A Picture Is Worth A 1000 Words

Secret negotiations established a banking cartel and called it the Federal Reserve Bank. It has grown ever stronger through the years; it’s owned by some of the world’s major banks and operates independently and is NOT an arm of the Federal Government. Rather than preventing financial crises, it precipitates them and creates new ones. We know Fed policy continues to reap huge profits for Wall Street and the Big Member Banks and themselves, while impoverishing Main Street and the Public. One hundred years is long enough. End the Fed. NOW” 

Ron Paul

Bernanke has the whole world trapped in his QE box. The local banks pay nothing on deposits, neither does Uncle Sam. No risk, no return, say the central-bankers-cum-central-planners. The economy lacks aggregate demand according to the head Keynesian (an oxymoron) and investors can fix society's problem. People buy stocks; stocks go up in price; people feel richer; then they go shopping and jobs are created. Easy, right? Too bad, it’s not! It’s been tried many times over the past 100 years, but has NEVER WORKED out that way. It certainly has not worked over the last 8 years!

The Fed's largess has sloshed into the canyons of Wall Street, Iowa's fertile farmland, crypto-currencies and Miami's condo market. Yet Main Street still suffers. At the rate that the government is going, Main Street's funk will keep the Fed on the job forever. Bernanke's handoff to Janet Yellen will be ever-so-smooth and that is a great negative. How long does one have to try the same thing over and over before one realizes that it is just NOT working? Meanwhile, the liquidity race will continue. Judging by her voting record and speeches, she's looser than Bernanke.

 So first we had the Greenspan put, followed by the Bernanke put and now we will most assuredly end up with the Yellen put. All evidence tells us that her “put” won’t work either. How many times does one have to bash their head against the wall before you admit to yourself that it is a failing solution?

With the Government and the Fed having the market's back, will interest rates ever go up? Will stock prices ever go down? Not because of anything the Fed does, but it looks like the Fed will do enough to complete the JAWS OF DEATH PATTERN by pushing the market up past 17,000 in the not too distant future.

Wall Street won't fight the Fed. But remember, while the Fed chairman wants you to risk your retirement to carry out his Keynesian, central-planning experiment, he (and then she) are just government employees. Risk-taking, farsighted entrepreneurs they are not.

The PhDs at the Fed can plug figures into their models, print money and fix interest rates all they want. But that does not change the fact that no econometric Keynesian Model has ever worked in real life and that doesn’t seem to bother them all. Their excuses for failure are always the same: The monies used were not large enough and/or carried on long enough. Any Austrian Free Market Capitalist knows that markets reflect the public's mood. The central bank isn't "pushing on a string," as Keynesians would say, it's pushing against public sentiment in vain. The market will always ultimately reflect the public’s sentiment. The public may not have a degree, but they have enough common sense to realize when something is not working, especially if they have seen it all before.

Robert Prechter and the folks at Elliott Wave International don't bow to the Keynesian Socialists. They have plenty in common with Doug Casey's point of view, and if I may say, this humble Economist, Technical Analyst as well.

Changes in mass psychology occur in measurable patterns, first identified by Ralph Nelson Elliott in the 1930s. Robert Prechter has used the Elliott Wave Theory to not only predict financial markets, but election results and other events in society. For instance, in 1995 Prechter wrote that social mood governed society's tolerance for recreational drugs.

As Prohibition was launched at the beginning of a Bull Market in 1920 and repealed at the depths of the Depression in 1933, the current War on Drugs began in 1982 at the origins of a Bull Market and will be abandoned at the bottom of the next depression with multiple states legalizing marijuana - which time too draws near.

If you've never studied the work of the Elliott Wave Theorist, below is your chance. In a word, the work of Prechter and his staff is compelling. I should disclose I'm an EWT subscriber.  What follows are five charts and commentary from the most recent Elliott Wave Theorist. The charts should alarm anyone fully invested in stocks.

