Be Careful what You Ask for, You Just May Get it

When Stimulus Does Not Stimulate

Recent polls now give Government's handling of the economy a negative rating because Government's 100 days of glory has not given the promised quick boost to the economy. The Democrats and their media friends, after blaming Bush for all the world's ills for 6 years, have begun to blame the Republicans in Congress for watering down the stimulus packages and attempting to block Cap and Trade and Health Care for no good reason: all in preparation to justify the failure of their massive Socialist policies, going into the next election. Unfortunately for the American public, sound economics teaches that regardless of how fast the money is spent or how much oversight is provided by bureaucrats, the money doled out by the stimulus plan will be mostly political and therefore wasted. It will have a detrimental impact on the economy not only in the short term, but especially in the long term. That is the nature of profligate government spending. Besides, very little of the money is getting into the hands of the people.

From an economic perspective, the stimulus plan is partly a welfare scheme, but mostly it is meant to go to Municipal, State and Local bureaucrats as well as political operatives such as ACORN in order to guaranty winning the next election; instead of going to productive American citizens who would be starting and expanding their own companies and creating jobs. Consequently, most of such spending is nothing more than government consumption which will create no permanent jobs, but will leave an unheard of level of permanent debt that must eventually be repaid or completely debase the currency.

All the Keynesian Economic Advisors are shocked that by and large, Americans are now saving and curtailing their spending. What else should be expected when there is a complete drop in the overall level of CONFIDENCE?

A common belief was, that when the government borrowed and spent a dollar it would increase GDP by $1½, but that expectation has been slowly but surely decreasing as the debt got bigger and bigger and REAL SAVING was used up. Now, $1 borrowed and spent by government increases GDP by less than $0.75 which is a sure recipe for disaster.

In the past, the most obvious way for government to raise the funds to spend on fiscal stimulus was to borrow. However, since they have reached their borrowing limits, the only other way is to tax and/or print money. That in turn devalues the currency and in so doing, inflates their way out of debt. Our current debt, which is peanuts compared to our projected deficits, will force the President to break all of his promises in an attempt to raise more revenue is every way possible.

The President, knowing all along that there was not enough money to be raised from just taxing the top 2%, has already broken his promises not to tax anyone earning under $250,000. Who do you think gets hurt the most by the tremendous tax increases on cigarettes and liquor? Cap & Trade will be the largest most regressive tax increase in history affecting every single American.. The healthcare tax increase will fall directly or indirectly upon whom? You guessed it; the consumer. Note: All forms of taxation directly impinge on taxpayers' well-being by reducing individual prosperity. In the long run, because it fosters capital consumption rather than investment, Taxation reduces the ability to save and invest. Since savings comes out of income and as people have less income at their disposal, they have less to save and invest. Taxation also reduces the incentive to invest because future rates of return on any investment will be lowered because of increased taxes. Without real investment (which can only come from real savings). Labor will become less productive, resulting in lower standards of living. Not exactly what you want when trying to get out of a RECESSION / DEPRESSION.

Because taxes are so politically unpopular, governments must resort to deceptive ways to raise funds. Save the Planet, Save the Children, Education, Health Care Reform etc., Have you noticed all the increased Taxes on your phone and Heating Bills? They all amount to increased taxes regardless of what name they give it.

A good case can be made that government borrowing is more harmful for long-run economic progress than taxation. Instead of being invested in productive capital accumulation, it is being lent to the government to fund state consumption. When the government borrows, market interest rates increase, making it harder for private entrepreneurs to gain access to capital. As private capital available for productive enterprise shrinks, our economy becomes less productive and less prosperous. Although taxation reduces both consumption and investment, it is a one time charge. On the other hand, Government borrowing (Debt grows at a compounding rate of interest) comes entirely from the nation's pool of savings. The money that is lent to the government is money that was saved and ready for productive investment.

The other source of funding turned to by the Government is monetary inflation. Governments can create money (print it) or they can inject money into the economy through the banking system by having the FED purchase Government Bonds, thereby monetizing the debt. This causes the purchasing power of the dollar to fall. Regardless of what they tell you, there is no general social benefit from inflation. In fact, monetary inflation via credit expansion is the source of our present troubles. Artificial credit expansion - credit not funded by savings - creates the business cycle by spawning poor investment and speculation. Artificial credit expansion and ultra low interest rates cause many unwise investments to be made (such as in residential and commercial real estate, financial derivatives and the building of excess capacity). They are made to look profitable because of the accessibility of cheap credit, so business activity expands, manifesting itself in an unsustainable boom. However, bad investments are not made economically sound just because there is more Fiat money in existence at low rates of interest. These bad investments eventually must be liquidated as the cheap, easy money dries up. The boom resolves itself in a bust whose twin children are capital destruction and unemployment. The moral of the story is that monetary inflation has never been able to generate economic prosperity over the long run.

