Everybody Knows

Or do they? Everybody thinks they know that the world is on the verge of a banking and financial crisis, but it is just one of the major effects of the real problem: SOCIALISM has reached the end of its rope. It has run out of other peoples' money.

Stocks are down big and one of the main reasons is -- Europe. The machinations over how to deal with massive debt, a bailout plan and Greece's continuing viability as a member of the European Union (EU) is quickly coming to a head. Just as I have been warning anyone who would listen over the last few months that it would. Politicians and bankers may have only a small window of opportunity to deal with this explosive situation in the heart of Western Civilization.

Investors are becoming increasingly skeptical that European leaders will succeed at jump-starting the region's economy and preventing a messy exit from the EU by Greece. That, in turn, is causing money runs on European Banks as people from all walks of life withdraw from the Euro and mistakenly dump their money into what they naively think is a safe harbor - US Dollars, hence the big slide in stocks throughout the World.

European leaders are scrambling to meet to try and find a way to keep the region's debt crisis from spiraling out of control. They also have to first face and then plan for what I think is the inevitable, and that is a departure of Greece from the European Union, realistically followed by Portugal, Ireland and maybe Spain. The ramifications will be felt throughout the global equity and financial markets.

SILLY ME, BUT THE RAMIFICATIONS ARE SO DIRE THAT I THINK THEY WILL SUCCEED IN KICKING THE CAN DOWN THE ROAD AT LEAST ONE MORE TIME.

I do not see any solutions even being discussed, let alone agreed upon. It looks like things must get a lot worse before they can get better.

If you have not already sold out, then I think the only solution is to buy some meager amount of insurance (puts) and hang on! But be prepared to sell into any trumped up solution because there are no good, acceptable voluntary solutions. How could there be when the problem is Socialism and the only possible solutions are all couched in Capitalism. And that goes for the USA as well. All the recent elections have gone against any form of Capitalist solutions by electing Socialists and Communists while getting rid of any politician who even mentions austerity (reduced benefits, longer work hours, more flexible hiring rules, etc.)

THE AMERICAN BUBBLE

Because of FED mismanagement and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, futures, inflation, risk, and discounts by investors - none of these free market forces exist anymore. The price of money is dictated by the Fed (but they cannot dictate savings and investment) While Wall Street merely attempts to front-run the Fed's next move. They and the politicians are allowed to trade on inside information, but we peons go to jail if we do.

As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along for awhile longer. The minute they lose confidence, they will unwind their trades and then watch out below!

ON THE MARGIN

Nobody owns the Treasury Bonds; they just rent them. Trillions in Treasury paper is funded by repos. You buy $100M in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or steadily rising, as it has been for the last 10 years or so. If the bond drops 2%, the spread and all your collateral will be wiped out. This is a very Dangerous Game but made to look easy.

If that happens, the massive repo structures, which is debt owned by still more debt will start to unwind and create a panic in the Treasury Bond market. People will realize that "the Emperor has no clothes." The Fed slowly but surely is destroying the capital markets by pegging and manipulating the price of money and debt capital: Interest rates signal nothing anymore. Even the yield curve signals nothing anymore because it is totally manipulated. The very idea of "Operation Twist" is an insult to everyone's intelligence (and that says it all).

Capital markets are at the heart of Capitalism and they are not working. (They destroyed the money market and CD accounts). Savers, especially seniors and those near retirement are being crushed at a time when we desperately need savings. The Federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year Treasuries at a yield of 200 basis points, capturing the profit and laughing all the way home to their pig sties. The Fed has become a captive of the politicians, traders and robots on Wall Street where out and out theft is condoned. MF GLOBAL is but one example and the recent Facebook IPO is another. The public be damned when there is a dishonest buck to be made. And they wonder why the public is NOT coming back to the market?

