Don't Shoot the Messenger

"No country upon earth ever had it more in its power to attain these blessings than United America. Wondrously strange, then, and much to be regretted indeed would it be, were we to neglect the means and to depart from the road which Providence has pointed us to so plainly; I cannot believe it will not ever come to pass." -- George Washington

Although Treasury Bonds are in a giant bubble, the bubble will not just burst because of the S&P downgrade. They have been in a bubble for quite some time now and by downgrading Treasury Bonds; the S&P has just opened everyone's eyes, but given the financial condition of Europe where else but the USA can you park the loads of counterfeit paper the USA and Europe are printing.. The multi-month long fiasco that went on in Washington, instead of coming up with even a partial solution, just highlighted the fact that Washington was unable to agree on taking even just the first step toward a solution and made the whole situation worse to the tune of another $4 trillion. That included a further $2 trillion increase in spending (but no real spending cuts). Hopefully this will be a wake up call to Washington, but I doubt it.

WHAT CREATED THE TREASURY BOND BUBBLE?

And the answer is: The same type of forces (the FED) that created the Tech Bubble in the late 1990s and the Housing Bubbles in the early and late 2000s. That in conjunction with 75 years of government mismanagement and ever increasing Socialism, have created the untenable situation we find ourselves in.

As usual, the majority of investment professionals are reacting perversely to the crisis. On the day after the first ever downgrade was issued on American government debt, investors reacted by igniting one of the biggest bond rallies in the history of the treasury market. Such an illogical kneejerk reaction suggests that investments of better value and fundamentals continue to be overlooked as safe Havens investments. Primarily because no other market is big enough to absorb all that scared money.

On the other hand, for us little guys I see many places to find shelter from the growing economic storm. While media attention is focused on weakness in the Euro, other currencies are doing quite well against the dollar. Over the last 12 months, the Australian dollar is up 12.6%, the Canadian dollar is up nearly 20% and the Swiss franc is up 37%. I believe investments that produce reliable income denominated in these and other currencies offer meaningful protection from declines in the U.S. dollar. However Gold, which I consider to be the only real money, is up over 40% so far this year alone and 10 days ago had its biggest one day gain in history. I believe that in the current environment, investments in precious metals (bullion and PM stocks) offers the best and safest way to preserve and grow your wealth.

Wild uncontrolled growth: Just in the last 4 years, the amount of Treasuries outstanding will have grown by $5.6 trillion. Amazingly, that's $1 trillion more than the total outstanding Fed Government Debt for all of the 232 years of America's existence.

Artificial props: Treasury Bond prices have been artificially pumped up by a series of unprecedented government efforts - first, when the Federal Reserve pushed short-term interest rates down to nearly 1% in the early 2000s, driving up stock & bond prices into a Bubble. Second, when it again drove rates down to 1% in the mid-2000s creating both a stock and Real Estate bubble for the ages: And now with its bond-buying rampages called "quantitative easing" that pushed rates down to Zero creating the millennium bubble that will set the stage for the Millennium crash that will last 4 to 10 years or longer and take the DJII to below 1000.

Don't Just Look to Blame Europe or the Japanese Tsunami or the S&P Downgrade. The U.S. has a series of issues all of Its own making.

Europe may have the PIGS (Portugal, Ireland, Greece, and Spain) battling with debt issues in Europe. Spain is not fully there yet, but will inevitably need to find money and what about Italy? They are all looking for money, but whether they find it or not or have the ECB, like the FED, just print it; the money is just their short term PROBLEM. The main problem for both Europe and the U.S. is that Socialism has reached the inevitable end of the road. Capitalism is no longer big enough or strong enough to carry the Socialist load and there is not enough money in the world to carry both the US and European Debt and growing compounding interest expense loads for much longer. Drastic changes are required. Can the politicians and economists finally admit their mistakes and do what is required? We will soon find out, but they don't have all that much time before the street riots and violence become common place in the world's major cities. Will the world then crash and degenerate into World War III? History tells us this always happens in the midst of a world wide Depression. Thus far, the real problems are not even being mentioned let alone addressed let alone solved.

HOW NOW DOW

Stock markets are battling negative sentiment, not only here but all over the world as well. Just check out the charts of the fastest growing BRIC countries. Their economies have started to slow down in the face of inflation and rising interest rates and led by their Stock Markets. Our situation was helped along by the crisis in Europe, but my economic analysis says that you cannot blame the Europeans, as it was our 40 plus years of massive printing of fiat money that has slowly but steadily spread inflation around the world. Now we have finally reached the end of the road. We have a financial mess of our own that can no longer be easily papered over. It has come to the forefront due to its severity and that's does not include the fact that 48 states cannot balance their budgets: Further Increasing the threat to the world's financial structure.

