The Fox is in the Hen House

"Just because something is inevitable doesn't make it imminent"

The U.S. Empire that we all knew and loved is now deteriorating rapidly as the 70 years of cumulative underlying ROT (deficits % insane over regulations) is beginning to show through. As it collapses, all kinds of what we thought were steadfast relationships will die as there is a mad, short sighted, rush to devalue, of every country for itself. Nothing on this scale has ever happened before. So for people who insist on keeping their heads in the sand, it's going to be hell on earth. But for the BOLD and INFORMED it's going to be one of the biggest money-making opportunities in all of history. It is a complete waste of time railing against the inevitable. It's far wiser to protect and take advantage of the what is sure to happen. (Depreciating currencies and rising interest rates.

INFLATION IS HERE AND IT IS GOING TO GET A LOT WORSE

Consider the following B.S. Washington has been feeding you: From the end of 2000 through the end of 2010, the fraudulent Consumer Price Index shows prices have risen 29.9% for an average annual increase of about 2.99%. But WHAT ARE THE REAL INFLATION RATES?

Taking just a few examples:

• The typical cost of homeowner's insurance and real estate taxes, two basic costs of owning a home - have increased an average of 92.5%.
• The cost of energy; averaging the prices for heating oil, natural gas, and electricity - have soared 87.67%.
• The cost of a gallon of gas for your car has jumped 118%.
• Medicare Part B premiums have rocketed 143% higher.
• And some of the very basic food items we buy on a regular basis - potatoes, eggs, beef, bread - they too have soared, rising more than 64% during the same period.

Overall, prices have increased 88% since 2000 - a rate of inflation that's three times greater than what the Government is telling you. To make matters worse, the pundits in Washington continue to claim that inflation is "not a problem" and that it will be "easy to deal with" if and when it comes.

PLUG IN 9% INFLATION AND SEE WHAT THE GDP AND DJII REALLY ARE

If Inflation is not about rising prices, what is it about? The fundamental problem is that the essence of inflation is not a general rise in prices as such, but an increase in the supply of money at a faster rate of growth than the increase in GDP, which in turns sets in motion a general increase in the prices of goods and services. In the past; during times of crisis, such as is now occurring in the Middle East and Japan, the Dollar has always strengthened as investors take "a flight to safety." This time around, the Dollar has not only failed to rally, but has broken down to new lows. What gives? Has the dollar lost its safe-haven status, but more importantly, is the Dollar about to lose its reserve currency status? The rest of the world has definitely stopped buying Bernanke's snake oil - they're actually dumping dollars (Treasuries)! China's holdings of Treasuries are now down to below $850 billion from a high of over $1.5 Trillion. And one dupe after another (Clinton, Schumer, Geithner, Bernanke and Obama) are taking turns calling China names. Who would have thunk it? As a result, the Euro is flying against the Dollar which is bad news for the buck - and worse news for Americans' cost of living - but it couldn't be better news for anyone who owns Gold and Silver. Over the past month, Dollar weakness has propelled both Gold and Silver, in the face of being overbought and every analyst calling for a correction, is rallying to new highs, as investors seek safe havens from crumbling paper currency.

The fundamentals are worsening for the dollar: With each passing day, federal debt and deficits grow by leaps and bounds as Bernanke dumps more newly created greenbacks into the system. The long-term fundamentals for the Precious Metals are growing more bullish; as every day, global demand grows and supplies shrink - the "perfect storm," for PM investors like us! More importantly, the Federal Government, sporting a $14 trillion debt and a $1.7 trillion budget deficit can only come up with $4 billion worth of spending cuts. I should be splitting my guts laughing, except it is not funny.

IS AMERICA POISED FOR HYPERINFLATION?

While we think hyperinflation - defined as the total destruction in the value of a country's currency - is for now a low probability event, a lot more monetary (creation) inflation most definitely is not. When you have a government that refuses to change its borrow and spend policies, combined with a central bank chaired by a man who thinks that loose fiscal and monetary policies are a risk free, no cost solution for a sick economy, you have a recipe for hyperinflation. For quite some time now, I have been warning you that both the US Dollar and the TREASURY BOND Market were headed for a collapse, as most analysts scoffed at the idea. After all, the Euro is in much worse shape than the US Dollar is, right?

