"The House of Representatives ... can make no law which will
not have its full operation on themselves and their friends, as well as the
great mass of society. This has always been deemed one of the strongest bonds
by which human policy can connect the rulers and the people together. It
creates between them that communion of interest, and sympathy of sentiments,
of which few governments have furnished examples; but without which every
government degenerates into tyranny." -- James Madison, Federalist No.
57, 1788
"There is a certain enthusiasm in liberty that makes human
nature rise above itself in acts of bravery and heroism." --
Alexander Hamilton, 1775
INFLATION AND THE MONEY SUPPLY
I have always been amazed at how most everything is looked at as either black
or white by most people especially analysts. Either the economy stinks or it
is wonderful. Either economic data portends a MARKET CRASH or it heralds the
greatest rally the markets have ever seen. The problem, naturally, is that
the neither the WORLD nor markets exist in a world of absolutes. To
make it even more complicated, the multitudes of variables are always
changing, but the most complicated variable of all is the
weightings that apply to each VARIABLE are rarely the same even during what
seems to be similar times. Not only do they operate in shades of grey, they
never ever go in straight lines. I bring this up because the current earnings
season is portending a rather scary forecast, raising doubts, at least for
me, that the progress made in stock prices are being decoupled from the
underlying profits being generated by companies. The stock markets have
already surpassed the 2007 all time highs, yet the economy is nowhere near
its previous stature.
THE UNIT OF MEASURE
What nobody seems to be taking into account is that the units ($’s) that
we use to measure earnings, the markets and everything else are rapidly
shrinking in value. The best example that I can give you is that the REAL
WEIGHTED (against Gold) DJII is somewhere in the neighborhood of 8,000 as
opposed to today’s stated price of 15,300.
What is even more troublesome is that in the face of overwhelming
governmental stimulus and an all out effort to push the markets UP into the
election, the best the professional manipulators can maneuver are openings of
100 to 150 point rallies, but closing only up only 5 or 10 points. Yet the
markets mediocre daily performances do not seem to be dampening Wall Street’s
enthusiasm because, in typical black-and-white fashion, the return of risk
appetite is overwhelming. Any fleeting thoughts that the market might be
getting ahead of itself are immediately dispelled. What is lost in this type
of analysis is that this 100% plus rise over the last 3 years has occurred on
record low volume which troubles me greatly. What happen to volume always
proceeding price? The trillions of dollars of the public’s sideline monies in
the face of record optimism are not willing, thus far, to come back to the
markets. Why? The truth of the matter may be that the improving economy is
not really improving at all, but is being juiced by Wall Street and the Media
using a combination of QE’s and manipulated government statistics that are
completely misrepresenting the true picture. The General Markets, although up
every week for the last 7 weeks in a row, tend to give analysts the
impression that the immediate past will extend far into the future.
But, as anyone with even a modicum of experience can attest, this is not
usually the case and I and the public are just not buying into it. Even
though, as you all well know, I have been calling for up to a 1500 point plus
rally for the last 5 months or so culminating into a NEW ALL TIME HIGH
leading into the largest BULLISH DEATH TRAP in history.
Estimates for the last quarter of 2012 were so optimistic that I wonder
where, with at best a suspect, projected 1 1/4% GDP growth rate, all those
forecasted earnings can possibly come from? Especially given the lowest
worker participation rate since 1983 and the high and rising inflation rate,
how can the economy produce those projected real earnings and GDP numbers?
Don’t forget that Europe and China are in recession and so is Japan. The
answer is they can’t and they have not met expectations and yet the markets
the world over keep barreling along. It’s amazing what counterfeit money can
produce as long a people are still willing to accept it. Eventually the
people wake up to the fact that the emperor has no clothes.
THE GROWTH IN THE MONEY SUPPLY
Perhaps a far better explanation for the markets rise is (a) the
year-over-year (YOY) rate of growth in both the US and the world’s Money
Supply(MS), which was reported to be about 14% and (b) since December
2011 was the 60th consecutive month in which the YOY rate of MS growth was
10% or more, and (c) the YOY rate of MS growth above 10% has become the longest
period of double-digit money-supply growth in US history. So
how can we be in 'danger' of experiencing a serious bout of deflation, given
that the US is in the midst of a record-breaking period of monetary
inflation? Based on recent preliminary data, the YOY rate of growth in US MS
has accelerated to 15.4% over the past few months. This leaves no doubt that
a new US monetary inflation record will soon be set, which would be a better
explanation for the rising stock markets than the nonexistent booming
optimism. After all, we should have known that, since it is exactly what
Bernanke has been hinting at (without actually saying so) – so much for the
FED’s promise of a new OPENNESS AND CLARITY. If they are so open, why does
everyone still argue as to what Bernanke is really saying?
