"By a continuing
process of inflation, government can confiscate, secretly and unobserved, an
important part of the wealth of their citizens" -- John Maynard Keynes
"The essence of Government
is power; and power, lodged as it must be in human hands, will ever be liable
to abuse." -- James Madison
By whatever measures you
use, all stock market players have rarely ever been as bullish as they are
today. Hedge fund Mutual Fund optimism is the highest since July 2011.
Put/Call ratios five day average was recently the lowest since July 2011. And
Newsletter writers have the highest level of optimism since April 2011.
How did all that OPTIMISM
back then work out? Not well - The 2011 market peak was made on April 28.
Mutual fund managers were more bullish on stocks than at any time since April
2010. The S&P 500 dropped 17% from the April 2010 highs to the July 2010
lows. What was and is driving the markets both then and now? FED Money
Extreme levels of
optimism are most often a contrary indicator for asset prices. Therefore the
logical question is:
IS NOW A TIME TO BE
BUYING OR SELLING?
As Optimism and the Nasdaq hits 11 year highs, volume drops to 10 year lows.
Volume has been very low for months, perhaps the lowest extended volume
period EVER? While markets refuse to drop with any enthusiasm, they also
refuse to rise with any enthusiasm. This lethargy will eventually lead to a
much more powerful move than anybody is expecting. Until then, it is best to
wait before becoming too aggressive with your trading positions. LOOK TO
BUY APRIL OR MAY CALLS ON THE WORST PERFORMING COUNTRA ETF'S ON ANY BREAKOUTS
TO NEW ALL TIME HIGHS
It was recently announced
that the unemployment rate fell in January to 8.3% and that more jobs were
created than previously expected. Meanwhile, no one is talking about the 1.25
million people that were statistically vaporized in order to get this
(misrepresented) number: Or that the percentage of working-age adults in the
labor force is now the lowest since 1983. And the spin pushed the Dow
Jones industrial average to levels not seen since the summer of 2008 and the
S&P 500 is nearing its 2011 high. Yet it's the technology-heavy Nasdaq that has been the most impressive index; trading
at levels not seen since the last quarter of 2000 and the index is
approximately up 12% in 2 months, which is its best start to a year since
1999: BUT at what cost? Our Debt now stands at $15.5 trillion and growing at
a rate approaching $2 trillion a year.
However, as the equity
markets surge, trading volume is diminishing. Last week, the New York Stock
Exchange reported the lowest non-holiday trading day volume in over a decade.
The number of shares traded in the day after the Super Bowl was 26% lower
than it was the year before.
So what does this rally
on lower trading volume mean? Plain and simple, it means that the small and
midsized company and investors are not buying into this rally. They are the
ones who feel the true day to day inflation the most and they also are the
ones who see and feel the true unemployment situation. The argument of them
just being gun shy is just BS as they are also the small business owners who
do their own taxes and know firsthand how tough business really is. They are
our country's RISK TAKERS and they are bearish and believe that these
headwinds will continue to prevail and prevent investors from being enticed
into buying stocks at these inflated (weak dollar) levels. Especially in the
face of the expected INCREASED taxing of the rich, which they realize is
them, not the Buffett's or Gates. And without retail investors'
participation, this bogus rally can only go so far and is doomed to fail.
Bulls argue that volume
is not a requirement for the market to move higher. The equity markets have
continued to advance since March of 2009 on lower volume and potential
investors will be pulled into the market as it proceeds to move higher. The
market is up 100%+ since March 2009 and the big money is still on the
SIDELINES. What is known for certain by both bulls and bears is that volume
is the mother's milk of all sustained bull markets. We all have learned the
hard way that volume "precedes prices". We are also of the
idea that the FED has been pouring trillions of dollars (as much as $15 to
$17 trillion) of "Counterfeit" money into both, the bond and
stock markets as well as The Banks and FOB (friends of OMAMA) but not into
the general economy in an effort to keep the insiders and big contributors
afloat. NO finger has ever been able to plug the hole in the dike for any
sustained length of time and continuing to do the same as what got you into
trouble in the first place is nothing but the height of FOLLY.
