Fananical Manias

HAPPY ANNIVERSARY

February 1st is the first anniversary of UNCOMMON COMMON SENSE and I must say it was a pretty good year. The one thing that gives me the most satisfaction is that I achieved my main objective of starting this letter; which was to become a Voice for Truth at a time when Truth was sorely lacking. It was difficult to make myself heard above the din of Bulls, all wearing blinders and galloping across our TV screens and newspapers yelling Goldilocks- a new paradigm is here, BUY, BUY, BUY! If the flood of emails that I have received over the year is any indication, I think I (we) have succeeded. Let us all hope that the coming year will be as good to us as last year.

FINANCIAL MANIAS

Every financial mania throughout history has always been followed by a commensurate BUST as all the excesses must eventually be purged in order to set the stage for an economic recovery and the next Bull Market. It is a NATURAL LAW: All things always revert to the mean. The angle of refraction is always equal to the angle of incidence, etc., etc. All the powers that be, from Greenspan on down to the lowly stock broker/order-taker, tried to convince us that the size and strength of the collapse was completely unforeseeable, which is why no one could have seen it coming. To that I say B.S.

A few of us not only saw it coming years ago, but were actually in print forecasting exactly what is currently unfolding. It was difficult to be heard above the thundering herd, however the few who listened not only were able to protect themselves, but actually made substantial profits in the process. So if anybody wants to know where we are going and what could or should be done, why on earth do they keeping asking the same people who did not see the danger in the first place? They are all still expecting a bottom to have been made in November. By their own definition, the future is just as unknowable to them now as it was before. They are all trend followers; lemmings that will always eventually follow each other off the cliff.

Today, their consensus is to bottom fish before both the economy and stock market get better by the second half of 2009. Well it seems that once again they have got it all wrong. The market may have a 1000 - 2000 point rally based on the euphoria of hope and optimism surrounding Obama's trillion dollar+ stimulus package before realization sets in that the country's sharp left turn towards Socialism will not work. Both the economy and stock market will turn down again by the end of the second quarter and crash into the latter half of the year.

The financial media and their guests have become so fraught with nonsense that I can no longer tolerate watching the News, Financial channels or buying newspapers. A headline in a recent issue of Barron's asked, "Is Cash in a Bubble?" No wonder they couldn't recognize either the Stock, Real Estate or Commodities Bubbles and now the BOND BUBBLE, they don't know what a bubble is. Bubbles by their nature require a great deal of overextension. Does anyone borrow cash to buy cash? Does anyone have too much cash? Without being over leveraged there can be no margin calls or forced liquidations, which is part and parcel of every crash. Also there can be "No Greater Fool Theory in play when you are dealing with just cash.

LESSONS FROM TODAY'S JAPAN AND AMERICA'S 1930s & 40s

The Treasury Bill rate hovered near 1% all through the 1930's and into the mid 1940's in the US and then for more than 20 years in Japan as both economies were mired in recession/depression. Analysts are always trying to compare today to some similar time in the past to justify why they should maintain their bullish "buy now" stance. Sounds good, but you better make sure that you are using a comparable period and for me the only good comparable one is 1929 & the 1930's - certainly not 1980, 1987.1990 or even 2001-2003. The US today is in the worst financial condition in its history: During the 1930's, we had 75% of the world's GOLD and were the largest CREDITOR Nation along with being the largest exporter. Now, compare that to today. By maintaining zero interest, rates and providing stimulus packages, will not only increase our debt and spending while increasing our trade deficits. All of which will make things worse instead of better and plunge the US into DEPRESSION, while dragging down the rest of the world. There has never been a world wide Depression without at least a few strong countries.

