The Height of Optimism

"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 Creation

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

UNEMPLOYMENT

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.

However, IRRATIONAL 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 monetization.

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 Depression.

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

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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
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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. 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.