The Interest Rate, Unemployment Fallacy

The young man knows the rules, but the old man knows the exceptions.

Oliver Wendell Holmes

Right or left, Liberal or Conservative, the major point that they all seem to agree on is that "Interest Rates must be kept at zero in order for the economy to be able to recover." Even a cursory examination of history shows that "It just ain't so" and we do not have to go back very far in history to learn that. After 9/11, Interest Rates were immediately lowered and for almost 18 months nothing happened. It was not until President BUSH pushed through the largest Capitalist inspired TAX CUTS in American history that the economy began to recover rapidly and in the process, lowered unemployment from 7% in January 2003 to only 4.7% by November 2008. But to listen to the Media tell it, we had a jobless recovery even though 20 million jobs were created in 5 years. Our economy will keep going from Bad to Worse as long as we insist on continuing on with only TAX and SPEND socialistic solutions.

The ONLY road to prosperity is through FREE MARKET CAPITALISM.

DOES HISTORY REPEAT?

What have we learned in 2,064 years? "The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

Cicero - 55 BC

THE FED'S NON-EXISTENT EXIT STRATEGY

The FED shocked no one when they announced their repeated standard statement of near 0% official Interest Rate policy for an extended period. Most common sense people regard their "no change policy" as an admission and a powerful contradiction of anything remotely resembling an economic recovery. Yesterday, the Euro Central Bank confirmed its own ultra-low 1.0% rate as ongoing and even justified. The same day, the Bank of England confirmed its own ultra-low 0.5% rate, and even announced an extra 20 billion pounds sterling for additional monetization of bank debt.

We are witnessing a global failure of the entire Central Bank franchise system, as well as a breaking down of the Breton Woods currency system itself. Bernanke regularly congratulates himself despite his admitted inability to foresee any problems. So how could he foresee any recovery, when he couldn't recognize the growth of Bubbles and their subsequent explosion? He made only one change of course followed by an almost immediate reversal since his inauguration. His failures read like a gangster's Yellow Jacket with one bad move after another. Massive US Treasury monetization follows colossal bond fraud, on top of huge mortgage fraud, not to mention a series of huge Ponzi schemes (none of which the regulators were able to see let alone uncover or prevent).

Given Bernanke's closed mindedness and strict Ideological bent towards Keynesian Socialism, what kind of exit strategy could he possibly come up with without admitting that he has been completely wrong all along?

Recent mid-level sized bank failures now total well over 110. The evidence is clear to anyone willing to look that the FDIC fund is also just about bankrupt and it will soon be hit with a second wave of several hundred dead US banks that must be shut down. The blinder wearing PC economists focus only on demand driven price inflation. They can't fathom that painful price increases come from increasing raw material cost inflation and shrinking capacity due to bankruptcy induced supply cutbacks and shutdowns together with a crashing US dollar. They can't seem to associate that price is a function of both Supply and Demand and not just DEMAND.

In Florida, 85% of foreclosed homes have yet to hit the property market for sale. It is just a matter of time before COMMERCIAL MORTGAGE LOSSES SHOW UP AS BANK LOSSES.

UNTIL both Home and Commercial FORECLOSURES run their course, NO lasting ECONOMIC RECOVERY IS POSSIBLE.

The cyclical corrective rally in stocks and the dubious positive print on GDP has caused many on Wall Street and in Washington to claim the Recession has ended. Despite all the good economic news, an end to fiscal and monetary stimulus is nowhere in sight, precisely because policymakers know the happy news is artificially derived.

A closer look indicates that neither the administration nor the Federal Reserve believes its own recovery rhetoric. They erroneously understand that the economy will not prosper without continued life support: Ideologically, they cannot bring themselves to believe that it is REDUCED spending and TAX CUTS that will revive the economy.

Although it appears that the S&P 500 is up over 60% from the March lows, if you measure it in real terms, it is a great deal less impressive. Since the beginning of 2000, the S&P is actually down about 50% measured in terms of a basket of currencies. The index is down nearly 80% if measured against the real inflation hedge--Gold!

SPENDING OUR WAY BACK TO PROSPERITY

A country cannot devalue itself to prosperity and a bull market cannot survive a rapidly increasing inflationary environment for long. Money supply, as measured by M2, has only increased 5% Y.O.Y. But the output of goods and services is falling. As long as the money supply is chasing a shrinking GDP pie, there will be upward pressure on prices. Just as there is upward pressure on import prices as our dollar shrinks in value.

