"A morsel of genuine
history is a thing so rare as to be always valuable."
Thomas Jefferson
"It should be the highest ambition of
every American to extend his views beyond himself, and to bear in mind that
his conduct will not only affect himself, his country, and his immediate
posterity; but that its influence may be co-extensive with the world, and
stamp political happiness or misery on ages yet unborn." -- George
Washington
IGNORANCE IS NOT BLISS
THE CONSEQUENCES OF AUSTERITY
The markets are only pricing in a 50%
probability of a Greek default even though the rumors in trading circles of a
default coming shortly are rampant. Bloomberg (and everyone else) reported
that Germany is making contingency plans for the default. Of course, Greece
has issued three denials. While Greece may still default, it is my opinion
that the EU will kick the can down the road one more time, at least for
another 3 months. Germany is assuming a 50% loss for their banks and
insurance companies. Sean Egan (head of the bond-analysis firm Egan-Jones)
thinks the ultimate haircut will be closer to 90%. And that is just for
Greece. What about the rest of the PIIGS?
Anyone reading my letters for the past year
cannot be surprised that Greece will default."Why?
It is just elementary school arithmetic, my Dear Watson."
Was anyone surprised that the Greeks announced
a state fiscal deficit of €15.5 billion for the first six months of
2011, vs. €12.5 billion during the same period last year? What else
would you expect from increased austerity? If you reduce GDP by as much as
Greece attempted to do, OF COURSE you get less GDP and thus lower tax
revenues. These are the consequences of allowing debt to get out of hand. Are
you listening Mr. President? We have come to the end of the game. "There
is no such thing as a free lunch". Do you think that does not apply
to the USA as well?
Not if, but when the US goes into recession,
have you thought about what the result will be? A recession means lower GDP,
which in turn will mean higher unemployment. This will also mean dramatic
increased costs across the board and sharply lower tax receipts; which in
turn means ever higher deficits. It will certainly be more than your
projected $1.5 trillion; more likely in the $2 to $2.5 trillion range.
Governments have much less control over spending than they think, especially
since the government has not even attempted to make a budget in over 3 years.
Ask Greece or any other country in a debt
crisis, how well they predicted their budgets. The Greeks were off by over
25%. If we are off anywhere close to that, it will guarantee Depression in
very short order (whether we use the word or not).
The Greeks are now in a (DDS) Debt Death
Spiral. There is no way out, short of Europe simply bailing them out, which
is not likely for more than 3 months at the most. Then what? Few if any of
the causes of the problem would have even been addressed, let alone fixed.
ON THE DOMESTIC FRONT
Recent revisions to economic data suggest that
companies are going to have even more trouble making their "pie in the
sky" earnings projections that are being projected in an attempt to
justify a bullish stock market stance. At the start of 2011, productivity
trends took an unexpected dramatic turn for the worse - especially compared
to what was initially reported. An initial estimate that Q1 productivity grew
by 1.8% was revised down to show a decline of 0.6% instead. A slight
0.7% rise in Q1 unit labor costs(ULC) was also
revised upward to show a staggering surge of 4.8%! In addition to that 4.8%
rise, ULC rose a further 2.2% in Q2. But the news gets even worse. Last week,
the BLS revised the ULC in Q2 up from 2.2% to 3.3% QoQ.
US non-farm business unit labor costs are now rising by 2% year over year (yoy). That is very bad news for profits and
especially bad news for equities because the pace of ULC is a key
determinant of profits and a driver of inflation. It is also bad news
for an increasingly criticized and divided FED. The NATURAL LAWS OF
ECONOMICS are coming home to roost.
Until the real crisis in Europe comes to a
head, the US will continue on with its economic head in the sand, since both
sides have no clue as to what must be done. Economists who base their
projections on politically correct history will not see what's coming.
Analysts who base their earnings estimates on falsified pie in the sky
estimated performances are going to be completely off base. Note: Analysts
are so very, very bad as a group at predicting future earnings that I am
amazed people still pay attention to them at all.
This week, we turn our eyes first to Europe
and then to the US and ask about the possibility of a yet another credit
crisis along the lines of 2008. We should consider that now rather than
waiting, while it is still possible to do something about it. But, that would
depend on our political leaders coming together, getting off their
ideological horses, making the difficult choices and doing what is necessary.
Like maybe passing a budget. Since we are in the political season, I won't be
betting on that happening any time soon.
