It's A Mad, Mad, Mad World!!!

"The House of Representatives ... can make no law which will not have its full operation on themselves and their friends, as well as the great mass of society. This has always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together. It creates between them that communion of interest, and sympathy of sentiments, of which few governments have furnished examples; but without which every government degenerates into tyranny." -- James Madison, Federalist No. 57, 1788

"There is a certain enthusiasm in liberty that makes human nature rise above itself in acts of bravery and heroism." --  Alexander Hamilton, 1775

INFLATION AND THE MONEY SUPPLY

I have always been amazed at how most everything is looked at as either black or white by most people especially analysts. Either the economy stinks or it is wonderful. Either economic data portends a MARKET CRASH or it heralds the greatest rally the markets have ever seen. The problem, naturally, is that the neither the WORLD nor markets exist in a world of absolutes. To make it even more complicated, the multitudes of variables are always changing, but the most complicated variable of all is the weightings that apply to each VARIABLE are rarely the same even during what seems to be similar times. Not only do they operate in shades of grey, they never ever go in straight lines. I bring this up because the current earnings season is portending a rather scary forecast, raising doubts, at least for me, that the progress made in stock prices are being decoupled from the underlying profits being generated by companies. The stock markets have already surpassed the 2007 all time highs, yet the economy is nowhere near its previous stature.

THE UNIT OF MEASURE

What nobody seems to be taking into account is that the units ($’s) that we use to measure earnings, the markets and everything else are rapidly shrinking in value. The best example that I can give you is that the REAL WEIGHTED (against Gold) DJII is somewhere in the neighborhood of 8,000 as opposed to today’s stated price of 15,300.

What is even more troublesome is that in the face of overwhelming governmental stimulus and an all out effort to push the markets UP into the election, the best the professional manipulators can maneuver are openings of 100 to 150 point rallies, but closing only up only 5 or 10 points. Yet the markets mediocre daily performances do not seem to be dampening Wall Street’s enthusiasm because, in typical black-and-white fashion, the return of risk appetite is overwhelming. Any fleeting thoughts that the market might be getting ahead of itself are immediately dispelled. What is lost in this type of analysis is that this 100% plus rise over the last 3 years has occurred on record low volume which troubles me greatly. What happen to volume always proceeding price? The trillions of dollars of the public’s sideline monies in the face of record optimism are not willing, thus far, to come back to the markets. Why? The truth of the matter may be that the improving economy is not really improving at all, but is being juiced by Wall Street and the Media using a combination of QE’s and manipulated government statistics that are completely misrepresenting the true picture. The General Markets, although up every week for the last 7 weeks in a row, tend to give analysts the impression that the immediate past will extend far into the future.  But, as anyone with even a modicum of experience can attest, this is not usually the case and I and the public are just not buying into it. Even though, as you all well know, I have been calling for up to a 1500 point plus rally for the last 5 months or so culminating into a NEW ALL TIME HIGH leading into the largest BULLISH DEATH TRAP in history.

Estimates for the last quarter of 2012 were so optimistic that I wonder where, with at best a suspect, projected 1 1/4% GDP growth rate, all those forecasted earnings can possibly come from? Especially given the lowest worker participation rate since 1983 and the high and rising inflation rate, how can the economy produce those projected real earnings and GDP numbers? Don’t forget that Europe and China are in recession and so is Japan. The answer is they can’t and they have not met expectations and yet the markets the world over keep barreling along. It’s amazing what counterfeit money can produce as long a people are still willing to accept it. Eventually the people wake up to the fact that the emperor has no clothes.

THE GROWTH IN THE MONEY SUPPLY

Perhaps a far better explanation for the markets rise is (a) the year-over-year (YOY) rate of growth in both the US and the world’s Money Supply(MS), which was reported to be  about 14% and (b) since December 2011 was the 60th consecutive month in which the YOY rate of MS growth was 10% or more, and (c) the YOY rate of MS growth above 10% has become the longest period of double-digit money-supply growth in US history. So how can we be in 'danger' of experiencing a serious bout of deflation, given that the US is in the midst of a record-breaking period of monetary inflation? Based on recent preliminary data, the YOY rate of growth in US MS has accelerated to 15.4% over the past few months. This leaves no doubt that a new US monetary inflation record will soon be set, which would be a better explanation for the rising stock markets than the nonexistent booming optimism. After all, we should have known that, since it is exactly what Bernanke has been hinting at (without actually saying so) – so much for the FED’s promise of a new OPENNESS AND CLARITY. If they are so open, why does everyone still argue as to what Bernanke is really saying?

