|
"We have reached a profound point in economic
history where the truth is unpalatable to the political class - and that truth
is that the scale and magnitude of the problem is larger than their ability
to respond or comprehend - and it terrifies them."
"We are single-digit years away from the most
profound market clearing moment in history" -- Dr. Aubie
Baltin
CHINA
THERE'S TROUBLE BREWING IN SHANGHAI AS WELL AS IN
THE REST OF THE WORLD'S EMERGING STOCK MARKETS.
It was November 2010 when I first warned about not
to get too excited about China: That China too, must and will succumb to the
Natural Laws of Economics like all centrally planned countries. Thus the
Shanghai Stock Exchange Composite Index was due for a sharp selloff and would
lead the rest of the world markets down. More recently, the index had just
broken a downward sloping flag formation or consolidating-triangle pattern if
you prefer. Which is a bearish development, and I figured the Shanghai Index
could be headed as low as 1,800 to 2,000 this year. The Shanghai Index hit
2,200 last December. It has been rallying since then and today, it's 6%
higher than where it started the year. But it's unlikely to hold on to those
gains.
While the index may continue to bounce in the short
term and test the former support line of the pattern giving an excellent
opportunity to short with a close stop; it projects a downside price target
of about 1800 for the index. That's a 17% drop from current levels - just
above the financial panic low of 1,800 back in 2008. If you are bearish on
China, you should use any rallies back up toward 2,400-2,500 to establish
short positions. Buying shares of YXI is one way to establish a short China
trade. YXI is an ETF designed to move in the opposite direction of China's
stock market.
THERE IS NO SUCH THING AS A FREE LUNCH
Fed Chairman Ben Bernanke has taken a lot of heat
for printing too much money, having been dubbed "Helicopter Ben."
His last post-FOMC announcement and press conference contained no surprises.
The Fed promised to do a small amount of additional harm in the short-term by
continuing the distortion of the relative prices of long and short-dated
government debt. It will do this via a 6-month extension to the program known
as "Operation Twist"; just its name alone should cause you
great concern. He also promised to eventually do a lot of additional harm via
more aggressive price-distorting policies if the economy is unable to recover
from the harm that has already been done to it in the past. The genius
leaders of the Fed actually believe that they can help the economy by
counterfeiting more, going deeper into debt, driving down the price of gold
and silver and taking other measures that corrupt the price signals upon
which all Free Market Economies rely, like interfering with the price of
money (interest rates).
But if Bernanke's making it rain money from a
helicopter, China's been bombarding its economy from multiple stealth
bombers. Money supply rose markedly in May and the recent years' credit
growth has surpassed even that of the U.S. in the
period leading to the Lehman collapse. Unfortunately, instead of being put to
good use, much of that money has ended up in the pockets of Government
officials and in the hands of wasteful, state-owned enterprises (SOEs).
Meanwhile, just as here in the US, cash-starved private entrepreneurs have
been relegated to the sidelines, unable to get even a small share of either Washington
or Beijing's ever increasing, politically driven, capital-misallocations. Is
this another sign of the coming unsustainable American and Chinese growth?
IT'S RAINING YUAN
The SOEs get tons of money to splurge on fancy,
wasteful items, get wined and dined by the country's
most powerful and politically connected, yet contribute relatively little to
the economy. In many cases, they're profitable solely because they're the
only players allowed in strategically important industries. Meanwhile, the
small and medium-sized businesses do the grunt work, contributing two-thirds
of all taxes and industrial output, and employing more than 75% of the
Chinese and American workforces. Yet despite the surge in bank credit, many
smaller businesses are either denied access altogether or charged absurdly
high rates on loans. Of course, China's four largest state-owned banks have a
tremendous bias in lending to SOEs. And the government's vested interest in
protecting the status quo has led to major restrictions on multinational
banks looking to expand within China. So naturally, JPMorgan Chase, Wells
Fargo and Bank of America have decided to avoid retail banking in
China altogether.
As a result of their intimate connections with
China's authorities, SOEs enjoy a number of remarkable advantages that
private firms would kill for. They get huge government subsidies in the form
of significantly lower tax rates, have access to much cheaper basic inputs
like water, land, and energy, and enjoy barriers to entry by competitors in
key industries. But despite their edge, SOEs are much less efficient than
their private counterparts (something that is completely lost on Politico's of all stripes). In fact, many are loss-makers
and there's mounting evidence they've misallocated capital on a tremendous
scale. But thanks to the "wonders" of state capitalism, they keep
getting funded, accounting for more than 75% of all bank loans and continue
to expand. Sounds like the big banks here.
