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Published : November 18th, 2008
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There comes a time that Man deceives himself to such an extent that he refuses to believe that Natures Laws even exist. The Wave Principle is based on the fact that Man refuses to learn from the past and thus keeps repeating the same mistakes over and over again. Somehow Man manages to convince himself that 2 + 2 = 5. The so called experts as well as the masses are led to believe that the Laws of Nature do not exist; That what is consumed need not first be Produced; That what is borrowed need not ever be repaid: That Promises are equal to Substance; That Benefits (entitlements) have no Costs and that Fiat Money is the equivalent to Gold.




The banks are now going to experience the exact same interest margin squeeze that occurred the last time Greenspan lowered the Fed Funds rate to 1%? Today however, the squeeze will be much worse. In the Greenspan era, banks could easily make money on the spread between commercial paper and deposits. Today, under the "Federal Reserve Starts Lending Plan" the Fed is asking 2.88% for 3 month highly rated commercial paper and 3.88% for asset backed commercial paper. With the banks paying 4% & 5% for 6 months and 1 year CD'S, how can they make money? To make matters worse, they are now paying 10% and 11%, non-tax deductible, dividends on $billions of Convertible Pfd's on recent, hastily raised new equity. Why would the Banks accept these kind of Bailouts rather than cut out their dividends? I for one will not be investing long term in these completely mismanaged institutions.


The Paulson-Bernanke "genius" team is sending mixed messages: Is their emergency financing a sign of weakness for participating companies, or a sign of strength for the companies allowed to participate? Are they picking winners and losers (socialism) or simply trying to liquefy the commercial paper market? Do they even know what their objectives are? Today's mantra is: Core deposits are King: And the Treasury is gifting, large deposit pools, of "weaker" banks to their chosen winners. But even the winners are stuck in a margin squeeze. Not wanting to be caught short, even the mega-banks are paying a premium 5% for 1 year committed deposits. By Bernanke lowering the Fed Funds rate to 1%, the corresponding prime rate is 4%. That would make the prime less than the cost of funds. That also makes the prime rate as well as the Fed Funds rate meaningless. Even the best bank customers will have to pay prime plus, ? Is it possible that Bernanke is so steeped in Keynesian thinking that they do not understand that "there is a time and a Place for everything" and they can't understand that lowering the Fed Funds at this point does the banks and economy much more harm than good? Do they not understand that the banks have learned their lesson and will no longer lend unless rates have credit, currency and interest rate RISK premiums built into the rates. Banks only profit from a steep yield curve. Besides, Treasuries are trading well below Fed Funds anyway. There is no hope of a psychological benefit from 1% Fed Funds if the banks won't lend at what they now know are ridiculous low rates. Would anyone in their right mind lend at these rates? And yet they persist in attempting to, push down long term rates. Are their EGOS so large that they think they can override NATURAL LAW?




Current yields on longer-maturity bonds for General Electric, Citigroup, Morgan Stanley and the like are implying credit default swap spreads of over 300 basis points, depending upon what credit spread (as distinct from default risk) one assigns to these highly rated issues. Given that Citigroup itself has started pricing loans on a system which incorporates both a Interest rate risk spread as well as the cost of CDS contracts over and above a particular benchmark: People and businesses will now incur much higher borrowing costs, regardless of lower Libor or Treasury rates. So why is everybody getting excited by a fall in Libor which is now meaningless, since the newly re-liquefied Banks which have greatly tightened their lending requirements, are not lending and therefore do not need to borrow from each other. Higher spreads must begin to negatively impact corporate profitability. On the positive side, borrowers will be forced to be more selective as to which investment projects they choose by making sure their expected return on investment is large enough to pay the higher cost of money. By the way, that is the way Natural Law says that it's supposed to work.


So far CDS market-makers have not dared to announce losses on positions established on sovereign risks such as Argentina, Bolivia, Venezuela, Ukraine, Iceland, Hungary, Pakistan and South Korea. But it is more than evident that the CDX emerging market index, at its current levels of 640-680 basis points, is totally out of tune with core perceptions amongst risk-offset providers. Pakistan CDS spreads soared from 200 to 3,500 basis points this past year alone. Spreads for Ukraine widened from 1,000 to 2,000 basis points. Market-makers for Russia, India, Indonesia and Turkey (to name just a few) have completely withdrawn from the market place. The inference to be drawn from the state of the CDS universe is that doubts relating to the shape of the emerging economies through the rest of the decade are intensifying with each passing day. Regardless of what emerging-market bulls on Wall Street are saying, CDS prices for the emerging market spectrum may be reflecting the type of broad and fundamental developing-country risk which equity analysts have not generally incorporate into their valuations. Also, it is virtually impossible to visualize a scenario where exchange-traded emerging market funds (ETF'S) can move sharply in one direction and emerging market CDS prices in the other.




