Liar, Liar Pants on Fire

EXIT STRATEGY

INTEREST RATES: There can be no possible exit strategy as long as both the Bond Market and Derivatives Market are relying on low and falling interest rates to stay afloat. If interest rates were to be increased (even just ¼ point) signaling a change in the direction that interest rates will be taking, the Bond Market, which is much larger than the stock market, could crash. This would doom all pension funds, insurance companies, banks, States Muni Bonds and anything that's left of private pension funds and 401Ks. In addition, what would happen to the $600 trillion of CDS's and other Interest rate derivatives that are all relying on zero interest rates for one side of the equation to stay afloat?

If the Government had to live by the same LAWS that the rest of us do, every one of them would be in jail. Can you just imagine applying Sarbanes Oxley to any set of Government Books?

It does not seem like Bernanke, Geitner, Volker, and Greenspan nor do any of the other economists traipsing across our TV sets realize that without Savers, there can be NO Real Savings and without savings there can be NO REAL LENDING. After all, who in their right mind is willing to lend money at 1% or even 5%, (certainly not the Banks) especially if inflation is expected to increase and taxes on interest received must be paid?

When it comes to borrowers, the interest rates are secondary. They could be 10%, 12% or more as long as there is money available to borrow. What should be obvious, but obviously is not, is that people are more likely to make loans at reasonable rates of interest. You can be sure that this time around, they will be TAKING THE DEGREE OF RISK INTO consideration before loaning any money. That is everyone, except for the Government. Can you now understand why the banks that are overflowing with excess reserves are only buying Treasuries.

BUBBLES, BUBBLES, FOOLS AND TROUBLES

By their own admission, both Greenspan and Bernanke have never been able to predict nor recognize any Bubble, even when one that they were sitting on was about to explode.

Will They Ever Learn? NOT HARDLY. Especially since we are now sitting on at least three NEW BUBBLES that are creeping close to exploding. The most obvious one is the Stock and Bond Market and let's not forget the bounce in the Real Estate Market. I apologize for not seeing it sooner, because it should have been obvious to me and everyone else that you cannot throw $13 trillion plus at an economy and not create bubbles. Oil (and well as most commodities) is probably another Bubble as it too, has doubled in price over the last 6 months, even though there is a glut in the world's oil supplies. The same is true for the rest of the world's stock markets since the world's central bankers are all playing the same "Blind Man's Bluff" game of throwing money at anything that's dead and not moving.

THE BIGGEST BUBBLE IN WORLD HISTORY IS THE CURRENT TREASURY BOND MARKET. In order for bond prices to go up, interest rates must decline. But how much lower than Zero can rates decline to? So why has this bubble to beat all bubbles, not exploded yet? The answer is FEAR! Most people around the world are afraid and the only market liquid enough to sop up all that liquidity is US Treasuries. However, as the US dollar continues to decline, that too will soon change as its safe haven status is slowly but surely evaporating.

The Zero Interest Rate Policy is an out and out scam reflecting the Central Bank and Government's complete lack of understanding of even basic economic principles. They talk strong dollar, but what they really are trying to do is inflate their way (devalue the dollar) back to prosperity. They have no concept of history. The Weimar Republic or France in the 1780 or Argentina or Russia in the 1990's or even our own country (the South) during the Civil war are examples of countries that attempted to print their way out of trouble (Zimbabwe is the latest basket case). It has never worked, not even once in all of recorded history. Look to the past and learn; knowledge is only as far away as your computer.

"Historically bonds have always turned out to be Certificates of Guaranteed Confiscation" Ludwig Von Mises

WILL WE EVER LEARN?

HERE WE GO AGAIN: Banks, encouraged by the FED, are dumping Fannie and Freddie-backed securities to the FED and replacing them with FHA-insured loans packaged into government-insured securities issued by Ginnie Mae. WHY? Because Ginnie Mae's are 100% guaranteed, considered "risk free," and therefore there are no reserve requirements. Banks can then use the money they otherwise would have to set aside, based on the already ridiculously low and arbitrary 20% risk-weighting on their junk, to leverage-up their books and create the illusion that banks have healthier balance sheets than they actually do. This New Deal is so good for the banks, that they are using (TARP) money to buy Ginnie Mae's. But it's all a Giant Fraud. The FED is allowing the banks to trade worthless JUNK, that pays no interest into Ginnies that not only pay interest, but are 100% backed by the Government. What a Deal! The result is capital ratios are being manipulated and insolvent banks are being propped up as more worthless JUNK is being stockpiled on the Federal Reserve balance sheet. Eventually, mortgage defaults will overwhelm the FHA just as they did FNM & FRE. The hoped-for floor in residential real estate will suddenly disappear and expose Bank and FED balance sheets for what they really are.