The question is: If there has been so much monetary inflation over the past few years, why hasn't there been much more "price inflation"? The answer is obvious: The Government has been jiggling the numbers and outright lying to us for years. Companies have been shrinking the size of their packaging without changing prices. The reality is that most prices have been driven by monetary inflation, especially gold and silver, oil and the stock market and commodity prices are now much higher than they would otherwise be. For example: Monetary inflation explains why the S&P500 Index, despite being 13 years into a valuation-compressing secular bear market, has just hit new all time highs in nominal dollar terms. It also explains why copper is priced at around US $3.5/pound and oil is priced at over $100/barrel, despite the economic problems in Europe, China, the US and Japan. It also explains why the soybean market, which for decades had a price floor at US $5-$6 and a price ceiling at US $10-$11, now appears to have a price floor at US $10-$11 (the old ceiling has now become the new floor). The fallacious idea that prices haven't risen by much is based on government manipulated price indices that purport to measure the economy-wide movement in prices. These indices clearly understate the extent to which prices have risen. That means that the actual amount of "price inflation" reported by the US government is grossly understated.   That being said, the response to such a large expansion of the money supply is not a surprise to me because I am always searching between the lines for the truth. However, one of the most dangerous characteristics of monetary inflation is that it is never possible to know, in advance, exactly how it will distort the price system. What we do know is that a large increase in the money supply ALWAYS leads to large price increases somewhere in the economy. The best we can do is to make an educated guess as to which items/investments will be the main beneficiaries of monetary inflation.

The bottom line is that monetary inflation in the US is doing what it always does. It is boosting prices in ways that can't be predicted with complete accuracy by anyone, let alone by central bankers and government economists employing hopelessly flawed Keynesian theories. Although I accurately predicted the rising commodity prices, especially gold and silver, I have been sadly lacking when it came to the stock markets. Thank goodness for my policy of always using 10% trailing stops. So in actual practice, we still made some money since I accurately picked most of the short term tops and bottoms letting our trailing stops lock in some profits while getting us out of harm’s way.

A PEEK INTO THE FUTURE OF EUROPE

UNINTENDED CONSEQUENCES:  According to Credit Suisse: “The probability of the Largest Disorderly Default Loss in History Has Increased Dramatically”. The best overviews of the never ending Greek soap opera (every soap opera eventually ends), although when it comes, the denouement is usually a whimper. In the case of Greece, it will be anything but. Yet listening to the daily cacophony from Europe's leaders and our media, who are clueless as to what is really going on, one may be left with the impression that there is a simple solution to the problem and Greece may be "saved... within hours." But it can't be. It is simply not possible. In fact, as of today, "I am left with a sense that the probability of delivering the largest default loss in history within 6 months has increased relative to doing so in an orderly fashion”.

BUT THEY WILL keep attempting to KICK THE CAN DOWN THE ROAD AT LEAST as long as they can keep getting away with it. Until eventually the world wakes up to REALITY.

As a reminder, Credit Suisse (CS) was the one bank smart enough to choose to completely ignore day to day news flows out of Greece and now Spain and soon to be Italy and France  (as it is literally just noise with absolutely no clear signal). Wish we could say the same for our government, Fed, analysts and the media. As such, “my view remains that, in any case, the chance of a disorderly outcome sometime in the near future is high, so to that extent, the immediate events are not really central to our point of view." Quite fascinating indeed, because they show to what extent an un-raveling economic and financial system will go to, to pretend that the number one fixable problem in Europe is the lack of liquidity. They completely ignore the real problem, which is a bankrupt Socialist system that was inherently DOOMED to fail from its inception and can no longer borrow enough money to keep the Socialist Party going. And so the only solution is to keep the monetary printing presses running full blast - a situation that can’t possibly endure for much longer.  NOBODY IS WILLING TO PAY THE PRICE OR ACCEPT ANY CUTBACKS or anyresponsibility. As I have observed previously, at this point it doesn't matter for Greece; even if the country gets the 2nd bailout or 3rd or 4th, it will be used almost exclusively to recycle cash into the failing banking system. Europe will have a first lien on nearly 150 to 200% of its GDP. At that point, the country is both a de facto and de jure a colony of the Troika. The longer the crash is delayed, the fewer assets will remain in Greek possession, and the poorer the population will be in; for the inevitable fresh start within or outside the Euro Zone.

