"The problem with Socialism is that you
eventually run out of other people's money." Margaret Thatcher
THE REAL BIG DANGER IS DERIVITIVES, NOT SUB-PRIME MORTGAGES. The Bank for
International Settlements (BIS) has issued a report stating that Derivatives
are now $1.14 quadrillion dollars. That is a one with 15 zeros after
it. AIG has now been given $180 billion dollars, with a good portion of that
money going to Merrill Lynch, Goldman Sachs, J.P. Morgan, Deutsche Bank and a
list of others covering one whole page. These are the counter parties to
insurance contracts (DERIVITIVES) written by AIG which, like the money given
to the banks, is supposed to keep the world's financial system afloat. But as
large as these monies are, it is just like spitting in the ocean. As these
Derivatives implode, there will be no end to the monies given to AIG, which
has on its books $400 billion of OTC Derivatives and $200 billion of sub-prime
mortgages (in a large measure directly due to government involvment).
As AIG comes to the feeding table (remember the size of the problem)
for more and more money, they are not the culprits the Government is making
them out to be. They are the Government's RED HERRING to deflect
scrutiny away from themselves, the real culprits, in their efforts to
disguise funneling taxpayer money into the banks to prop up their prime
campaign contributors and "frat-buddies". Perhaps by the 10th time,
John Q. Public will finally get it with regards to the enormous FRAUD that
Socialism really is, as you the taxpayer, are being asked to pay For it.. But the taxpayer is completely taxed out and there will
be a great many tax defaults since people cannot pay as they struggle to
survive. How much Capital Gains Taxes do you think will be collected next
year, regardless of what Congress raises the rates to? What I am saying is
that the tax short fall will be tremendous.
WHY IS AIG SO IMPORTANT THAT WE CAN'T LET IT DIE?
This conglomerate insures 70,000 individual businesses, over 100,000
large businesses, and has 74 million customers. Without insurance or bonded
coverage, many businesses would be forced to close down operations The $165
million in bonuses is just a ruse to deflect attention away from the
ineptitude of Congress. The bonuses are going to over 650 people ( some of which were working for a salary of $1/yr)
because the Government put a cap on salaries and the bonuses are exactly what
they claim to be: RETENTION bonuses. If the best key people leave, what
happens to the $180 billion we have already sunk into AIG? How much can we
sell a viable, on-going business for as compared to a failed corporation
without its top key executives?
Fannie Mae had a yearly loss of $59 billion dollars and Freddie Mac
lost $50 billion for 2008 alone and there is no end in sight to their losses.
And that's after buying $5 trillion of their Bonds. If the FED is
determined to continue to buy up all the defaulted Derivatives, then the easy
conclusion is that the FED will "debauch" the currency. I've also
come to the conclusion that hyper-inflation is the inevitable outcome, as
there is not enough money in the world to take care of the Derivatives.
According to Schwartzman of Blackstone, 45% of all investment assets
have been wiped out across the globe. Fortunately, all my loyal readers have
heard this before while there was still time to do something about it, as my
past years' forecasts are now being confirmed by statistics and events.
"Nothing goes straight up or straight down". There are always
rallies and pullbacks regardless of the market's primary direction. Recently,
we went down for 16 days in a row and now we are well into that 3000 to 4000
point Bear Market Rally that I was warning you about that may take us into
the summer. But one thing is for sure: It will not be a straight up move.
After the rally is over, we will be going down again and a lot lower than we
dropped before.
Sell your long term Treasuries, Corporate and most Municipal Bonds. Most have escaped the
real blood bath thus far, but they are living on borrowed time. Sooner rather
than later, the FED will be forced to raise interest rates in a futile effort
to defend the US Dollar. So sell while the selling is good. This Recession/Depression,
whatever you want to call it, is not going to be a short term affair, more
likely it will last years and Government deficits will grow larger than even
the most pessimistic are projecting. But fear not, stay tuned in and just
keep looking for that rainbow in the sky so as to remind yourselves that the
world is NOT coming to an end.