THE PRESIDENT'S JOBS SPEECH
If the President's speeches are any guide, he
will be relying on teachers, firemen and police jobs "saved",
instead of new jobs created. This means that most of the $500 billion, just
like the $800 billion TARP stimulus of 2008, will go primarily to shoring up
his political campaign (an exact replay of 2008). If it didn't work in
2008-11, why should we expect a different outcome this time around? Besides,
if you start every speech by attacking Congress and especially the
Republicans, how can you logically expect a great deal of cooperation from
the Congress?
THE SELF DELUSION OF WALL STREET
In spite of all the economic and financial
changes that have come to light, Wall Street is still coming up with the same
kind of delusional analysis: "Stocks closed down for the fifth
session out of six; that puts them down for two weeks in a row, and that is
two out of three weeks that the market has closed to the downside ahead of
the weekend. Not good action. Even so, the indices are still holding their up
trends off of the early August low. The S&P 500 is still holding its
uptrend and so is the NASDAQ, which actually is holding on to a somewhat
bullish double bottom. The small caps are holding their uptrend as well. By
the way, you can forget that barbarous relic called "GOLD".
Doesn't all this great analysis, along with the President's new Stimulus Jobs
plan, not make you all want to go out and load up on all that cheap stock out
there. Besides, Buffett just put $5 billion into Bank of America. Well I,
too, would take the deal he made: A nontaxable, 6% convertible preferred that
is guaranteed by the government. Why was this super sweet deal not offered to
the hapless, long suffering shareholders? You mean give small ordinary
shareholders a break? Don't be silly; Government handouts are only given to
FOB or could it be that BAC is so desperate for cash it would have taken too
long to raise the cash by doing a secondary?
So why doesn't the government step in and do
something like SPEND SOME MONEY? Well, the problem is that we have done this
time and time again and it just does not work and what is worse, now we are
broke and it will once again be proven not to work. Nevertheless, every Wall
Street and Media Talking Head is demanding QE3. Rest assured we will get it
before the 2012 election. Perhaps the Chubby Checker "TWIST" really
is QE3 in disguise?
We have been living in history's biggest PONZI
schemes that the world is just beginning to wake up to.
AN IDEA WHO'S TIME HAS COME
At this point, the ONLY possible solution is an
about face return to Capitalism and our Constitution. However, without TERM
LIMITS, no solution is possible since we could never get a majority to
vote against their own personal best self interests.
And even if they did, Obama would veto it.
WE ARE NOT TOO BIG TO FAIL, BUT WE ARE TOO BIG
TO BAIL
According to USDebtClock.org, the total amount
of personal debt in the United States is now over $16 trillion. The exploding
levels of personal debt have created a tremendous amount of stress in
households from coast to coast. Combine that with the Federal debt and we are
over $30 trillion in debt and expanding realistically by over $2 trillion a
year as far as the eye can see. Add another $10 trillion for the states and
another $60 plus trillion in Social Security obligations and at least as much
pension underfunding and it becomes as plain as the nose on your face that
we, as a country, are on a fast track to bankruptcy. And we are too big to
bail.
The average yearly income of the top 0.1% of
U.S. income earners is $5.6 million and many people led by 3 weeks of
nationwide demonstrations that Obama and the Democrats say they sympathize
with, are trying to sell us that an economic system that funnels all of the
rewards to the very top is deeply broken. And yet it is that very system that
created the most powerful economic country in the world with the highest
standard of living. In truth, it is the steady erosion of Capitalism over the
last 75 years that was drastically accelerated over the past 3 years, as the
government pushed Socialisms' quest for universal equality that is destroying
our country. The Bible and history teaches us that Capitalism (Individual
Responsibility) is the only system that works. However, most Socialists
including most clergy from all denominations do not really believe in or
understand the Bible and therefore do not understand CAPITALISM. They, as
well as Conservatives, are all very good at taking partial sentences out of
context to prove anything they want the Bible to say.
The tent cities that were prevalent during the
Great Depression Era are beginning to spring up all across America.
WHY DOESN'T THE GOVERNMENT DO SOMETHING
Both parties have demonstrated, now and during
the 30's, that they do not have a CLUE as to what must be done to turn things
around. Hoover, although a Republican, was nevertheless a Socialist and
started a great many of the make work projects (Hoover Dam and the TVA) that
FDR later termed the NEW DEAL. (Do any of you know that FDR ask Hoover to run
THE NEW DEAL, but Hoover refused?) Together they managed to turn what should
have been no more than a 2 or 3 year Recession (such as the one just after
WWI - 1919 to 1921) into a 17 year Depression. And that was at a time when
the US was the world's economic powerhouse, the world's largest
manufacturer and creditor and owned 80% of the world's Gold.
