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I contend that for a nation to try to tax itself
into prosperity is like a man standing in a bucket and trying to lift himself
up by the handles.
-- Winston Churchill
HOPE SPRINGS ETERNAL
Bernanke,
by creating negative yields, thinks he can push the big boys into buying
equities and investing in the economy. But what if they distrust the
government and they just buy hard assets, like gold, silver, grains, crude
oil, etc. thus creating ever larger inflationary pressures? What is he going
to do then? Print the money and short gold? Meanwhile, by creating 0% interest
rates, he as killed the CD and money market funds, leaving no safe pension investments.
The ones hurt the most are the common people and seniors as savers suffer
most. No wonder retail sales are way down as people won't spend the last of
their savings when they are so worried about the future. Yet, by inflating
both the Bond and Stock Markets with QE1 and QE2, in the last month or so,
the market has edged higher in the face of pessimism on the promise of the
coming QE3; it's hard to push the market higher without QE3. They won't buy
at P/E’s of 14, 15 no matter how cheap Wall Street tells us it is. They
think they know better; without QE3, there will be no real buying and that's
why the volume is so low. Ben is trapped, but he'll never admit it.
THINGS “SEEN” AND “UNSEEN”
It was the famed
Free Market French Economist of the 19th Century, Fredric Bastiat, the father of Austrian Economics, who fostered
the accent on Freedom and Individual Choice as the best and perhaps the only
way to properly handle both the things Seen and Unseen. Far too many
investors react incorrectly to the “seen” or obvious events in
place because they do not concentrate on the BIG PICTURE and therefore cannot
appreciate what is currently “unseen” and what most likely lies
ahead. Take for instance the nearly 3-4 hour 2% jump in the Stock Market when
GDP came in at above expectations. That “seen” event was an
increase in GDP ahead of estimates. But what kind of estimates were they?
Since they were only a smidgen of an increase, the rally did not last out the
day. Were they realistic estimates or ones designed to be beaten so as to
give a false reading as to what is actually going on? To make matters worse
it was, like most “NEWS” events are, outdated information because
it dates back to activity for the quarter ended in June.
As you may remember, the majority of the economic data started turning sour
near the end of the last quarter; bad enough to bring down the Q2 GDP by 0.5%
from the Q1 reading, but not bad enough to scare anyone just yet,
by maintaining a false sense of optimism. This means that the new quarter
starting in July came stumbling out of the gate. Both ISM reports show a
marked slowdown along with most of the regional activity reports and like the
unemployment reports are completely misleading, placing the unemployment rate
closer to 13% than the reported 8.2%.
So what will
happen to real GDP if these trends continue and we have a full quarter of
soft data? And what happens when that information becomes more public and
weighs on consumer and business sentiment? And what happens when the Fiscal
Cliff becomes visible virtually guaranteeing a 1% to 01.8% reduction in GDP
instead of the 3% to 5% increase; especially since to start with, there was
no real growth in the first place? It is the part that is unseen (the truth) which is most
important. That is why I examine the government published misinformation most
closely, relying much more on the “SHADOW STATISTICS, especially in
this election season where the government is more interested in getting re-elected
than they are in what’s good for the people and the economy. The Truth
Be Dammed.
Essentially,
the Debt Super Cycle is the decades-long growth of debt from small and
easily-dealt-with levels, to a point where both the Bond the Stock Markets
rebel and the debt has to be restructured or reduced or a program of
austerity must be undertaken to bring the debt back to manageable
proportions. The history of the
U.S. is characterized by a long-run increase in indebtedness, punctuated by periodic
financial crises and subsequent continuing policies of inflation. The
subprime blow-up is the latest installment in this ongoing Debt Super Cycle
story. During each crisis, there are always fears that conventional re-inflation
will no longer work, implying the economy and markets face a catastrophic debt unwinding. Such
fears have always proved to have been unfounded, and the current episode,
because of its size in relation to both the USA’s and the World’s
economies, may well prove to be the exception.
