Pinocchio is Alive & Well & Living in Washington

TRANSPARENCY: The headline read "Bank Stress Test Lifts Clouds of Uncertainty." Did it really? Did they explain the assumptions that they used? Was it mark to market, mark to model or what? Has the real estate market hit bottom? If not, what numbers did they use as to when and how much lower prices will drop? What were their assumptions regarding commercial real estate and the $1.6 trillion in refinancing coming due in the summer? Maybe I should STOP being so picayune - after all, the bank stocks are rallying. The regional bank, Fifth Third Bancorp was up 40% on the news that it needs to raise only $1.1 billion. The next day Bank of America announced that they will only need to raise an additional $33 billion or so and what happened? The stock soared 62%. In total, the Government's Stress Tests recommended that banks need to raise only $75 billion to withstand further potential losses. Of course, the bank rally only lasted one day, but who's counting? And no mentioned the word DILUTION.

For the "Stress Test," the Treasury used 7.9% unemployment as its "worst case scenario." Yet on the day the Stress Test info was released, the unemployment numbers were reported at 8.9% and will certainly go a lot higher before they improve. The euphoria surrounding the so called slower than expected increase in unemployment claims must also be tempered by the 72,000 increase in Federal Government hiring that went into making up the most recent numbers.

I'm not sure how to reconcile the Stress Test results with the April/09 IMF Report on expected bank losses: They estimated that total losses for banks and financial institutions would hit $4 trillion with the US share being $1.1 trillion. What assumptions did they use to come up with that number? Even so, since $500 billion has already been written off, leaving $600 billion in write offs yet to come. Clearly some things do not add up. I understand that part of the Government's role is to boost confidence in the economy, but throwing out ridiculous economic numbers isn't going to do it. I might be dumb, but I'm not stupid. These numbers won't fool anyone for very long and will undoubtedly subvert the tremendous amount of confidence there presently is in the administration by undercutting any and all confidence in "official Washington" numbers. And what about the $1.4 trillion budget deficit? That is 4 times larger than the largest deficit ever. What effect will that have on our economy?

LESSONS FROM THE PAST

In 1920-21, the United States faced a grave economic crisis, worse than 1929, the first year of the Great Depression. Double-digit unemployment and a 21% decline in production over the previous twelve months greeted the new president.

President, Warren G. Harding, told Americans that the bust following the artificial, credit-induced boom of the war years was the fault of the banks. He stated that, "the banks got themselves into this mess, so let them get themselves out" and decided that the Government would do NOTHING. Hoover was then Secretary of Commerce and proposed the exact same remedies that he eventually introduced as President in 1929 to 1933. Harding stopped Hoover cold and the Government actually cut its budget during the crisis. There was no fiscal "stimulus." The Fed looked on and did nothing: Low and behold, by the summer, recovery had already begun. According to today's Keynesian textbooks, that wasn't supposed to happen. But it did.

On the other hand, President Obama's approach to the current crisis couldn't be more different. Once in office, the candidate who had run on "hope" and "change," began speaking in apocalyptic terms of what might happen to America if vigorous Government interventions were not undertaken. At the very least, we might experience an extended slump rivaling the Great Depression. "Just look at Japan," Obama said in his first press conference as president. Japan "did not act" and as a consequence they suffered what he termed the 'lost decade' where essentially for the entire '90s and up until today, they did not see any economic growth. As usual, the Left sees only what it wants to see and thus draws the wrong lesson from history.

In actual fact, Japan acted very "boldly" and "quickly." Tens of trillions of Yen in stimulus were thrown at just about anything that moved or should I say didn't move, including propping up failing companies and especially failing banks. Interest rates were lowered overnight to zero, and massive programs of government infrastructure spending were instituted, including building an entire island on which the world's largest and most modern airport was built. The result: After 19 years, Japan has nothing to show for its 100's of trillions of Yen other than making Japan, which at the time had the world's largest trade surpluses, the most indebted country in the world. Nineteen+ years later, they are still in recession and now heading for depression.

Keynesians, desperate to find some reason why their entire game plan failed to elicit the expected response, try to argue that Japan didn't nationalize its banks fast enough or soon enough. However, when Japan did start nationalizing its banks, it resulted in the two worst years (1998 and 1999) of their "lost 2 decades."

Shortly after taking office, President Obama urged the Congress to approve a "stimulus" package of over $1.5 trillion in order to restore our economy and stop it from falling into depression. In his first news conference as President, Obama warned that a failure to pass this bill "could turn a crisis into a catastrophe" and "that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans."

WHERE DID THE BUST COME FROM ANYWAY?

How, did we get into this funk anyway? It was certainly not because of any lack or regulation or oversight. The key culprits were, as they always are, the Congress in conjunction with the Federal Reserve and its government induced, ultra loose monetary policy. The new money created by the bus load under the auspices of Alan Greenspan in conjunction with "The Community Reinvestment Act" and the gutting of the Glass-Steagl Act in the years following 9/11, went overwhelmingly into the housing market, inflating prices to unheard of and unsustainable levels.