The United States no longer relies on industry for growth. With securities trading now exceeding 4 X GDP, our country's economic backbone has become money. America finances the world's corporations and emerging markets, its dollar is the world's reserve currency, and its citizens' purchasing power allows for the monstrous consumption that accounts for over 70% of the world's largest GDP, while becoming the worlds buyer of both first and last resort. That this nation faces a liquidity crisis is the worst case of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that leverage. Since the 1970s, America has gradually shifted from being an industrial production superpower to a consumption-based financial center, concurrently going from Largest Creditor nation to the world's Largest Debtor nation in less than 20 years. It was only able to do this because of the leverage it had on the rest of the world's economies by its currency being the world's only reserve currency; which also allowed and even encouraged 20+ years of trade deficits.




Federal Reserve Chairman, Alan Greenspan manufactured a credit bubble in the 1990s through a series of interest rate cuts, in conjunction with an extremely inaccurate new methodology of inflation calculation introduced by Bill Clinton: Interest rates were manipulated to artificially ease credit, which grossly misdirected capital and created a series of bubbles in information technology, dot-coms, equity markets, real estate, and credit in general. The 1990s were a period of ridiculous economic growth in America, but it was substantially artificial, as over consumption pervaded the perceived growth. This over consumption was financed by borrowing, using artificially created out of thin air free credit. True purchasing power was significantly below perceived wealth, and thus asset values shot up and now, are shooting back down twice as hard and twice as fast. Now that the credit market has collapsed (as well as credit-dependent markets, namely housing, automobiles and consumption in general), purchasing power is dropping fast in real terms. Americans are losing wealth rapidly, especially through their investments in Hedge Funds, mutual funds and pensions funds, as well as their homes. To ease the flow of credit to get Americans borrowing again and consequently consuming (hopefully propping up the American economy), the Fed has been lowering interest rates again, but that is exactly the wrong thing to do at this time, since it is exactly that which got us into trouble in the first place. And this time there is the added problem of inflation and a world-wide drop in confidence. The re-calculation of inflation will be manifesting itself in a weakening dollar and eventually valuations will finally come to represent true inflationary levels, now around 10% already. The problem is the American government is trying to stimulate consumption once more by re-liquefying banks by buying out bad mortgage-related assets, especially derivatives. Consumption does not drive economic growth in the long term, Capital Investment does. A Welfare package does not become a stimulus package just because you call it that. It is only Investment Capital that spurs technology, adds liquidity, increases output and creates JOBS: Something America has not experienced since it turned its back on industry. Raising taxes on business to pay for a new welfare package is exactly the wrong thing to do. America has enjoyed strong inflows of foreign capital because of its equity markets and reliable currency, but neither of those are incentives for investment any longer. The government's plan to buy defaulted credit assets to bail out big banks is in fact worse for its long-run economic growth, because it weakens the dollar even further. The US dollar is now essentially backed by bad mortgage debt, and the only thing propping it up right now is temporary, relative strength, as the rest of the world experiences its own credit crisis and the dollar remains the world's reserve currency. But for how long?


The United States has plundered global wealth by exploiting the dollar's dominance and the world urgently needs other currencies to take its place. The front page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.




American national debt (Bond Market) will be the last bubble to collapse, and in fact it is still inflating and will continue to do so but only until a weakened global economy will force nations to first stop buying our bonds and then call in their debts. This will be the coming of age for the next wave of financial titans: Singapore, Hong Kong, China, Australia, and Russia. This will be the downfall of the American Dollar and its replacement as the world's pervasive reserve currency. This will be the true liquidity crisis, as the United States will essentially be forced into bankruptcy with no surplus to pay off debts and no way of financing them because of an illiquid banking structure. This could mark the end of capitalism in America as America seeks into a socialist European type morass. A steady and ever increasing Diet of Socialist programs from the 30's until the today has foreshadowed the economic collapse. Alan Greenspan ushered it in, War, George Bush and his Drug Plan and Congress' refusal to face up to their wild spending and future entitlements worsened it, and Barack Obama with his far left Socialist Congress, big government programs and bailouts will make it "The Perfect Storm" (Hyperinflation followed by Depression). Sounds eerily similar to 1930s Germany. The only question remaining: Who will become America's demagogue?