I guess the $13 trillion was not enough, so the Government is throwing even more money at the banks and brokers and still there is no money for Main Street.

But wait, there is more: There do not seem to be any provisions being made for the coming Commercial Real Estate defaults and/or their inability to refinance. The same holds true for Prime Real Estate mortgages that are coming up for refinancing on homes that are now underwater. Well, if changing the mark-to-market rules wasn't enough, this scam will help them out, but for how long? Can you believe how they can just change the rules as they please? Are we not still living in a Country of LAWS?

The risk now is if faith (belief) in a recovery starts to wane, investors will decide to flee from the very same assets all at the same time. Everything from commodities to stocks and high-yield bonds and finally treasuries could all drop in tandem.

What do U.S. stocks, Asian stocks, Brazilian stocks, and high-yield bonds all have in common? They are all risky assets, driven higher in an attempt by the Federal Reserve and Central Banks worldwide to entice investors' last bit of savings away from safe havens and back into unperceived RISKS.

In all social democracies with a fiat currency, all roads eventually lead to hyperinflation.

THE FED's TIMELY REVERSAL OF POLICY?

There have been nine official recessions since 1955. In every case, the Fed's recognition of the situation and efforts to stimulate the economy were thought to be too little, too late and too slow to be effective. What is much more likely is that one cannot fix an over stimulated economy with even more stimulation.

On the other hand, the FED has never been able to recognize (or so they say) a Bubble in the making or the onset of inflation. Their perennial FEAR especially today, is if in acting too soon, they would risk sending the economy back down into a double-dip recession. Yet, leaving the massive stimulus conditions in place will surely result in runaway inflation, which always ends up in DEPRESSION. Stimulations from the Central Government in the form of Zero Interest Rates and Easy Credit to the Banks have NEVER WORKED. Japan tried the zero interest stimulation trick starting in 1990 and here we are in 2009 (19 years later) and Japan is still mired in Recession/Depression. Yet everybody is still pinning all their hopes on a global, stimulation-and-recovery trick to work just this one time. The basic Laws of Economics are God's Laws, not just a bunch of suggestions that you follow when it is convenient.

WHEN YOU FIND YOURSELF IN A HOLE, THE FIRST THING YOU MUST DO TO GET OUT IS TO STOP DIGGING.

WALL STREET IS TRYING TO REWORK MORTGAGE SECURITIES

The WSJ reports that a new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make junk securities look better. Unfortunately for them, Regulators are pushing back and saying that the transactions don't have enough substance and stand to benefit only bankers and rating agencies. The deals come as Wall Street, buoyed by surging markets, is seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis. Meanwhile, Regulators are struggling to prevent a recurrence of the crisis. The way they work, is that insurers and banks that hold junk securities on their books want Wall Street to separate the so-called good from the bad. The good mortgages are then bundled together and create a security designed to get a higher rating (maybe AAA?) The weaker securities get lower ratings (lets say BBB?)

FOOL ME ONCE SHAME ON YOU, FOOL ME TWICE SHAME ON ME

HOW NOW DOW

The Money On the Sidelines is Fleeting: The "money on the sidelines" myth was debunked by the latest flow of mutual funds report which shows that money has NOT flowed into stock-based mutual funds since August 12th. In fact, $7 billion flowed OUT. This combined with the fact that insiders are selling at record numbers and corporate buybacks are at a record low (down 72% from last year), tells us that this latest market rally has literally nothing to do with money on the sidelines. The market has been stalling for months as even the manipulators are running low on money. The rally is all due to free government money at zero interest rates. As long as the Governments keeps on printing, who knows how long the rally can last. It is strictly a liquidity driven rally. But you can't fool all the people all the time.