There is no such thing as a free lunch, and there is no costless way to fund Government spending.

Given the Governments $ trillions of projected deficits as far as the eye can see, the only question is, "What economic poison will the government pick - taxation, borrowing, or inflation?" With the demand for money being so great, the only logical answer is all three. The Government's fiscal response to our current debacle is a near perfect example of what not to do when trying to regain economic prosperity. While not wanting to be identified as the great tax assessor and hence, promising to cut taxes for most citizens, the administration is actively seeking ways to increase taxes by calling them by different names besides Taxes. The Administration is also presently considering raising taxes on healthcare expenditures by taxing employer-provided health care benefits and decreasing the deductibility of medical expenses. It will be their lever to pushing everyone into the government run Health Care Plan They have already raised taxes on cigarettes, adult beverages and carbonated drinks, fruit juices, iced teas, and sweetened coffee drinks all in the name of the nation's health. On top of letting the Bush Tax Cuts to lapse in 2010 they have also proposed raising corporate taxes instead of lowering them as would be more appropriate during a Recession. They intend on placing excessive regulations as well as heavier taxes on commodities and option traders as well as on Hedge Funds. Don't they realize that most of that activity can and will move offshore; just as Sarbanes Oxley most of the worlds underwritings to London Frankfurt and HonkNong. They are even considering increasing taxes on intangible drilling, an important technique in oil and gas exploration. While taxing these specific groups may be politically doable, it cannot be good for capital accumulation and economic recovery. It certainly will not reduce our dependence on foreign oil.

DEPRESSION WILL BECOME INEVITABLE SHOULD CAP & TRADE AND HEALTCARE REFORM BECOME LAW.

OUTSOURCING has not been a political football lately, but if you thought that it was a problem before, wait till you see what happens after all those tax increases are put in place. Not only will Money and Jobs be moving off shore, so will whole companies and any expansion plans. The super wealthy will move their money and possibly themselves off shore, hence the Government's recent attack on UBS and the worlds TAX havens. Can you imagine what will happen to Government revenue and therefore the deficits?

The U.S. government just reported the first monthly budget deficit for an April in over 70 years as well as a record budget deficit in the month of May and that is just the beginning. The current year's official deficit is slated to be $1.85 trillion (that's right, trillion)! But realistically, it will be well over $2 trillion. Can you believe it? The good news is that the Obama Administration is saying that it has things under control. They project that next year's deficit will only be $1.25 trillion. Really?

When the U. S. Treasury spends over a trillion dollars more than it receives in taxes, it must borrow or monetize to fill the gap. In fact, the deluge of Government Debt has already begun. The National Debt has increased by $804 billion in less than five months. Not surprisingly, loanable funds are becoming relatively scarce and we know that they are being shunted to less productive uses perpetrated by the State. Even Ben Bernanke has risked his reappointment by publicly confessing his concerns that "fiscal deficits like the ones being projected will serve as a serious drag on the economy". Maybe he is smarter than I gave him credit for and he does NOT want to be reappointed, so as not to preside over a full blown INFLATIONARY DERPRESSION.

WHERE IS ALL THE INFLATION?

One thing that Bernanke is not concerned about is inflation. Increasing liquidity by expanding the money supply is his drug of choice because the money supply growth is actually being held in check for the time being. This is due to $13.5 trillion in wealth destruction and the tremendous write-downs with more to come by the Banks as well as the additional $ trillions of losses, still hidden on their balance sheets by their recently approved new accounting rules. To make matters worse, the low interest rate mortgages is a disaster (S&L crisis) just waiting to happen. The monetary base was reported to have increased from $96.2 billion to $820.8 billion, an inconceivable annual rate of 753%. Such a huge expansion should have sowed the seeds of hyperinflation, but the increase in savings up from 0% to 7% as well as the concomitant reduction in the velocity of money has thus far held inflation at bay.