The key stock market indices are crashing below their respective 50-day moving average (MA) and 200-day (MA) (The Death Cross). The near term technical picture is bearish and we are in very dangerous territory without a good technical base for support. Look for an opportunity to go SHORT on any 300 to 500 point Rally's. Perhaps after everyone figures out that Bernanke although he did not announce QE3 outright hinted that it was coming, only by a different name. (if necessary LOL)

THE ADVENTURESOME and SWIFT A FOOT can trade the coming Rally by buying options but for me I am sticking with my Gold even though it too may be due to correct it can just as easily explode.. You may sell out of the money calls against some of your GLD holdings and use the money to buy calls on greatly undervalued Gold and Silver mining shares.

The debt resolution that was approved by the Senate and White House that calls for a $2.1 trillion increase in the debt ceiling to around $16.5 trillion is an attempt to pull the wool over the world's eyes in a desperate move to buy some more time. (time to do what) It is an out and out sham as there were no real enforceable cuts. First of all, this is just adding to a massive debt load. In return, there were supposed to be spending cuts of approximately $2.4 trillion, but only in the future over a 10-year period (2 congresses from now) and this deal, as bad as it is, cannot be enforced on any succeeding Congresses. The deal is so bad that investors the world over have recognized it for what it is; a sham, long before the final deal was announced. This is exactly what the markets were expressing for over a week now and the S&P downgrade (which is always late and understated) finally confirmed only a hint of the danger. (Hooray for S & P).

CAPITALISM vs. SOCIALISM

SOCIALISM (MARXISM, COMMUNISM) has been tried the world over for the last 90 years and been found wanting in every instance. The oldest Communist countries have seen the light and switched their economies over to a form of non Democratic Capitalism (In reality Fascism). They have become the fast growing economies while the Capitalist countries of the west have gone in the opposite direction and have so damaged the Capitalist aspects of their economies by overloading them with Socialist programs that they can no longer be supported. Can you imagine the impact of a return to higher, normal, market driven interest rates on their Governments balance sheets and more importantly, their cost structures? The problem, as I have been trying to explain, is that the U.S. economy is floundering and following President Obama's hoped for plans of destruction according to Clowen and Piven. The useless spending of nearly a trillion dollars in supposed infrastructure spending (less than 10% was spent on infrastructure) along with $800 billion of QE2 (all going to the major banks, Wall Street and Obama's cronies) signed the economy's death warrant.(as will be come evident within the next 2-3 years)

The sky is not falling yet, but we may be pretty close to it.

Just take a look at the second-quarter GDP that came in at a meager 1.3%, well below all the experts' lofty estimates. In contrast, China is slowing, but is still growing at around 8.5% (they lie too). Making matters worse was a downward revision (as expected) in the previous first-quarter estimate to a dismal 0.4% from 1.9%. It should be obvious that the projections of 4% to 5.5% GDP growth for the 4th quarter were all just pie in the sky projections, conjured up by using the government's false, feel good, but misleading statistics for over 2 years now (just as I have been showing you every month).

JP Morgan downgraded its estimate both for itself and for the 3 quarter GDP to 1.5% from 2.5%.That is terrible, but not as bad as it should have been without all their balance sheet manipulations that the FED IS ALLOWING THEM TO DO. (Without it, the Banks would have been forced to declare bankruptcy 3 years ago.)

DOUBLE DIP RECESSION

You have got to be kidding. There will be no Double Dip Recession since we are still in the 1st Recession heading for Stagflation, leading to a full blown DEPRESSION by 2012 - 2013. Nothing new, it just takes them awhile to catch up.

The manipulated manufacturing numbers continue to show a stagnant economy. The ISM Index was flat at 50.9 in July, its lowest reading in years and well below the revised 54.0 in June. An ISM reading below 50.0 represents contraction. The ISM Services index was also weak and grew at its lowest rate in 17 months. In addition, factory orders also declined in June.

Is their any doubt that all of these numbers have also been over stated? If anyone not in government ever lied to the extent that the President and Congress lie, they would be in jail for their next 10 life times. See why they pass laws that exempt them from having to follow the laws that the rest of us must adhere to?

Now I'll ask you all one question: How is it possible for companies to be making so much money with the economy in recession, 25 million + unemployed, sharply rising commodity prices and no inflation? And the street is still projecting 10 to 20% earnings growth?

APOCALYPSE NOW?

While our nation's entire financial system is not yet on the brink of collapse, it soon might be. It all depends on the actions that will be taken in Washington in the near future.

The proposed 1% tax on all banking transactions is really a 2% plus tax That is across the board, regardless on your level of income: Will that create Jobs and grow the economy? One of the unintended consequences will be that people will withdraw their savings out of the banks, which could lead to the very breakdown that we are so worried about. Banks need money in order to lend. Banks are the conduit of money from savers to investors and spenders. What happened to taxing only the rich? Did everyone who has a bank account suddenly become rich?

