Denial & Self Delusion is Never A Solution

HOPE SPRINGS ETERNAL

Bernanke, by creating negative yields, thinks he can push the big boys into buying equities and investing in the economy. But what if they distrust the government and they just buy hard assets, like gold, silver, grains, crude oil, etc. thus creating ever larger inflationary pressures? What is he going to do then? Print the money and short gold? Meanwhile, by creating 0% interest rates, he as killed the CD and money market funds, leaving no safe pension investments. The ones hurt the most are the common people and seniors as savers suffer most. No wonder retail sales are way down as people won't spend the last of their savings when they are so worried about the future. Yet, by inflating both the Bond and Stock Markets with QE1 and QE2, in the last month or so, the market has edged higher in the face of pessimism on the promise of the coming QE3; it's hard to push the market higher without QE3. They won't buy at P/E's of 14, 15 no matter how cheap Wall Street tells us it is. They think they know better; without QE3, there will be no real buying and that's why the volume is so low. Ben is trapped, but he'll never admit it.

THINGS "SEEN" AND "UNSEEN"

It was the famed Free Market French Economist of the 19th Century, Fredric Bastiat, the father of Austrian Economics, who fostered the accent on Freedom and Individual Choice as the best and perhaps the only way to properly handle both the things Seen and Unseen. Far too many investors react incorrectly to the "seen" or obvious events in place because they do not concentrate on the BIG PICTURE and therefore cannot appreciate what is currently "unseen" and what most likely lies ahead. Take for instance the nearly 3-4 hour 2% jump in the Stock Market when GDP came in at above expectations. That "seen" event was an increase in GDP ahead of estimates. But what kind of estimates were they? Since they were only a smidgen of an increase, the rally did not last out the day. Were they realistic estimates or ones designed to be beaten so as to give a false reading as to what is actually going on? To make matters worse it was, like most "NEWS" events are, outdated information because it dates back to activity for the quarter ended in June.

As you may remember, the majority of the economic data started turning sour near the end of the last quarter; bad enough to bring down the Q2 GDP by 0.5% from the Q1 reading, but not bad enough to scare anyone just yet, by maintaining a false sense of optimism. This means that the new quarter starting in July came stumbling out of the gate. Both ISM reports show a marked slowdown along with most of the regional activity reports and like the unemployment reports are completely misleading, placing the unemployment rate closer to 13% than the reported 8.2%.

So what will happen to real GDP if these trends continue and we have a full quarter of soft data? And what happens when that information becomes more public and weighs on consumer and business sentiment? And what happens when the Fiscal Cliff becomes visible virtually guaranteeing a 1% to 01.8% reduction in GDP instead of the 3% to 5% increase; especially since to start with, there was no real growth in the first place? It is the part that is unseen (the truth) which is most important. That is why I examine the government published misinformation most closely, relying much more on the "SHADOW STATISTICS, especially in this election season where the government is more interested in getting re-elected than they are in what's good for the people and the economy. The Truth Be Dammed.

Essentially, the Debt Super Cycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where both the Bond the Stock Markets rebel and the debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions. The history of the U.S. is characterized by a long-run increase in indebtedness, punctuated by periodic financial crises and subsequent continuing policies of inflation. The subprime blow-up is the latest installment in this ongoing Debt Super Cycle story. During each crisis, there are always fears that conventional re-inflation will no longer work, implying the economy and markets face a catastrophic debt unwinding. Such fears have always proved to have been unfounded, and the current episode, because of its size in relation to both the USA's and the World's economies, may well prove to be the exception.

A combination of Fed rate cuts, fiscal easing (aimed at relieving the subprime distress), and a lower dollar simply trigger another up leg in the Debt Super Cycle, and a new round of leverage and financial excesses. The objects of speculation are likely to be global, particularly emerging markets and resource related assets. The Super Cycle will end if foreign investors ever turn their back on the U.S. Treasuries, triggering capital flight out of the Dollar and robbing U.S. authorities of any room to maneuver. This could happen a lot sooner than anyone expects as powerful forces such as China, Russia, Japan, the Middle East oil sheikdoms, and Brazil (just to name the larger countries) are trying to replace the US Dollar as the world's only RESERVE CURRENCY with a NEW RESERVE CURRENCY that will probably be at least partiality GOLD BACKED, if not fully Gold Backed. What happens to the price of gold then?

Many so called experts believe that we are nowhere near the ending of the Debt Super Cycle; but ask yourselves, who is paying them? Even though the government is stepping in to buy its own Bonds because private debtors are cutting back, we have just shifted the focus of where the debt is coming from and who is buying it, expanding the Debt Super Cycle in the US, Europe, Great Britain, Japan and other developed countries (yes, even Greece!) at an ever expanding rate. This is still very much in play as the increases are magnitudes larger than any possible decreases in the private sector debt as governments explode their balance sheets. Meanwhile, total debt continues to grow.

