History's Lessons

This time it's different: Even though we eventually discover to our sad consternation that this time it's never different, when it comes to a 1930's type depression, the FED governors and our economists have us believing that this time it really will be different, because they have learned from the mistakes of the past or so they claim. Oh, if it were only so. There are two main reasons why history repeats. The first is simply because nobody bothers to study history; the second reason is that even if there were people who did take the time to study the past, most of recorded history is not all together factual as it is written in a politically correct fashion.

Take the NEW DEAL and Great Depression as perfect examples: As long as it is held as a truism that FDR and the New Deal halted the Depression and saved Capitalism from itself, we will definitely be making the same mistakes in the not to distant future as was made it the past. In case you have any doubts, go back and read my past missive on HISTORY REPEATS "The New Deal Debunked" and you will see that some of the mistakes of the past are already up before Congress. The first one is the Bill to eliminate the Secret Ballot when voting for Unions which is now in the process of being voted on: I am referring of course to. The tremendous increase in power given to the Unions in 1933 which ended up being one of the biggest job destruction programs in history. If we repeat that same mistake today, the out-sourcing that we have seen thus far will seem like a trickle when compared to the out-going tidal wave that will be forth coming.

ANTI BUSINESS ATTITUDES

Chevron, after a four-year battle with environmentalists, gave up and dropped plans to build a $650 million liquefied natural gas (LNG) terminal off of Mexico's West Coast near the U.S. border. The energy company withdrew the already received key Mexican permits required to develop the project. On a good business basis, they decided to send their natural gas supplies from the Greater Gorgon gas fields off northwest Australia to Japan instead. Good for Japan: Bad for America and our environmentalists claimed victory. However, Chevron is just the latest company to abandon plans to build an LNG terminal. ConocoPhillips had already dropped plans for a terminal in Rosarito, 15 miles south of San Diego and Marathon Oil. was forced out in 2004 when municipal authorities seized its beachfront property in Tijuana. Only Sempra Energy is building an LNG terminal in Ensenada because it is 50 miles south of San Diego and located completely in Mexico.

Instead of Congress investigating oil company's excess profits and so called price gouging (no such thing in a free economy), which will not produce one additional ft/lb of energy; the government should be investigating why no new Refineries or LNG terminals or Nuclear power facilities have been built in the USA for more than 30 years.

In America, the bastion of free market enterprise, the anti-business climate and attitudes in both government and the media as well as in the public square, is now the worst in the world. Up until recently, our economy (read businesses) has been protected by our Constitution, but as Congress grows ever more hostile and passes more and more regulation and more and more Judges continue legislating from the bench, more and more companies will be moving their operations off-shore, if for no other reason but to protect themselves from the trial lawyers and an out of control Congress bent on revenge and squeezing out more revenue: Witness Halliburton's recent move to Dubai.

Since the passage of Sarbanes Oxley, in a matter of less than two years; for the first time in history the NYSE has lost its underwriting and listing leadership to London and Hong Kong. Make no mistake about it; history's latest and largest take-over craze is also in large measure the result of Sarbanes Oxley and the ever growing anti-business climate. BEWARE; take-over and buy-out bubbles always occur at Stock and Bond Market TOPS. When it comes to small and medium sized businesses, Sarbanes is making it almost cost and risk prohibitive to remain or go public; closing off small businesses most important avenue for raising money. Up until now, it has been the garage inventor's ability to raise money for the most hair-brained ideas that has kept the USA in the forefront of the world innovation and technology. Talk about education all you want, but without inventors/entrepreneurs being able to raise money here, there won't be any jobs available regardless of the quality and level of our education.

PROPOSED NEW LAW -- AMERICANS WITH NO ABILITIES ACT
(The person who sent the following assures me that this is not a Joke)

WASHINGTON, DC - The new Congress is considering sweeping legislation, which provides new benefits for many Americans. The Americans With No Abilities Act (AWNAA) is being hailed as a major legislation by advocates of the millions of Americans who lack any real skills or ambition. "Roughly 30 percent of Americans do not possess the competence and drive necessary to carve out a meaningful role for themselves in society," said Senator Barbara Boxer. "We can no longer stand by and allow people of inability to be ridiculed and passed over. With this legislation, employers will no longer be able to grant special favors to a small group of workers, simply because they do a better job, or have some idea of what they are doing." House speaker Nancy Pelosi pointed to our public schools and the success of the US Postal Service, which has a long-standing policy of providing opportunity without regard to performance. Approximately 74 percent of postal employees lack job skills, making this agency the single largest US employer of Persons of Inability. Private sector industries with good records of nondiscrimination against the inept include retail sales (72%), the airline industry (68%) and home improvement "warehouse" stores (65%). The DMV also has a great record of hiring Persons of Inability (63%), and fast food restaurants (93%). Under the Americans With No Abilities Act, more than 25 million "middle man" positions will be created, with important-sounding titles but little real responsibility, thus providing an illusory sense of purpose and performance. Mandatory non-performance-based raises and promotions will be given to guarantee upward mobility for even the most unremarkable employees. The legislation provides substantial tax breaks to corporations which maintain a significant level of Persons of Inability in middle positions, and gives a tax credit to small and medium businesses that agree to hire one clueless worker for every two talented hires.