Elliott Wave's View from the Top

By Robert Prechter, Elliott Wave International

The stock market top has eluded us. Prices have repeatedly passed what we thought were terminal junctures. But the charts just keep getting more bearish. The graph above (Figure 7) shows the S&P that everyone is watching. New bull market, right? Wrong. The middle graph shows the real S&P, which has been in a Bear Market since the first quarter of 2000. The Fed's liquidity has re-fattened the banks and brokers who in turn are lending the new money to wealthy institutional speculators, who use it as collateral to buy stocks on ten to thirty times leverage. This is not a Bull Market but a hyped-up Bear Market rally.

As the Elliott Wave Principle taught us 35 years ago, "If the analyst can easily say to himself, 'There is something wrong with this market,' chances are it's a B wave [a Bear Market rally]." There is something not just wrong, but sick about a market that is making new all-time highs for seven months on the subterfuge of a purposely debased measuring unit and the central bank's financing of speculators with value stolen from the people (savers).

The huge difference between the top two lines on the first 2 graphs on the above chart highlights how remarkable it is that nominal prices for Gold, Silver and Commodities are down 30%-60% from their highs. In real terms, they have fallen even further.

The lower graph on the chart above confirms our interpretation that the post-2000 rallies were Bear Market rallies. Main Street knows that the recovery is a phony and its assessments of the economy are in lock-step with the real S&P, not the phony one. The Recession/come Depression is ongoing and counterfeiting money can't change it.

Big-cap institutional issues are pushing up the popular averages, but the NYSE Index—a broad measure comprising 1,860 stocks—hasn't even passed its 2007 high in nominal terms, much less in real terms. The broad list of stocks is still in a Bear Market no matter how you look at it.

This year, Elliott Wave Theorist and Elliott Wave Financial Forecast have showed two dozen charts of sentiment indicators at or near all-time levels of optimism and here are two more. Figure 9 above shows that in the second-to-last week of October, the public poured more money into various US stock funds than at any time in at least seven years, which includes the 2007 stock market top.

All this stock buying has created a lopsided investment ratio among fund sectors. As shown in Figure 10 above, the percentage of money in Rydex's conservative money-market funds as opposed to speculative stock market funds is the lowest since 2001, which is just after the all-time high in the real value for stocks (shown in the middle graph of Figure 7).

What about professional advisors? Figure 11 above shows that newsletter advisors polled by Investors Intelligence have just reached the lowest percentage of bears since 1987, over a quarter century ago! Under the Elliott Wave model, that optimism made sense because the market was in the third primary wave of the Bull Market, the healthiest part of the rise. Still, those peak readings led to the second biggest stock market crash of the 20th century.

The reading today, while not quite as extreme, is lower than that at the stock market peak of 2007, lower than at the peak of 2000 and just one quarter of the percentage of bears recorded near major lows. In addition, the latest Daily Sentiment Index shows 90% bulls among S&P futures traders. Now observe on the upper graph (Figure 11) that the S&P 500 Index is right at the upper line of a trend channel dating back to the 2009 low. Overall, then, we have near-record optimism at an all-time high, right at a point of trend line resistance.

SO WHAT DO WE DO NOW?

If you have been lucky enough to have been riding the BULL MARKET up since 2009, God must have been blessing you, but God also helps those who help themselves. I forgot that. An 11 year Bull Market in Gold that rose from $300 to $1900 was not enough for me? But this time, TAKE YOUR PROFITS NOW! If there is anything left of this fantastic run, leave it for somebody else. And get ready for the next Precious Metals Bull Run: Start scaling into Gold and Silver and their respective mining stocks. If you are worried about not catching the bottom, you can start selling bullish Put Spreads on Gold, Silver and the mining stocks with the strongest Balance Sheets. Or you can wait two more weeks for my next letter, which will highlight exactly what I have been just referring to. I have had an 11 straight years of 30% to 50%/year profits until my ego got in the way, so the last 2 years were not so hot. But my bubble has been deflated and I am now ready to get back on track. Besides, I am still projecting 17,000 to 17,500 targets on the DJII (for traders only using close trailing stops) plus buying LT Puts on TBT and/or selling long term (3 to 6 months) out of the money put spreads to generate cash and profits. Interest rates have nowhere to go but up, which means that Bonds have nowhere to go but down (especially Muni’s).