We are in the final innings of a debt super-cycle and I think the likely next move is a breakdown of the U.S. government bond market (history's largest Ponzi scheme). Since it is the heart of the world's financial markets, you can draw your own conclusions. All of the rates and spreads are unreal. It may be the only game in town, but the public has finally gotten wise and decided not to play. Buy gold and silver and salt it away under your mattress as it offers much better safety and returns.

A GOLDEN ALTERNATIVE

Investors should look instead at the Market Vectors Gold Miners ETF (NYSE: GDX), which mimics the Gold Bugs Index (NYSE: HUI). It is trading at a P/E of 13. This kind of valuation is near historical lows, making precious metals producers (as a group) a very compelling investment. That's not to say they can't get a bit cheaper. But consider this: The very first time GDX traded at these prices was back in October 2007. At the time, gold was trading under $800 and silver under $15. Both metals are now double those levels. Yet the gold and silver producers are still trading at October 2007 prices. This can't last. The HUI Amex Gold Bugs Index generated a new buy signal on May 21st. This argues for a wave 5-up in Gold, Silver and Precious Metals to have started, confirmation will come after the 30 day stochastic joins the HUI PPI on a buy signal. Wave 5 is typically the most dramatic wave for precious metals and mining stocks. The HUI Purchasing Power Indicator buy signal (Wave 5) is coming at a time of extreme oversold levels in many indicators such as the Daily and Weekly Full Stochastics, and are at a place where key support levels from declining triangle and wedge patterns have been reached, making an excellent set up for a strong and lengthy rally.

Ten days ago gold and silver miners were at Vector Vest 2nd lowest ranking of their 225 industry groups. On Friday, they closed up 10 rankings.

The World Gold Council has recently released the Q1, 2012 Gold Demand report. Gold demand grew 16% over the past 12 months to 1,098 tons, which had a value of just $59.7B spent on gold in the entire world in Q1 2012.

Investment demand again dominated as under owned gold continues to be accumulated worldwide. Gold investment demand (for gold bars, coins and ETFs and similar products) grew by 13% year-on-year to 389.3 tons in Q1 2012, equating to a demand value of just US $21.2 billion. The key drivers of this increase came from China and ETFs. Global demand was boosted by China posting a quarterly record of 98.6 tons of investment demand up 13% from Q1 2011. This increase was a result of investors' continued move to preserve wealth amid ongoing concerns over rising inflation. This suggests debt may have again reached bubble proportions in finance, the leveraged banking sector and the tech sector. When the bubbles in these sectors burst, some of that capital will flow into the very small, physical gold market. This could lead to dramatically higher prices and means that our long held price target of $2,400/oz (the inflation adjusted high from 1980) for year end 2012 is becoming increasingly conservative.

The game is rapidly reaching its crescendo. The slide into the Great Depression is resuming. As an example, the CA budget deficit has doubled since their last guesstimates in January. JPM "suddenly" lost $2 billion going on $4 billion with potential for more. On May 13th, over 230,000 unemployed people lost benefits and the government uses these numbers to claim that the percentage of the unemployed dropped. More bank runs were reported in Greece on May 15th and on May 18th, there were also simultaneous bank runs in Italy and Spain. They won't be putting their money back into the banks any time soon. Every shark in the water smells blood.

DANGER, DANGER, DANGER

The worldwide financial structure is crumbling. When stocks reach the 2009 lows, the banking system will implode. Banks will begin closing by the score. The collateral for bank deposits is land and buildings, which are losing value by the day. If banks are in trouble, so are most businesses and depositors. Someday the public will awaken and there will be an astounding run on the banks as panicked depositors try to get out the door with what little money they have left. It is preferable to keep most of your liquid money in Gold under your mattress than in banks.

The financial structure's rot is too great to overcome. Chaos is coming, a result of massive un-payable debts created by 60 years of ever increasing Socialism. The final result of the Socialism inspired housing boom will be a wasteland of boarded up houses, the exact opposite promised by the government. Millions of home buyers have been fleeced of their savings and then evicted. The medical system will also collapse as it too is rotten to the core …dispensing drugs and destructive treatments that kill, maim, and mutilate to rack up huge incomes for the purveyors of this massive dose of medical quackery. The system was broke before Obamacare and now we are about to add 50 million new non-paying clients as well as new mandates. Brilliant!