DEFLATION - INFLATION

Most of our mavens and all of our politicians regard deflation as a terrible thing that must be countered at all possible speed, regardless of cost. This is especially the view of Federal Reserve policymakers, in particular Fed Chairman Bernanke: To counter a possible deepening price deflation - in addition to lowering the fed funds to zero-is pursuing aggressive "out of thin air" monetary creation. In December, the yearly rate of growth of the Money Supply stood at 151.7% against 141.3% in November and only 2.6% in December 2007. As a result, the Fed's balance sheet in December jumped to $2.238 trillion in junk from $0.9 trillion in Treasuries in December 2007. According to the latest FOMC statement, the US Central Bank is likely to raise its balance sheet much further in the months ahead. The focus of the Committee's policy will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that increase the size of the Federal Reserve's balance sheet with junk in ever increasing amounts. As previously announced, over the next few quarters, the Federal Reserve will purchase large quantities of agency debt (junk) and mortgage-backed securities (more junk) to provide support to the mortgage and housing markets, and it stands ready to further expand its purchases of agency debt and mortgage-backed securities as conditions warrant. They refuse to see that the value of the junk diminishes as real estate values plunge and will continue to do so for at least another 4 to 8 years. They simply won't allow the Free Market to work and cleanse itself, delaying setting the stage for its next recovery. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury Securities. This will put the final touches on the Biggest Bubble of all time: The Bond Market which in all probability has already peaked. NOW, maybe the time to begin shorting Treasuries by BUYING OPTIONS on the TBT (an ETF that goes up when Treasuries fall)- BUY TBT JUNE 50 CALLS @ 3.00 as an example. They will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and consider ways of using its balance sheet to further support credit markets and economic activity. Is all this not complete insanity? They are laying the foundation for the next Savings & Loan crisis by forcing banks to give out 30 year, 4% and 5% mortgages by making the assumption that the interest rates will stay down (as we stay in recession) for the next 20 to 30 years.

Would a controlled Recession be such a terrible thing as most commentators imply? In the present case, the emerging decline in prices is the outcome of a severe weakening of various non-productive bubble activities that have emerged on the back of past, loose monetary policy. Between January 2001 and June 2004, the Federal-Funds-Rate was lowered from 6% to 1% in a vain attempt to keep the Real Estate Bubble from imploding.. Yet it is this aggressive, loose money stance that gave birth to all the various bubbles in the first place. It obviously has not worked so by all means lets do more of the same. They will end up destroying the world's and our financial systems in the process.

The reversal of this loose stance from June 2004 to September 2007 - when the Federal-Funds-Rate target was increased from 1% to 5.25% - started to undermine the various bubbles. (False activities cannot survive without the support of monetary pumping; they cannot secure goods and services without "out of thin air" money). In contrast, wealth-generating activities do not require loose-monetary policy to secure goods. Wealth generators acquire other goods - real wealth - by means of the real wealth they have produced.

As a result, the ability of false activities to increase the rate of price growth has weakened. Consequently, their ability to divert goods to themselves from wealth-generating activities by bidding prices higher has also weakened. (Remember that a price of a good is the amount of money per unit of a good. Also remember that false activities divert goods to themselves by means of money that was created out of thin air, but dispersed selectively (by governments) as is obviously being done now. This is good news for wealth generators since less diversion of wealth strengthens wealth generators. From this we can infer that pushing massive amounts of money to counter price declines serves to prop up various false activities and weakens wealth-generating activities, delaying any sustainable economic recovery.

THE BANKS ARE NOT LENDING?

Why should they? By law, TARP funding is preferred equity with a 5% annual dividend. Add on administrative costs and a loan, just to break even, needs approximately 6%, to service the taxpayer requirements of TARP. How can anyone who understands the facts expect the banks to give out 30 year mortgages at interest rates below 5%? It would be tantamount to committing suicide. As things stand at present, on account of the banks' reluctance to expand lending, most of the Fed's monetary pumping ends up within the banking sector and doesn't spread to the rest of the economy. For the time being, banks are not keen to lend for the simple reason that their capital is in jeopardy and it's costing them a minimum pf 7 %.after Tax.

Banks are not supposed to lend their capital, they lend deposits. In the week ending December 17, 2008, bank cash reserves jumped to $774.4 billion from $604.7 billion in November and $2.39 Tillion in December 2007. In early December, the yearly rate of growth of commercial bank loans fell to +3.5% from +4.8% in November and +10.2% in December 2007. But what else do you expect when the economy is trying to consolidate and de-leverage? Banks are not reluctant to lend, they are just finally tightening their lending standards to where they should have been in the first place. According to the Federal Deposit Insurance Corporation (FDIC), equity of commercial banks and savings institutions fell by $44 billion in the Q3 2008 after declining by $10 billion in the previous quarter. The rising level of bad loans, particularly in real estate, credit card and car debt has led many banks to increase their level of provisions for loan losses in Q3. to $50.5 billion, more than three times what the banks put aside in Q3 2007.