IS THERE A WAY OUT FOR US? If enough of you ask for it I will try to come up with a plan. BUT then who is there to listen?






If there is one common agreed upon solution to the economy's problems, it is that housing prices must be stabilized and demand for housing must be increased. WHEN WILL THEY EVER LEARN? Lack of demand is an oxymoron! There is only a lack of demand at today's prices, which are still overvalued, especially in light of the fact that we are already in Recession. Economics 101, Supply and Demand, teaches that if one wants to increase the quantity demanded of anything, including homes, DECREASE THE PRICE. Don't stabilize them! The politicians and economists from both sides of the fence are so steeped in Keynesian economics that they are stuck in the concept of increasing demand by throwing money at the situation and subsidizing both borrowers and lenders. That never will work, as all it does is cause inflation everywhere while picking winners and losers, Whatever demand is increased will only be spotty and temporary and end up causing much more harm than good as the inflation generated permeates throughout the whole economy. Draw a simple supply demand chart (An x,y, axis with a X in the middle) and see for yourself what happens as you raise or lower prices and what you have to do to change price. This is a simple fact, that no one in a position of power or influence, including the Economic Nobel Prize winner Grubman seems to understand and it is why I am so sure we are headed towards Depression. With everyone demanding that the government do something, whatever they will do will make the situation worse, not better and when it doesn't work, will they then follow what they did with more of the same? The best corollary I can think of is the alcoholic who wakes up every morning with the shakes and needs a drink to steady himself. This goes on for 20 or 30 years until his liver is damaged beyond repair. Now that morning drink, instead of steadying him only makes him a lot worse. Since he does not know any better, he continues drinking until he eventually kills himself. Are we no smarter than a drunk?




This Country started as a Free Market Capitalist Country and focused on Individualism, but ever since Jefferson left the government, Hamilton and Morris led the country slowly but surely towards Mercantilism, which has morphed into Socialism, with only the occasional pause (REAGAN). The move left really accelerated with the election of FDR Nixon Clinton and G.W. Bush.




Capitalism is so powerful that it was able to carry all the interference and attacks against it until this year, when the Socialist bailouts finally broke its back and has set in motion the Biggest Recession come Depression that has ever hit this country. The only way to either avoid the Depression or get us out of it, is a return to Free Market Capitalism, which obviously requires the introduction of Free Market solutions to our problem. Without a return to Capitalist principles, the DEPRESSION will last a minimum of 20 years. (Go back and read my Jan 2008, Kondratieff Wave).




The consensus from both sides of the aisle is that we must save the CAR industry to preserve jobs of not only the carmakers, but all their suppliers as well. Great Idea - save 250,000 jobs and jeopardize the rest of the economy. Have they not yet figured out that they CANNOT turn back the clock? I guess not since they are still talking about bringing all the old manufacturing jobs back from China and elsewhere. While they are at it, why not bring back all the agricultural jobs that have been lost over the last 100 years?


Saving the car industry must start by declaring Chapter 11 bankruptcy. This would not shut down the industry, but it would freeze their liabilities and cancel all their Union contracts. This would then allow the companies to drastically reduce expenses by first getting rid of their gold plated pension and medical costs and bring them back down to reality. Second, it would eliminate the necessity of paying 80% salaries to laid off workers. It would also get rid of all the tremendous cost increasing "make work" union work rules. The result would be a new highly competitive industry would re-emerge. There is a reason why foreign car companies succeed in the USA using all American workers and Management - NO UNIONS. The American cars today are among the most innovative, high quality and most sought after cars in a long time; so repeating over and over again that they are not building cars that are wanted is just plain false. Especially in light of the fact the American Car Companies sold 6 million cars last year and GM is profitable all over the world except in the USA. Saddling the industry with an average of $750 to $1250 a car in extra costs has been and is untenable in today's competitive world market place. We must get rid of all the Socialist rules and dictums that our American companies must labor under that none of the foreign companies have to live by.


