Ignorance is Not Bliss

"A morsel of genuine history is a thing so rare as to be always valuable."

Thomas Jefferson

"It should be the highest ambition of every American to extend his views beyond himself, and to bear in mind that his conduct will not only affect himself, his country, and his immediate posterity; but that its influence may be co-extensive with the world, and stamp political happiness or misery on ages yet unborn." -- George Washington

IGNORANCE IS NOT BLISS

THE CONSEQUENCES OF AUSTERITY

The markets are only pricing in a 50% probability of a Greek default even though the rumors in trading circles of a default coming shortly are rampant. Bloomberg (and everyone else) reported that Germany is making contingency plans for the default. Of course, Greece has issued three denials. While Greece may still default, it is my opinion that the EU will kick the can down the road one more time, at least for another 3 months. Germany is assuming a 50% loss for their banks and insurance companies. Sean Egan (head of the bond-analysis firm Egan-Jones) thinks the ultimate haircut will be closer to 90%. And that is just for Greece. What about the rest of the PIIGS?

Anyone reading my letters for the past year cannot be surprised that Greece will default."Why? It is just elementary school arithmetic, my Dear Watson."

Was anyone surprised that the Greeks announced a state fiscal deficit of €15.5 billion for the first six months of 2011, vs. €12.5 billion during the same period last year? What else would you expect from increased austerity? If you reduce GDP by as much as Greece attempted to do, OF COURSE you get less GDP and thus lower tax revenues. These are the consequences of allowing debt to get out of hand. Are you listening Mr. President? We have come to the end of the game. "There is no such thing as a free lunch". Do you think that does not apply to the USA as well?

Not if, but when the US goes into recession, have you thought about what the result will be? A recession means lower GDP, which in turn will mean higher unemployment. This will also mean dramatic increased costs across the board and sharply lower tax receipts; which in turn means ever higher deficits. It will certainly be more than your projected $1.5 trillion; more likely in the $2 to $2.5 trillion range. Governments have much less control over spending than they think, especially since the government has not even attempted to make a budget in over 3 years.

Ask Greece or any other country in a debt crisis, how well they predicted their budgets. The Greeks were off by over 25%. If we are off anywhere close to that, it will guarantee Depression in very short order (whether we use the word or not).

The Greeks are now in a (DDS) Debt Death Spiral. There is no way out, short of Europe simply bailing them out, which is not likely for more than 3 months at the most. Then what? Few if any of the causes of the problem would have even been addressed, let alone fixed.

ON THE DOMESTIC FRONT

Recent revisions to economic data suggest that companies are going to have even more trouble making their "pie in the sky" earnings projections that are being projected in an attempt to justify a bullish stock market stance. At the start of 2011, productivity trends took an unexpected dramatic turn for the worse - especially compared to what was initially reported. An initial estimate that Q1 productivity grew by 1.8% was revised down to show a decline of 0.6% instead. A slight 0.7% rise in Q1 unit labor costs(ULC) was also revised upward to show a staggering surge of 4.8%! In addition to that 4.8% rise, ULC rose a further 2.2% in Q2. But the news gets even worse. Last week, the BLS revised the ULC in Q2 up from 2.2% to 3.3% QoQ. US non-farm business unit labor costs are now rising by 2% year over year (yoy). That is very bad news for profits and especially bad news for equities because the pace of ULC is a key determinant of profits and a driver of inflation. It is also bad news for an increasingly criticized and divided FED. The NATURAL LAWS OF ECONOMICS are coming home to roost.

Until the real crisis in Europe comes to a head, the US will continue on with its economic head in the sand, since both sides have no clue as to what must be done. Economists who base their projections on politically correct history will not see what's coming. Analysts who base their earnings estimates on falsified pie in the sky estimated performances are going to be completely off base. Note: Analysts are so very, very bad as a group at predicting future earnings that I am amazed people still pay attention to them at all.

This week, we turn our eyes first to Europe and then to the US and ask about the possibility of a yet another credit crisis along the lines of 2008. We should consider that now rather than waiting, while it is still possible to do something about it. But, that would depend on our political leaders coming together, getting off their ideological horses, making the difficult choices and doing what is necessary. Like maybe passing a budget. Since we are in the political season, I won't be betting on that happening any time soon.

