The Real Enemies of Capitalism

The Enemies of Capitalism are not the Socialists, Marxists or Communists because everyone knows who they are and what they stand for. I think it was Capone who said "Keep your friends close and your enemies closer." The real ENEMIES are the New Rule Neo-mercantilists, Neoconservatives (Neo-Cons), who should be charged with FRAUD if they call themselves "free market capitalists." People such as Bush, Paulson, Greenspan, Bernanke and Ben Stein are the primary threat capitalism faces. All of these compassionate Conservatives are the false prophets of capitalism. They are Harvard or onr of the other Ivy League graduates who are so steeped in Keynesian Economics that they don't know what capitalism is and end up being the greatest allies the Socialists and Communists could possibly have.

Many prominent American figures such as Warren Buffet and Bill Gates claim to believe in free markets, but in practice they are Socialist Democrats who advocate for higher taxes, neo-mercantilism Corporate Bigness (monopolies, oligopolies), government central planning and control. These policies always lead to inefficiencies and disastrous economic and social consequences due to the inability to foresee all of the "Unintended Consequences." Congress investigates everybody and everything, always with a political bent and puts people in jail for lying even if they had committed no crimes. But nobody investigates Congress who does not have to live under the same laws as the rest of us - especially the one against lying. The resulting economic and social catastrophes are then blamed on capitalism, free markets, and deregulation when, in actual fact, the fault lies with big government interference in the free market economy. At this point, Socialists are easily able to convince the distraught public that capitalism is a failed experiment and only continued massive government intervention can save them. Such is the way that capitalism dies, eaten away by a cancer from within. Would you believe that Greenspan was a disciple of Ayn Rand and a staunch proponent of the Gold Standard? He sold his soul for Prestiege.

DÉJÀ VU ALL OVER AGAIN

It happened in the 30's when a massive intrusion by government, managed to turn what should have been no more than a 3 year Recession (such as 1919 to 1921) into one that lasted 17 years. We are now in the process of repeating with pride the exact same follies of The New Deal.

The real mystery is not that some of the loudest proponents of free markets often institute policies that are antithetical to free markets, but that the general public, as well as our learned scholars, rarely challenge these claims. In general, the public simply accepts that if a person claims to believe in capitalism and private-property rights, then they are truly capitalists. In truth, most politicians who claim to be champions of free-market principles are anything but.

George W. Bush, for example, claimed to believe in free markets, but in practice he created the largest increase in entitlements (Prescription Drugs) in history and expanded the corporate-welfare system throughout his entire administration. It was towards the end of his second term that he did the most damage. Under Bush's watch, the financial and auto sectors have been the recipients of trillions of dollars, leading to the government running our banks, insurance and auto industries, on a scale never before seen in American history. In an interview on CNN, Bush stated, "I've abandoned free-market principles in order to save the free-market system." Only in the minds of Neo-cons and Keynesians can this claim seem to have merit.

As Obama prepared to attend the G-20 summit, he vowed to defend the free market against calls for global regulation. Yet he also stated, "I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown."

Is there no one of influence or power out there who realizes that only Capitalism can create wealth, raise the world's standard of living and get us out of our malaise? Even a cursory examination of history will tell you that: Oh I forgot, it has to be an honest not a politically correct examination of history.

When the nation's most visible proponents of Capitalism claim that they have abandoned it because, without big-government policies, Capitalism itself would be destroyed, and when Ben Stein, a self proclaimed and renowned Conservative Capitalist Economist, calls for higher taxes and more government involvement, there remains little work for Socialists to do but to sit back and let it all happen.

For those who don't understand economics and believe Bush is really a true Conservative Capitalist, they are then easily persuaded to accept the propaganda that the free market has failed and that government must come to the rescue.

Now consider another "free marketer," Ben Bernanke. Surely he, of all people, is a true Capitalist. The Federal Reserve System is little more than a central-planning organization created to carry out the ever increasing power hungry desires of the government to effect social policy under the cover of an independent FED and more importantly, to enrich it owners, the Big Banks. If central planning the price of oil, corn and other goods and services is in violation of capitalist principles, then how can centrally planning interest rates and the amount of money in circulation be considered part of the free market? Bernanke's actions during the "crisis" is in direct opposition to free market principles as he, along with Paulson, used the ensuing panic to demand powers never before granted to the Fed: Brokering (and funding) mergers and nationalizing banks. Yet even before the "crisis," Socialists were holding Bernanke up as the apotheosis of capitalist ideals.