A combination of Fed rate cuts, fiscal easing (aimed
at relieving the subprime distress), and a lower dollar simply trigger another
up leg in the Debt Super Cycle, and a new round of leverage and financial
excesses. The objects of speculation are likely to be global, particularly
emerging markets and resource related assets. The Super Cycle will end if
foreign investors ever turn their back on the U.S. Treasuries, triggering
capital flight out of the Dollar and robbing U.S. authorities of any room to
maneuver. This could happen a lot sooner than anyone expects as powerful
forces such as China, Russia, Japan, the Middle East oil sheikdoms, and
Brazil (just to name the larger countries) are trying to replace the US
Dollar as the world’s only RESERVE CURRENCY with a NEW RESERVE CURRENCY
that will probably be at least partiality GOLD BACKED, if not fully Gold
Backed. What happens to the price of gold then?
Many so called experts believe that we are nowhere
near the ending of the Debt Super Cycle; but ask yourselves, who is paying
them? Even though the government is stepping in to buy its own Bonds because
private debtors are cutting back, we have just shifted the focus of where the
debt is coming from and who is buying it, expanding the Debt Super Cycle in the US, Europe,
Great Britain, Japan and other developed countries (yes, even Greece!) at an
ever expanding rate. This is still very much in play as the increases are
magnitudes larger than any possible decreases in the private sector debt as
governments explode their balance sheets. Meanwhile, total debt continues to
grow.
But what is most worrisome is that
government’s off-balance sheet obligations are exploding at an
even faster rate than their bond obligations. Plus the fact that in the US, the Baby Boom Generation is now
retiring at a rate of 15,000 a day for the next 20 years. Up until now, they were the generation that did most of the saving,
investing, and spending and paid most of the taxes. They have become the
takers (Social Security and Medicare), selling their homes, pension funds and
401Ks in an attempt to maintain their standard of living.
There is a limit to how much debt you can pile on.
But this
time is different or is it?
Most of the large borrowing has come from foreign sources and not for the
increase of productive capacity, but mostly for consumption. Up until
recently, it took $3 of debt to create a $1 rise in GDP where as now, each $1
rise in debt is government debt, and has a negative multiplier – so in
truth all that new debt actually hurts GDP.
Talk about unsustainable. The US cannot borrow another
$15 trillion in the next ten years. It's just not there. Long before that,
the Bond Market will simply rebel, rates will skyrocket, and the aftermath
will make the last crisis seem like a cakewalk. Some say (like me) that the
coming election is the most important one this country has ever had. It is
one thing for the Tea Party movement and Independents to elect a Republican
Congress. However, the GOP Power in Washington are NEOCON Keynesians and
although the spending will slow, without the quick passage of Term Limits eliminating
the need to get re-elected, the economy cannot cut back fast enough and will first
slow into a Double Dip Recession and then slip into Depression by 2014/15.
Then, the really important election will be in 2016
when everyone will have to decide the new direction the economy and country
will then take going forward. Without term limits, it won’t make much
difference who gets elected as the world will slip into WORLD WAR III, which
history tells us always follows worldwide Depression. One thing for sure, the
economy will not be booming by 2014, as there is no leader in sight who is able
and willing to lead the US into a new era of FREE MARKET CAPITALISM.
Will voters in 2014, 2016 and 2018 decide that no
economy can possibly sustain a nanny entitlement country? Can they stay the
course for fiscal and entitlement control or will they scream for more and
more FREE STUFF?? Will they take the long view and let politicians make hard
choices or will they send the message that short-term choices are what they
want? Will they give lip service to going on a diet and exercising and
then stay on the couch and eat chips and watch TV? Or will they really get
fiscal religion and say NO to Socialism and go back to individual
responsibility and freedom and small government Capitalism?
GOLD and DEFLATION
What usually happens to
gold and silver during a period of profound deflation?
Public budgets are over-strained, the financial sector faces systemic
problems, and currencies are depreciated in order to re-inflate the system so
that the government can pay its bills. Moreover, the credit quality
deteriorates and the creditworthiness of companies and governments come into
question. The investment focus then shifts from capital growth to capital
preservation. The confidence in the financial system and paper currencies
declines, while the importance of gold increases as re-monetization takes
place.
Late July most commonly marks gold's major seasonal low just in time
for its most reliable autumn rally.
As you can clearly see, an autumn rally has started and will be accelerating
into September, after struggling all summer building its base; exploding higher
by late September. So if you can, hold on through the summer doldrums, ignore
the ubiquitous bearish psychology and sit tight, usually you will be richly
rewarded.