THE PRESIDENT'S JOBS SPEECH

If the President's speeches are any guide, he will be relying on teachers, firemen and police jobs "saved", instead of new jobs created. This means that most of the $500 billion, just like the $800 billion TARP stimulus of 2008, will go primarily to shoring up his political campaign (an exact replay of 2008). If it didn't work in 2008-11, why should we expect a different outcome this time around? Besides, if you start every speech by attacking Congress and especially the Republicans, how can you logically expect a great deal of cooperation from the Congress?

THE SELF DELUSION OF WALL STREET

In spite of all the economic and financial changes that have come to light, Wall Street is still coming up with the same kind of delusional analysis: "Stocks closed down for the fifth session out of six; that puts them down for two weeks in a row, and that is two out of three weeks that the market has closed to the downside ahead of the weekend. Not good action. Even so, the indices are still holding their up trends off of the early August low. The S&P 500 is still holding its uptrend and so is the NASDAQ, which actually is holding on to a somewhat bullish double bottom. The small caps are holding their uptrend as well. By the way, you can forget that barbarous relic called "GOLD". Doesn't all this great analysis, along with the President's new Stimulus Jobs plan, not make you all want to go out and load up on all that cheap stock out there. Besides, Buffett just put $5 billion into Bank of America. Well I, too, would take the deal he made: A nontaxable, 6% convertible preferred that is guaranteed by the government. Why was this super sweet deal not offered to the hapless, long suffering shareholders? You mean give small ordinary shareholders a break? Don't be silly; Government handouts are only given to FOB or could it be that BAC is so desperate for cash it would have taken too long to raise the cash by doing a secondary?

So why doesn't the government step in and do something like SPEND SOME MONEY? Well, the problem is that we have done this time and time again and it just does not work and what is worse, now we are broke and it will once again be proven not to work. Nevertheless, every Wall Street and Media Talking Head is demanding QE3. Rest assured we will get it before the 2012 election. Perhaps the Chubby Checker "TWIST" really is QE3 in disguise?

We have been living in history's biggest PONZI schemes that the world is just beginning to wake up to.

AN IDEA WHO'S TIME HAS COME

At this point, the ONLY possible solution is an about face return to Capitalism and our Constitution. However, without TERM LIMITS, no solution is possible since we could never get a majority to vote against their own personal best self interests. And even if they did, Obama would veto it.

WE ARE NOT TOO BIG TO FAIL, BUT WE ARE TOO BIG TO BAIL

According to USDebtClock.org, the total amount of personal debt in the United States is now over $16 trillion. The exploding levels of personal debt have created a tremendous amount of stress in households from coast to coast. Combine that with the Federal debt and we are over $30 trillion in debt and expanding realistically by over $2 trillion a year as far as the eye can see. Add another $10 trillion for the states and another $60 plus trillion in Social Security obligations and at least as much pension underfunding and it becomes as plain as the nose on your face that we, as a country, are on a fast track to bankruptcy. And we are too big to bail.

The average yearly income of the top 0.1% of U.S. income earners is $5.6 million and many people led by 3 weeks of nationwide demonstrations that Obama and the Democrats say they sympathize with, are trying to sell us that an economic system that funnels all of the rewards to the very top is deeply broken. And yet it is that very system that created the most powerful economic country in the world with the highest standard of living. In truth, it is the steady erosion of Capitalism over the last 75 years that was drastically accelerated over the past 3 years, as the government pushed Socialisms' quest for universal equality that is destroying our country. The Bible and history teaches us that Capitalism (Individual Responsibility) is the only system that works. However, most Socialists including most clergy from all denominations do not really believe in or understand the Bible and therefore do not understand CAPITALISM. They, as well as Conservatives, are all very good at taking partial sentences out of context to prove anything they want the Bible to say.

The tent cities that were prevalent during the Great Depression Era are beginning to spring up all across America.

WHY DOESN'T THE GOVERNMENT DO SOMETHING

Both parties have demonstrated, now and during the 30's, that they do not have a CLUE as to what must be done to turn things around. Hoover, although a Republican, was nevertheless a Socialist and started a great many of the make work projects (Hoover Dam and the TVA) that FDR later termed the NEW DEAL. (Do any of you know that FDR ask Hoover to run THE NEW DEAL, but Hoover refused?) Together they managed to turn what should have been no more than a 2 or 3 year Recession (such as the one just after WWI - 1919 to 1921) into a 17 year Depression. And that was at a time when the US was the world's economic powerhouse, the world's largest manufacturer and creditor and owned 80% of the world's Gold.