The real issue remains the ECB’s exposure to the BOG. Protecting that (i.e., ensuring that Greece does not systematically default via introducing a new currency) becomes the bottom line. Since my objection to leaving EMU is that its corollary is systematic default, bank nationalization and the like, once the latter problems are a given (a situation towards which we seem to be heading in Greece), then the cost of the incremental step of introducing a new currency becomes less. The economy would subsequently Euroize at potentially a lower cost level. The effect of the delay would have been to transfer the cost from Greek citizens (who by now have already moved substantial sums of money and other movable assets out of the country providing in fact a source of subsequent financing that makes the equation even more attractive) to both Greece and the ECB. The core has a very serious problem and the probability of a major ‘Crash’ is rising. I remain very cautious about the long-term sustainability of the debt with or without a restructuring, but even if by some miracle a final solution is agreed to, that will not be the end. It is just the beginning. WHO is next? Italy, Portugal, Spain, Ireland or? And what about the rest of Eastern Europe or even France? Do you think that America and the rest of the world are immune? How much confidence will the people still have in Fiat Currency and then what?  BUT the biggest problem of all and one which nobody is even talking about are the 1000’s of trillions of dollars of outstanding DERIVITIVES & CREDIT DEFAULT SWAPS (CDS) that would come due, that no bank has accounted for on their books.

THIS IS THE BEST REASON THAT I CAN FIND FOR THE ECB and the rest of the European country’s TO FINALLY AGREE TO KICK THE GREECE PROBLEM DOWN THE ROAD ONCE AGAIN.

BACK HOME TO THE USA - THE UNEMPLOYMENT RATE

The entire 2012 presidential election probably hinged on one number: The unemployment rate. My prediction, made sometime in June – July, was that the official unemployment rate will dip below 8.0%. That theme was launched right on schedule with the media touting that the employment rate now is the "lowest” in years. What Obama and the media won't tell you is that the unemployment numbers have two built-in huge, fudge factors that are hiding the real unemployment situation.

Firstly, the numbers are "seasonally adjusted," which is why the actual number of employed persons could decrease from month to month and still show a drop in the unemployment rate. Apparently, if you are so discouraged by the NON-Recession that we are in and you quit looking for a job, you are no longer counted and you effectively cause the unemployment rate (%) to drop. Go figure.

From January 2005 to January 2009 (during Bush's last term), the "participation rate" changed very little (65.8% to 65.7%). In just three years under Obama, the labor force participation rate has reportedly dropped to 63.7%. This two percentage point drop brings the participation rate to the lowest in nearly three decades and makes all the difference.   If the participation rate had stayed the same, even using the "adjusted" employment numbers, the unemployment rate would have been 11%. If the labor force participation rate dropped 1% to 64.7%, the adjusted unemployment rate would be 9.7%. If we use the non-seasonally adjusted numbers and a static participation rate over the past three years, the unemployment rate looks even worse. Obama could never have gotten re-elected at 11% unemployment or even 9.6% unemployment.  He needed that number to be under 8%. So they counted a smaller and smaller percentage of the population as actually being in the workforce.

