“You Can Fool all of the People Some of the Time…”

“Paper money will ruin commerce, oppress the honest and open the door to every species of fraud and injustice” George Washington

THE LOOMING RECESSION & COMING DEPRESSION

“There is no means of avoiding the eventual collapse of a boom brought about by credit expansion.” The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of continued credit expansion or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises

There doesn’t seem to be any question what the Bernanke FED and numerous others FEDs have chosen. Whether there is an intentional conspiracy or just a bunch of irrational, emotional, poorly informed people, each one acting separately I can’t say; but the conflicting opinions and information that they are spewing out and on which we are all expected to rely on just doesn’t make sense. The only reason that I can find to shed a bright light on all the dribble that is coming forth, without it being a collusion, is that they were all trained to think the same way by our one-sided Socialist education system. From pre-school on they keep drumming in to the heads of all students the exact same Populist Keynesian philosophy that permeates our bastions of higher learning, especially our Ivy League Schools such as Harvard, Yale and Princeton, from whence ours and most of the world’s leaders and their advisors come from. So what are these theories and misconceptions?

1. THE NANNY STATE: GOVERNMENT CAN FIX AND TAKE CARE OF EVERYTHING AND EVERYBODY.

Empirical evidence speaks quite clearly in telling us that Government is most likely the Problem and is rarely, if ever, the Solution.

The Sub-prime Debacle: Who is to blame? Listening to the media, Wall Street and the politicians it is everybody from greedy unscrupulous Mortgage Brokers, lying Investment Bankers and Monolines, including all the Rating Agencies all the way to the hapless housing speculators and poorly informed home consumers looking for the American dream.

Yet NO ONE is even looking at, let alone blaming the real culprits, “GOVERNMENT” and last but far from least, the greatest Central banker of all time, Allan Greenspan. Was it not the President and Congress who were pushing for NOTHING DOWN mortgages in order to give the “poor” a chance at the American Dream? But that was all just rhetoric, you say, why did the lending agencies listen, should they not have known better than to issue nothing down, Liar Loans? Where were their underwriting standards?

Did you ever hear of Moral Suasion? Unless the Banks and Brokers made a certain percentage of their loans to minorities in poor areas, they would be subject to the Government oversight committees. They would not be able to get approval for anything if they only looked like they might be “discriminating” with the Government using percentage of loans issued as their criteria. Was Greenspan not on TV night after night espousing the virtues of ARMs? And what about all those professional Analysts and Money Managers of the Pension Funds, Hedge Funds, Mutual Funds and Insurance Companies, from all over the World? Were they all not screaming for more CDOs, CMOs and the rest of the junk? Where was their due diligence? You have to know that whenever there is a great demand for a product, Wall Street will surely deliver. But, If there is one thing that we all agree on it is that this bubble was the direct result of the FED keeping interest rates too low for too long.

So what will they do now? Let’s get the ones that screwed up the situation in the first place to fix and regulate it. And by the way, while we are at it, why not add another level or two of bureaucracy?

2. BAILING OUT THE BIG GUYS: Why should we be using Taxpayer money to Bail Out the big guys, like Bear Stearns and not the poor little guys suffering the threat of foreclosure? A HISTORY LESSON might be appropriate at this time. In 1929, there was a Bank called THE BANK OF AMERICA. It was a highly profitable mid-size New York bank that was suddenly faced with a RUN. Although it was solvent, no bank can withstand a run. The FED, instead of doing what it was set up to do; coming to its aid and nip the problem in the bud, decided not to come to their aid, the reason being that it was one of those troublesome Jewish banks. Perhaps because of its name, word spread far and wide that America had failed and it triggered the Depression and the eventual failure of over 9000 banks. Could a Bear Stearns failure have triggered the same thing? I for one am happy that we did not get to find out. Was this not almost the exact same situation as LTCM in the 1980s? Besides, do you call forcing the Shareholders of BSC to sell their shares at $2 when just 2 days earlier they were selling at $30 and less than a year ago were selling at over $170, a bailout? I’m sure that they could have received more by going into liquidation.