Most money managers, stock brokers and analysts that I talk to ARE
ACTING LIKE OSTRICHES and keeping THEIR HEADS IN THE SAND. Without any
justification they feel that, by the end of 2009, we will be in a
recovery stage. Unfortunately, most do not have a clue as to what is going
on. Any up-tick in reported earnings or in home sales are met with great glee
as a sign that the bottom is at hand. HOPE is a negative word and actually
means nothing. People will buy into almost any rhetoric if it is repeated
often enough, especially by the media and their latest Hero. The lack of pent
up demand for anything is staggering as this nation is bloated with DEBT and
saturated with things that they did not really need in the first place.
Inventories of unsold houses are at all time record highs and that is not
counting all the homes taken off the market by people who refuse to accept
the fact that their homes are no longer worth what they thought they were.
Life cannot now be fixed by the smoke and mirrors of eliminating the
mark to market requirement and additional low or even zero Interest rate
loans. Bernanke's announcement that the FED is buying $1.3 trillion of agency
debt and treasuries emphasizes that this country is crippled, especially with
the government attacking all of the mechanisms of productive capital
formation. This nation has drained its people's integrity by spending their
life savings, including their home equity.
The main point is that the Government and Bernanke will make all the
exact same mistakes of the 1930's and will tax the people into poverty (not
just the rich). They won't call it an income tax, but nevertheless they will
tax the middle class as well as the poor because that is where the real money
is. They will call it a Green Energy Tax, a Sin Tax, or a Save the Planet
Tax. But whatever they call it, they are all taxes on the poor and middle
class. Remember, if taxes on companies cannot be passed on, then the
companies go out of business and all their workers join the ranks of the
unemployed. Don't listen to the rhetoric: A tax on companies is a tax on
people. THE CONSUMER ALWAYS ends up PAYING.
We need to unfreeze the credit markets so that everyone can borrow more.? Is that not CRAZY? How about saving some money and building up
your cash reserves, which is exactly what the people are now doing, having
gone from -1 ½% to a +4 ½% savings rate in less than 6 months.
During times of crisis, the people are always smarter than the government.
The Keynesians call it the Fallacy of Savings but that is exactly what it is
a FALACY. Elementary Economics teaches that one persons Savings is another's
Investment.
President Obama talks about job creation. What jobs? Created by whom?
By the private companies both large and small that he is attacking, taxing
and demanding that they pull in their belts and sacrifice? How about some
government sacrifice such as passing up their coming pay raises and at least
deferring their pet welfare (redistribution) projects, at least until we can
afford them?
TODAY'S Government solutions are: Print more, borrow more, then
encourage everyone to go deeper into debt. The US DEBT to INCOME ratio has risen higher in the past 5 years than in the last 40
previous years combined.
HYPER-INFLATION IS INEVITABLE
If you want to think that we are on the way up now and this disaster
is over, THEN THINK AGAIN. For me, a
hyper-inflationary outcome is inevitable. That is because the public, the
ones who are on the feeding tube of entitlements (growing by 10 million a
year as the baby boomers retire), will demand to be kept there and will
expect that their collapsing incomes be made whole (most have lost 30% to 70%
of their 401K funds). Whenever I mention the word entitlements, you must
realize that no one wants to ever give them up. When I mention trillions,
most do not have a concept of the money involved. Budget deficits will grow
more in the next 4 years than in all of American history combined.
I cannot see how the Chinese will be inclined to lend the US
substantially more money, certainly not enough to stop the printing presses
from having to run 24/7, 365 days. Hilary and Geitner
have already insulted the Chinese and they have already warned the U.S. about
guaranteeing their Treasury Bonds. But with what? Now they are talking about
a new Reserve currency or new SDR'S that would include Gold.
I repeat, the idea of selling or shorting
bonds into every Bernanke induced Bond rally is a most prudent strategy and nearly a sure
thing. Besides, how much lower than zero can Bernanke continue to lower rates
to? The risk coming in the bond area is not palpable for me. Thus, I buy
Gold that brings no income, but I know my capital (principle) will be there,
no matter what.
The risk is that the accumulated wealth of perhaps 50 years for some
individuals will be mostly lost. It is my contention that our national debt,
in the form of Treasury Bonds, cannot possibly remain viable. You have to
think about and realize what is taking place. Already Pelosi is talking about
another Stimulus Package. Again, it is Socialism and the
Over-the-Counter Derivatives (unregulated and a form of Socialism) that are
destroying our financial system. Most people, including all Ivy League educated
economists, do not seem to understand what they are or their potential to
destroy.