REAL SAVINGS: Now, the essence of credit is not about lending money as such, but actually lending the real stuff - real savings. Without real savings (client deposits) no real non-inflationary lending is possible. The fact that banks have accumulated a large amount of bad assets may indicate that the pool of real savings is in trouble. If this is the case, it will be futile to try to boost lending by pushing more Gov. created money into the banking system. If the pool of real savings is falling, it means that the percentage of losing business activities exceeds the percentage of wealth-generating activities. Consequently, banks are likely to remain reluctant to lend regardless of the Fed's pumping. This, in turn, will continue to undermine bubble activities. As a result, the growth momentum of prices will continue to weaken.

The Fed could bypass various lenders and hand money directly to companies and people as they are now attempting to do in order to boost spending and reverse the decline in prices. However, such a policy is likely to severely damage the real economy since all they are doing is to continue funding activities that the private sector does not deem as being worthy of their capital. After all, they can't print it and unlike the Government, they still have to earn it.

If it were possible to lift real economic growth by means of money pumping, world poverty would have been eradicated a long time ago. Real economic growth requires real savings to fund various activities that support and promote it. (Remember that money is just a medium of exchange and cannot grow anything. Money is employed to exchange goods of one wealth producer for the goods of another wealth producer.)

Can fiscal policy revive economic activity? At the G20 Summit on November 15, 2008, leaders stressed that fiscal policy - strong increases in government spending - will have a bigger role to play in reviving economic activity. Barack Obama has suggested that one should not worry about budget deficits - what matters, he said, is to revive the economy. That is a lawyer speaking. The facts do not sustain this premise.

But how can an increase in Government outlays kick-start the economy? Any activity that the Government initiates requires funding. (Any persons and companies employed by the Government will expect compensation for their work (at far higher than the going market rate.) The Government as such doesn't create any real wealth, so the only way it can pay these individuals is by taxing others who are still generating real wealth. By doing this, the Government weakens the wealth-generating process and undermines prospects for economic recovery. The only way for the economy to revive is if the pool of real savings is growing.

In his various comments, Obama has suggested that the aim of his economic policies would be to create employment. He has also reiterated that various job-creation projects under his administration will not amount to a reckless spending of taxpayer's money. Accordingly, he will spend money wisely by undertaking only essential projects such as fixing roads, creating NEW GREEN JOBS in unproven technologies and other favorite left wing projects. But this is no different from what a centralized system like the former Soviet Union attempted. The collapse of the Soviet Union's system is the best testimony to the impossibility of replacing the Free Market economy. Will spending $500 billion on expanding Medicare to 50 million uninsured Americans and 15 million illegals, produce one more doctor or nurse?

Contrary to President Obama's assertions, what is required is a rapid buildup of real wealth. What is the point of employing people in jobs that the free market does not endorse? Does it mean that fixing the infrastructure such as roads is a bad idea? Not at all: However given the present lack of real wealth, Americans cannot afford to pay 6 or 7 times (Government increased costs) the going rate to improve roads and bridges at this time. There are more important priorities and a much better way of accomplishing our stated goals.

Does this imply that we shouldn't be concerned with growing unemployment? Once the focus becomes wealth generation, then by implication this will lead towards increased employment in a less-controlled economy. In a true Free Market economy, unemployment is never an issue. In plain English, only profitable, growing companies can create jobs: Attacking and punishing our finest companies such as Exxon, Microsoft, Wall Mart, etc. is certainly not the way. All it will accomplish is increased "outsourcing."

At present, both the US central bank and US Treasury are pursuing knee-jerk reaction policies. In their vain attempt to suppress the symptoms, no attempt is made to logically evaluate the true causes of the present crisis.