Recently, the Financial Channel had both Warren Buffett, a Democrat and Obama supporter and Sam Zell on as hour long guests. Both are famous investors with incredible track records and when they speak people listen. Low and behold, both are predicting a bleak future for the Dollar. Mr. Buffett said that the Dollar will become "less important" over time as America's "dominance" of the world's economic system diminishes. Sam Zell went even further and said, "My single biggest financial concern is the loss of the Dollar as the reserve currency. I can't imagine anything more disastrous to our country. I'm hoping against hope that "ain't gonna" happen, but we are already seeing things in the markets that are suggesting that confidence in the Dollar is falling out of bed.

HOW GOES THE US DOLLAR?

US Dollar has taken out its long-term, multi year- uptrend line. Does that mean "GAME OVER" for the Greenback? There are now only two points of support; 75 and 72, the 2009 and 2008 lows. And the long term picture is even worse. The US Dollar, going back 20 years, is developing a massive Head and Shoulders pattern. Once this pattern is confirmed by its breaking the neck line, we're heading to 40 on the US Dollar index: A near 45% DROP from current levels.

WILL WE EVER LEARN?

Invesco Mortgage Capital Inc. (IVR) recently sold $150 million of default protection on U.S. home-loan securities owned by a European bank, as toughening European capital rules for financial companies seem to offer opportunities for investors, Chief Financial Officer Donald Ramon remarked. "That's nice. They're getting paid 3% for protection beyond 25% loss on the bonds. It's being done so that the bank involved can claim it doesn't have any risk. Does Invesco have the money to pay should they be required to do so? The answer is: NO IT DOESN'T."

Bear markets are inevitable when basic fundamentals break down. Usually the sector initially most affected will roll over before the general market and tends to be a warning sign of what lies ahead. The last Bear Market was triggered when the credit bubble created by Greenspan's foolish expansionist monetary policy burst. It was exacerbated by Bernanke's reckless attempt to debase the currency and re-inflate the bubble. All he succeeded in doing was to inflate oil to $147, which put the finishing touches on an already crumbling economy.

The market, in late 2007, gave us a warning when the financials, began to diverge from the rest of the market. Considering that the banks were the leading sectors during the "02-"07 Bull Market, the fact that they couldn't follow the rest of the market to new highs after the February "07 correction was a big red flag that the Bull Market was over.

WHAT ARE THE FINANCIALS DOING NOW?

First of all and obvious to anyone who is looking is that the Financials are not only lagging, but are not participating at all with the rest of the Market.

Secondly, TWO MAJOR developments have just occurred in the financial world and as usual, the mainstream financial media has completely missed it. The 1st "development" is that the Bond King, Bill Gross, the single largest Bond Fund Manager has dumped ALL of his LT US Treasury holdings. For Gross to do this means that the US debt implosion is about to hit the markets. How much longer and how much more phony money must be printed to keep on buying the ever increasing government debt? .Does that mean Treasuries collapsing, Interest Rates soaring and Inflation going into overdrive? YES Probably by no later than JUNE.

And lastly The NYSE just got taken over by the Germans and talks are now underway for the takeover of the NASDAQ by the British: Both are the natural consequence of SARBANES OXLY Insane Over Regulation, which has already cost our markets 75% of the worlds new underwritings and listings. and nobody says or does anything. The New FINREG will Signe the Death knell to America's World financial leadership.

UNINTENDED CONSEQUENCES

I've been warning for more than a year now (my biggest weakness is timing) that the unintended consequences of the QE's would be to spike inflation, which in turn would poison ours as well as the global economy. It is simply basic economic laws. So naturally, I had forecasted all along that Bernanke was never going to create any jobs by printing money and of course he hasn't. So if inflation is going to sink the economy and kill the stock market, we should see warning signs from the sectors most affected by rising inflationary pressures, just like the banks warned us in "07 that their fundamentals were broken.

ARE WE STARTING TO SEE THOSE WARNING SIGNS?

Emerging markets have been hit hard by food, fuel and commodity inflation. We are now seeing food riots in many countries around the World.. Emerging markets and financials, just as during the last Bull, were one of the leading indicators; they are now starting to diverge from the rest of the global stock markets and are on the verge of breaking back down below the November cycle lows.