WHEN WILL THE MARKET CRASH? So far, there is no way for me to tell for sure. But crash it will. I am sure that we are living on borrowed time. At the low in early March, mutual fund cash was at a 12-year high so naturally, this lead to our latest rally of about 60%. (61.8% is the most common Fibonacci maximum pullback) However, their current cash levels are now reversed and have not been this low since October of 2007 (the top). You draw your own conclusion?

How much longer can the manipulators defy economic reality and continue to turn ever increasing bearish economic numbers into 3 digit rallies? It never ceases to amaze me how many so called Ivy League educated and knowledgeable analysts and economists can come up with completely illogical reasons to justify buying the market, while still remaining negative on Gold. Even the odd few who give a relatively fair assessment of the economy are still pushed by the Media moderators to come up with a few fairly priced stocks that investors can still buy. SELL is no longer part of the investment vocabulary. Check the charts of the S&P, China (FXY) and Oil. They made their highs weeks ago and seem to have topped out into this rising market. The evidence of profit taking is everywhere. Should this selling trend continue for much longer, it will spark that much wider sell-off leading to that crash that I have been looking for over the last 5 weeks or so. Cyclically the market could possibly rally into the end of the month or more probably Option Expiration day, so BE CAREFUL.

UNCOMMON COMMON SENSE was started in 2002 and we called the economy to a "T" catching every major market swing (go to the archives and check for yourselves). But our preferred investment was always GOLD. Let's assume that all you ever did was buy the sell-offs in Gold as recommended and never sold and completely ignored the stock market. You would have outperformed the stock market by a factor of four. Don't forget, most of your GOLD investments have by now turned into long term holdings. Don't allow yourself to get suckered into taking short term gains when you are in a long term bull market; even though Obama needs all the taxes he can get. I don't know about you, but I am already paying more than my fair share, I don't need to increase it. I am happy that I stayed 90% in Gold.

GOLD

Naturally, the Gold price sold off on the news of the IMF 403 ton gold auction. But just as I have cautioned you so many times before, any sell off will be temporary. Gold is a "Superior Good" and the price will not only bounce back, but go on up to new record highs. WE ARE ONLY HALF WAY THROUGH THIS GOLDEN BULL MARKET.

(A Superior Good in economic terms refers to a product that seems to defy the Laws of Supply and Demand by its demand going up as it becomes more and more expensive. Perfect examples are Rolex watches, Ferraris and of course GOLD).

If you want relatively meaningless fundamental reasons to buy Gold, there are many Gold bugs ready to supply them with new groups of analysts every day now, after 8 years are jumping on the Golden band wagon, and all ready to supply you with any and all the secondary reasons. BUT the real reasons why Gold is still a tremendous BUY are all the things I have talked about for years, with the best examples being the beginning of this letter.

GOLD'S WALL OF WORRY

In recent weeks, Gold has provided a classic illustration of a bull market climbing a wall of worry. The Gold market sentiment numbers stood at 39.5% four weeks ago when Gold was trading at the same level that it closed on Friday Oct.2. And yet the number of bullish Gold market timers dropped to a low of only 18%. This type of drop in sentiment is the kind of sentiment foundation on which higher prices are built and contrarians like me are on the lookout for. In no way is this type of behavior any where close to the extreme bullishness that I have previously described as being seen at major market tops (see Riding The Golden Bull, 21st Century Gold Rush, The Golden Bull is Stomping and Gold Myths and Misconceptions).

For the time being and probably the next 5 years to come, hop onto the GOLDEN BULL and hang on for dear life. I repeat, DO NOT let any short term down swings get you to let go. They are all only buying opportunities. SO HANG ON AND ENJOY THE RIDE.

NOTE: As most of you are aware, NXG was my largest holding (by number of shares). I did not like its price action over the last few weeks and especially over the last few days. As I was unable to find any reasons for this kind of price action in the stock, I SOLD MY ENTIRE POSITION in NXG on 10/08/09 at $2.79. But that was based on one stock's price action and in no way is a reflection on where I think the Price of Gold is going. You will recall that I tripled my position of NXG between $0.55 and $0.62. NOTE: I have since discovered that the reason for the stocks poor behavior was the coming of a huge financing to bring the Davidson mine into production.

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Aubie Baltin CFA, CTA, CFP, PhD.
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