SILVER
Silver’s average summer performance is considerably worse than
gold's, drifting between its May close and 5% lower. And silver's autumn
rally also starts later on average. Silver is a hyper-speculative metal that
needs excitement in order to thrive. Capital only floods into silver
when traders expect a major surge in gold. Silver investors are greatly
rewarded in autumn when major seasonal gold-buying spikes return. One must realize
that gold stocks actually start rallying on average well before the
market summer doldrums end.
Historically from late July to late September, gold stocks as a group
have advanced nearly 15% on average throughout this entire secular Bear
Phase. There is a heck of a rally due! And the only way to ride it is to be a
contrarian and fight the crowd. When everyone else is convinced gold stocks
are heading much lower into late July, early August, you have to buy them or
hold on to what you have. Check the charts and you will notice that the best
stocks have already bottomed. July through August is definitely the shopping
season for PM’s (check out SVM).
WHAT DO WE DO NOW?
HOPE FOR THE BEST BUT PREPARE FOR
THE WORST:
I'm also always asked if the Elliott Wave, Dow Theory or any other
technical method is still valid because of all the efforts to manipulate the
markets. The short answer is yes. While manipulation can have a temporary
effect on the market, it cannot fix the problem, it cannot stop the
inevitable and in the end, it will only serve to make matters much more exaggerated.
The very basis of
technical analysis is that everything is discounted into price. So, if every
influence known to man and the market is reflected in price and technical
analysis is a study of price, then absolutely the Elliott Wave Theory and
other technical methods are just as valid today as they have ever been and
the manipulative efforts to "fix" things does
not matter. The only variable that I see in technical analysis, like anything
else, is that one person will see the data to mean one thing, while another
person may see it to mean something different. Therefore, opinions may vary,
but still everything is discounted into price and it all boils down to the
technician and his methods.
None of us can know the exact time when bubbles will
burst or when underpriced assets will come to life, but we do know that the
last fools holding the bag will lose big time.
There
is one truism that I all too often seem to forget, “Never fight the FED.” The Fed and Government can
stay IRRATIONAL a lot longer than you and I can stay solvent going against
them. Being Dead Right is still
being DEAD. The only thing to do is wait for the BREAK and then jump on
board. The only reason to try and
catch the tops or bottoms is EGO.
And being a pretty good Economist and Political Analyst, I all too
often allow my ego and impatience to overcome my better judgment. After all, it could be months and
sometimes years before one’s reasoning is proven to be correct. Trust
me when I tell you that your ego will be much better satisfied by jumping on
board after the Market Breaks your way than to pick the exact turning point
in advance. Making money while
most people are losing theirs is always the most satisfying. Just think back
to how you felt in 2008 and 2009. Or for that matter, 2006 and 2008 when I
refused to turn Bearish along with the majority of GOLD BUGS and insisted
that you not sell your gold.
So I
will swallow my pride and admit that although I am sure that my analysis is
right that you had to be completely irrational to buy 30 year bonds, you still
could have made money on the bond appreciation from falling interest
rates. We lost some money over
the last few years trying to pick that TOP. However, the time may have
finally come to start nibbling by buying some 3 month puts on TLT or calls on
TBT. Not so much to make real money, but enough to make sure we keep a sharp
watch on the Treasury Market so we will be prepared to increase our positions
once we are confident we are convinced we finally caught the next major
trend. After all, how much lower can interest rates fall below zero?
Hopefully, we will recognize the break in plenty of time to jump on board the
band wagon, catching the major part of the move and long before the great
majority finally admit to themselves that they have been duped and the 40 year BULL MARKET in Bonds is over. But let’s not fight the FED just
yet. PATIENCE!
Although
the bond bubble may continue for a while longer as the FED initiates a new
massive QE3 into the elections in an attempt to re-elect Obama, the BOND BULL
MARKET IS OVER. Let someone else fight to get the last scraps.
A 1000 POINT UP MOVE IN THE DJII?
So, if
I am looking for a 1000 point rally in less than 2 months, why am I not
recommending buying stocks whole hog?
Remember all the investment managers who flamed out shorting JGBs
(Japanese Government Bonds) in 1990...1995...2000... What I am worried about
is that the stock market may be having one last flurry into the QE3
announcement. It could then FLAME OUT.