A HISTORY LESSON
The global economy was in
serious danger of a financial collapse in November 2007 and I predicted then
that the U.S was headed into a recession. Seven months later, Bear Stearns
failed, triggering the crisis. By June 2008, it was obvious to me that the
crisis would escalate into a crash. Will GREECE and Portugal or Italy be
this year's Bear Stearns and Lehman? Here we are again, only this time
the situation is much, much worse. Not only is the USA on the verge of not
being able to meet its gargantuan present and future unfunded obligations and
liabilities, totaling $155 trillion plus and growing daily, but it cannot
even meet its current obligations without printing more new money and coming
to Congress every 3 or 4 months to ask for another $1.5 trillion increase in
the DEBT Ceiling. Europe and Japan face debt levels that ensure
eventual sovereign debt defaults and declining standards of living. There is
a strong possibility for all of this unwinding to seriously alter the living
standards of an entire generation. These economies, given their current
political and economic thinking, cannot possibly grow their way out of their
problems and the cuts needed to balance budgets would create massive social
unrest since the cuts themselves would lead to sharp reductions in GDP,
creating vicious negative spirals. The only current solutions any of them can
come up with is MORE OF THE SAME. That means it can
only keep things afloat until the rest of the world will no longer accept
their ever increasing worthless Fiat paper money. We are fast approaching the
point where they will refuse to loan either the PIIGS or the USA any more
money and will demand payment in gold. We will then find out just how much
gold America really has in Fort Knox. I suspect that we have none
since we have refused to conduct an audit for over 40 years.
I venture to guesstimate
that we will be in the next major crisis within 3 to 18 months.
EUROPE AND THE USA
Genuine reform has not
been implemented and no serious discussions on the subject have ever been
held. This crisis was caused by unprecedented levels of Government, consumer
and corporate debt and Wall Street greed, led by the Government's unrelenting
Deceit and fraud in their search for ever more power at any cost. When
the crisis hit, the Government rescued distressed debt by massively
increasing its own (the taxpayers) debt. And they are attempting to repeat
the same measures today, both here and in Europe. For example, the Federal
Reserve and the European Central Bank are using their balance sheets at about
a 30:1 leverage. This is the same sort of leverage that Wall Street banks had
recklessly indulged in. When government debt was substituted for corporate
and consumer debt, the whole system rolled over into a much more dangerous
phase. Today the world has shifted the focus of the crisis to Europe, but the
European crisis is simply a proxy for a global debt crisis. It happens to be
focused on Europe today because Germany has not been as eager as the Federal
Reserve to print money. Germany remembers its own hyperinflation of 1923-24,
when unbridled money creation led to prices doubling every two days. Today,
governments have a preponderant influence on the economy, while Giant
corporations have inordinate influence over the government, to the detriment
of all other stakeholders. As the danger of a deflationary depression
increases, governments are attempting to re-inflate the economy - they may well
be forced to overreach and create hyper-inflation by the new entitlement
Society who believes NO PAIN and ever increasing DEBT. Their broadest theme
by far is to avoid taking any hard decisions by increasing debt. We just saw
France's debt downgraded and a negative watch put on the European Financial
Stability Facility. This negative spiral will continue. Even though the U.S.
has tepid signs of economic growth (I think it is temporary and falsified at
best). If true at all, it is at the cost of enormous amounts of debt and
phony money stimulus being poured into the economy. Their government
socialist minds can only think of debt as the only solution. Let someone else
pay. Both the US and Europe are headed for Recession/Depression if they are
not already in it.
Given that the U.S. and
Europe are its two largest export markets, China also is headed for a hard
landing and recession. They do, however, have a $3.5 trillion bursting piggy
bank to help ease the pain. However, China is so worried about their own economy
that they are seriously considering buying more and more European Sovereign
Debt, but at what price too both Europe and too themselves?
But unlike the USA, China
is buying as much GOLD as it can get its hands on and encouraging its people
to do the same.
Much of the discussion of
the European crisis has centered on Greece. But a recent auction of six-month
Italian bonds was priced at an interest rate of 6.5%-the highest rate of a
bond auction since Italy joined the Euro zone 13 years ago. The people are
invited to enter into a "suspension of disbelief" to go along with
the story, even if implausible. Before the 2008 crisis, that was the mindset
of investors. Now they want to believe that governments can solve their own
problems with just a little more liquidity. Can Italy Portugal and Greece
even pay just the interest that will be required?
Greece was not the
primary cause of the European crisis. It was brought about by the ever
increasing nanny, socialist state and triggered by the insolvency of most European
Banks especially the German, French and U.S. banks. These banks (like the
largest American Banks) are all insolvent if they were required to mark their
assets to market and not to some nonsensical theoretical models. But, we too
are suspending disbelief because we all have skin in the game. We need things
to work out and people tend to believe what they want to believe instead of
making hard decisions and taking personal responsibility until its too late. The drives for
austerity ensure that Portugal, Ireland, Italy, Greece and Spain (PIIGS) will
continue to see their economies shrink, leading to lower tax revenues and the
continued inability to meet budget targets, exacerbating the problems, which
will require larger and larger debt relief. It is a vicious downward spiral
that will lead to ever increasing social unrest and declining standards of
living. In the USA, Bernanke just announced the continuation of low interest
rates into at least 2014, which in reality is (QE3 only not announced) continuous
creation of more and more Fiat Money. This may succeed in pushing the crisis
down the road a ways, but for how much longer?