GOLD

Warren Buffett has once again reaffirmed his opinion about gold’s “significant shortcomings.” He said that gold is “neither of much use nor procreative.” He also suggested that gold was in a bubble and compared it to the internet stock and housing bubbles. “While the majority of the world’s investors and the public were chasing Real Estate; today; less than 2% own any gold.” His thoughts regarding gold are a rehash of similar negative views on gold repeated in recent years. Once again, he either shows that he does not understand gold and real diversification. Or he chooses not to understand gold as a safe haven asset in a portfolio or more likely he’s acting as just a “Shill” for the administration. After all, Obama just gave him a $40 billion gift by cancelling the Keystone Pipeline.  FYI - Buffett is considered to be a Capitalist, which he definitely is NOT.  Being a good investor or businessman does not automatically make one a Capitalist: A CRONEY CAPITALIST yes, which is an oxymoron since a Crony Capitalist is, in reality, a Socialist (Fascist).  This is the furthest thing away from being a Capitalist since the word Capitalist is a synonym for FREEDOM and would have nothing to do with a Central Planning Government. The less informed continue to have a blinkered anti-gold bias. They continue to focus solely on gold’s nominal price and assert that it is in a bubble. It’s not even close to being in a bubble. It is directly related to the FALLING US Dollar that continues to be manipulated lower in a all out effort to maintain the public’s faith in FIAT CURRENCY.  This cannot endure much longer as the people are really beginning to feel the ravages of inflation.

Although Gold will eventually end up being in a bubble, it will not happen before 2017 and over $6,000+/oz, especially since most gold holdings are NOT being held on margin. Bubbles are always preceded by record margin buying such as 0% down on real estate mortgages or record margin debt.  HOW CAN GOLD BE IN A BUBBLE WHEN LESS THAN 2% of the world’s investible funds are invested in GOLD and none of which are being held on margin?

The uninformed refuse to see gold as a form of financial insurance in a diversified portfolio even though one central bank after another have approved gold as being a Tier 1 asset. This is changing slowly with a very gradual growing appreciation of gold’s importance as a safe haven asset and as the only REAL MONEY in a world of massive paper and digital fiat money creation; where each country is trying to devalue its currency in order to improve their exports status and reduce the carrying costs of their outstanding debt. They are all in a RACE to the bottom. Continued monetary creation seems to be the only game for as far as the eye can see.  Notice how few questions Kramer and other financial media shows get on gold, silver or their securities. That is not the sign of a bubble.

GOLD OUTPERFORMS THE STOCK MARKET

ETFs are just paper and they are being dumped by people in the know, such as Soros, which is why I warned you all 2 years ago, to convert your paper gold holdings into bullion or into the two ETFs that are not just paper. In fact, owning units of these ETF’s: (PHYS) SPROT Physical Gold Trust and (PSLV) SPROT Physical Silver Trust gives you the right to actually take delivery of your gold and silver for accounts over $100,000.  And although they  trade on the NYSE and TSE,  they are Canadian Corporations based in Canada and all their assets are held in solid Canadian Banks in  Canada and audited regularly; out of reach of Obama’s and the IRS’s  grasp.

WHAT TO DO IN a mad, mad, mad world!

First of all: DO NOT sell any of your Gold, Silver, Platinum or Palladium Bullion or their Respective Securities. They are all forming solid bases that are laying the foundations of Gigantic Rallies once their charts give a Buy signal.

Secondly: The stock markets are about to have a 250 to 500 point sharp SELLOFF. But that won’t be the start of the coming Bear Market. It will only be a correction and the final set up for the last upward explosion setting the DEATH TRAP for those Wall Street Bulls as the market pays its dues. You can play both these moves (Down then Up, they will be fast and furious, but you must maintain TIGHT trailing stops, perhaps as small as 5% (certainly not more than 8%) from their highs reached since your purchase. Start making your SHORT SELLING LIST beginning with scaling into TBT (for seasoned option players only) - you can sell 3 month out of the money calls and puts against your TBT positions (check your margin requirements).

GOLD & SILVER: Make your Buy List. Start with the quality like SLW and FNV or GG and do your research and pick out the most promising Juniors, but wait for the HUI to give you a breakout buy signal. Don’t bottom fish. Only fools and liars can buy at the absolute lows.

LOOKING FOR INCOME?

Forget about buying Bonds. We are looking to short Bonds. Look to buy Oil and Natural Gas pipelines such as ERF and LNG - There are quite a few others so do your homework.

GOOD LUCK AND GOD BLESS

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UNCOMMON COMMON SENSE            

Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

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Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.