UNEMPLOYMENT will be the NEXT crisis. Expect a rise above 15%.


Jobs and a lack of income will cause the next wave of delinquencies Credit Card & Auto Loans), which means fresh new challenges to bank liquidity, perhaps larger than what we have seen thus far, because there are no hard assets backing any of the loans. The United States has lost a reported 1.2 million jobs so far this year. Actually, the number is substantially higher as the 1.2 million is an already reduced figure, by the phony birth/death estimate of new jobs the Labor Dept assumed new businesses created. Without that number, the U.S. has lost 2 million jobs so far in 2008. Now, consider this: Just to keep pace with population growth, the U.S. has to add 150,000 new jobs per month. So, the result is the U.S. saw 3.5 million of new unemployed people in 2008. That is a ton of future loan delinquencies, foreclosures and shattered dreams. This is 1930's Depression era pain, so be prepared.




The Daily Full Stochastics for three major markets, the London FTSE, the German DAX, and Australia's SPASX200 all just recently generated new "sell" signals. A good reason to pay attention to these markets is that it is clear that world markets are interdependent, so that if a group of Senior markets all give a signal; it usually spreads around the globe. These foreign markets are probably confirming that a sharp plunge has started in U.S. markets. It started with the two day plunge on low volume Wednesday and Thursday, that was the worst EVER. That collapse in prices suggests the 5th wave of my short term Bearish scenario, is underway and will likely take prices below their intraday lows of October 10th to mark the end of the first phase of the Bear Market that started over a year ago in October 2007. Confirmation will arrive with a break below 7,882 low in the Industrials. As I wrote in my last letter, although this decline will be a short-term event, it has further to go and will likely be complete by the end of November and will mark a significant tradable bottom. BUT it will only be the end of the first phase of the Secular Bear Market. The coming rally will be tantamount to the 1930's Bounce which was strong enough to bankrupt the famous short seller, Jesse Livermore and fool the likes of JP Morgan. I hope that I learned something from studying the past and won't end up repeating their mistakes.




Buy precious metals now to protect yourself and make money. Venture Capitalists are gone, there are no new IPO's, there is no new industry, the currency is in danger of becoming worthless, hyperinflation will kick in, and there is no demand curve growth in sight. Buy precious metals. Short term traders ONLY can buy puts or the Double Short ETF's such as QID, SDS, DXD and SRS. You do remember SRS (short commercial real estate) that you should have bought between $80 and $90, that is now up around $180. For the rest of you, search out your favorite dividend paying stock to go long once that time comes. Don't wait for the bottom and then make a mad dash to find stocks to buy. Stick with the big stocks BE PREPARED. For the speculators among you, take a shot on the financials. BUT MAKE SURE YOU USE STOPS or just buy their ETF'S or call on their ETF's such as .UYG


Keep in mind that I am NOT a stock tout. I rely on the research of others and I refuse to recommend people that I do not know personally.


Will this coming LOW be the final Bear Market low? No, I don't think so. Not this time around. Notice all the Bullish divergences developing. I think we will test the July 7882 low and maybe even go as low as 7000 over the next few weeks which would be similar to the 1929 low, then we will go into a 1930's type bounce before selling off again into the final low sometime in 2009-2010 Maybe as low as 4000 - 5000. REMEMBER, even though the Great Depression lasted 17 years and did not end until 1946, the LOW in the stock market was made in 1932.




I said all that I know what to say that was worth saying in my last letter. (If you haven't received it let me know.) Continue to buy Junior Golds like NXG, HL and CDE as well as the top seniors like AEM that have most of their assets in safe countries. These are by no means an exclusive list. Or you can buy calls on the GDX. Another less risky way to make money is by selling At or Out of the money puts on your favorite Gold stocks or on the GLD and GDX: HAPPY HUNTING.


Aubie Baltin CFA, CTA, CFP, PhD.


2078 Bonisle Circle

Palm Beach Gardens FL.  33418



Also by Aubie Baltin


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 on 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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Aubie Baltin has spent his career identifying major trends in the markets and helping others to profit from them. He uncovers changes to the major trends in his newsletter, “UNCOMMON COMMON SENSE”, then presents specific, actionable recommendations to help his readers profit before they become obvious to everyone else.
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