THE PENSION BENEFIT GUARANTEE CORPORATION (PBGC)
It is broke, just like the FDIC that insures your bank deposits.
Shortly, the PBGC will be asked to takeover the CAR
INDUSTRY'S Pension plans among other newly bankrupt companies. But the
printing of money cannot be endless. I anticipate the time where the whole
system will implode to be in the neighborhood of ONE to THREE years. All of
the US Pension Plans are heavily invested in real estate, stocks, bonds, and
other asset classes that have seen tens of trillions of dollars disappear in
a matter of months and are now far behind in their funding due to their
ludicrous underlying assumptions about return on investment. They are
effectively bankrupt and they too will have to be bailed out.
Unless another bailout is orchestrated to save all these middle class
pensions, they will never recover. However, I do not think the Government can
bail out everyone's pension. Most likely you are going to see the PBGC follow
in the footsteps of The Socialist Government of Argentina and nationalize the
private pension money (including IRA and 401K) and mix it with Government
entitlements. This pension money seems like it would make an excellent source
of new funds: Which Obama is already eyeing. Don't think that it can't
happen. We have just witnessed how easy the Government breaks contracts and
how little regard they have for our Constitution.
FOR YEARS I HAVE BEEN WARNING YOU THAT IT WAS THE GIANT LEFT WING
CONSPIRACY THAT YOU HAD TO WORRY ABOUT AND THAT A GIANT RIGHT WING CONSPIRACY
WAS AND IS AN OXYMORON.
DERIVITIVES
This is a market of bets on the performance of "something"
other than a stock (mostly interest rates, currency ratios and credit
worthiness). It is so huge that not even the Fed, Treasury nor anyone else
knows who owes what to whom, or who has lost what and how much. Yet this
Derivative Market is still growing at about 15% a year, which means that more
than $200 trillion is being added each year and nothing is being done about
it except getting rid of the only people who do (at AIG).The reason for this
is that most of these derivative contracts are being rolled over each year
into new ones that are being formed and the losses to one or the other party
are also being rolled over. The losses are temporarily being swept under the
rug with the rest of the toxic assets.
To clarify what I am talking about: You and I can make a bet in which
the winner must be paid $1 billion dollars, and each of us puts up only a
$1000 (even if it was a $1 million) to seal the deal. We then both agree by
contract that gains and losses will be carried forward. But eventually
settlement must be made at some point in the future, so we both buy insurance
to cover potential losses. This $1 billion for the winner and loser becomes
the "NOTIONAL" value of this derivative. That is the exposure to
both parties. The Notional value is the $2 billion being leveraged. The
agreement is a private agreement and not regulated. Eventually Notional Value
becomes the actual value to be paid off. But in the meantime, the winner is
using the NOTIONAL profit to pad his balance sheet, report a profit and
increase his leverage ability. The amounts are astronomical and will have to be
paid. When one party asks to be paid off, Notional value becomes the ACTUAL
amount demanded. When one party wants payment, and it is a big company (like
Bear Stearns), often times this Notional loss has been insured by a third
party insurance company that also cannot make good (such as AIG) - that is
when the FED has to step in to what is really a never ending black hole.
THE ROOT OF AN UNFOLDING DISASTER
In 1990, the total value of these OTC Derivatives was about $100
billion. At that time, major banks and institutions the likes of GE, JP
Morgan, Bank of America, Citi, AIG, and especially
insurance companies, money market funds and every type of bond market all
around the world, started to play the game of insuring,
"securitizing" (similar to the portfolio insurance of the 1980's
that ended with the 1987 crash) everything in sight, in what they thought was
REDUCING RISK so that they could increase their leverage. So we now have a
market that has grown to over $1 quadrillion. AIG was especially profuse (in
its London Branch) writing insurance on every kind of Derivative. The idea
was why not take big fees on insuring something that would never happen. Kind
of like a flood happening in the Sahara Desert. But you know what, a flood
did happen and AIG, which never put enough reserves away because they thought
the event could never happen, found itself owing potentially $ trillions. The
Government (bought and paid for by Wall Street) has made you, the taxpayer,
the PAYER OF LAST RESORT. The potential exposure to these immense losses is
not being revealed as long as the FED can keep interest rates from rising.
However, once rates start to go up, the flood gates will break wide open.