The lessons of history
teach (but nobody studies history or wants to learn from her) that Greece,
Portugal and Ireland would be much better off leaving the EU, defaulting on
their debts and devaluing their currencies. After some pain, things will work
out, as they did in Argentina and Russia in the 1990s and Iceland last year.
investors want to believe that heavily indebted countries can solve the
problems of other heavily indebted countries and that an insolvent banking
system can be rescued by issuance of more & more debt and debt
The European Central Bank
has floated as a solution of issuing euro bonds, backed by all 17 members of
the Euro Zone, as a solution to this problem. But Germany does not want to go
down that path unless the indebted countries adopt even more severe austerity
measures to be monitored by impartial observes. When will they finally admit
that Socialism DOES NOT WORK. Eventually you run out
of Other People's Money.
We have entered into the
realm of absurdity. For example, the European Financial Stability Facility is
a private company authorized to borrow €450 Billion from the private
sector backed by a guarantee from all the EU members who are already heavily
in debt and being steadily downgraded. One proposal I saw was that it would
use the €440B of debt as collateral to borrow another €1-2
trillion of debt to lend to the PIIGS! Where does this kind of thinking come
from and can this type of thinking ever end well?
As Europe enters a
recession, the problems will only get worse. Euro bonds,
issued by deeply indebted countries, just means that France (which has
already been downgraded) and Germany are putting their own balance sheets at
further risk. It may provide some time, but it does not solve the problem.
The question is: Should they bailout the PIIGS or take the same money and
bailout their own banks? There are no good political solutions. Any workable
solutions would require more than one or two years or more to work, which is
way past the next election and is therefore much too long for any politicians
to even think about.
THE BIGGEST PONZI SCHEME
OF ALL TIME
When I studied economics,
we were taught that U.S. Treasuries were the risk-free asset to be used as an
absolute benchmark. Given the recent downgrade perhaps the economics
profession should start looking for another risk-free benchmark: Just as the
U.S. dollar replaced the pound sterling after WWII. Has the time come to
replace the US$ with Gold or the Yuan as China would prefer.
HAS THE TIME COME FOR
GOLD TO REPLACE THE US DOLLAR?
One of the primary
measures of personal protection is a healthy cash balance. You have to be in
a position where you are able to ride out any crisis, so that you can take
advantage of the extremely low valuations that arise during times of crisis.
If the crisis is as bad as I think it will be, you will be able to find and
acquire assets at generationally low prices. But you must first protect the
purchasing power of your liquid assets. The surest way to protect your self is to invest in precious metals. I believe
precious metals will do well whether we continue to stagnate or actually see
another crisis. I think silver and gold equities will also do very well in
the long run and extremely well in the short run.
U.S. domestic stock funds
have seen net redemptions for five straight years. Due to negative real
interest rates, they say equities are undervalued in historical terms, but
that is only true if you ignore the fact that the Nixon dollar is now only
worth $0.10. Fund managers are paid to perform or else they face redemptions.
So, the bias is for stocks to rally as we are seeing now, unless the second
phase of the crisis clearly emerges, which in my opinion is inevitable
Ironically, in another
crisis, governments will likely turn to quantitative easing with a vengeance,
which means that, despite a crisis in sovereign debt, we will see a
substantial rally in commodities, particularly gold and their equities, as
substantial sums of newly created money finds its way into the system and
money leaves the bond markets. You may find prices rising while the economy
is being undermined.
From 2001 onward, I
realized that the U.S. seemed to lack the political will to deal with its
increasing levels of budget and trade deficits. In fact, the Fed was creating
asset bubbles that were bound to end badly. At the same time, I knew from
history that Fiat money always ends badly, going as far back as Kublai Khan.
I came to anticipate the decline of the U.S. dollar and the rise of gold. I
believe that the price of gold will be much higher in the coming years and
that gold will become part of the monetary system whether we like it or not.