THE GOLD BUBBLE

By 1990 (10 years after its January 1980 peak), investment in Gold had dropped significantly to 0.6% and by the year 2000 represented a mere 0.2% of global assets. By the end of 2009, nine years into the Gold bull market that began in 2000, it was estimated that Gold represented only a mere 0.6% of total global investments whose percentage increased to only 0.7% of global financial assets in 2010. So despite Gold reaching recordnominal highs, the world holds about the same portion of its wealth in Gold as it did over 20 years ago.

The increase in Gold ownership from 0.2% in 2000 to 0.7% in 2010 is also misleading. If you consider the approximate $227 billion that was invested in Gold bullion in 2000, that level of investment would have grown to $1.18 trillion or 0.6% of financial assets by the end of 2010 - based purely on Gold price appreciation alone. In other words, the actual amount of new investment into Gold since 2000 represents only 0.4% of current global financial assets. Consider that for Gold to return to a meaningful level of investment, say to the 5% level of 1968, it would require over $9 trillion of Gold investment today, or about 6.5 billion ounces at the current Gold price. This would represent well over 1.3 times the amount of all the Gold ever mined throughout history and four times the amount of known Gold reserves. So, not only is the public relatively underinvested in Gold, but at current prices, it isn't even possible to increase our Gold holdings back to a meaningful level. One must also factor in the tremendous shift of wealth from west to east that has been occurring, especially over the past 10 years. The people of India and China have always been big believers in owning Gold as it is part of their culture. The more wealth created in those countries, the bigger the demand will be for Gold.

Can you imagine if the investment world became so nervous and panic stricken by the potential of a Euro-zone/USA default that millions of investors, hedge funds and central banks began heading for Gold over a short period of time. A period of seemingly hyper-inflation would also cause this type of stampede.

Will there be enough Gold to go around? If the price goes up there is. There is nothing more powerful than a BULL MARKET powered by both GREED and FEAR.

You can imagine what a rush to purchase Gold would do to its price if the investment world began bidding on Gold both as an investment and as SAFE HAVEN asset. That is how bidding wars start and how prices rocket skyward. This is the fundamental principle behind all Gold investors' belief and why it's now being accumulated at record levels by central bankers around the world. Even though the Golden Bull is 10 years old, it is just now beginning to come into its formative years and still has at least another 6 or 7 years minimum to run.

The United States and Europe cannot possibly solve their debt problem unless there is a 180 degree shift in economic policy, away from Socialism and back to Free Market Capitalism. This is something that I do NOT expect any time in the near future and not without a lot of blood in the streets. Therefore, as these huge fiscal and monetary imbalances continue threatening us, the price of Gold will remain high and accelerate higher. This will result in profit margins the likes of which has never before seen in the Gold and Silver mining sector. As the majors attain PE ratios of 20 to 40 times and are sitting on billions in cash, it will then become the Juniors turn to take off; as expectations are always worth more than reality during a RAGING bull market. I like both Gold and Silver producers and explorers with a good story to tell. There will, of course, always be sharp corrections and consolidations. So don't chase, buy into weakness. But whatever you do; do not allow yourself to panic should (when) we get any eventual sharp selloffs. They will act no different than they did in 2006 and 2008. They will blast off to higher and higher highs. Riding the Golden BULL is never easy.

WARNING - DANGER: the Central Bankers will always be trying to manipulate the price of Gold down. Do not let them scare you into selling.

WHAT DO I AS AN INVESTOR DO NOW?

HOW NOW DOW: Gold and Silver and near term market projections as well as trading ideas and stock selections are reserved for paid subscribers.

All of my long term readers were not surprised by the shenanigans of the last few weeks. There are rarely any major surprises once you learn how to analyze political speech with an open mind and without pre-conceived ideological positions. My most frequent mistakes are usually ones of timing. I seem to continually underestimate the stupidity and ignorance of our Media, Keynesian Economists and Politicians who don't seem to know how to tell the truth. In most cases, "The Obvious Is Obviously Wrong" is the one thought that will keep you on the right side; that and COMMON SENSE.

We are coming into the most trying times in our nation's history. We can either succumb to our Government's folly or personally prosper. As always the choice is yours.

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