It's taken the Fed, Treasury, Paulson and now Geitner
to sweep all the trillions of losses into the future - which has already cost
the US Treasury $11 trillion dollars so far. Sooner or later, the Piper
Must Be Paid. Are You Prepared?
The Fed will attempt to monetize everything in sight, but then the US
dollar will definitely collapse. By choosing to buy these $ trillions in
toxic waste, you will get what might be called terminal inflation in the US,
where the value of the dollar collapses in about 1 to 3 years. Did I hear
someone say HYPER-INFLATION?
The question then arises: Is it possible to avoid this uncontrolled
inflation and/or the destruction of the US dollar or uncontrolled deflation
and a total implosion of the $1200 trillion of World Derivatives? Any answer
has to be negative. WHY? Simply because the world's financial system is
"de-leveraging" and its $1200 trillion in size and affecting every
institution that you can name. How can the the $11
trillion stop it? That is less that 1% of the amount out there. The Fed
actually has spent $11 trillion in paying off just a fraction of these
Derivative bets, most visible to AIG, the gigantic insurance company who made
these bets or acted as a third party insuring one side or the other or both.
The money has gone to many third parties such as Goldman Sachs, Merrill,
Society General, UBS, etc. to pay for the Derivatives coming due.
The question then becomes who else, other than the Fed, can possibly
raise another $11 trillion each year for two or more years? There is no one
central bank that can, except possibly if a combination of China, Japan, the
ECB and the FED all get together and handle this emergency. That is why
Bernanke continually says he needs more authority to deal with
"systemic" risk, why President Obama just said the G-20 needs world
stimulus and why Geitner just agreed to consider a
new world reserve currency. The estimated money spent so far to stop this
de-leveraging comes to about $20 trillion, which is not even 2% of what is
out there.
The truth is that the Central Banks are running out of money. Interest
rates will soon start creeping up because of this perceived demand for more
and more financing. At this point, I do not know the eventual solution to
this problem or if there even is one. But, what I do know is that unless it
is a Free Market Capitalist Solution, it cannot and will not work.
There is no difference between what is being done by the US Treasury
and Fed from what the IMF and World Bank lectured all the developing
countries not to do because of the hyper-inflationary implications implicit
therein.
NON COMPREHENSION
"Facts do not cease to exist just because they are ignored."
-
Aldous Huxley
The Fed just recently announced that it will be buying $300 billion of
US Treasuries and another $1 trillion of agencies (FNM &FRE). Of course,
with no one wanting more of our debt, the only action left to do is for the
Fed to buy our own debt. Try to understand that buying our own debt is the
beginning of the end. It is the final 1st step towards hyper-inflation. It is
called "monetizing" the debt and is the most dangerous thing any
Central Bank can do. On this news, the stock market turned around and the
media bobble-heads could not control their glee. Either they do not
understand finance or are fully controlled by others. For Bernanke to say
that he will re-absorb the excess money later on is sheer fantasy that even
he does not believe. It is lying to the public but then what else is new?
Interest rates must be kept down at all costs so as to save the
housing industry, or so they say. But it won't work. In a free market,
interest rates must be allowed to find their own true level. If we have a
mortgage interest rate of perhaps 4%, it will not save the industry, it will
lay the foundation for next S&L type crisis. It's called UNINTENDED
CONSEQUENCES. Monetizing is the red flag that tells people that the US dollar
must go down in value as more money enters into circulation. While the dollar
does not have to go down right away, it is easy to see a decline of 50% in a
year or so. What the media bobble-heads did not tell you is that Gold also
went up $50 right away and the dollar sank. This $ trillion created out of
thin air, will be followed by other trillions till we come to a financial
crisis and the present Government or Congress is thrown out on its ear. The
desire to get re-elected is so strong that they are overcome with madness.
But that is what Socialism is. The real scary thing is that the Republicans
now in Congress are not any better. Money is going to flow out of over priced assets and into cash. The definition of
cash according to our U.S. Constitution is defined as Gold and Silver. As
asset prices start to crater (and they will), their value in Gold terms will
fall. Gold is not a commodity; it is the only real money. As your Government
buys US Treasuries because they have to, they will try desperately to hold
the price of Gold down. But, they too, will fail.