The other sector that is extremely sensitive to inflation, are the transports. When energy costs spike, shipping companies' profit margins are squeezed. The Dow Transports have also folded under the pressure of surging oil prices. Keep in mind oil is only on the 30th day of its intermediate cycle that lasts on average 50-70 days. I think we are going to see $5.00/gal. gasoline by the time the Dollar collapses into its next three year cycle low, sometime this spring or summer. Remember, that every single product or service gets to the consumer by truck.

If the market can recover from the recent correction and make new highs, I don't expect the transports will be able to follow. That would set up a Dow Theory non-conformation and most Major Bear Markets begin with a Dow Theory non-confirmation. Did you notice that when the DJII broke out to a new 2 year high the transports did not follow? Was that a non confirmation?

China, like most of the hot emerging markets, has also probably topped and I doubt the rest of the global markets have more than a month or so left before the next leg down of the secular bear market resumes.

The "debt super-cycle" is approaching dangerous levels. And like a rubber band, nobody knows exactly how far it can be stretch before it violently snaps back.

Derivatives (now a 1000 X larger than world GDP) "financial weapons of mass destruction," as Warren Buffett called them - still plague the Global Financial Landscape and are still increasing in size as more and more risks are trying to be protected against. But there is just not enough money out there to do the job.

Governments are still struggling to introduce legislation that might help us avoid these problems. But they aren't making any progress. Again, nothing has changed. What is even worse, these global financial problems are a small part of an even bigger issue that I call the debt super-cycle. When the cycle reaches its breaking point, the best thing you can do is have your money in the one sector that will keep going up...GOLD and SILVER;

JUST HOW MUCH DEBT CAN THE SYSTEM HANDLE?

Right now, governments may talk about "cutting spending." But the harsh truth is government debt-to-GDP ratios are still shooting up rapidly.

A real safe haven should harbor no debt, no foreign claims against its sovereign assets and remain outside the confines of the credit system. While some currencies can do that for the short term, none can sustain theses qualities for much longer. ONLY GOLD AND SILVER CAN.

CREATIVE DESTRUCTION

A great deal of creative destruction must occur in order to release much needed capital and resources back into the productive PVT. SECTOR before America can get back on track, and a great deal of pain will be felt before there is an epiphany that our economic well-being is now being sustained entirely by lies and illusion. However, since INDIVIDUAL Yankee know-how can never be counted out, we must get government out of its way. Unfortunately it will require a Double Dip Recession or a full blown Depression before the re-allocation of capital from a still-vastly overvalued financial sector (just 1 example) to one that efficiently turns out real goods and services that the rest of the world vitally need and wants. For now, the Great Recession and our Fascist Government has dealt America's economy and standard of living a terrible blow. Even most of the so called rich have not gotten away unscathed, even after the Fed's, fraudulently engineered, stock market rally temporarily eased some of the pain of their Dot-com and Real Estate losses. The stock market must now crash too, since it is buoyed by a tide of Fiat money. Ultimately however, nearly all classes of assets, except for the few that I have already mentioned, are destined for collapse, since current valuations are based on using a greatly understated Inflation Rate and on a money system whose basic unit of measure is grossly over valued dollars. The majority of the super wealthy and upper middle classes are not going to escape this inevitable phase of our economic cleansing.

MY ANALYSIS BEGINS WHERE ALL THE MEDIA AND POLITICAL MIS-INFORMATION ENDS

As an example: The Labor Department released its February Jobs Report, reporting that Non-farm Payrolls rose, a better than expected 192,000, which was completely bogus. Of that number, 112,000 were fictitious make believe jobs the BLS guesstimated were created by new businesses they think might have started up. (Complete bull.) This is known as the CESBD adjustment which can be viewed by Googling CESBD. Further, of the 192,000 new jobs reported, 29,000 were temporary services jobs. The U.S. economy must create 150,000 new jobs a month just to keep up with population growth. What we really need is a legitimately counted new jobs rise of about 250,000 per month just to reduce unemployment by 100,000. Of course, none of this covers quality jobs. We now see former middle management and laid off highly trained workers manning clerical jobs, working at fast food restaurants and other unskilled jobs at substantially lower wages than they were used to. In short, the unemployment situation is not getting better; it is in fact getting worse.