The question is: If there has been so much monetary inflation over the
past few years, why hasn't there been much more "price inflation"?
The answer is obvious: The Government has been jiggling the numbers and
outright lying to us for years. Companies have been shrinking the size of
their packaging without changing prices. The reality is that most prices have
been driven by monetary inflation, especially gold and silver, oil and the
stock market and commodity prices are now much higher than they would
otherwise be. For example: Monetary inflation explains why the S&P500
Index, despite being 13 years into a valuation-compressing secular bear
market, has just hit new all time highs in nominal dollar terms. It also
explains why copper is priced at around US $3.5/pound and oil is priced at
over $100/barrel, despite the economic problems in Europe, China, the US and
Japan. It also explains why the soybean market, which for decades had a price
floor at US $5-$6 and a price ceiling at US $10-$11, now appears to have a
price floor at US $10-$11 (the old ceiling has now become the new floor). The
fallacious idea that prices haven't risen by much is based on government
manipulated price indices that purport to measure the economy-wide movement
in prices. These indices clearly understate the extent to which prices have
risen. That means that the actual amount of "price inflation"
reported by the US government is grossly understated. That being
said, the response to such a large expansion of the money supply is not a
surprise to me because I am always searching between the lines for the truth.
However, one of the most dangerous characteristics of monetary inflation is
that it is never possible to know, in advance, exactly how it will distort
the price system. What we do know is that a large increase in the money
supply ALWAYS leads to large price increases somewhere in the economy. The
best we can do is to make an educated guess as to which items/investments
will be the main beneficiaries of monetary inflation.
The bottom line is that monetary inflation in the US is doing what it
always does. It is boosting prices in ways that can't be predicted with
complete accuracy by anyone, let alone by central bankers and government
economists employing hopelessly flawed Keynesian theories. Although I
accurately predicted the rising commodity prices, especially gold and silver,
I have been sadly lacking when it came to the stock markets. Thank goodness
for my policy of always using 10% trailing stops. So in actual practice, we
still made some money since I accurately picked most of the short term tops
and bottoms letting our trailing stops lock in some profits while getting us
out of harm’s way.
A PEEK INTO THE FUTURE OF EUROPE
UNINTENDED CONSEQUENCES: According to Credit Suisse: “The
probability of the Largest Disorderly Default Loss in History Has Increased
Dramatically”. The best overviews of the never ending Greek soap opera (every
soap opera eventually ends), although when it comes, the denouement is
usually a whimper. In the case of Greece, it will be anything but. Yet
listening to the daily cacophony from Europe's leaders and our media, who are
clueless as to what is really going on, one may be left with the impression
that there is a simple solution to the problem and Greece may be
"saved... within hours." But it can't be. It is simply not
possible. In fact, as of today, "I am left with a sense that the
probability of delivering the largest default loss in history within 6 months
has increased relative to doing so in an orderly fashion”.
BUT THEY WILL keep attempting to KICK THE CAN DOWN THE ROAD AT LEAST as
long as they can keep getting away with it. Until eventually the world wakes
up to REALITY.
As a reminder, Credit Suisse (CS) was the one bank smart enough to choose
to completely ignore day to day news flows out of Greece and now Spain and
soon to be Italy and France (as it is literally just noise with
absolutely no clear signal). Wish we could say the same for our government,
Fed, analysts and the media. As such, “my view remains that, in any case, the
chance of a disorderly outcome sometime in the near future is high, so to
that extent, the immediate events are not really central to our point of view."