Americans felt wealthier than they really were. They were lent money that they thought never had to be paid back; all they had to do was refinance and each time they did they could take out more spending money. They made consumption decisions based on pipe dreams; they thought that they were living in Disney Land. Businesses were started and expanded under the boom that was expected to continue on forever. After all, they are not making any more of it (land that is) and with all the new immigrants flooding in, yada, yada … and now that we are in a new paradigm. But alas, like all booms, reality eventually sets IN. As home prices stopped rising and with easy credit no longer so readily available, (Bernanke raised interest rates to 5¼% from 1%), the whole world came face to face with reality.

Had the economy been allowed to correct itself of all its bubble activities, by suffering through a mild two year controlled recession, all of the misapplied resources would then be made available for use by new real wealth producers. The best cure for recession has and will always be a recession. In two years we would have been back in the growth groove just like we were after the 1920-21 Depression. But first Bush and now Obama and the Democrat Congress would not let that happen. But they too, will come smack dab up against reality and the worst depression in our history will be the end result.

ECONOMIC OUTLOOK: CAN THE CONSENSUS BE RIGHT?

Among the Government economists, Wall Street and media hacks, a new consensus view has emerged .The evidence, they say, while not yet compelling, is that the Stock Markets and the U.S. economy is at least in the bottoming process. This is a key reason why the stock-market rally of the last two months has exceeded widespread expectations and the injection of $trillions into the system. However, a possible end of the contraction or in the rate of decline doesn't mean a resumption of quick growth. Indeed, even to the most optimistic, the recovery is expected to be sluggish and protracted at best. Can you really believe that a bunch of government BUREAUCRATS like Geithner and Bernanke et al, will be able to solve and then regulate the largest most complex economy in the World under Socialism?

That's how life works. Nothing is ever cut and dyed and common sense always takes a back seat to the "what maybe could be" way of thinking. People who are sitting on the sidelines waiting for the results of tests that are just smoke and mirrors - just missed out on a fifteen hundred point market move. You just can't react to news stories and expect to make money. Remember the cardinal rule - "the obvious is obviously wrong". People who waited for the news of the Stress Test to jump into the market ended up buying just as the market was about to sell-off.

HOW NOW DOW?

"When In Doubt Stay Out" There's no doubt that the major indices are extended and some kind of pullback is in order and I am not about to try again to trade against the major trend. After 3 days of sell off I took my licks and sold all my puts into the close cutting my losses to around 12% not to bad. We got lucky.

The majority of the talking heads have managed to convince themselves, in the face of reality; that we are looking at both an economy and stock market that are in recovery mode: DON'T YOU BELIEVE IT! Then as if right on cue, the Obama Administration revealed its forecast that the U.S. economy will be growing at a 3.5% annualized clip by the end of the 3rd quarter. That would be great news and would underscore the heart felt belief, that stocks remain attractively valued. But 3.5% growth is also more than twice what "the" most optimistic economists are forecasting. Do you really want to trust a bunch of people who completely missed the last 1 ½ years of stock market and economic forecasts to now be able to tell you when it will be over? So here's your wake up call. Stop chasing the NEWS and start getting in ahead of the moves. Stop buying programs that are all set to take effect after the moves are already half over and stop relying on news that is really history. Start learning how to anticipate moves by getting on board with the winning UNCOMMON COMMON SENSE team and start learning how to make money.

GOLD

I am not sure if you will call it fortunate or unfortunate, but I don't have much to add to my forecasts over the last 15 months. Gold, Silver and most Gold and Silver stocks continue on in their normal and expected consolidation faze even though Gold and Silver's fundamentals continue to improve on almost a daily basis (if that's possible). Stay the course; continue to accumulate on weakness into the $750 to $850 area and be prepared to jump on board should Gold breakout above $1060. Have you noticed that most of my previously recommended favorite Juniors like IAG, NXG, GSS NSU and GBU.TO are breaking out? My biggest single position (in number of shares) NXG hit $2.00 up from $0.50 before backing off. GG also came out with great earnings with superb expansion prospects and can also be accumulated in this area or on any pullbacks. That's about all I have to say for the time being except that the World's Central Banks continue to print money like it's going out of style. Rampant inflation is not too far out of sight and neither is the Gold price explosion. My target for this year still remains $1500 to $2,000 and my long term target (8 years) is still $6,250. Just because I am not a rampant Gold Bug right now, is there anybody around who is more Bullish than me? If you insist on pure fundamental information, check out Gold-Eagle.com where there are plenty of good fundamental analysts around who can supply you with all the facts that you may want. Just remember who the best timer is. (LOL)

Wake up call. Stop waiting for the news and then chasing the markets: It's time to start getting in ahead of the news by anticipating it. .Stop buying into news induced rallies that are about to reverse and sell off after a day or two, and start learning how to anticipate those moves instead: By getting on board with the UNCOMMON COMMON SENSE winning team now:

I have spent my entire career identifying major trends in the markets and helping others to profit from them. These are trends that will be happening in the near future; trends that most analysts and investors notice only after they have already been well established and we have made the majority of the easy money. In my newsletter, "UNCOMMON COMMON SENSE", once I uncover changes to the major trends, I then present specific, actionable recommendations that will help you profit even during the worst of times and before they become obvious to everyone else.

If you have been satisfied with UNCOMMON COMMON SENSE make sure you tell your friends. You will receive a $50 credit for each new subscriber that you introduce.

The one year subscription is still only $259 and a two year subscription is only $439.

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