For most experts, in particular Ben Bernanke, the causes of the current crisis are of a complex nature - i.e., they are mysterious, which means they doesn't know. This is why practitioners of the mainstream methodology treat symptoms rather than causes. The outcome of such an approach is to inflict ever more damage on the economy. Has it not occurred to Bernanke that massive amounts of "out of thin air" money cannot replace nonexistent, real savings? If printing money is going to fix the problem, why is a country like Zimbabwe in total ruin after doing just that?

Conclusion

The current policy of fighting price deflation is a remedy for economic disaster. What is required is purging the economy of various activities that nobody really wants (not willing to pay for) that severely undermine the economy's ability to generate real wealth. The Government's picking of various policies is aimed at fixing the symptoms rather than addressing the true causes. The fall in the prices of goods and services is in response to the weakening of non-profit generating activities. This means that so-called price deflation indicates that false activities such as banks, brokers, autos and home building are in trouble. This should be seen as great news since the process of purging the economy is in full force. The weak sisters must be allowed to fail. The sooner the economy is cleaned up and scarce resources are released, the sooner wealth generators can start producing real wealth - the key for the economy's revival. To prevent a further destruction of the American economy, Congress must stop the mindless and reckless policies supporting production that the people no longer want. Stop giving money to companies that the Free Market refuses to finance.

Just because we are seeing falling prices now we will soon see the inflationary effect of $10 trillion injections as there is always a 12 to 24 month lag between the implementation of monetary policy and its effect on markets. After all, financial markets are non-linear systems, so even though we'd like to see a nice and tidy straight line relationship between high inflation and Gold, it never ends up being that simple.

But we do have the theme of massive money creation in place to drive Gold well into the multiple $1,000's. It's just going to take some time for this theme to work its way through the system. After all, it has to overcome the Government's attempt to manipulate the prices of Gold lower. But rest assured, they will fail.

As an aside, do you remember when the credit crisis first started way back in August 2007? At the time, they estimated that it would cost just $500 billion to "fix" it. Then Merrill Lynch shocked the financial world by writing off US $4 billion. The spin doctors immediately went to work saying that it was a good thing - get all the bad news out at the beginning. To date, Merrill Lynch has written off over $100 billion with more to come and no longer exists in its own right. I recently read an article saying that the banks need another $2 trillion just to stay solvent. I think this comes up short, way short. First I and then Warren Buffet, over 3 years ago, warned that the then $1 trillion in Derivatives were a time bomb just waiting to explode. Today, there are $550 to $600 trillion in Derivatives and most of that involves banks. I would guess that the Government will need at least 15% to 30% of that to bail out those very same banks, since I know of no one who has that kind of money and is willing to invest it in those banks.

Shifting gears, we see that the fiscal budget gap for January-March 2009 will reach $455 billion which when annualized would be $2.2 trillion, without counting in any stimulus packages.

OVERSIGHT? Yah, right: By whom, Congress? They can't even balance their own check book, nor can they live under the laws that they themselves have passed and that the rest of us must live buy. Thomas Jefferson knew from the very beginning that government was always the problem, never the solution. That is why our Constitution was written so as to restrict the power and size of the Federal Government. But from day one, the politicians have constantly attacked it in their never ending search for more and more power for themselves.

HYPERINFLATION: THE WRITING IS ON THE WALL

Barry Ritholtz, in constructing a spreadsheet of government bailouts, points out that it has already injected $8.5 trillion, not including the "$5.2 trillion already injected into Fannie/Freddie and that also does not include the additional $8.8 trillion that the US taxpayer is now explicitly responsible for." But even his analysis may be on the low side since President Obama's stimulus package being kicked around today is already up to $850 billion from $700 billion and likely to reach over $1.25 trillion once Pelosi and Reid finish with it in Congress.

To put this stimulus bailout into perspective, Olivier Garret of the Casey Report compiled a list of the cost of ALL the American wars and government initiatives, including Iraq, the Gulf War, Vietnam, Korea, World Wars I and II, the Marshall Plan and everything NASA's ever done, including visiting the moon. He came up with $8.1 trillion. Ritholtz' relatively modest bailout figure is nearly a half a trillion higher than all of that. The ultimate question here is; how can the world possibly digest another $8.5 trillion of brand new dollars? "If the Fed creates enough inflation, Gold's probably going to hit $5,000," said noted analyst Peter Schiff on Fox News.