3. Bailing out the Homeowners from foreclosure. Since the so called BSC bailout was for $30 billion, we have had a number of politicians of all stripes naturally propose a $30 billion homeowner bailout. After all, this is an election year. That’s all well and good, especially with all the money the Government is throwing around these days. But how do you refinance a $400,000 loan on a home that is now only worth $300,000 and falling rapidly? Today’s interest rates are not exactly high, so lowering interest rates is obviously not the answer. As is usual, the Government will end up creating more problems than they are trying to solve. The laws of Supply and Demand eventually will always win out, but the more they are interfered with, the greater and longer the pain will be. If you want to increase demand for houses, “LOWER PRICES,” allow prices to fall and perhaps speed up the fallback down to affordable levels, there is NO other solution! Remember, lower prices also mean lower insurance costs as well as lower taxes, making home carrying costs affordable once more. If you want to help the people who are losing their homes, help them to buy affordable homes after the prices have come down to pre 2001 levels.

4. Insurance Regulation which has worked well under State Regulation for over 114 years is now going to be subject to an added new layer of Federal Regulation. That’s terrific - let’s fix something that is not broken by adding another layer of Government bureaucracy. The Government is not big enough, so let’s make it bigger by adding more layers of regulation. The whole world, except us of course, has learned that reduced regulation and smaller government is the only way to raise a country’s standard of living. The best example is Ireland: In 10 years, government spending was cut from 61% of GDP to 44% and its standard of living went from being the lowest in the ECU to the highest during that same 10 year period.

5. The Securities Act of 1933–34 VS. The Securities Act of 2008-?

It took Wall Street over 60 years to overturn the work done by the 1933–34 Securities Act as well as the Glass Steagle Act that kept brokers from buying and merging Banks, Brokers, Insurance Companies and Mortgage Brokers into one entity. So here we are, less than 10 years after, scrapping everything we learned from the ‘29 Crash plus some modern lessons as well, such as eliminating the collars as well as the up-tick and position limits rules. Now let’s call on Secretary Paulson, a Wall Street insider and leading figure in overturning all the previous regulation, to start a new commission to re-instate something along the lines of the old Act. Wall Street will probably succeed in getting rid of the new act in another 50 years or so, just in time for the next debacle so the blame game can start all over again. Perhaps Paulson can incorporate enough loopholes so it won’t have to scrap the new regulations in the future. BUT regardless who is at fault, we all know who ends up paying the Bill - the hapless Taxpayers of course!

WHERE TO NOW DOW?

The cyclical bear market in equities, which is now around 6 months old, is still far from being over. Problems caused by the Real Estate Bubble, which are now permeating throughout the entire US economy as well as the rest of the world, cannot be solved quickly. The fact that the real estate contagion has caused a severe infection of both the US and world financial systems is now finally being widely admitted to. This realization is reflected by how the labeling of the crisis by the media evolved over the past year: From a “Sub-prime Crisis” in early 2007 to a “Liquidity/Credit Crisis” in summer 2007 to the more recent “Solvency Crisis” and now finally to a “Systemic Crisis.” However, what is being overlooked is the spreading of the sub-prime Virus to the A-1a and Prime mortgage areas as the resets of the ARMs approach their apex as the declining prices of homes continues on in its downward spiral. History teaches that the average downturn in housing lasts 8 to 10 years and yet we expect the biggest Housing Bubble in US history to be resolved in less than two years? On top of that is the almost complete avoidance of discussing the looming problems in Credit Card and Car loan CDOs. A Worldwide Systemic Financial Crisis cannot take just a few months before it is finally resolved, it will take years and that is assuming that no serious mistakes are made. The Federal Reserve and the Federal Government are thus far only addressing two main issues:

• How to prevent a collapse of the ailing financial system and,
• How to convince the entire world that the US financial system will be rebuilt based upon a new, strong and healthy foundation.

The first problem is highly relevant and to solve it, two methods are being implemented:

1. Inflationary legislation and easing Fed policy. Congress pushed through a fiscal stimulus bill for $160 billion and more legislation is unquestionably on its way. The Fed is providing monetary stimulus by slashing interest rates and attempting to increase money supply by re-liquefying the major lending institutions.
2. A masked bailout of the financial institutions is being accomplished by swapping Asset Backed Securities with dubious market values and ratings for Treasuries which do NOT require the banks to hold reserves. The model for a swap of non-liquid bank assets in exchange for Government Treasuries was first implemented in the Fed’s deal with JP Morgan (JPM) in March and has since been used again in the $200 billion Term Securities Lending Facility. (TSLF)

Ultimately, these ways of addressing system problems will only be viewed as the first steps toward a massive nationalization of mortgages which are under the threat of foreclosure. The first hint of doing this is through expanding the size and power of Fannie Mae and Freddie Mac. Since they were in trouble and were forced to restate their earnings, I’M SURE that by REDUCING THEIR RESERVE REQUIREMENTS FROM 30% down TO 20%, that WILL STRENGTHEN THEM ENOUGH SO THAT THEY CAN BUY UP ALL THE JUNK THE FED HAS PLACED ON ITS own BOOKS. Then maybe they can buy up everybody else’s junk.