NO DEMAND FOR STEEL? TRY RAISING PIGS
A recent piece in the Financial Times
outlined how several state-controlled steel companies, faced with falling
demand and big losses are branching out beyond their core lines of business. Baosteel Group, the world's third-biggest
steel producer, used more than half of its net borrowing last year for
non-steel related businesses, which ran the gamut from real estate to
telecommunications to manufacturing. Wuhan Iron & Steel, the
country's fourth-largest steel producer is investing $4.7 billion over the
next five years in pig, fish, and organic vegetable farming; they went from
steel to pigs. WOW… More worrisome, this trend isn't just confined to
steelmakers. Cofco, a state-controlled
grains company, is now building luxury hotels in Beijing, and Tongling, the nation's second-largest copper
producer, is diversifying into timber. What do they know about hotels and
timber?
Instead of reducing capacity in response to falling
demand, China's SOEs forge onward and upward with their grandiose schemes,
lured by potentially higher profits, but encouraged primarily by preferential
access to large quantities of cheap credit. After all, if the cheap money
keeps flowing, you just have to INVEST
it. Otherwise, it might be cut back if you don't. Besides doesn't everyone
have a brother who could use a few extra Sheckles?
Haven't they learned anything about the perils of excessive and cheap credit
from the rest of the world? Oh I almost forgot a centrally planned Fascist
economy does not have to follow the Natural Laws of Economics, especially if
they do not have a Congress to answer to, like Obama is always complaining
about.
Despite growing evidence of huge capital
misallocations in the huge state-run sector, many
investors remain indifferent, clinging to their faith in the effectiveness
of central planning. They agree with Obama that China is a special case and
that an authoritarian government can more easily control the economy, even
given the abundance of historical evidence to the contrary. Just because an
authoritarian regime has tight control of the levers of the economy doesn't
mean it has the faintest idea how to use them. Especially given the degree of
cronyism associated with political appointments. Unless there's a meaningful
rebalancing of the economy that involves severely curtailing lending to the
SOEs, China will not only cease to prosper, it will crash. Only
through policies that raise households' disposable incomes and their
purchasing power might we finally see the Chinese start to spend: A godsend
not just for China, but also for the hundreds of multinationals, like Yum!
Brands (NYSE: YUM) and Starbucks (NYSE: SBUX) etc., that are
banking on the tremendous promise of 1.3 billion new Chinese consumers.
Maybe I don't fully grasp the benefits of state
capitalism. Maybe all the historical evidence against central planning
doesn't apply to China. Maybe this time it really is different. And maybe
those pigs that Wuhan is raising will also fly one day?
HOW NOW DOW
Our domestic equity markets are still hanging tough
when compared to the rest of the world's markets. Their charts still trade
above long-term support of their 200-day moving averages. Although we did
fall below this key level briefly in early June since then, money from around
the world has been seeking the relative safety of the U.S. equity markets,
especially when compared to Europe. SO WHAT SHOULD WE DO NOW? Well, I have
been speculating for a while now that we were due for one last speculative
BLOWOFF to perhaps as high as14,300 to slam the door shut on the biggest Bull
Market TRAP in history in conjunction with the BURSTING of HISTORY'S Biggest
Bubble; THE US TREASURY BOND MARKET BUBBLE. Well it looks like that last
rally may have started this past Friday. The question is how do we play
it? My number one investment is still gold and silver securities, which have
never been more undervalued in relation to bullion; but in the name of being
prudent, a little diversification may be in order. You can either buy your
favorite stocks and/or some leveraged ETF's or their underlying options. But
you must maintain 8% trailing stop loss open orders on your stocks and 18%
trailing stops on your options.
REMEMBER: We at are at most 2 to 3 months away from
history's BEST SHORTING OPPORTUNITIES -- and we certainly don't want to be
caught going the wrong way.
Central Bank Gold Manipulation; Steady As Ever.
" Avoid Paper Gold"
Chris Powell, Secretary and Treasurer of the Gold
Anti-Trust Action Committee (GATA) told Bernie Lo on CNBC Asia that central
banks are continuing to manipulate the gold market as they are interested in
supporting government bonds and the dollar and keeping interest rates low
While buying as much Gold as they can on any weakness.
Further evidence of rising interest in gold is seen
in the fact that due to the increased flow of gold bullion into Switzerland,
the most respected depository, Via Mat International, is currently adding
capacity to their storage facility. Powell also warns about "paper
gold" and says that we "try to persuade investors that if they are
purchasing gold, they had better get real gold - the metal. They should not
get "paper gold" nor keep it or real gold within the
confides of banking system."
He further asserts that "there are huge naked
short positions in gold" and estimates that perhaps "75% to 80% of
the gold that the world thinks it owns does not exist and is just a claim on
a bullion bank that is underwritten basically by the British and American
FED's."
Gold rose after European leaders agreed to a
"deal" (but not really) which has helped bring down soaring
borrowing costs in Italy and Spain. Stock and commodity markets have greeted
the news with enthusiasm and strong gains. While the move helped ease fears
over the region's debt crisis, large structural issues remain unaddressed and
all of the debt still remains overhanging the markets and rest assured there
is still a lot more debt yet to come post this 'deal'. This certainly
explains a lot of the current machinations in the gold and silver markets.