Meanwhile the banks, that look like they are presently sitting on a mountain of excess reserves, know the real truth and are not making loans. Besides, why should they when they can borrow from the FED at ¼% and then buy Treasuries yielding 21/2% to 4 % with no overhead or carrying costs and especially NO RISK and no reserves required? The Carry Trade for American Banks has been reborn. Notwithstanding official worries about deflation and potential additional defaults, especially when commercial real estate attempts to refinance this fall, the FED will continue to monetize the Nation's Debt by buying most if not all of the newly issued Treasury Bonds. This will ensure that Hyperinflation will eventually take hold as the new money created overtakes the credit (wealth) destruction. It has been recently reported that the non-seasonally adjusted consumer price index increased at an annual rate of 4.3% last month. All of these trends are consistent with the above-mentioned monetary inflation. Truthful economic analysis tells us that the recent monetary inflation has not provided any real help to the economy in general, but is only pushing the inevitable slightly into the future. The moral of the story is that the current Stimulus Plan will not stimulate economic progress, but will usher in a new Great Depression.

WHERE TO NOW DOW

To give a pure technical answer - First of all, it is reasonable to believe that we are witnessing a manipulated market because of the following:

• Volume is low and shrinking and yet the market is holding up in the face of the cardinal rule that volume always precedes price. This is a Wall Street Rally with Traders trading among themselves and the public by and large is not participating.
• Time-wise, we have just reached the 25% time correction point with August being 38%, so the time frame for a pullback is between July and August and is just about over.
• For all intent and purpose, we have had a 38% give or take correction and that is enough of a consolidation of the drop to justify a continuation of the Major Bear Market.
• There is no chance that March was the beginning of a new Bull Market as Wall Street and the Media have been trying to sell us.
• In order to have a major Bull Market, there must be a source for a constant inflow of BIG DOLLARS coming into the market. Starting back in 1984, all pension and endowment funds were 75% invested in Bonds, now they are 75% or more invested in stock and other high risk commodity investments. There is just not enough money to fuel a sustained Bull Market.

So, are we ready to break DOWN NOW? Probably and if not now, definitely by the Fall perhaps after we have had a 500+ sell off and then a final last ditch manipulated rally to 9,500 - 10,000, (the only trouble is; that's what everybody else is expecting). That in conjunction with a new massive stimulus package would then morph into the Biggest Bull Market TRAP in history leading to the worst crash in history, followed by the worst DEPRESSION in history.

DANGER
The preceding all sounds too simple to be true, especially since just about every technician and cycle analyst is predicting a turn date between the 15th to 27th of July. They are also expecting this conflagration of cycles to coincide with signaling a bottom. But what if the Market does what it always does and that is to make the majority WRONG? What if it does not sell off into the middle of the month and what we have been witnessing for the last 6 weeks or so is the the minor b wave and that a c wave 500 + point rally completes the topping out process of that March B Wave bounce. That would mean that the TURN is not a move upward to $9,500 - $10,000 but instead is the end of the Rally and the direction of the turn is HARD DOWN instead.

You may think I am crazy (primarily because you do not want to believe what I am saying is true), but you know that I called the Recession to a T a year before anyone else would even mention the word and I called for a Depression to start by late 2009 early 2010, two years before anyone even dreamed that a Depression was possible.

THERE IS A TIME AND A PLACE FOR ALL THINGS and now is the time to get into cash and wait. Any move up will be relatively minor in relation to the crash that will follow and you certainly do not want to be caught LONG when that Black Monday or Tuesday or… hits. But whatever you do: REMEMBER that you MUST use OPEN ORDER STOPS.

You (subscribers only) can expect a Special Bulletin when I think that its time for the big move

NOW MAY BE A GOOD TIME FOR SOME TO TAKE A CHANCE ON LONG TERM " STRANGLES". (but not more than 10% of your portfolio)

GOLD

I hope that you have been buying Gold coins. If not, it's never too late until it's too late as I expect we may have until Sept-Oct before Gold explodes to the upside. However, that explosion could start any day now; since the minimum time consolidation of the 84 month up cycle has been achieved. Cover your short calls as they drop below $1 or as Gold approaches $850. Meanwhile, continue your program of buying on weakness to the $850 area and to the support levels on your favorite Gold and Silver stocks. The better juniors should lead the market up.

NEXT WEEK I WILL SEND OUT THE LIST OF GOLD AND SILVER STOCKS THAT I HAVE BEEN ACCUMULATING. (reserved for current subscribers)

Our Country's and the World's economies have never been in greater DANGER. But if you believe in a GOD and I do, he will do something to stop us from destroying ourselves. LOOK FOR THAT RAINBOW

God helps those who help themselves, so for God's sake, as well as your own, protect yourself.

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.

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