THE BIGGEST BEAR MARKET IN HISTORY

Once this market tops out, it will be the beginning of the Crash of the Century. Bigger than the 1930’s and you sure do not want to miss that; or worse. Getting caught long in a Bear Market.  NOBODY IS ALWAYS RIGHT! Not even Robert Prechter. You will recall that he was bearish on Gold and Silver all through its 11 year Bull Market, while I became super bullish on Gold and Silver starting in 1999-2001 and stayed that way until today. I stand by my Gold Projection made in 2003 of $6,250 by 2017.

January is the seasons of projections and self congratulations. This year, I am no different. I, like Prechter, and every other analyst have a tendency of letting our egos get in the way.  Well my ego got its comeuppance and to make amends, I am cutting the one year subscription rate down to $149 for 1 year and $249 for 2 years. Take advantage of the low rates, while they last: Just in time to reap the rewards of the topping process of the biggest Bull Market and the beginning of the biggest Bear Market of the 21st century that’s about to get started any day now - perhaps after one last gasp rally to 17,000.  STAY TUNED!

I'll say it again; picking Bear Market bottoms isn't easy. Very few people have the patience, conviction and endurance that it takes to survive the volatility of a Bear Market bottom. This is especially true when everyone else they know is making money buying into the latest bubbles. But human nature never changes and those people always get caught when the bubble pops. Tech investors, real estate investors and most probably Bitcoin investors come to mind.

In contrast, the few traders who can hold on and survive a Bear Market bottom become the new millionaires and billionaires of tomorrow. Gold is in the process of ending it first annual loss in 30 years. Is it time to BUY?

QE 3, 4 and QE infinity?

As I have stated many times, the talk of tapering was totally cosmetic: The Fed knows it can’t stop QE.  In fact, it will be increased over time.  Just look at the US banking system, it’s in a mess.  If all of the banks were to apply the recently passed Volcker Rule, which is to mark all of the toxic debt to market, no major bank would be left standing today. And that’s not counting Derivatives.  That is why there will be no significant tapering in 2014. In fact, I would rather bet on a sizeable increase in QE.  Just look at the recent data:  The Philly Fed Index dropped to 7 from an expected 10 - that’s a seven month low.  There was a big drop in the average work week, number of employees, as well as new order shipments.  Also, capital expenditures had the biggest 3-month drop in 5 years. And yet earnings increased and the market climbed a wall of worry against all logic. Every step the Government has taken will result in increased taxes and lower employment, especially if we go to a $15 minimum wage. And the Obamacare increased costs and new taxes and penalties have certainly not been accounted for!

The new robot industry is just beginning to explode where a $50,000 robot can make, garnish, flip and serve 600 hamburgers an hour without making a mistake. Combine that with $15 per hour minimum wage and we will see a drastic drop in employment in the most vulnerable segments of our society.  If that’s not bad enough, the new Ford Plant will be fully automated using robots. Where will that leave the highest paid of our manufacturing workers and their unions?  In the long run, that will be very good for the US economy as a great many manufacturing industries will be repatriated, but at much lower wages than they once paid. Of course, the cars will be a lot cheaper and of a lot better quality. Sorry, but all that leaves more questions than answers.

Although I was and still am quite bearish, my LT charts called for a new Bull Market high with a potential upside target of DJII 17,000. Unfortunately I believed the fundamentals rather than the Technical’s even though I have been a Technical analyst for most of my investing life. But back then, I only wrote one page market advisories and didn’t bother too much with the economic fundamentals and so this time, I missed the biggest Bull Market in history. Next to our 11 year Bull Market in Gold that we did not miss and my insistence of maintaining trailing 8% stops at all times, made sure that we caught most of Gold and Silver’s 11 year rise. 

But that’s enough BS about the past, what do we do now and in the future. Home sales also had their first fall in 29 months.  Housing has only been strong because of massive subsidies and institutional buying, which only came about because there was nowhere else to invest low risk money and get a decent return. So here we are now developing another housing bubble in the US.  Higher interest rates in the US are also increasing the cost of housing quite significantly.  But it’s not just in the US; it’s also in many European countries as well.  And let’s not forget Canada:  Their 15-20 year housing bubble is about to implode as they, like the US, continue to lower their Underwriting Standards, which will only end up making the situation a lot worse. Governments can’t seem to come to grips with the concept of “Short term gain = Long Term Pain”

Likewise, the credit explosion in China is also becoming serious. Their banking system is under extreme pressure.  The PBOC has to continuously add more and more funds as the 7-day Repo Rate surged to 9%.  This is the highest it has been since the June banking panic which almost crashed the system.