GOLD IS NOW MORE THAN 50% BELOW REAL RECORD HIGH OF
32 YEARS AGO - In January 1980, gold traded at $2,600/oz in real terms, adjusted for the significant inflation
of the last 32 years.
GOLD AND THE CPI - 10 YEAR TREND ANALYSIS
There are very few assets in the world that are
trading at significantly below their real price in 1980. An example of this
is the Dow Jones Industrial Average which was trading at 1,000 in 1980 and is
trading today at 12,500. Therefore, it is nearly 13 times higher than its
nominal high in 1980. The gold market however, has yet to see any kind of
irrational exuberance, let alone that kind of mania phase with gains being
gradual in recent years, including last year and so far in 2012.
No mania has come anywhere near the gold market;
with the majority of the public having no allocation to gold whatsoever and
especially given that even when the financial media does occasionally cover
gold, they do so very skeptically. There continues to be a complete failure
to understand gold's importance as a store of value, an important
diversification asset and as a crucial safe haven asset.
Alexei Kudrin, Russia's
former Finance Minister said that a full-blown economic and financial crisis
in the Euro Zone is inevitable and will develop within a year. On the other
hand, Russia like China is planning to give the ruble some form of gold
backing in order to protect the ruble from devaluations and protect Russia
from an international monetary crisis.
Eugene Kim, chief Korean Investment Officer at the
central bank's foreign-exchange reserve management group, said its gold
holdings are "too small" given the size of its Forex
reserves, which stood at a record-high of $310.87 billion at the end of May,
and that the BOK will be buying more bullion this year, given its symbolic
presence and usefulness as a safe haven in times of crisis. The Bank of
Korea's gold reserves remain tiny as a percentage of their large foreign
exchange holdings. They are also very small when compared to the gold
holdings of western central banks many of whom, such as the Federal Reserve,
supposedly have over 50% of their reserves in gold bullion. (There has not
been an audit of America's Gold holdings in over 50 years.) Mr. Kim said the
central bank needs to boost its gold holdings even after two purchases last
year that took the amount to 54.4 metric tons or about 1% of their total
reserves.
SPECULATORS AND TRADERS SELL WHILE LONG TERM STORE
OF VALUE BUYERS ACCUMULATE ON DIPS
Managed money longs boosted their net longs in gold
by 4,962 to 104,646 lots in the week up to June 19, but their positions
remain near record monthly lows showing that what little speculative froth
there was has been washed out of the market. With investment demand,
particularly from ETFs, Asian demand and central bank demand remain robust.
Investors and store of wealth bullion buyers have
not been selling; quite the opposite, most continue to accumulate more on
dips.
Of the small amount of people selling bullion in
recent weeks, the majority of those sellers sold because they had to sell due
to having financial difficulties. Gold came to their rescue as it always has
for many, being one of the few liquid assets that they can sell in order to
pay down debts. Those with a long term perspective will continue to be
rewarded as currencies continue to be debased and devalue versus each other
and especially versus gold.
Today, fiat currencies throughout the industrial and
non-industrial world are vulnerable to further devaluation. There is indeed
the real risk that the slow but steady decline in the value of fiat
currencies seen in the last 100 years accelerates. The coming global monetary
crisis, once realized by the public, will likely result in a massive flight
to gold.
Turkey, Russia, Ukraine and Kazakhstan Further
Diversify Into Gold
Incredibly, this will be the 20th time EU leaders
have met. While gold has not surged in value as many expected, gold has performed well during the period having again
preserved wealth.
 
Central banks are expanding reserves due to the Euro
Zone and American debt crisis and concerns about fiat currency debasement.
They are on course to buy more bullion this year than the purchase of about
456 tons in 2011 as countries continue to diversify their reserves.
Central bank demand and Chinese demand alone should
be enough to put a floor under prices near these levels and gold looks well
positioned for another summer rally akin to the one seen last July and
August.
CYCLES
Very few analysts, brokers and especially media
commentators ever look at cycles and few if any take cycles into account when
commenting on gold or silver. As usual, the only thing they look and comment
on is yesterday's prices and the morning's news and then try to relate the
current news to the day's price movements. They usually cannot see any
further than their noses. So when it comes to gold and silver, the only thing
they talk about is yesterday's price movements. Few, if any ever notice that
PM's move in cycles (short, intermediate and long term cycles) and none that
I know of have noticed that gold and silver most often bottom out in July and
August and peak out in October to December. However, when it comes to their
stocks, they all do not peak or trough on the same day. Since we are
approaching the beginning of the bottoming cycles, the time is ripe to start
bottom fishing and buying your favorite PM stock on any weakness over the
next 2 months. Since stocks have never been as oversold in relation to their
bullion as they are today, it is time to do your bottom fishing in stocks
instead of bullion. Have a little more patience, THIS DOG can still hunt and
is about to have his day!
In historic times, like we are in today, it is
worthwhile maintaining an historic perspective.
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.
|
