money that will be pumped into the market in the name of saving the economy from deflation. At the moment, there is a panic going on as people are really looking at cash and treasury bills for safety and the heck with making any returns. They just want to maintain their principle. But once the Treasury Market tops out, the only safe havens that will be left standing will be GOLD and SILVER.

AVOIDING DEPRESSION

With OPEC promising to cut oil output, it is not surprising that a report by Goldman Sachs Group Inc. recently forecasted that oil prices will reach $150 to $200 dollars a barrel within 2 years. JP Morgan has also predicted that prices could rise to $200 a barrel. BUT in my humble opinion, they are just as wrong this time as they were the last time they predicted $200 Oil. These opinion makers have not studied the Depression or even the reasons why oil dropped to below $12 after the 70's oil shock was over. At below $50, most of the energy producing countries such as Russia, Iran, Venezuela, Saudi Arabia, Abu Dhabi etc. regardless of official quotas, will cheat like crazy since they cannot possibly pay their bills at $50 oil or below on reduced volumes and will try to sell as much oil as they can in their desperate attempt to stay solvent. The costs of production will play no part in determining prices. You can manipulate the LAWS OF SUPPLY AND DEMAND for a time, but they always win out in the end.

Will Obama realize that he can kill five major VULTURES with one stone? 1) By instituting major incentives to search and drill for oil in America, both on and off shore, he would quickly create at least 350,000 new jobs without using one penny of government money. 2) As a matter of fact, the government would collect $billions from the sale of oil leases. 3) By keeping the price for oil low while we encourage the search for alternate energy and begin building nuclear power plants, wind farms etc., we would create even more jobs (these are all investment jobs that would produce increases in productivity and raise the standard of living for all Americans They are also self liquidating as they end up paying for themselves). This is true stimulus investment spending which is a lot different than poor and middle class consumption spending (most of which goes to China). 4) By keeping the price of oil down, not only do we reduce our balance of payment deficits but 5) we put our enemies like Russia, Iran and especially Chavez, etc. on the defensive by keeping them broke and unable to fund their terrorist, anti-American mischief. Watch how fast Iran comes to the table and abandons their bomb at $50 oil and below: See how fast Russia changes its tune towards America and its war against terrorism. DRILL, DRILL, DRILL is the one thing that could go a long way towards getting us out of Depression.

WHERE TO NOW DOW?

As you all know, over a year ago I called for the Recession to begin as early as the 4th quarter of 2007, but no later than the 1st qtr of 2008, Over the next three months, be prepared to witness some of the worst economic data you've ever seen or ever heard of. Why do I say this? Among other things, the recent weekly leading index's growth rate stood at a minus 24.6%. Not only has the rate fallen off a cliff, it's also the lowest reading ever! And this is no small data series as it goes back to January 1949, nearly 60 full years of information. That tells me that the next couple of months should see the sharpest slowdown/recession since the 30's. The latest unemployment report of 550,000 lost jobs on top of Oct.240,000 jobs lost, as well as the downwardly revised 284,000 jobs lost in September is most assuredly just the tip of the iceberg. I would venture to say that we're about to witness some truly scary, once-in-a-lifetime readings on jobs, industrial production, economic growth - you name it. And that process is already underway. Just this past week, General Motors reported monthly vehicle sales of less than 200,000 for the first time in 20 years. The figure was down 45% from just a year ago! The GM Sales Chief said "in my 27 years in the industry, I've never seen a month like this," adding that, adjusted for population growth, October was likely the single worst month for the auto industry since World War II. If the leading index's readings are correct, we should be ready for more such "worst in decades" readings in the weeks and months ahead along with all the hoopla and headlines that will surely come with them. However, the key to remember is that the market has most likely discounted much of the bad news you're going to read about. That's why the major indexes were already down more than 45% this year and why they crashed in September, October and most of November. My point is that the market is a discounting mechanism and is reacting to what the economic landscape will look like in the future, not the economic readings of yesterday. And from that point of view, I thought that there was a good chance that the market, after breaking below their lows of mid-October, would sell off to around the 7,200 level.