The Shanghai Stock Exchange has fallen for 12 straight days.  The yield on the 10-Year Bond in China is at the highest it has been in 8 years.  The banking system needs more cash as it is under extreme pressure.  You can forget about China being able to pull the world up by its bootstraps. The financial problems are now worldwide, not just in the US.  Japan also remains a basket case with no improvement whatsoever.  Japan’s situation is truly frightening.

The situation in southern Europe as in the USA is also a lot worse than is being reported.  The percentage of the population at risk of falling into poverty in southern Europe is now between 25% and 35%.  There are people in countries such as Spain, Portugal, Italy, and Greece who are now at a point of major unrest as a result of the financials being on the verge of a crisis.  There are protests in the streets, the blocking of borders and blocking of roads, all of which is just the beginning and about to get a lot worse. The announcing of phony statistics all over the world, but especially in Europe and the US, does not make them true. It just makes matters worse.

The Italian President, Napolitano, has just said that he has a major fear of social unrest in Italy.  I agree with that.  There is a high risk and Italy has a history of social unrest.  The 5-Star Movement is now gaining in popularity because they are anti-EU, anti-state, and anti-immigrants.  The Italian people are tired of the current cast of me first politicians.  So things could turn very ugly in southern Europe in 2014, with a lot of hungry and desperate people fueling the unrest with no solutions in sight. The same could be said for the US. In my opinion, Socialism has finally come to the end of its rope virtually all over the world and doing more of the same is definitely NOT the answer: Ask Albert Einstein!

GOLD

Now, turning to Gold, the short sellers have already tried to push Gold to new lows under $1,178.  But they have used up most of their ammunition. We were almost there a few days ago when gold hit $1,187.  Although it’s possible Gold and Silver could get a bit weaker, I am seeing ever increasing bullish divergences on the daily and weekly charts for Gold. Gold priced in other currencies has already made substantial new lows since the June bottom, but not when priced in dollars.  Gold in all other currencies is now back down to 2010 levels.  But just look at what’s happened in the US since then:  In 2010, the US debt was at $12 trillion, today its $17 trillion and scheduled to continue to rise rapidly.  The Fed’s balance sheet was $2 trillion, and it’s now at $4 trillion. Just think what Obamacare will soon do to it!  

The US’s total debt and Fed balance sheet have gone from $14 trillion to $21 trillion since 2010.  That’s an increase of 50% or $7 trillion.  So $7 trillion has been created from debt and money printing since 2010 and yet Gold is somehow back at 2010 levels.  The reality is that Gold has only declined during this time period because of manipulation and the massive credit creation has not yet been reflected in the Gold price, but it will be very shortly. Remember my 2005 Elliott Wave Gold projection of $6,250 by 2017 still stands. If anything, my projection was (is) on the LOW SIDE.

In my view, we are now coming to an end of this manipulation. The Western central banks are running out of Gold and the London bullion bank stocks are also at record lows due to the massive buying from China.  As for Ft. Knox, I don’t think there is any Gold left.  So 2014 will be the year that Gold’s Bull Market resumes and Gold will go back to properly reflecting the destruction of paper money.  If we add to that a short squeeze due to the total distrust in the paper Gold market, we should see some real fireworks in both the Gold and Silver markets beginning as soon as the early 1st quarter of 2014.  And when we do, what do you suppose will happen to Bitcoin?

The manipulators have been a formidable power ever since the 1940’s. But we all know the #1 RULE:  You have got to realize when you have lost your power and your run is over - you either lock in your profits or end up giving back all your massive profits plus a lot more.

********

GOOD LUCK AND GOD BLESS

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UNCOMMON COMMON SENSE                                                       January 5, 2014 Aubie Baltin CFA, CTA, CFP, PhD.

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This letter/article, like all my others, 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. Although I include recommendations from time to time, being a bi-monthly publication, it is not meant to be a trading letter. 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.