(There is no such thing as a sure thing; especially when everyone is waiting
for that same sure thing.)
WHY AM I NOT GUNG HO TO BUY STOCKS NOW? Because it is too dammed dangerous. Sure, things are never sure
and more importantly, it will be highly selective and most people cannot
change their minds on a dime. PATIENCE is the most important skill to
successful investing. So for me, I am accumulating gold and silver securities
of which I am fundamentally sure of, plus we are just at the beginning of the
most favorable time of the year to buy PM’S. WHAT IS THE RUSH? BEFORE THIS YEAR IS OVER, WE WILL SEE
THE START OF THE BIGGEST BEAR TRAP IN HISTORY (best shorting opportunity) as
both the Bond and Stock Market BUBBLES BURST.
One is
more likely to stay solvent and profitable buying reasonably priced assets
like gold and silver and patiently waiting for the rest of the world to
agree, than purchasing the popular overpriced hot things, like AAPL, GOOGLE
and AMAZON (that has no earnings)
hoping to get out in time before that last suck in rally FLAMES OUT.
Don’t forget that it was me who was speculating that we would have this
one more SUCK IN RALLY into the elections, while the majority of the Street
was turning BEARISH into the European disaster, America’s disappointing
3rd quarter earnings and disappointing ISM and Employment numbers.
TREASURY
BUBBLE
Is that
"hissing" sound you hear, the air leaking out of the bond market bubble? No one seems to notice – or, rather, no one
seems to care – that interest rates have spiked over the past two weeks
(not enough to cause concern YET?) The yield on the 10-year Treasury
note bottomed at an historic low rate of 1.4% two weeks ago.
Yesterday, it closed at 1.62%. That's a 15% increase in interest rates. And
it likely signals an intermediate reversal of the direction of interest
rates.
Take a
look:
.
In two weeks, the 10-year
yield has recovered everything it lost in the previous two months. More
significantly, we now have a new series of higher highs and higher lows on
the chart. We haven't seen that happen off a deeply oversold level since last
September when rates bottomed at 1.7% and then rallied to 2.4% six weeks
later. A similar move this time would pop the 10-year note yield to 2%
– basically right back to where it was in April. That's horrible news
for bond investors. It'll wipe out all the gains of the past few months. And
anyone who bought bonds
recently as a gamble that the Fed
would announce a new quantitative easing program will suffer large losses.
NOW IS
THE TIME FOR PATIENCE!
WHERE TO NOW
DOW
After reaching an all time high in December 2007 of nearly 14,200, the
markets crashed by more than 50% into March 2009 at just below 6,000, causing
the biggest financial and stock market crisis since the 1930s. The big
question now is: Have the problems that precipitated the crash been fixed or
at least alleviated and what happens next?
Well, not only have the
problems not been fixed, but they have not even been addressed and by and
large they have spread to the rest of the world and to a large extent have
become much worse. Europe, our largest trading partner, is on the verge of
splitting apart at its seams as the majority of their member nations are on
the threshold of bankruptcy. The second largest economy, China, has succumbed
to the natural LAWS OF ECONOMICS (just as I warned you she would) and both
their economy and stock market have been slowing and heading down sharply.
However, because of their massive foreign currency reserves that they have
amassed over the last 15 to 20 years, they are not in the same danger as the
rest of the world. Nevertheless, like the rest of the economies that rely on
exports, they are having a tough time of it and their Real Estate Bubble is
even larger than the one the USA is struggling with. It is far beyond the
scope of this newsletter to cover all the economies and stock markets of the
world, so I will now switch back to the economy and stock markets that we are
most interested in, the USA, realizing full well that they are all related to
each other in varying degrees.
Even though we have
recaptured 7000 of the approximate 8000 points we have lost since 2008–2009,
it is my guestimate that the manipulators will probably succeed in breaking
out the markets to a new all time high above DJII
14,200. However, we are not now nor will we be the, into a new BULL MARKET. WE WILL THEN BE IN THE BIGGEST BULL TRAP IN RECORDED
HISTORY. More on that later as we approach that situation. Stay Tuned!
The reason for my belief
that the DJII will hit 14,200 is due to a number of factors.