The quality of the money supply growth is very low because the increase in supply is coming from commercial bank purchases of Treasury debt, rather than from an issuance of credit to the private sector for capital goods creation. Total loans and leases at commercial banks are down 8.2% from last year. Meanwhile, the amount of Treasuries held at all commercial banks is up 20% year-on-year. Money supply growth is emanating from the Government's misallocation and redirection of Fiat money. It isn't being loaned out to small businesses or to build mines and factories: Instead, it is being squandered on failing corporations, increases in consumption while creating ever more consumer and governmental debt.

CORPORATE TAKEOVERS do not produce one new job or one loaf of bread: The only beneficiaries are a few Insiders, some shareholders and of course Wall Street. The Economy and the public are all losers.

CAPITALISM VS SOCIALISM

As the rest of the world, after discovering that the way to prosperity is by way of Capitalism, shifts slowly but surely more and more towards FREE MARKETS, the USA is rushing head long into Socialism.

Last week, the Indian Government announced plans to sell stakes in all its profitable state-run companies to the public in order to assure their continued growth as well as to help control its deficit but more importantly reduce or eliminate POLITICS from the decision making process of business decisions, A government report in July said 250 billion rupees could be raised selling stakes in state-run firms.

American manufacturing has been in a depression since 2001. This is to be expected, when politicians live only to tax, spend, and regulate our economy's productive elements. Who can blame manufacturers for building their new plants and/or moving their existing domestic plants and jobs overseas when their own Government and at times their own employees have committed themselves to damaging and vilifying their own companies?

Steel production is up nicely from its lows of last March, but it's still 10% below that of a year ago. Steel was once a major factor in America's economy and the leader in employing new technology and a source of high-paying jobs - but not anymore.

Let's keep things in perspective here: The economy is a mess and unemployment continues to climb. Additionally, looking for the silver linings and ignoring the real losses on the banks' balance sheets, along with more U.S. banks being shut down every other day, has become the latest trend. Until we do see bearish follow-through, instead of changing our stance from bearish to bullish, I am using close "STOPS" on my limited bearish positions, while waiting on the sidelines for confirmation that the Bear has returned; all the while counting all the money I am making in Precious Metals while searching for new investment opportunities in a field where we know that the long term direction is UP. Have you noticed GBU.TO lately? Look into it.

It's not about being "right" or "wrong" about a stock market stance that is important. (I know when I'm right BEFORE I know what the outcome is.) It's about being "successful" or "unsuccessful" for the period that really matters. Making money is my first objective. I leave the glory to someone else.

THE PRIMARY OBJECTIVE IS TO KEEP ONE'S HEAD (WALLET) WHILE ALL AROUND YOU ARE LOSING THEIRS.

At this point, it's just a psychological game with yourself. Will you let your emotions or you reason dictate your actions? Or will you look to the market and move to where the money is really flowing? One answer will kill your account and the other will make you wealthy. Choose wisely. ...

GOLD

When Gold was below $500/oz., Fed Chairman Alan Greenspan twice said, "Central Banks stand ready to lease Gold, should the price begin to rise." Greenspan was essentially telling the world that governments would suppress the price of Gold which has been brought to light by the brilliant work of GATA. The Fed did manage to suppress the price of Gold for 20 years and is still trying to cap it. However, with the price of Gold well over $1,000, it should now be obvious that they have lost their power. This is probably because since 2001 they have been going against the trend and now they almost certainly no longer have enough Gold left to influence its price and may soon the manipulators will soon be forced to start covering their shorts.

A trillion dollars here, a trillion dollars there and now we just got another trillion dollars added to our growing deficit. This is just another reason to buy Gold and stop worrying about what all those know nothing, Johnny Come Lately analysts are saying about Gold being in a Bubble. With our national debt sitting at about $12 trillion today, with that debt slated to rise to $21 trillion plus within the next 10 years (Government's own numbers), and with interest on the national debt now running at about $1billion a day, I can only see rising GOLD PRICES, a falling U.S. dollar and higher interest rates in our future.

THERE IS NOTHING MORE POWERFUL THAN A BULL MARKET POWERED BY BOTH GREED AND FEAR.

Now that the 10-year earnings cycle has peaked (as explained in my September 15th letter), fear will become the dominant factor in the financial marketplace in the not too distant future. Gold is, of course, the number one beneficiary of fear.

Gold has put in a new 52-week high every single year since 2002; a clear illustration of the strength driving this market. And yet the majority still doesn't like Gold. What's there not to like EXCEPT if you are not invested in IT?