THE
GOLD BUBBLE
By 1990 (10 years after its January 1980
peak), investment in Gold had dropped significantly to 0.6% and by the year
2000 represented a mere 0.2% of global assets. By the end of 2009, nine years
into the Gold bull market that began in 2000, it was estimated that Gold
represented only a mere 0.6% of total global investments whose percentage
increased to only 0.7% of global financial assets in 2010. So despite Gold
reaching record nominal highs, the world holds about the same portion
of its wealth in Gold as it did over 20 years ago.
The increase in Gold ownership from 0.2% in
2000 to 0.7% in 2010 is also misleading. If you consider the approximate $227
billion that was invested in Gold bullion in 2000, that
level of investment would have grown to $1.18 trillion or 0.6% of financial
assets by the end of 2010 - based purely on Gold price appreciation alone. In
other words, the actual amount of new investment into Gold since 2000
represents only 0.4% of current global financial assets. Consider that for
Gold to return to a meaningful level of investment, say to the 5% level of
1968, it would require over $9 trillion of Gold investment today, or about
6.5 billion ounces at the current Gold price. This would represent well over
1.3 times the amount of all the Gold ever mined throughout history and four
times the amount of known Gold reserves. So, not only is the public
relatively underinvested in Gold, but at current prices, it isn't even
possible to increase our Gold holdings back to a meaningful level. One must
also factor in the tremendous shift of wealth from west to east that has been
occurring, especially over the past 10 years. The people of India and China
have always been big believers in owning Gold as it is part of their culture.
The more wealth created in those countries, the bigger the demand will be for
Gold.
Can you imagine if the investment world became
so nervous and panic stricken by the potential of a Euro-zone/USA default
that millions of investors, hedge funds and central banks began heading for
Gold over a short period of time. A period of seemingly hyper-inflation would
also cause this type of stampede.
Will there be enough Gold to go around? If the
price goes up there is. There is nothing more powerful than a BULL MARKET
powered by both GREED and FEAR.
You can imagine what a rush to purchase Gold
would do to its price if the investment world began bidding on Gold both as
an investment and as SAFE HAVEN asset. That is how bidding wars start and how prices rocket skyward. This is the
fundamental principle behind all Gold investors' belief and why it's now
being accumulated at record levels by central bankers around the world. Even
though the Golden Bull is 10 years old, it is just now beginning to come into
its formative years and still has at least another 6 or 7 years minimum to
run.
The United States and Europe cannot possibly
solve their debt problem unless there is a 180 degree shift in economic
policy, away from Socialism and back to Free Market Capitalism. This is
something that I do NOT expect any time in the near future and not without a
lot of blood in the streets. Therefore, as these huge fiscal and monetary
imbalances continue threatening us, the price of Gold will remain high and
accelerate higher. This will result in profit margins the likes of which has
never before seen in the Gold and Silver mining sector. As the majors attain
PE ratios of 20 to 40 times and are sitting on billions in cash, it will then
become the Juniors turn to take off; as expectations are always worth more
than reality during a RAGING bull market. I like both Gold and Silver
producers and explorers with a good story to tell. There will, of course,
always be sharp corrections and consolidations. So don't chase, buy into
weakness. But whatever you do; do not allow yourself to panic should (when)
we get any eventual sharp selloffs. They will act no different than they did
in 2006 and 2008. They will blast off to higher and higher highs. Riding the
Golden BULL is never easy.
WARNING - DANGER: the Central Bankers will
always be trying to manipulate the price of Gold down. Do not let them scare
you into selling.
WHAT DO I AS AN INVESTOR DO NOW?
HOW NOW DOW: Gold and Silver and near term market projections as well as trading
ideas and stock selections are reserved for paid subscribers.
GOOD LUCK AND GOD BLESS
All of my long term readers were not surprised
by the shenanigans of the last few weeks. There are rarely any major
surprises once you learn how to analyze political speech with an open mind
and without pre-conceived ideological positions. My most frequent mistakes
are usually ones of timing. I seem to continually underestimate the stupidity
and ignorance of our Media, Keynesian Economists and Politicians who don't
seem to know how to tell the truth. In most cases, "The Obvious Is
Obviously Wrong" is the one thought that will keep you on the right
side; that and COMMON SENSE.
We are coming into the most trying
times in our nation's history. We can either succumb to our Government's
folly or personally prosper. As always the choice is yours.
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UNCOMMON COMMON SENSE
Aubie Baltin
CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
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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. All
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. I am not a registered investment advisor.
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