Hank Paulson distinguished himself at both Dartmouth and Harvard. He briefly worked in the Nixon (we are all Keynesians now) Administration before climbing to the top of Goldman Sachs. But don't confuse being an accomplished executive with being a capitalist: Usually quite the contrary. What they all understand is the use of centralized power (government) to enrich themselves. During the economic "crisis," Paulson consistently used the powers of his position as Treasury Secretary to save big business, especially his ex-company, Goldman Sachs (in which he still held a $billion interest in a blind trust) from the consequences of their poor decisions and to save friendly institutions. He then used fear to force Congress into granting him unprecedented powers. Language for the $700 billion bailout protects him from, "Decisions pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." That's better than being a Russian Czar! Paulson and Bernanke, orchestrated the largest government intervention in capital markets in history - can anyone, even vaguely familiar with the tenets of capitalism, believe their professions of faith in free markets?

Anyone who understands capitalist theory has an obligation to refute the claims made by those who falsely profess free market principles and they must be confronted at every opportunity. We must not become subject to the bystander effect and rely on someone else to take up the fight. We must all challenge the false claims, for the enemies of free market principles are many and vocal and the consequences will be disastrous.

GROUPTHINK

In the book "Psychology of the Stock Market," it explains how follow the crowd reasoning carried the "nifty-fifty" to ridiculous extremes in 1972, and coined the phrase "groupthink." It illustrated how groupthink replaced competent analysis and conventional valuation methods causing portfolio managers and analysts to leave their senses and like lemmings, follow the crowd over the cliff. The same held true with the "Portfolio Insurance" craze that resulted in the 1987 crash and the Dot Com Bubble.

In the current era, once Glass-Steagll was out of the way (thanks to Clinton, Rubin, Paulson, Geithner and Greenspan) "groupthink" forced banks, brokers, insurance and mortgage companies to merge their way to a point of such bigness that no one knew what was going on. Each division was compelled and encouraged by ultra low interest rates to compete for ever larger profits without regard to risk and in the process, created the largest Financial Catastrophe in history. The brave new world of derivatives resulted in hedging simply for the sake of making easy money by ignoring risk and providing the ability to increase leverage to the point of absurdity, without any regard to fundamentals or risk analysis. They just bought and sold Credit and Interest Rate Default Swaps to the tune of over $1.4 quadrillion.

GROUPTHINK is alive and doing its destructive damage in that there is now a firm belief by everyone that we must do something and that doing even the wrong thing is better than doing nothing. The printing presses are running full speed and we are all in a mad dash towards that cliff.

There is a Universal Keynesian belief that Recessions result from an insufficient demand for goods and services - and so the thinking goes, our central bank can remedy this deficiency by cutting interest rates. DON'T FACTS MATTER? We have been borrowing and spending like mad for the last 35 years. They even wrote a song in the 70's about just this, "A dollar down and a dollar a week you can have anything you seek." Well, we are about to find out the truth.

If it is currently the universal belief that it was too easy credit, printing money and 1% interest rates that brought us to the brink of destruction in the first place, how can doing more of the same solve the problem? Does Common Sense now reside only with this letter and its readers?

DOESN'T ANYBODY CARE ABOUT SAVINGS AND SAVERS? Is high risk speculation the only way left to get a decent return on you savings?

Governments, government economists, central bankers, and private mainstream economists have shown a complete disregard for one of monies' primary attributes; its "store-of-value" function. The resulting reduction in purchasing power can best be seen by comparing the cost of a typical market basket of goods and services over the past century in terms of the 1900 US dollar.

Cumulative inflation in the dollar over the past century has been staggering, especially the surge from the 1970s to today. The rise of inflation has clearly coincided with the staggered elimination of Gold's discipline from the monetary system, whose destruction began with the creation of the FED in 1913. William Jennings Bryan, in his famous 1896 Democratic Convention speech, set the mood towards Gold for the next 100 years. Bryan condemned the idea of a Gold Standard warning that, "You shall not crucify mankind upon a cross of Gold." It seems we have the same kind of FOOLS now as we had back then. However, Gold's place remained in the system and four years later (1900), the US moved from a Bi-metallic Standard to a pure Gold Standard.

The collusion between "frat buddy" bankers and politicians who formed the Federal Reserve System in 1913, represented the world's first major official negative influence on Gold and Fiat Money. In 1925, the Gold Standard was replaced with the Gold Exchange Standard whereby only dollars and pound sterling were redeemable into Gold.