At this point, I must apologize to you all. I have been so right for so long that I got too cocky and hitting 7,449 was not good enough. I was looking for one more day and 7,200 to 7000 before buying. So God, in his infinite wisdom, reminded me that there is but one God and it's not me. Stocks would then start a tradable {B} Wave, Rally that could last 2 to 4 months into 2009. And so I (we) missed a fast 1300 point, 5 day Rally.

But this Market Low will not be the final bottom. It will only be a 1930-31 type {B} Wave bounce that will trap even the best of the bears as the market resumes its Bear Market in 2009-2010. So if the Indexes either beak down immediately or after a week or two of a suck in rally, be ready for a tradable low sometime in the next 2 weeks or so.: Be Prepared - the market may have laid the groundwork for a few good months ahead despite what the economic indicators may be saying..

BE CAREFUL AS IT WILL BE A TRADERS RALLY - even though it may end up to be as much as 3,000 points, it will be highly volatile (500 to 1000 point inter day swings). FORGET ABOUT JUST BUYING AND HOLDING. TRADERS ONLY NEED PLAY, but whatever you do, DO NOT chase rallies.

GOLD

They've been dumping Gold for a couple of reasons: 1) Prices are falling. 2) Credit lines are either being pulled back or completely withdrawn. 3) In many cases, investors have no choice but to liquidate their Gold positions as they are their only positions that have a decent bid and/or are their only positions in which they are still making money. The key factor for Gold in recent months is not that it has not appreciated significantly, but that it has held its value in a period of a strong US dollar, decreasing inflationary expectations, collapsing oil and commodity prices and aggressive hedge fund liquidation." While this may be a statement of the obvious, given that all the factors quoted are normally considered adverse for the Gold price, the yellow metal's resilience in the face of so many negative pointers suggests a tremendous amount of underlying strength. And all this was before the latest mini surge in price - the Canadian and Australian Gold mining sector currency movements mean that the price had actually risen by 25 to 32 percent in terms of their respective currencies - a considerable boost to the mining sector where costs are primarily in domestic currency. This applies also, of course, to other Gold producing countries where the strong US dollar has led to a significant rise in price in terms of local currencies, with a decrease in operating expenses.

There seems to be a strong increase in investment demand for Gold in terms of record quarterly movement of funds into Gold ETFs and the well documented demand for coins and bars which has led to temporary shortages and delivery delays in many places. Jewelry demand has also remained strong in India and China. The strong increase in demand has been sufficient to mop up the widespread disinvestment resulting from hedge fund selling, margin calls and unwinding of forward contracts. The shrinking bond yields will support further investment in Gold as both a safe haven and a store of value.

Just like during the heyday of the commodity bubble, I cautioned all investors that there would be a major supply response to continued high prices. The Laws of Supply and Demand may seem be asleep for awhile, but they are not Dead. The Demand side of the LAW is about to kick in!

THERE IS A SUPPLY DEMAND PRICE EXPLOSION FOR GOLD BAKED INTO THE SYSTEM JUST WAITING TO BE RELEASED.

WHAT COULD KEEP GOLD PRICES DOWN?

You would really have to get back to a place where the economic, political and financial situations are no longer worrisome and inflation is no longer a major concern either before you will see people sell Gold and jump back into stocks and bonds. That's the only likely scenario for lower Gold prices that I can come up with. In the Gold mining equity market or any other mining market, even oil and gas, you saw that the price of the equities were pushed much higher by the momentum players (hedge funds) than what could be considered a reasonable value. Now, the prices of a lot of equities are far below what you could consider a reasonable value for the enterprise. The rules of the game never change, but they do masquerade in an attempt to fool the majority of the lazy and gullible in the Pro's attempt to maximize their profits. Which camp will you fall into?

SHORT TERM: Gold's Short Term Stochastics are on a sell signal, suggesting that a short-term decline is likely. However, the Weekly Stochastics are on a buy, and the Monthly Stochastics are already down to an area where bottoms are made. Once this short-term decline completes, a huge, multi-month rally is over due.

The GDX - While Short Term Stochastics are still calling for a further decline, the Weekly and Monthly Full Stochastics are close to giving buy signals suggesting that once this short-term decline completes, a huge multi-week, maybe multi-month rally leg is also over due..

 

 

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UNCOMMON COMMON SENSE
December 1, 2008
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
[email protected]
561-840-9767