Finally, the AWNA ACT contains tough new measures to make it more difficult to discriminate against the Non-abled, banning discriminatory interview questions such as "Do you have any goals for the future?" or "Do you have any skills or experience which relate to this job?" As a Non-abled person, I can't be expected to keep up with people who have something going for them," said Mary Lou Gertz, who lost her position as a lug-nut twister at the GM plant in Flint, MI due to her lack of notable job skills. "This new law should really help people like me." With the passage of this bill, Gertz and millions of other untalented citizens can finally see a light at the end of the tunnel, said Senator Ted Kennedy, "It is our duty as lawmakers to provide each and every American citizen, regardless of his or her adequacy, with some sort of space to take up in this great nation."{The Senator's office at the same time issued this statement: The Senator fully identifies with the people this legislation is designed to help.}

BETWEEN A ROCK AND A HARD PLACE

"The biggest potential danger to our economy isn't from a slowdown in the U.S. or Chinese economies. It's from the personal and corporate debt load as well as the pyramid of leverage in the debt markets created by traders and speculators using cheap money from around the globe, particularly from Japan."

The Mortgage Bankers Association recently reported that sub-prime adjustable rate mortgage delinquencies reached 14.4% during the fourth quarter of 2006. while delinquencies in general reached 4.95%. Lenders, encouraged by both the Government and the FED, clearly did not consider the consequences of their exotic lending practices and neither did the investors who financed them.

While it is clear that "Greed" has overwhelmed financial institutions, investors and individuals wanting to own their own home, the real culprit was and is excess liquidity in conjunction with unrealistically low interest rates. The world is awash in fiat money and whenever that occurs, the result is always symptomatic gambling: When easy money is available for the asking, it is most often spent without regard to risk. Investors, banks and home buyers were all being paid, by the miracle of negative real interest rates, to "take advantage" of rising real estate prices and grab onto the American dream, while in reality they were merely gambling with cheap easy money.

Investment companies, awash in cash from expansionary monetary policies and the yen carry trade, needed to do something with all this money; so among other things they gobbled up mortgage backed securities as fast as they were created. Banks and specialty mortgage firms noticed this demand and obliged their insatiable appetite. The investment firms seemed not to care about the quality of the mortgages since they were trying to invest all that cheap money as fast as possible. Greed caused the lending institutions to lower their lending standards so that they could generate more and ever higher fees on sub-prime loans. Home buyers were overjoyed since many who could never have afforded to buy a house because of poor or no credit could now get in on the game with not only no money down, but with ultra low "teaser" interest rates and loans for up to 125% of the value of their homes, they were actually able were able to take money out when buying a new home. They were also suddenly able to furnish their new homes with no money down and with no payments for as long as two years. All this speculation in real estate, stocks, bonds, antiques, rare coins, art, etc. and last but far from least, the Take-over craze, can be traced directly back to "low interest easy Fiat money".

Easy money is possible because all the money we have (other than gold) is fiat money and central banks are encouraged by their "Masters" to create more and more of it. It seems that there is very little comprehension of the nature and role of interest rates and money and the consequences of changes in money supply: Even Alan Greenspan admitted he does not know what money is or how to measure how much of it is around.

The US Federal Reserve is managing the US money supply by focusing on inflation expectations and stopped publishing M3 so that nobody would know what it is. This is so preposterous that, had I not seen the quote by Ben Bernanke myself, I would have never believed it. Apparently the Fed believes that it can create as much money as it wants with only positive ramifications as long as people don't expect prices to rise.

The US Treasury used to have a website dedicated to publishing the US Public Debt. Now if you go to that website, you are re-directed instead to the website where you can buy US Treasury debt. Like M3, it is being taken out of the public eye. It seems that the game plan is to talk people into believing that prices will not rise and then, the theory goes, prices won't rise and the Fed can create all the money out of control spending politicians want. The strangest thing of all is that financial professionals and economists are falling for all this hog-wash.

The FED as well as the rest of the world is "caught between a rock and a hard place" because they have reached that inevitable point where "lowering interest rates" will not only no longer work, but will actually make matters worse, as the last of any logical investments become inflated to unrealistic heights, the only thing left to inflate will be consumer goods. Lowering interest rates now is tantamount to going on a weekend drinking binge, waking up on Monday with a huge hang-over and then expecting that by taking a few more drinks, you will then be ready to go to work. At today's home prices and highly elevated lending requirements, lowering interest rates will not make overpriced houses any more affordable even if the lower classes were still able to get any mortgage at all, let alone with zero money down.