From its lows of roughly $255, Gold is up over 425% while the DOW, during that same time frame (assuming that the Low was 7200, set in October 2002), is up only a miserable 150% at its current 11,000. This clearly indicates that Gold was and continues to be a far better place for investors to have the bulk of their money invested. Does that mean that Gold and Silver can't SELLOFF or PULL BACK? Of course not! They can and will. BUT that should be looked upon as a Golden Opportunity to BUY instead of a reason to panic.

THE OBVIOUS IS OBVIOUSLY WRONG

Most Economists and Financial Analysts are of the opinion that GOLD'S move to $1100 is foretelling a coming hyperinflation. Perhaps, but the more likely explanation is that Gold's rally is a sign of fear over the continued deflation perhaps turning into Depression. However, as far as investors in Gold are concerned, they need not worry about INFLATION OR DEFLATION since Gold does well in either an INFLATIONARY or DEFLATIONARY environment. Gold will exceed even the most optimistic expectations (except for mine of course).

KEEP IT SIMPLE STUPID: BUY GOLD!

The CURRENT Financial System is built on a sand foundation which has become a farce that is now fraught with lies and deceit and is in the process of crumbling. It will soon be replaced by WHAT? I don't know, but rest assured Gold and maybe Silver will have something to do with it.

HOW NOW DOW

A lot of noise is being made each time the Dow trades at a new yearly high, however a simple calculation reveals that all these new highs are merely illusory. Nothing has occurred to suggest that the rally from March 2009 started a new primary Bull Market. Instead, evidence builds that a significant top is forming; especially if we take the drop in the value of the US dollar into account.

One year ago (November 2008), Gold's highest close was $818. So far, the high this year closed at roughly $1100 plus, which is a gain of roughly 35%. Silver has risen from $ 10.35 to over $17.50 showing a one year gain of 68%. The Dow would need to trade a lot higher just to break even. The long term implications of the Dow's inability to even compensate for the lower dollar means that when this market starts to sell-off again, the move down will be hard and all encompassing; probably dropping below the March 2009 lows.

History teaches that although stocks staged some massive rallies and collapses during the early 60's to early 80's, they largely traded sideways. Those who were able to time the collapses did quite well. However, for most investors, unless you were investing in Gold, investing in stocks had negative returns for 20 years.

Virtually most, if not all of stocks' gains over the last decade can be attributed to the US Dollar losing value. In REAL terms (measured against Gold), stocks have actually LOST 80% of their value since the 2000 highs.

SHORT TERM OUT LOOK

There has been an ever increasing amount of technical weakness developing into every rally since June/July. These Technical Bearish Divergences range from between prices and breadth, prices and volume, as well as in the momentum and sentiment indicators that I follow. These Bearish Divergences keep getting larger as only 30% of volume can be attributed to the public and they keep getting worse into each rally. These are all Red Flag warnings not to trust this rally. The decline may start out slow; but then the last several years of my preferred scenario is a 250 point crash to signal the resumption of the Bear Market.

By far, the great majority of analysts are convinced that the March lows represented the beginning of a new Bull Market. But I vehemently disagree; I earned my reputation in part by being ahead of the times (my nickname was Panasonic) with my economic projections and then sticking with my forecasts and waiting for them to be proven correct. The most recent example occurred earlier this year when - as Wall Street became panic-stricken - I covered my shorts and in a Special Bulletin dated March 13th, I predicted that the Market had hit record oversold conditions and would rally in an ABC, 2 steps forward 1 step back, rally to about 9,500 DJII.

And today is no different. We have reached our maximum upside target coincident with record over bought technical and sentiment indicators. Once again, I am sticking with both my economic and market projections: The Economy is continuing on its path towards economic Depression in the face of Government misinformation of statistics and inflation numbers, which do not affect what is unfolding in the economy but, in conjunction with the most manipulated stock market that I have witnessed in my 50 years of trading, is influencing the stock market.

NOTE: They remain unsuccessful in holding down the price of Gold or stopping the US dollar from crashing; both of which are too large to be manipulated for extended periods of time and are now the only ones telling the true story. Volume is continuing to contract as the Government's and Wall Street's manipulation arsenal shrinks and they lose their power to deceive.

STICK WITH THE PLAN: Sell into 100 to 200 point rallies. Use close STOPS (8%-10%) and move your stops to stay 8% above the lowest closing lows so that just like the last 2 weeks, we caught a high and a 5%+ sell-off. We moved our stops as outlined in the Special Bulletin and ended up mostly breaking even or making a few dollars after commission.

TODAY, Friday 13th I bought back the same (initial) positions into the 100 point morning rally and will wait for confirmation of the top before taking the balance of my short positions. My stops have been entered and I will sleep very well this weekend as Gold continues on its merry way. I will be keeping you informed.

 

 

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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