NOTE: A prolonged period of credit and monetary expansion will create distortions that permeate throughout the entire economy. Once it is realized that these distortions are unsustainable and begin to unravel, they cannot be halted through further monetary expansion. Attempting to do so can only destroy the currency.

COOLER HEADS WILL ALWAYS PREVAIL

I have been bombarded by a slew of articles sent in by my loyal subscribers asking for my opinion on a resumption of the Bull market to becoming Bearish on Gold to the Shrinking M1 money supply to the increasing M3 money supply, etc. etc. AND yet, despite the contribution of the additional dollar weaknesses to the already super bullish fundamentals for gold, there are a number of so called experts out there who, misusing M1 money supply figures, insist that the FED is trying to shrink the money supply and are advising the sale of Gold. I never comment on other people’s work. Although there are a great many opinion makers out there, there are really only a very few that I respect and are worth while reading. Please do not ask me who they are.

AN EXCEPTION LEADS TO A LESSON

Do any of you really believe that I did not see the correction in Gold coming? In my last letter, I emphasized not only not chasing Gold above $930, but using any $100 to $150 point pullback as a buying opportunity. I also called for a temporary market bottom as the stage set for a 500 to 900 point rally. Over the last two weeks, the market seems to have followed my script to the letter.

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I try to look forward since any fool can look backwards. Looking only at the Money Supply is looking backwards, and what’s worse, using questionable numbers at best, both as to Money Supply and Government inflation figures and then back tracking these numbers to see which Money supply, M1, M2 or M3 correlates best is not something I would hang my hat on. More importantly, a prime factor in determining the effect of Money Supply on prices is Velocity (the number of times a $ turns over during the year) which can only be measured in hindsight. That is why in every letter I am trying to teach you to anticipate instead of reacting which will always end up costing you money.

As I have mentioned many times, there are no one on one infallible relationships! And if one develops, it stops working soon after everybody notices it. Oil and Gold are separate markets unto themselves, even though at times they seem to be moving in tandem, they are not Siamese twins.

GOLD

Although Gold had its $150 correction that I was expecting, it only took 3 days and that is not enough time, just like it was not enough time in 2006. So don’t chase Gold or the Majors BUT BUY INTO WEAKNESS.

I don't care what is happening next week or even next month to Gold. We are in a 16 to 20-year Bull Market for Gold which started in either 1999 or 2001, which leaves us with at least 7 more years of Bull Markets. Historically, the biggest moves will come in the last 6 to 12 months. There will always be corrections and reactions to news such as last week’s desire by the IMF to sell 400 tons of Gold; this announcement caused barely a two day blip in the price of Gold. The last time they did that was in 1979 and Gold exploded from $400 to $850 right into the face of all that selling from both the IMF and US Treasury.

The single most important thing you have to beware of is:

“Don’t let that Golden Bull Buck You Off.”

DONT LOOK A GIFT HORSE IN THE MOUTH: A continuing crisis in the financial system has brought about a dramatic risk aversion and re-pricing on behalf of investors. Among the many shocks to the financial system, it has also led to a temporary distaste for the junior mining sector: When combined with exceptionally robust prices for precious metals, it has led to extraordinary values in most small cap gold and silver stocks which we should NOW be buying, NOT selling. ONLY LIARS AND DRUNKS CAN BUY AT THE LOWS. It is just a matter of time before the world begins to realize what $1,000, $2,000 $3,000 or more Gold does to the value of a company’s reserves, balance sheets and profitability. Most PM stocks are dirt cheap and have never been this undervalued, especially at a comparable stage of a precious metals Bull Market.

SPECULATIVE STOCKS PURCHASED SINCE MY LAST LETTER:

CDE 3.50, EGO 7.00, GBN 3.25, HL 11.10 and SGCNF 1.00

I also purchased 4 highly speculative Very High Potential non-precious metal stocks

ENVI 2.25, IVAN 1.85, KOG 1,55 and NTAH .90 Check them out for yourselves.

GOOD LUCK AND GOD BLESS April 15, 2008

You Can Now Subscribe To MY LETTER, “UNCOMMON COMMON SENSE” We are now living in the type of times in which you will probably want to be kept abreast as to what is really happening on a regular bi-weekly basis. A 3-month trial subscription is only $55, One Year $199: Call for more info.

Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

[email protected]

561-840-9767