#1 The markets of the
world are now the most manipulated ever, beginning with the most obvious
ones, which are US Treasury Bonds and Interest Rates.
#2 Perhaps of greater
importance is the 90% correlation between a rising stock market in the last 2
months leading into a presidential election and the incumbent getting
re-elected. Given that this President and his administration (especially the
Media, Financial Press, FED and the Treasury) are the most manipulative in
history, I am confident that they will pull out all stops in their attempt to
assure his re-election. This means predominantly printing money, monetizing
all new and some old debt (buying bonds) and creating mountains of out of
thin air money.
But a 1000 points in 2
months is a very Tall Order and very appealing, so if you want to gamble and
play the upside, buy 3 month options (no more than 5% of your assets) on your
favorite Index ETF’s (the most liquid ) using 20% trailing stops.
Depending on your level of sophistication in the use of options, you can buy
collars (please do not ask me what a collar is, just stick with what you
know). Personally, I prefer to accumulate more Junior silver and gold on any
further weakness. Of course, I am violating a Cardinal Rule of prudent
investing and that is the one about diversification, but we are in SPECIAL
TIMES (more about this later).
WHAT ABOUT THE FUNDAMENTALS?
With interest rates down
to zero and dropping to negative in parts of Europe, money managers are being
forced to take ever increasing RISK in their attempt to achieve their pension
fund’s growth assumptions necessary to be able to pay for the promised
benefits. Union and Government Pensions can no longer expect to receive ever
increasing contributions to make up for the short-falls. Tens of millions of
individual 401k owners who thought they had set aside large enough nest eggs
to be able to retire in safety by investing in long term Treasuries and CDs, can no longer do so and are now forced into the Stock
Market in order to attempt to achieve any kind of meaningful returns. It is
probably one of the main reasons that the Stock Markets have gone up as much
as they have (on low, declining or no volume), given the dire straits most of
the world’s economies are in. Once the selloff begins in earnest, it
will be doubly re-enforced by the early liquidations that the Hedge Funds and
Seniors will be forced into (at the first signs of danger) in an attempt to
save what little they will have left. There is no question in my mind that
the coming crash will make 1929 look like it was a walk in the park in
comparison.
COMPLACENCY REIGNS
As more and more Pension
Fund Managers and other so called experts seek ever increasing riskier
Investments (calling them “Safe Havens) in their attempt to meet
targeted returns, they are pouring more and more money into riskier, lower
grade debt and other riskier investments, such as commodities, options, and
day trading FOREX, all of which they know less about than stocks.
Have you all not noticed
how many ads are out there offering to teach you how to trade FOREX? Kind of reminds
you of the market just before the DOT.COM Bubble burst.
Everyone knows that
history repeats but the big question is: What history are we looking at to
repeat? And as more and more of the experts become lost, they revert to the
old tried and true self preservation method of
playing “Follow the Leaders,” which will result in cascading
selloffs. DON’T YOU BECOME A
LEMMING; STICK WITH AUBIE.
QUESTION: Why would anyone invest in negative yield, risky assets,
such as European Sovereign and Bank Debt or for that matter US TREASURIES
paying little if any interest (with true inflation in the neighborhood of 7%-8%)
instead of in Gold and Silver and/or high dividend paying solid securities,
such as AT&T?
GOLD
"Never
Sell a Dull or Quiet Market Short" is a tried and true, trading axiom that
alludes to a price bottom being formed, and you won't find a much quieter
market than gold and silver these days.
BUY GOLD, SILVER AND THEIR
SECURITIES.
GOOD
LUCK AND GOD BLESS
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To subscribe, call 561-840-9767 as we accept most major credit cards or mail a
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Aubie Baltin
CFA, CTA, CFP, PhD.
2078 Bonisle
Circle
Palm Beach Gardens FL 33418
uncommon@aubiebaltin.com
561-840-9767
Please Note:
This article is for education purposes only and is designed to help you make
up your own mind, not for me to make it up for you. Only you know your own
personal circumstances so only you can decide the best places to invest your
money and the degree of risk that you are prepared to take. The Information
and data included here has been gleaned from sources deemed to be reliable,
but is not guaranteed by me. Nothing stated in here should be taken as a
recommendation for you to buy or sell securities.
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