But what is most worrisome is that government's off-balance sheet obligations are exploding at an even faster rate than their bond obligations. Plus the fact that in the US, the Baby Boom Generation is now retiring at a rate of 15,000 a day for the next 20 years. Up until now, they were the generation that did most of the saving, investing, and spending and paid most of the taxes. They have become the takers (Social Security and Medicare), selling their homes, pension funds and 401Ks in an attempt to maintain their standard of living.

There is a limit to how much debt you can pile on.
But this time is different or is it?

Most of the large borrowing has come from foreign sources and not for the increase of productive capacity, but mostly for consumption. Up until recently, it took $3 of debt to create a $1 rise in GDP where as now, each $1 rise in debt is government debt, and has a negative multiplier - so in truth all that new debt actually hurts GDP.

Talk about unsustainable. The US cannot borrow another $15 trillion in the next ten years. It's just not there. Long before that, the Bond Market will simply rebel, rates will skyrocket, and the aftermath will make the last crisis seem like a cakewalk. Some say (like me) that the coming election is the most important one this country has ever had. It is one thing for the Tea Party movement and Independents to elect a Republican Congress. However, the GOP Power in Washington are NEOCON Keynesians and although the spending will slow, without the quick passage of Term Limits eliminating the need to get re-elected, the economy cannot cut back fast enough and will first slow into a Double Dip Recession and then slip into Depression by 2014/15.

Then, the really important election will be in 2016 when everyone will have to decide the new direction the economy and country will then take going forward. Without term limits, it won't make much difference who gets elected as the world will slip into WORLD WAR III, which history tells us always follows worldwide Depression. One thing for sure, the economy will not be booming by 2014, as there is no leader in sight who is able and willing to lead the US into a new era of FREE MARKET CAPITALISM.

Will voters in 2014, 2016 and 2018 decide that no economy can possibly sustain a nanny entitlement country? Can they stay the course for fiscal and entitlement control or will they scream for more and more FREE STUFF?? Will they take the long view and let politicians make hard choices or will they send the message that short-term choices are what they want? Will they give lip service to going on a diet and exercising and then stay on the couch and eat chips and watch TV? Or will they really get fiscal religion and say NO to Socialism and go back to individual responsibility and freedom and small government Capitalism?

GOLD and DEFLATION

What usually happens to gold and silver during a period of profound deflation? Public budgets are over-strained, the financial sector faces systemic problems, and currencies are depreciated in order to re-inflate the system so that the government can pay its bills. Moreover, the credit quality deteriorates and the creditworthiness of companies and governments come into question. The investment focus then shifts from capital growth to capital preservation. The confidence in the financial system and paper currencies declines, while the importance of gold increases as re-monetization takes place.

Late July most commonly marks gold's major seasonal low just in time for its most reliable autumn rally.

As you can clearly see, an autumn rally has started and will be accelerating into September, after struggling all summer building its base; exploding higher by late September. So if you can, hold on through the summer doldrums, ignore the ubiquitous bearish psychology and sit tight, usually you will be richly rewarded.

SILVER

Silver's average summer performance is considerably worse than gold's, drifting between its May close and 5% lower. And silver's autumn rally also starts later on average. Silver is a hyper-speculative metal that needsexcitement in order to thrive. Capital only floods into silver when traders expect a major surge in gold. Silver investors are greatly rewarded in autumn when major seasonal gold-buying spikes return. One must realize that gold stocks actually start rallying on average well before the market summer doldrums end.

Historically from late July to late September, gold stocks as a group have advanced nearly 15% on average throughout this entire secular Bear Phase. There is a heck of a rally due! And the only way to ride it is to be a contrarian and fight the crowd. When everyone else is convinced gold stocks are heading much lower into late July, early August, you have to buy them or hold on to what you have. Check the charts and you will notice that the best stocks have already bottomed. July through August is definitely the shopping season for PM's (check out SVM).

WHAT DO WE DO NOW?

HOPE FOR THE BEST BUT PREPARE FOR THE WORST:
I'm also always asked if the Elliott Wave, Dow Theory or any other technical method is still valid because of all the efforts to manipulate the markets. The short answer is yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end, it will only serve to make matters much more exaggerated.

The very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Elliott Wave Theory and other technical methods are just as valid today as they have ever been and the manipulative efforts to "fix" things does not matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician and his methods.

None of us can know the exact time when bubbles will burst or when underpriced assets will come to life, but we do know that the last fools holding the bag will lose big time.