Quite fascinating indeed, because they show to what extent an un-raveling
economic and financial system will go to, to pretend that the number one
fixable problem in Europe is the lack of liquidity. They completely ignore
the real problem, which is a bankrupt Socialist system that was inherently
DOOMED to fail from its inception and can no longer borrow enough money to
keep the Socialist Party going. And so the only solution is to keep the
monetary printing presses running full blast - a situation that can’t
possibly endure for much longer. NOBODY IS WILLING TO PAY THE PRICE OR
ACCEPT ANY CUTBACKS or anyresponsibility. As I have
observed previously, at this point it doesn't matter for Greece; even if the
country gets the 2nd bailout or 3rd or 4th, it will be used almost
exclusively to recycle cash into the failing banking system. Europe will have
a first lien on nearly 150 to 200% of its GDP. At that point, the country is
both a de facto and de jure a colony of the Troika. The longer the crash is
delayed, the fewer assets will remain in Greek possession, and the poorer the
population will be in; for the inevitable fresh start within or outside the
Euro Zone.
The real issue remains the ECB’s exposure to the BOG. Protecting that
(i.e., ensuring that Greece does not systematically default via introducing a
new currency) becomes the bottom line. Since my objection to leaving EMU is
that its corollary is systematic default, bank nationalization and the like,
once the latter problems are a given (a situation towards which we seem to be
heading in Greece), then the cost of the incremental step of introducing a
new currency becomes less. The economy would subsequently Euroize at
potentially a lower cost level. The effect of the delay would have been to
transfer the cost from Greek citizens (who by now have already moved
substantial sums of money and other movable assets out of the country
providing in fact a source of subsequent financing that makes the equation
even more attractive) to both Greece and the ECB. The core has a very serious
problem and the probability of a major ‘Crash’ is rising. I remain very
cautious about the long-term sustainability of the debt with or without a
restructuring, but even if by some miracle a final solution is agreed to,
that will not be the end. It is just the beginning. WHO is next? Italy,
Portugal, Spain, Ireland or? And what about the rest of Eastern Europe or
even France? Do you think that America and the rest of the world are immune?
How much confidence will the people still have in Fiat Currency and then
what? BUT the biggest problem of all and one which nobody is even
talking about are the 1000’s of trillions of dollars of outstanding DERIVITIVES
& CREDIT DEFAULT SWAPS (CDS) that would come due, that no
bank has accounted for on their books.
THIS IS THE BEST REASON THAT I CAN FIND FOR THE ECB and the rest of the
European country’s TO FINALLY AGREE TO KICK THE GREECE PROBLEM DOWN THE ROAD
ONCE AGAIN.
BACK HOME TO THE USA - THE UNEMPLOYMENT RATE
The entire 2012 presidential election probably hinged on one number: The
unemployment rate. My prediction, made sometime in June – July, was that the
official unemployment rate will dip below 8.0%. That theme was launched right
on schedule with the media touting that the employment rate now is the
"lowest” in years. What Obama and the media won't tell you is that the
unemployment numbers have two built-in huge, fudge factors that are hiding
the real unemployment situation.
Firstly, the numbers are "seasonally adjusted," which is why the
actual number of employed persons could decrease from month to month and
still show a drop in the unemployment rate. Apparently, if you are so
discouraged by the NON-Recession that we are in and you quit looking for a
job, you are no longer counted and you effectively cause the unemployment
rate (%) to drop. Go figure.
From January 2005 to January 2009 (during Bush's last term), the
"participation rate" changed very little (65.8% to 65.7%). In just
three years under Obama, the labor force participation rate has reportedly
dropped to 63.7%. This two percentage point drop brings the participation
rate to the lowest in nearly three decades and makes all the
difference. If the participation rate had stayed the same, even
using the "adjusted" employment numbers, the unemployment rate
would have been 11%. If the labor force participation rate dropped 1% to
64.7%, the adjusted unemployment rate would be 9.7%. If we use the
non-seasonally adjusted numbers and a static participation rate over the past
three years, the unemployment rate looks even worse. Obama could never have
gotten re-elected at 11% unemployment or even 9.6% unemployment. He
needed that number to be under 8%. So they counted a smaller and smaller
percentage of the population as actually being in the workforce.