TWENTY YEARS of excess monetary creation, on average 7% above real growth rates, has produced a world-wide oversupply of capacity of just about everything, except food and commodities. The only thing left to do with all that excess liquidity is to over leverage and over pay for takeovers and privatizations, setting the stage for a great many good companies being forced to declare bankruptcy as the first signs of a recession hits and they can no longer meet their bloated interest payments.

Suck? Wow. When I heard those words, I nearly had a stroke; only because someone who surely knows the facts about the housing market finally had the nerve to tell the absolute truth. It was like the kid telling the emperor that he had no clothes. He also went on to say that excess inventory, built up during the boom cycle that saw housing construction reach all-time highs, is the biggest problem facing the sector. And judging from the state of the mortgage markets, that problematic glut is now going to be much harder to work off.

Last week, the second-largest independent U.S. mortgage lender said that, although it has minimal exposure to the troubled "sub-prime" segment of the market, it expects to see a significant increase in mortgage delinquencies this year. While a sub-prime borrower is someone who has a credit score of 620 or lower, they point out that those problems will spread and hurt the credit performance in their loan portfolio as non-performing loans rise from .063 percent at the end of 2006 to as high as 2 percent or more during 2007. The main problem is that the secondary market for non-performing loans is drying up. And they may instead have to hold onto bad loans rather than sell them. In addition, investors who buy packaged loans are insisting on using clauses in these contracts to force the bank to buy the loans back in the event of default. In the fourth quarter, they had to buy back less than $300 million in mortgage loans. But this year, that amount is expected to more than double; resulting in tightened lending standards in anticipation of worsening credit problems. To make matters worse the government, under the leadership of Barney Frank, is preparing legislation to force a drastic increase in lending standards. That would be funny if it were not so sad, since it was Moral Suasion by both Congress and the FED that forced the exceedingly loose standards in the first place.

THE FED'S CONUNDRUM

For the last 20 years or so the FED has been able to use its liquidity hose to inflate the economy out of trouble; The ride was great while it lasted but like all good things this to must come to an end. Bad enough that the banks have finally started to re-introduce prudent lending standards, Congress led by Barney Frank is leading the charge to impose stricter lending standards, which like everything else congress does, will go to far and preclude qualified borrowers from obtaining mortgages and other types of loans. So what is the Conundrum? This time it really will be different. The FED will attempt to throw another party and lower interest rates but this time nobody will come because congress and the FED created too tight lending standards. But that will only be half the damage; lower interest will cause the dollar to crash and inflation to skyrocket . If on the other hand Bernanke see the danger and tries to defend the dollar the Stock and Bond markets will crash and that my friends is a real Conundrum.

GOLD and SILVER

While fiat money across the globe is being created at a blistering pace, the production of gold is slowing down. Last year, total mine production of gold amounted to 2,467 tons. It has been estimated that the total amount of gold ever mined is about 155,000 tons and essentially all this gold is still available in some form or another. This "above ground" gold is the gold equivalent of money supply and annual mine production can be considered as inflation of the gold supply. Last year's gold inflation rate was 1.6%. US monetary inflation was estimated to be above 10%, Britain's monetary inflation rate is above 12%, while Europe's inflation rate is also above 10% and Japan's is only a measly 4.5%. It must be just a coincidence that all actively managed fiat currencies have higher inflation rates than gold,?

The price of gold over the medium to long term is determined by its inflation rate relative to that of the fiat currency you want to measure it against. With most fiat currency inflation rates running substantially higher than gold's inflation rate, it's easy to see why the gold price will continue to increase with some sharp corrections along the way but will continue to consistently increase over the long term. This is not about to change regardless of short term volatility. Continue to use any further weakness to accumulate and/or add to your positions.

With Gold global production and down and demand poised rise in this growing global economy, the gold miners, who are not foolish, fully understand the long-wave cyclical nature of the commodities markets and realize that this is not just a temporary problem. That is why we are such aggressive investment in exploration, mergers and acquisitions It will take many years for the gold mining industry to noticeably increase supply and gold producers and explorers will greatly capitalize on this trend in the very near future: And it is definitely not too late to capitalize on this gold bull. The producers are poised to lead the way as they ramp up their production and reserves, but they are not the only ones positioning themselves for success. Hundreds of gold companies are jockeying for investor attention and capital."

WHAT NOW

So far, gold, silver and the stock market have been behaving almost exactly as I have been expecting for over two years. Gold is in its final stages of its consolidation phase as it lays the ground work for it's Wave III explosion. Its recent weakness was in no way due to the market's overall sell-off; it was just doing its own thing, completing what will turn out to be a major jumping off point for the next explosive rally while the overall market completes its topping out process (if it has not already done so). Usually gold prices and the general market move in opposite directions and the coming (no later than May) market sell-off in conjunction with higher inflation should help fuel gold's price explosion.

If you want more detailed explanations on how gold, silver and their respective stocks will perform in the near as well as the distant future, go back and re-read my past missives on the subject(s) you are interested in: I am more than prepared to stand on my past track record.

GOOD LUCK and GOD BLESS

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

21 March 2007

The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes and is not meant to be used as investment recommendations.