There is one truism that I all too often seem to forget, "Never fight the FED." The Fed and Government can stay IRRATIONAL a lot longer than you and I can stay solvent going against them. Being Dead Right is still being DEAD. The only thing to do is wait for the BREAK and then jump on board. The only reason to try and catch the tops or bottoms is EGO. And being a pretty good Economist and Political Analyst, I all too often allow my ego and impatience to overcome my better judgment. After all, it could be months and sometimes years before one's reasoning is proven to be correct. Trust me when I tell you that your ego will be much better satisfied by jumping on board after the Market Breaks your way than to pick the exact turning point in advance. Making money while most people are losing theirs is always the most satisfying. Just think back to how you felt in 2008 and 2009. Or for that matter, 2006 and 2008 when I refused to turn Bearish along with the majority of GOLD BUGS and insisted that you not sell your gold.

So I will swallow my pride and admit that although I am sure that my analysis is right that you had to be completely irrational to buy 30 year bonds, you still could have made money on the bond appreciation from falling interest rates. We lost some money over the last few years trying to pick that TOP. However, the time may have finally come to start nibbling by buying some 3 month puts on TLT or calls on TBT. Not so much to make real money, but enough to make sure we keep a sharp watch on the Treasury Market so we will be prepared to increase our positions once we are confident we are convinced we finally caught the next major trend. After all, how much lower can interest rates fall below zero? Hopefully, we will recognize the break in plenty of time to jump on board the band wagon, catching the major part of the move and long before the great majority finally admit to themselves that they have been duped and the 40 year BULL MARKET in Bonds is over. But let's not fight the FED just yet. PATIENCE! Although the bond bubble may continue for a while longer as the FED initiates a new massive QE3 into the elections in an attempt to re-elect Obama, the BOND BULL MARKET IS OVER. Let someone else fight to get the last scraps.

A 1000 POINT UP MOVE IN THE DJII?

So, if I am looking for a 1000 point rally in less than 2 months, why am I not recommending buying stocks whole hog? Remember all the investment managers who flamed out shorting JGBs (Japanese Government Bonds) in 1990...1995...2000... What I am worried about is that the stock market may be having one last flurry into the QE3 announcement. It could then FLAME OUT. (There is no such thing as a sure thing; especially when everyone is waiting for that same sure thing.)

WHY AM I NOT GUNG-HO TO BUY STOCKS NOW? Because it is too dammed dangerous. Sure, things are never sure and more importantly, it will be highly selective and most people cannot change their minds on a dime. PATIENCE is the most important skill to successful investing. So for me, I am accumulating gold and silver securities of which I am fundamentally sure of, plus we are just at the beginning of the most favorable time of the year to buy PM'S. WHAT IS THE RUSH? BEFORE THIS YEAR IS OVER, WE WILL SEE THE START OF THE BIGGEST BEAR TRAP IN HISTORY (best shorting opportunity) as both the Bond and Stock Market BUBBLES BURST.

One is more likely to stay solvent and profitable buying reasonably priced assets like gold and silver and patiently waiting for the rest of the world to agree, than purchasing the popular overpriced hot things, like AAPL, GOOGLE and AMAZON (that has no earnings) hoping to get out in time before that last suck in rally FLAMES OUT. Don't forget that it was me who was speculating that we would have this one more SUCK IN RALLY into the elections, while the majority of the Street was turning BEARISH into the European disaster, America's disappointing 3rd quarter earnings and disappointing ISM and Employment numbers.

TREASURY BUBBLE

Is that "hissing" sound you hear, the air leaking out of the bond market bubble? No one seems to notice - or, rather, no one seems to care - that interest rates have spiked over the past two weeks (not enough to cause concern YET?) The yield on the 10-year Treasury note bottomed at an historic low rate of 1.4% two weeks ago. Yesterday, it closed at 1.62%. That's a 15% increase in interest rates. And it likely signals an intermediate reversal of the direction of interest rates.

Take a look:

In two weeks, the 10-year yield has recovered everything it lost in the previous two months. More significantly, we now have a new series of higher highs and higher lows on the chart. We haven't seen that happen off a deeply oversold level since last September when rates bottomed at 1.7% and then rallied to 2.4% six weeks later. A similar move this time would pop the 10-year note yield to 2% - basically right back to where it was in April. That's horrible news for bond investors. It'll wipe out all the gains of the past few months. And anyone who bought bonds recently as a gamble that the Fed would announce a new quantitative easing program will suffer large losses.

NOW IS THE TIME FOR PATIENCE!

WHERE TO NOW DOW

After reaching an all time high in December 2007 of nearly 14,200, the markets crashed by more than 50% into March 2009 at just below 6,000, causing the biggest financial and stock market crisis since the 1930s. The big question now is: Have the problems that precipitated the crash been fixed or at least alleviated and what happens next?