Remember, not one solution to the 2008 financial crises has been installed only more debt, no big banks liquidated, no end to massive Government deficits, no discharge of huge big bank home inventory, no revival of the housing market, no return of US industry from abroad, no stop to endless costly wars, debt downgrades galore, no end to the propaganda pumped out by the Main Stream Media (MSM). Nothing has changed in the last 4 years except an additional $5 trillion in debt and $15 trillion in counterfeit money printing and more debt to fuel the collapse.

The Big Daddy of Government Organized Crime is yet to come to fruition…a total collapse of the banking system. The AJC of June 19th revealed the incestuous relationship between the banks and federal and Georgia banking supervisory authorities. The banks are hiding losses and overstating assets with the approval of the authorities. Says the AJC: "Operating mostly in secret, state bank examiners repeatedly overlook risky lending policies, portfolios bulging with loans gone bad, inept management…etc." This is likely taking place in every state. One report says that nationwide, banks have overstated assets by 3 trillion dollars. That is huge and there is no way it can be covered by the Federal government, especially in this new era of austerity. The gap is growing daily. The only real money the banks have is the deposits by individuals and businesses from their earnings and sales. Anyone who thinks their money is safe because of the FDIC suffers from delusions. The ability of the criminal ruling class to paper over insolvency is coming to its inevitable end. Every day another crack opens in the dike. Recently, it was reported that Bank of America is short $50 billion of operating capital. Remember, the majority of bankers are like government bureaucrats…dumber than a "sack of rocks". Recently, we learned they have placed huge amounts of their money market funds under their control into European banks as they cannot let Europe fail and they are desperate for yields. Another Brilliant Low Risk Move.

We all know what happened to MF Global. Customer deposits were allegedly stolen by Mr. Corzine. And you know what happened to MF Global and Corzine? NOTHING! Just a sham - a Government inquiry, with no arrests and no return of client monies by either, MF Global, Corzine or the exchange. Those who follow conditions there know a financial collapse is imminent. In Barron's this week we learned that "…European debt holders are likely to face a 90% haircut, far greater than the 30% that had been anticipated." We were not surprised. That will impact the money market funds. It is matter of when, not if. Recall my early warnings about the subprime mess and the housing bubble back in earl 2007…the government authorities said "no problem, go back to sleep, sheeple." They are playing the same game once more.

HOW NOW DOW

OK, we sold in May, but we didn't go away, and the market promptly dropped. BUT NOW WHAT?

THE OBVIOUS IS OBVIOUSLY WRONG

THE ELECTION INDICATOR: During election years, the stock market has risen by an average of 11% dating back to 1928. June, July, and August are - by far - the best-performing months during an election year. More importantly, stocks have only had three negative years over the past 21 election cycles. There is a common sense element that goes into this indicator. During election years, it's in the best interest of the current Administration to do EVERYTHING in its power to prevent stocks from going lower. After all, Americans usually vote with their wallets.

Billionaire investor Jim Rogers is known for being extremely bearish on stocks. However, he's bullish on stocks for the rest of 2012. He expects the current Administration "to print money like crazy in an effort to get reelected." After the recent market pullback, stocks are no longer up on the year. The election year indicator says that we should just about be at our maximum downside. On the upside, we have a chance of about 8% to 10%, which would give us the Super Bull Trap that I have been expecting. But it is much to dangerous to play the upside.

GOOD LUCK AND GOD BLESS

We are in the most trying times in our nation's history. We can either succumb to our Government's and the World's folly and go down with the ship or protect ourselves and personally prosper. Do you really think the time is right for you to be going it alone? As always, the choice is yours.

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