It is already being pushed by China, Russia, Brazil, the Arab Oil Sheiks and
other solvent nations. They are tired of watching purchasing power of their
US BONDS being pilfered by the shrinking value of the USA Dollar. Gold is
interesting in another way. Throughout history, booms have been localized
geographically. As an example, the average Canadian investor is unlikely to
invest in, say, Argentinean real estate or in its stock market even if they
are booming. The Internet Bubble was the first time that a global audience
became aware of an asset category that was rising dramatically, ironically
thanks to the Internet itself. But you could not participate unless you had a
U.S. brokerage account. Gold is the first truly global asset boom that
investors at all levels can participate in. Today, investors are savvier and
more heavily invested across markets and categories, but gold is
fundamentally money and all investors and savers can buy it around the world
regardless of their income strata.
The potential impact on
the market for gold as an asset class is phenomenal. It appeals to all levels
of investors. Someone buying a few grams of gold in China creates demand that
directly helps the value of your gold holdings here. Historically, gold and
silver equities leveraged the returns on gold. In 2011, mining companies were
producing gold at an average cash cost just under $600/ounce (oz) and were getting about $1,600/oz
in revenue. Cash flows are very impressive and price earnings are healthy.
Mining companies continue to buy juniors with good assets, especially at
today's ultra low share-price values. I moved into
the sector to take advantage of this bull market in gold. And, I believe we
will see a mania in junior mining stocks before this is over (within the next
year or two as people begin to realize that solutions to the global economic
situation are not forthcoming). There will be more and more nervousness and
gold will find a larger and larger audience.
We now have a situation where
central banks, which were net sellers of gold for 20 years, have become net
buyers in 2009 and are accelerating their buying programs. We are seeing
tremendous support for gold from central banks, institutional and retail
investors across the world.
THE GOLDEN ROCKET IS
GETTING READY TO LAUNCH
Watch gold as it
continues to push its way upward. Any realization that the Fed has started
QE3 without telling us could send Gold and Silver "to the Moon,
Alice". The combination of the public realizing that the Fed resumed the
QE party and that LTRO2, which is just another name for QE, could be the
trigger that sets off the explosive mix.
GOLD: WHAT DO WE DO NOW?
Since the PM'S bottomed
late last year, they have led the way higher. That's because gold is cheap right
now, and the miners are even cheaper. I suspect this trend could stay in
place for a quite a while. Perhaps it may be smart to take a look back at my
July- October 2011: Gold and Silver recommendations and stock
selections. Back in July - August 2011, when every analyst and his mother and
that includes both the Johnny Come Lately's as well
as most of the best of the GOLD analysts were all saying that: "At 25%
above its 200 day MA, gold is grossly over bought," BUT not me! I have
explained on many occasions too numerous to mention that Gold is a market
UNTO ITS OWN. At times, it goes with oil and as we have seen lately, at
times it doesn't. The same is true for every other commodity, index, currency
or what have you including the stock markets. GOLD goes its own way. Because
It is also a SUPERIOR good. Unlike most other things, the faster the
price of a Superior Good (gold) rises, the faster and larger the demand for
it increases. My long term target for gold remains $6,250/oz. Although I am
not calling for any near term substantial pull backs given the degree of
government manipulation, it could happen and since I do not have a crystal
ball, I cannot tell you exactly when, but it may not happen. As I emphasized
back then, our biggest risk was to take our huge profits in gold, as everyone
else was recommending only to see gold take off
while we are sitting on worthless cash. The worst case scenario that I could
see for us is that we have another mild correction ($100 to $200) for a month
or two (probably wishful thinking) before gold resumes its upward trek OR
ROCKETS UPWARD, triggered by some Black Swan event (Which is a much better
bet) Any selloff from here will not be enough to let you back in at lower
prices than when you got out. The danger was/is that you might not get back
in at all, waiting for that one last drop. I won't belabor the point. My
recommendation was then and is now to sit tight and accumulate on weakness.
If you are too nervous and afraid of losing all those big profits you have
built up, you can buy some two month Puts on GLD, enough to let you
sleep at night. But for heaven's sake, HOLD ON TO YOUR CORE POSITIONS.
Continue to accumulate gold and silver mining stocks on either weakness or on
breakouts to new all time highs. It takes guts to
make the BIG MONEY. You may also sell out of the Money calls that have
10% plus premiums on some of your long positions.
I am expecting a new
"mania" to begin in junior and mid-level mining stocks to develop in
the very near future. I am reiterating my past recommendations of holding
physical gold outside the banking system as a safety net. And continue to
accumulate my buy list on any weakness or on breakouts to new highs.
Don't you dare let
yourself get caught in another MF GLOBAL type situation.
Because it will happen again: They have not fixed anything: If anything they
made it worse!
GOOD LUCK AND GOD BLESS
NEW AND EXISTING
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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA,
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
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.