John Maynard Keynes' New Socialist Economics introduced by FDR and his New Deal in the 1930s, had a profound negative influence on the Gold Standard, which Keynes also deemed a "barbarous relic." It reached its crescendo when in 1933, Roosevelt confiscated all of American's Gold and banned US citizens from owning it, but still allowed foreign governments to redeem dollars for Gold. The restriction on US citizens lasted 41 years. Oddly enough, until 1945, the Federal Reserve was required to hold Gold reserves equal to 40% of its outstanding notes and 35% of its deposit liabilities. In 1968, all Gold reserve requirements were dropped and a two-tier Gold system was put in place with both an official Gold price and a free-market price. The official US government Gold price began in 1797 at $19.75 an ounce, was bumped up to $35.00 in 1934, then to $38.00 in 1972, and finally to $42.22 in 1973. Each increase represented a devaluation of the dollar.

By 1971, our friend Charles DeGaulle, who we put into power by allowing him to lead the Free French in our Victory march into Paris and who played virtually no part in the liberation of France, began cashing dollars for Gold because of our ballooning trade and balance-of-payment deficits. Nixon, realizing the US couldn't cover its foreign liabilities and fearing a European run, closed the Gold window to foreigners, placed a 10% surcharge on imports and imposed wage and price controls - not exactly what you would expect from a Conservative Republican during Peace Time. Nixon then declared, "We are all Keynesians now" and from 1971 to this day, the dollar and every other currency has been devoid of all ties to Gold.

AN IMPORTANT LESSON FOR TODAY

In the late 1970s, William Simon, Secretary of the Treasury in his infinite wisdom, devised a program of US Treasury Gold auctions, which coincided with IMF Gold sales. Inflation had begun to pick up, the free-market Gold price was rising and the authorities wanted to squelch interest in Gold. Official Gold sales drove the free-market Gold price from $200 an ounce in 1975 to $103.50 by August of 1976. Bankers and economists were so convinced Gold was finished that Walter Wriston, head of Citibank, forecasted publicly that the free-market Gold price would be driven back to $35 an ounce or lower. But in the face of oil shortages and long lines at the pumps, an 18% inflation rate and 20% Treasury Bond rates, Gold rose in spite of the regular Gold Auctions from its $103.50 low to over $850 in less than 3 ½ years, with the majority of the rise coming in the last 3 months. The increase in liquidity of Gold suddenly allowed the Oil Shieks to convert billions of US dollars into Gold at one time without disrupting the market. What do you think the Chinese with their $42 trillion in reserves will do should Gold auctions resume? But like all Blow-Off Bull Markets, it rose too high. Gold then began a twenty-one year Bear Market as Reagan ordered Paul Volker to break the back of inflation and the USA fell into a severe Recession that lasted from 1981 to 1983 when the Reagan Tax cuts took affect.

Despite continuous central bank Gold sales and forward-selling programs by the mining industry, Gold nevertheless made its double bottom in Feb.2001 at $256. Once the bottom was in place and in spite of all the manipulated attempts at driving Gold lower, it worked its way higher into a near perfect Elliott Wave, Fibonacci Five Waves Bull Market until it hit $1030 in March of 2008. The accelerated debasement of the dollar, in conjunction with enormous trade and budget deficits has finally brought the long-term reserve currency status of the US dollar into question. By creating trillions of dollars out of thin air, the dollar has lost its function as a store-of-value to all savers.

Moreover, the US dollar has become the cornerstone of what amounts to a global fiat paper money DEBT system. History is strewn with worthless, defunct fiat paper monies. History buffs will recall the US experience with the Continental dollar; the inflated currency rapidly became worthless and all we were left with was the expression, "Not worth a continental." France, during the French Revolution, saw its currency, the Assignat, become worthless and the Germans saw their Reich marks become worthless in 1923 and again after WWII. There are so many similar modern day examples that they are too numerous to mention. The latest being Zimbabwe, who just printed the first billion unit note.

Confidence in irredeemable paper money is very much a state of mind. Benjamin Disraeli described confidence in money as "suspicion asleep". Once suspicion has been awakened, it won't go back to sleep for a very long time. In periods of sound money, confidence in paper has been maintained by a Gold backing. However, not only the US, but the entire world has abandoned the natural stability of a Gold-backed currency. A look back in monetary history would conclude that a breakdown in paper money, including the dollar, is unavoidable at some point. The only question remaining is WHEN?