WATCH OUT FOR MORE OF THESE KINDS OF HIDDEN TAXES

(oops, sorry, USER FEES).

"The Obama Administration and Congressional Democrats as well as the NEOCON Republicans are betting their political futures on the hope that the American electorate is ignorant and forgetful, and hence the memo has gone out to functionaries all over the country from David Axelrod to John Kerry: This is to be called the 'tea-party downgrade.' That this is said with straight faces bespeaks either an unshakable contempt for the mind of the American voter or an as yet unplumbed capacity for Democratic self-delusion. Let us revisit the facts. The original debt ceiling deal put forward by the Democrats totaled $0.00 in debt reduction. This would have fallen approximately $4 trillion short of the $4 trillion in debt reduction the credit-rating agencies suggested would constitute a 'credible' step toward maintaining our AAA rating and avoiding a downgrade. The Democrats have suggested that the Republicans' refusal to accede to tax hikes is the main reason Standard & Poor's felt it necessary to issue a downgrade, the first in American history. Lastly, in their assessment of Standard & Poor's reasoning, the Democrats are acutely at odds with Standard & Poor. The credit-rating agency did not call for tax hikes, but S&P, along with the other credit-rating agencies, has long taken a position on one aspect of our fiscal troubles: entitlement reform. As anybody who has looked at our long-term deficit projections knows, entitlement spending is the major driver of our future deficits. Tea Party leaders, far from being a barrier to entitlement reform, have demanded it. The deal that finally did pass would have contained significantly more in deficit-reduction except for the fact that Democrats categorically refused to consider it -- is this sounding familiar? -- Entitlement reform, the most important issue. Democrats believe that they have discovered a cartoon villain in the Tea Party (to replace Bush?) and they are hoping that American voters are gullible enough to be distracted by the political theatrics. Come November 2012, Americans should keep in mind both the insult and the injury -- to the nation and its credit." Meanwhile the Republicans are not home free .thy better be prepared for either primary challenges or a 3ed party if they keep breaking their promises. (So far 3 up 3 down)

GOLD

Will the Downgrade cause the FED to heed Wall Street's call for QE3? Later if not immediately it will and when, not If it does, you can rest assured that it will drive Gold ever higher. Either way, Gold will go higher, much higher.

Looking at the Gold and Silver mining equities, they have been selling off along with the rest of the markets in the face of Gold being up more than $250 to a new all time high touching $1,800 (right in the area of my minimum year end projection of $1,750 to $2,500). So what gives? As I have pointed out many times, when markets crash (1,100 points in 2 days and over 2,500 in less than 2 months), we have what is called panic selling combined with the forced selling due to Margin Calls and you end up having the baby being thrown out with the bath water. But for those who are members of Uncommon Common Sense, we were prepared since we saw it all coming and there has been no forced selling on our part. Instead, we just sat back, bought more gold and counted our money while calmly studying our "to go short list", placing orders above the market as our favorite stocks (ETF'S) Rally. We have learned from the selloffs in 2006, 2008 and June of this year, not to look a gift horse in the mouth. Selloffs and sharp corrections are all part of the game, especially when dealing with manipulated markets.

SILVER

What's happening to Silver? If you will recall, I have always preferred Gold over Silver because GOLD is safer as it is also money and Silver is a lot more volatile, so only experienced traders can benefit from Silver's added volatility. Besides, if $400 to $6,250 is not enough of a Bull Market, then you will have to find someone who can do better and subscribe to his newsletter as well. That said, what do we do with Silver NOW?

Do not sell out of your Silver positions: Buy more by scaling in. It is impossible to measure irrationality. Silver has not been following Gold because the world has turned super BEARISH. Witness the panic selling of the last few days. Investors are no longer so sure about the industrial demand for Silver. If the world economies are slowing down, then so is inflation or so they think. They do not know what Inflation really Means. But the US dollar looks weaker than it has ever looked with doubt creeping in as to whether or not America will be able to pay its debts thus accentuating the desire to own GOLD. But Silver will eventually catch up and surpass Gold %age wise.

INFLATION - DEPRESSION

Inflation means increasing the money supply at a faster rate than the growth of GDP. It does not necessarily mean rising prices. One thing is for sure, Helicopter Ben will have his printing presses going Full Blast to try and stop Depression in its tracks. Of course his actions will actually cause the very thing he will be desperately trying to avert. When it comes to depression, it never goes from a minor Recession straight into Depression; it goes into full recession and then into Stagflation, which can then morph into Depression.

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Aubie Baltin CFA, CTA, CFP, PhD.
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