Well, not only have the problems not been fixed, but they have not even been addressed and by and large they have spread to the rest of the world and to a large extent have become much worse. Europe, our largest trading partner, is on the verge of splitting apart at its seams as the majority of their member nations are on the threshold of bankruptcy. The second largest economy, China, has succumbed to the natural LAWS OF ECONOMICS (just as I warned you she would) and both their economy and stock market have been slowing and heading down sharply. However, because of their massive foreign currency reserves that they have amassed over the last 15 to 20 years, they are not in the same danger as the rest of the world. Nevertheless, like the rest of the economies that rely on exports, they are having a tough time of it and their Real Estate Bubble is even larger than the one the USA is struggling with. It is far beyond the scope of this newsletter to cover all the economies and stock markets of the world, so I will now switch back to the economy and stock markets that we are most interested in, the USA, realizing full well that they are all related to each other in varying degrees.

Even though we have recaptured 7000 of the approximate 8000 points we have lost since 2008-2009, it is my guestimate that the manipulators will probably succeed in breaking out the markets to a new all time high above DJII 14,200. However, we are not now nor will we be the, into a new BULL MARKET. WE WILL THEN BE IN THE BIGGEST BULL TRAP IN RECORDED HISTORY. More on that later as we approach that situation. Stay Tuned!

• The reason for my belief that the DJII will hit 14,200 is due to a number of factors.
• The markets of the world are now the most manipulated ever, beginning with the most obvious ones, which are US Treasury Bonds and Interest Rates.
• Perhaps of greater importance is the 90% correlation between a rising stock market in the last 2 months leading into a presidential election and the incumbent getting re-elected. Given that this President and his administration (especially the Media, Financial Press, FED and the Treasury) are the most manipulative in history, I am confident that they will pull out all stops in their attempt to assure his re-election. This means predominantly printing money, monetizing all new and some old debt (buying bonds) and creating mountains of out of thin air money.

But a 1000 points in 2 months is a very Tall Order and very appealing, so if you want to gamble and play the upside, buy 3 month options (no more than 5% of your assets) on your favorite Index ETF's (the most liquid ) using 20% trailing stops. Depending on your level of sophistication in the use of options, you can buy collars (please do not ask me what a collar is, just stick with what you know). Personally, I prefer to accumulate more Junior silver and gold on any further weakness. Of course, I am violating a Cardinal Rule of prudent investing and that is the one about diversification, but we are in SPECIAL TIMES (more about this later).

WHAT ABOUT THE FUNDAMENTALS?

With interest rates down to zero and dropping to negative in parts of Europe, money managers are being forced to take ever increasing RISK in their attempt to achieve their pension fund's growth assumptions necessary to be able to pay for the promised benefits. Union and Government Pensions can no longer expect to receive ever increasing contributions to make up for the short-falls. Tens of millions of individual 401k owners who thought they had set aside large enough nest eggs to be able to retire in safety by investing in long term Treasuries and CDs, can no longer do so and are now forced into the Stock Market in order to attempt to achieve any kind of meaningful returns. It is probably one of the main reasons that the Stock Markets have gone up as much as they have (on low, declining or no volume), given the dire straits most of the world's economies are in. Once the selloff begins in earnest, it will be doubly re-enforced by the early liquidations that the Hedge Funds and Seniors will be forced into (at the first signs of danger) in an attempt to save what little they will have left. There is no question in my mind that the coming crash will make 1929 look like it was a walk in the park in comparison.

COMPLACENCY REIGNS

As more and more Pension Fund Managers and other so called experts seek ever increasing riskier Investments (calling them "Safe Havens) in their attempt to meet targeted returns, they are pouring more and more money into riskier, lower grade debt and other riskier investments, such as commodities, options, and day trading FOREX, all of which they know less about than stocks.

Have you all not noticed how many ads are out there offering to teach you how to trade FOREX? Kind of reminds you of the market just before the DOT.COM Bubble burst.

Everyone knows that history repeats but the big question is: What history are we looking at to repeat? And as more and more of the experts become lost, they revert to the old tried and true self preservation method of playing "Follow the Leaders," which will result in cascading selloffs. DON'T YOU BECOME A LEMMING; STICK WITH AUBIE.

QUESTION: Why would anyone invest in negative yield, risky assets, such as European Sovereign and Bank Debt or for that matter US TREASURIES paying little if any interest (with true inflation in the neighborhood of 7%-8%) instead of in Gold and Silver and/or high dividend paying solid securities, such as AT&T?

GOLD
"Never Sell a Dull or Quiet Market Short" is a tried and true, trading axiom that alludes to a price bottom being formed, and you won't find a much quieter market than gold and silver these days. BUY GOLD, SILVER AND THEIR SECURITIES.

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Aubie Baltin CFA, CTA, CFP, PhD.

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Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.