In the move to substitute paper for Gold, the Federal Reserve became a prisoner of its own expansionist policies, which have created domestic political demands for perpetual economic growth, regardless of the additional debt created. Consequently, total credit-market debt has ballooned disproportionately relative to the size of the US economy. It now takes over $7.00 of new debt stimulus to produce only $1.00 of GDP growth. Like trees that can't grow to the sky, a debt pyramid can only grow so much before imploding. Believe it or not, deflationary forces have now caused the Federal Reserve to lower short-term rates to zero thus setting the stage for a Treasury Bond Collapse that will end up destroying all savers.

The US is now saddled with world record budget and trade deficits and is dependent on record amounts of foreign sources of financing. Both the government and its citizens have been living far beyond their means. The final solution is likely to be the re-association of paper money with Gold, but only after a major monetary catastrophe.

In the interim, drawing from the history of how inflation-riddled paper monies have eventually fared, private citizens should be able to see the handwriting on the wall for the US Federal Reserve notes as well as the whole global paper money system. In the end, the impact on history's only enduring money, GOLD, should prove to be extraordinary. For Gold investors, it will be "Déjâ-vu all over again."

GOLD - WHERE TO NOW?

Fortunately there is nothing new to report. Both the Gold Bullion and Gold Stocks are behaving almost exactly as I have expressly pointed out to you in my last few emails. We have as much as another 8 months of further consolidation or as little as one month, before Gold will explode up towards $1500 to $2000 area. So continue with the program as previously outlined. Sell one month out of the money calls against your positions into rallies and sell out of the money puts on stocks you would like to own into sell-offs. Should Gold explode past $1060, cover all your short calls and go long.

LESSONS TO REMEMBER

I apologize for not issuing a Special Bulletin, but to tell you the truth I could not figure out what was happening and more importantly, why? The first lesson to remember is ALWAYS USE STOPS.

Although I had picked the top to the exact day, the sell-off was no where near to being what I expected and what's more, the rally has lasted longer and stronger and has become more overbought than is normally seen, even at the top of a major Bull Market. If there is one thing that I am sure about it is that we are still in a Major secular Bear Market.

So the question is: What is Happening?

After first reviewing the 61% approval rating of Obama's first 100 days and then listening to some of my Jewish friends (as one by one extolled Obama's virtues in the face of his current policy towards Israel), it suddenly dawned on me what was and is happening. Up until his budgets were passed, Obama had been talking down the economy telling everyone how bad things were. However, once Obama returned from his world tour of apology and even though absolutely nothing was accomplished at the G-20, he was back on the full campaign form. Only this time his message became one of hope and optimism that was backed with positive expectations from all his followers and especially the media, just at a time when the people were begging for that kind of positive encouragement. For short periods of time, hope can overcome reality, both at bottoms and at tops, but not for very long. Whether we adhere to them or not, the Natural (God's) Laws of Economics always prevail.

The second lesson to remember: At times, the Market can act irrationally and will do whatever it has to do to make the majority wrong. DON"T FIGHT THE TAPE AND WHEN IN DOUBT, STAY OUT

HOW NOW DOW

There is no telling how far the love affair with Obama can take us. So, for the time being, let's stay with the major trend. Do not take any new short positions. Since we only invested limited funds in buying puts on the triple short ETF'S knowing full well that we were trying to buck the trend, stay with these positions and wait for the sell-off to develop. Hopefully, it will come in time for our puts to be worth at least what we paid for them. We are, as I expected, in the Wave B up correction similar to the 1930 Bear Market Rally that trapped all the Bears pending the continuation of the Bear Market. You never know the reasons until after the fact, but this time around Obama may give us that 50% pullback rally with record bullish sentiment figures and trap all the Bulls just like in 1930. Only this time we will be waiting and prepared to take maximum advantage.

Stay with your long calls and short puts on the TBT's as well as you're long puts on the TLT which has just recently broken down. Increase your positions on any 1-3 day FED engineered Treasury Bond Rally, it will NOT last. The Bond Market is on the verge of collapse and it is only a lack of transparency and fraudulent manipulation by the government and their captured Banks that's keeping it afloat.

With the Arlen Specter defection and the continuing belief that Obama can do no wrong, there is now nothing that can stop the Recession from turning into a major Depression. I now have two weeks to ponder our next move - stay tuned. If any light goes on, I'll send out a Special Bulletin.

Wake up call. Stop chasing the News and the Market and start getting in ahead of the moves. Stop buying programs that are all set to take effect after the stock market moves are already half over and start learning how to anticipate those moves instead: By getting on board with the winning UNCOMMON COMMON SENSE team now:

 

 

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
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