You will notice that slowly but surely, the better of the analysts are now, one year after my January 2008 letter "Recession 2008 - Depression 2009, finally catching up with my forecasts. Should there be any doubt, my archives are there for all to read on Gold-Eagle.com - check it out.

Life in the United States is about to undergo the most severe changes in its history. Fortunately however, you have had at least two years of lead time to prepare yourselves. To Be Forewarned, Is to Be Forearmed so that you can continue to not only protect yourself-but amass substantial profits as well, by staying ahead of the pack.

As most of my regular readers have already noticed, my prognostications are well beyond the scope of the mass media: Staying far ahead of the curve and spotting trends that have come to pass as projected. The outlooks that I discuss with you here are based on history and the knowledge of Economic Laws backed up by technical analysis. They are not just wild guesses. My opinions are explained in detail and are there for all to see and learn how to do your own research.

HOW NOW DOW?

Last week, we saw Thursday's sell-off low hold above Tuesday's low as most of my technical indicators, both short and long term, are in such deeply oversold territory that most often signals that a sustainable rally for a couple of months is due. The choppy markets that we have been witnessing since November 20th are typical of B Wave consolidations in ongoing Bear Markets. However, because I believe that we are in a Once In A Lifetime Bear Market, it is possible that the degree of bearishness of the indicators, instead of signaling a major rally, are actually signaling a major crash. That is precisely why I chose the Strangle Strategy that I sent you last week. On the other hand, the reason for the delay in starting the rally could be due to Obama's negative Inauguration Speech instead of the highly positive uplifting one that he has become so famous for.

Nevertheless, I am still expecting a tradable rally to begin shortly. If you want to play it, you can buy the Double ETF'S like the QlD, and SSO or the Triple ETF's like BGU (Large Caps), TNA (Small Caps) and the ERX (Energy), But whatever you do, as soon as you get filled, enter open order stops limiting any losses to 10% or 12% maximum. WE ARE STILL IN A MAJOR BRAR MARKET.

WHEN IN DOUBT, GET OUT - may be the best advice for all,

But What ever You do: DO NOT CHASE RALLY"S buy only into weakness and USE STOPS

Patience is a virtue. So it may be best to just stick to buying Gold.

GOLD

I know that I am probably sounding like a broken record. but last week with both Gold and the US $ making significant advances, you all should be convinced by now that Gold has always been in a market unto itself. So forget about what Oil and the US$ or anything else is going to do; Gold is in its own 16 to 20 year MAJOR BULL MARKET with a minimum of 7 years still to come and my projected long-term target of $6,250 still stands.

Gold's and the HUI have rallied sharply, exactly as expected, from their target lows I gave 2 weeks ago. We gave a downside target for Gold of $775 to $825 and the HUI of $235 to $245. Gold hit 801.50 on January 15th and the HUI hit 241.78 the same day. Since then, Gold rose over a 100 points (12.5 %), and the HUI rose 60 points, or 25%. This rally was suggested by the near perfect Elliott Wave patterns unfolding as well as the extended bottoming pattern of the Monthly Stochastics. I am now looking for a sizeable, multi-week, maybe multi-month rally that is in the process of unfolding. By now, you should all be solidly invested in GOLD and its stocks.

 

I have spent my career trying to identifying major trends in the markets - and helping others to profit from them. By identifying the trends that will be happening tomorrow; trends that most analysts and investors notice only after they have already been well established and the majority of the easy have been made, we are presented with superior profit opportunities. In my newsletter, "UNCOMMON COMMON SENSE", I have often uncovered changes to the major trends before they even begin and then presents a goldmine of specific, actionable information that will help you profit even during the worst of times. Make me work for you, by subscribing to UNCOMMON COMMON SENSE at the still low, discounted Holiday Rate.

 

I am EXTENDING the Holiday Special until FEB. 1st. A two year subscription extension is only $339. The one year subscription is still a reasonable $199 at which time prices will increase to $259 and $449: Don't forget to extend your subscription now before prices increase.

 

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