GOLD
Warren Buffett has once again reaffirmed his opinion about gold’s
“significant shortcomings.” He said that gold is “neither of much use nor
procreative.” He also suggested that gold was in a bubble and compared it to
the internet stock and housing bubbles. “While the majority of the world’s
investors and the public were chasing Real Estate; today; less than 2% own
any gold.” His thoughts regarding gold are a rehash of similar negative views
on gold repeated in recent years. Once again, he either shows that he does
not understand gold and real diversification. Or he chooses not to understand
gold as a safe haven asset in a portfolio or more likely he’s acting as just
a “Shill” for the administration. After all, Obama just gave him a $40 billion
gift by cancelling the Keystone Pipeline. FYI - Buffett is considered
to be a Capitalist, which he definitely is NOT. Being a good investor
or businessman does not automatically make one a Capitalist: A CRONEY
CAPITALIST yes, which is an oxymoron since a Crony Capitalist is, in reality,
a Socialist (Fascist). This is the furthest thing away from being a
Capitalist since the word Capitalist is a synonym for FREEDOM and would have
nothing to do with a Central Planning Government. The less informed continue
to have a blinkered anti-gold bias. They continue to focus solely on gold’s
nominal price and assert that it is in a bubble. It’s not even close to being
in a bubble. It is directly related to the FALLING US Dollar that continues
to be manipulated lower in a all out effort to maintain the public’s faith in
FIAT CURRENCY. This cannot endure much longer as the people are really
beginning to feel the ravages of inflation.
Although Gold will eventually end up being in a bubble, it will not happen
before 2017 and over $6,000+/oz, especially since most gold holdings are NOT
being held on margin. Bubbles are always preceded by record margin buying
such as 0% down on real estate mortgages or record margin debt. HOW CAN
GOLD BE IN A BUBBLE WHEN LESS THAN 2% of the world’s investible funds are
invested in GOLD and none of which are being held on margin?
The uninformed refuse to see gold as a form of financial insurance in a
diversified portfolio even though one central bank after another have
approved gold as being a Tier 1 asset. This is changing slowly with a very
gradual growing appreciation of gold’s importance as a safe haven asset and
as the only REAL MONEY in a world of massive paper and digital fiat money
creation; where each country is trying to devalue its currency in order to
improve their exports status and reduce the carrying costs of their
outstanding debt. They are all in a RACE to the bottom. Continued monetary
creation seems to be the only game for as far as the eye can see.
Notice how few questions Kramer and other financial media shows get on gold,
silver or their securities. That is not the sign of a bubble.
GOLD OUTPERFORMS THE STOCK MARKET
ETFs are just paper and they are being dumped by people in the know, such
as Soros, which is why I warned you all 2 years ago, to convert your paper
gold holdings into bullion or into the two ETFs that are not just paper. In
fact, owning units of these ETF’s: (PHYS) SPROT Physical Gold Trust and
(PSLV) SPROT Physical Silver Trust gives you the right to actually take
delivery of your gold and silver for accounts over $100,000. And
although they trade on the NYSE and TSE, they are Canadian
Corporations based in Canada and all their assets are held in solid Canadian
Banks in Canada and audited regularly; out of reach of Obama’s and the
IRS’s grasp.
WHAT TO DO IN a mad, mad, mad world!
First of all: DO NOT sell any of your Gold, Silver, Platinum or Palladium
Bullion or their Respective Securities. They are all forming solid bases that
are laying the foundations of Gigantic Rallies once their charts give a Buy
signal.
Secondly: The stock markets are about to have a 250 to 500 point sharp
SELLOFF. But that won’t be the start of the coming Bear Market. It will only
be a correction and the final set up for the last upward explosion setting
the DEATH TRAP for those Wall Street Bulls as the market pays its dues. You
can play both these moves (Down then Up, they will be fast and furious, but
you must maintain TIGHT trailing stops, perhaps as small as 5% (certainly not
more than 8%) from their highs reached since your purchase. Start making your
SHORT SELLING LIST beginning with scaling into TBT (for seasoned option players
only) - you can sell 3 month out of the money calls and puts against your TBT
positions (check your margin requirements).
GOLD & SILVER: Make your Buy List. Start with the quality like SLW and
FNV or GG and do your research and pick out the most promising Juniors, but
wait for the HUI to give you a breakout buy signal. Don’t bottom fish. Only
fools and liars can buy at the absolute lows.
LOOKING FOR INCOME?
Forget about buying Bonds. We are looking to short Bonds. Look to buy Oil
and Natural Gas pipelines such as ERF and LNG - There are quite a few others
so do your homework.
GOOD LUCK AND GOD BLESS
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UNCOMMON COMMON
SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
561-840-9767
Don't forget to include your email address as well as your phone number.
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.