Taxpayer money is being squandered by a bunch of idiots in Congress
that have caused the problem in the first place. If they were forced to live
by the laws that they passed and that everyone else has to live by, every
single one of them would be in jail. You will notice that they NEVER swear to
tell the truth, only you and I have to do that.
Obama has readily announced being in favor of taxing capital and
imposing some protectionist policies which, to me, is a clear indication that
he, like Bernanke, has learned nothing from the Great Depression. No one that
I either heard or read about has any access to power, is capable of
straightening out this economy. All the answers so far can be summed up into
one solution; the printing of unlimited money. The Democratic super majority
is hell bent on totally remaking the economy JUST AS WAS DONE IN the days of
Wilson, FDR and Carter administrations. There will be hyper-inflation,
runaway regulation, no incentives to produce, innovate or invest,
confiscatory tax rates and collapsing incomes from reduced business activity
and inflation combined with rising unemployment. These people in Congress are
economic ignoramuses and they are in the process of nationalizing the
domestic energy, banking, automobile and healthcare sectors just for
starters. What will be left? Is WWIII our only way out?
THE STOCK MARKET AND THE ECONOMY
First things first: There are times when the stock markets and economy
go their separate ways and NOW is one of those times. The reasons are usually
varied and complex, but today they are quite simple. The level of economic
illiteracy around the world is outstanding. It seems that ALL the
politicians and their economic advisers are all Keynesian Socialists and
therefore in the words of Obama, all believe that there is a worldwide hole
in economic demand. Yet not one journalist or opposition leader has even
asked, "Where did this shortfall in demand come from?" It certainly
was not due to a lack of Government or public spending. Yet their solutions
are all in unison, SPEND MORE. Doing more of the same as what got the world
and especially the USA into this mess in the first place is the height of
insanity.
But, enough of that for now, let's get back to the market and
make some money. I have warned you time and again that we are in a
period that closely resembles the 30's, so we are now in a period similar to
1930. The N.Y. government in their infinite wisdom,
has come up with a passel of massive spending plans that the world, and
especially the American press, politicians and of course Wall Street think
will work. Before their audacious plans are actually put into practice, the
ever optimistic stock markets, living on hope are now in that RALLY MODE that
I have been expecting for the last 4 TO 6 weeks. This is the rally that could
set us all up to become Rich by first making a nice profit on the upside and
more importantly, giving us our last chance to liquidate and build up our
cash positions. Then we will be ready to go short into what will probably be
the biggest crash of our life time; maybe of all time?: BUT only if we each
have the courage to stand alone against the maddening crowd.
SHORT TERM
We are extremely overbought. So try to cash in your profits; if we are
lucky enough to get a 100 to 300 point rally into the option expiration day
(Friday). OR if you have stock positions instead of options, you can buy some
April Puts to protect your profits into option expiration on Friday and then
CASH IN. Continue to sell OUT OF THE MONEY PUTS or buy Calls on the TBT into
any Bond Market Rallies. You want to bet on long treasuries crashing
eventually.
GOLD: WHAT TO DO NOW?
Not much NEW to say about Gold other than what I have been saying for
the last year and a few months: Gold is in a consolidation phase until the
ultra high levels of optimism are worked off. In the meantime, continue to
accumulate Gold and stock positions into sell offs toward the $750 to $800
range. Now is a time for patience as everyone besides Gold Bugs begin to realize the ever improving Fundamentals for Gold.
The next WAVE up will be an explosive 3rd Wave so sit back, build your
positions and get ready for the 2nd best ride of your investing life. The
best ride will be the 5th Wave starting in 3 to 5 years from now. So take it
easy, stay calm. I have not missed a major move yet and neither will you if you stay tuned and keep the faith.
GOOD LUCK AND GOD BLESS
I have spent my entire career identifying
major trends in the markets and helping others to profit from them. These are
trends that will be happening in the near future; trends that most analysts and
investors notice only after they have already been well established and we
have made the majority of the easy money. In my newsletter, “UNCOMMON
COMMON SENSE”, once I uncover changes to the major trends, I then
present specific, actionable recommendations that will help you profit even
during the worst of times and before they become obvious to everyone else.
Aubie Baltin CFA, CTA, CFP, PhD.
UNCOMMON
COMMON SENSE
2078
Bonisle Circle
Palm
Beach Gardens FL. 33418
aubiebat@yahoo.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 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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