GOLD

I keep hearing from everyone, including Gold Bugs, that Gold is risky. Why? Because they think that as a general rule, the higher the price the higher the risk (high prices will increase Supply while decreasing Demand). As I have explained on numerous times, Gold is what is called in Economic Parlance a SUPERIOR GOOD. What that means, in plain English, is that unlike normal goods, as the price for Gold increases, the Demand also increases only exponentially more so. Secondly, it takes as much as 10 years to bring a new mine into production and newly mined Gold has been falling steadily for more than 20 years. But more importantly, as prices of PM's increase, low grade deposits suddenly become economic and the miners start mining the lower grade deposits so as to extend the life of their mines. This results in reduced production but greatly increased reserves. This is a very important point to consider when analyzing mining companies and comparing them to other type companies. An examination of the statistics confirms that PM's as compared to non-mining companies shows that if nothing else, all that negative B.S that you read demonstrates the low quality of all those Bearish analysis. As for my BULLISH analysis, I do not have much more to say since you have already heard most if not all of it over the last 10 years. Nothing has changed: The whole of this letter also goes to reconfirm my Long Term Bullish stance for both Gold and Silver. DO NOT SELL your core positions. USE 5% to 10% corrections resulting from short term HOT money traders as buying opportunities.

When it comes to Bullish PM analysts and traders, the consensus of opinion is that although Gold and Silver seem to be both extended and overbought, their fundamentals keep getting stronger and therefore they will continue to go higher. They are not all wrong, but they are not all right either.

Gold and Silver constitute between 1% and 3% of the world's total invested liquid assets. They are, not only NOT over owned, they are UNDEROWNED by a tremendous margin. And they have at least another 7 years to go before this Bull Market gets long in the tooth. I became Bullish on Gold in late 2000 and back then called for a 16 to 18 year Bull Market and as early as 2005 I raised my LT target for Gold to $6,250. Everybody laughed at the crazy Canuck, but how many are laughing now as I see calls for as high as $25,000. Before you ever think of listening to someone who writes or sounds eloquent, check their long term track record. Mine is in Gold-Eagle's archives for all to check out very easily.

GOLD AND RISING INTEREST RATES:

Gold is correlated with rising interest rates as witnessed from 1971 to 1980. Gold will only become vulnerable towards the end of the interest rate tightening cycle (which has not yet started) when investors start receiving very positive real interest rates. The fact that the US has to create money in order to buy their own long term government debt creates the real risk that stagflation could degenerate into an inflationary currency crisis. The worst case scenario of a Weimar style hyperinflation is becoming increasingly possible.

NOTE: The breast beating by the street of the tremendous Treasury Auction success is as phony as a $2 Dollar Bill. Where did all this buying come from if Bill Gross just dumped all of his long term Treasuries and China and others have been reducing their holdings instead of buying more? So I ask you, who has picked up all the slack?

Will We Have corrections and pullbacks? You better believe we will. Risk aversion has returned with equity markets internationally under pressure after the Spanish downgrade and continuing geopolitical tension and the 9.5 earthquake and tsunami will certainly not help matters. But it will pass.

Gold and Silver have taken a breather. A correction is well overdue but the technicals and fundamentals would suggest that any sell off may again be swift, short and shallow; maybe in the 5 to 12% range. Do not try to trade it. If you are nervous, you can sell options against your long positions to both protect your profits and generate some cash.

Remember, just as in every REAL Bull Market, the BULL will do whatever it has to do to buck everybody off. The only BIG WINNERS are the ones who have the courage of their convictions and the intestinal fortitude to hang on. I could only hang on to that Bull named Fu Manchu for 2.7 seconds, but rest assured I will still be aboard come 2017 or $6,250, whichever comes first.

"Freedom is not something to be secured in at any one moment of time. We must struggle to preserve it every day, for freedom is never more than one generation away from extinction." -- Ronald Reagan

 

 

All of my long term readers were not surprised by the shenanigans of the last few weeks. There are rarely any major surprises once you learn how to analyze political speech with an open mind and without pre-conceived ideological positions. The most frequent mistakes I usually make are ones of timing. I seem to continually underestimate the stupidity and ignorance of our MEDIA, Keynesian Economists and Politicians who don't seem to know how to tell the truth... In most cases "The Obvious Is Obviously Wrong" is the one thought that will keep you on the right side: That and COMMON SENSE.

We are coming into the most trying times in our nation's history. Is now the time you want to be going it alone?

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