The Writing is on the Wall – A politically incorrect analysis
by Aubie Baltin CFA, CTA, CFP, PhD.
Originally posted 17 August 2009
This article is a Must Read! – Aurick
AS I WAS SCRIBBLING NOTES preparing to write this missive, I came across Jim Willy’s excellent latest piece (see here), and although I am actually comfortable standing out there all alone, I was pleased to discover that he too sees the “Writing On The Wall.” A currency crisis is now upon us but most (especially our Government Leaders led by Obama, Hillary, Geithner and Bernanke) refuse to recognize that it even exists. US Treasuries and GSE’s are being slowly diversified out of and their diversification is gaining traction and power, but little publicity. “Foreign creditors are attempting to protect their core US$ denominated reserves, while clearly undermining the US $ on the margin, as alternatives are sought.”
To date, their alternative choices are not currency but hard assets, commodities, properties and companies from the resource sectors of the world. The paradigm shift now taking place will change the face of the United States permanently, yet few here in the US recognize the changing landscape. The only concessions that the Chinese have made is that they are not dumping their holdings on the world’s bond markets, but they and their Government surrogates are working overtime to unload their US $ holdings by buying up resources and resource based companies (Such as the recent purchase of 17% of Teck Minerals – symbol TCK – the largest Canadian mining conglomerate which produces copper, zinc, moly and hard coke coal).
What do the Chinese know that we don’t?
Although oil prices have dipped recently, they are still at levels that are 3 times higher than they were 10 years ago. While our “Heads in the Clouds” Government keeps talking and what’s worse, acting about energy self sufficiency by developing alternate fuels, the Chinese have been taking advantage of this year’s low oil prices to step up their buying of oil fields and resource companies using their steadily depreciating US dollar reserves. Recently, the China National Petroleum Corp signed a deal with BP to develop an oil field in Iraq – yes, that Iraq, the one we liberated and were accused of doing so only to get our hands on their oil.
The Chinese are also attempting to buy the Argentinean division of the Spanish oil firm, Repsol. China’s Sinopec Group bought Addax Petroleum. China’s Aviation Oil signed a letter of intent to purchase a refinery in South Korea and PetroChina bought 45.5% of Singapore Petroleum; recently they have made major investments into the Canadian Tar Sands and that’s just the beginning. While China, India and the rest of the world have told us in no uncertain terms that they will not be destroying their economy with any Cap & Trade nonsense, we are rushing head long, at break neck speed, avoiding all debate, into Cap & Trade.
Why this buying spree? Simple, China as well as everybody else (except our politicians) knows that oil will only stay this cheap as long as the world remains in Recession/Depression. Once growth resumes, prices will explode and China is, unlike America, investing in the future. More importantly, their time horizons are long term and not the 1½ year focus of American politicians. After all the Chinese do not have to worry about elections or pacifying their “Green” lunatic fringe. China’s energy consumption has been growing at 5% a year. In May alone, sales of automobiles in China rose 47%, while its oil imports hit a 14-month high. Moreover, China knows it will need a lot more oil in the near future as their population of 1.3 billion people is only just now buying their first cars.
Hillary has just received a wake up call while on her trip to India where she was told in no uncertain terms that India will not destroy their economy for some idiotic no win fight on Global Warming. She will continue to run up against the exact same common sense attitude from the rest of the world. DEPRESSION is inevitable if the US implements its recently passed Cap & Trade legislation. It will serve absolutely no purpose if the rest of the world does not go along and that is without getting in to the Global warming argument. I don’t need a crystal ball to come up with this conclusion.
So what steps is America taking to insure that we maintain and assure our future energy requirements? Dreaming about replacing Coal, Oil and Natural Gas, of which the US has the world’s largest untapped reserves with alternate sources of energy (like Ethanol?) and new technologies which are not yet on the drawing boards?
The status of the US Dollar as a reserve currency
The pressure from Russian, China, Brazil and our friends in the Middle East to change the world’s monetary order is pressing forward at breakneck speed. At the recent G-8 meetings, China asked for a forum to debate proposals for a new global reserve currency! China has not yet started selling its Treasuries or Agency Bonds, but they have already spent $157 Billion this year buying American Companies. This has helped to fuel the current Government manipulated Stock Market BUBBLE that will very shortly turn into history’s biggest Bull TRAP. But they are not stopping there as they proceed to buy just about anything of value that they can get their hands on to use up their hoard of US Dollars. They are moving as quickly as possible, without crashing the world’s financial system, while paying lip service to our idiot politicians that we send over there. What are we doing in the mean time? We’re making the entire situation worse by ballooning our deficits, debt and money supply and doing our best to destroy America’s CONFIDENCE in herself!
Bank earnings (!) – an oxymoron?
There is now a proposal on the table to bailout second mortgages on top of the already $ trillions committed to the utterly corrupt banking sector. The fact that you might have some lenders taking capital injections to reduce 2nd liens while leaving 1st mortgages intact is simply a backdoor further bailout of banks beyond any sensible financial policy. Americans would not tolerate this if they realized what was happening. I hope you don’t expect Obama, Geitner and Bernanke to enlighten you. My gut feelings were sadly being confirmed when the private-public investment program was announced.
“The Obvious is Obviously Wrong”
BULL MARKET TRAP: If there is one sure thing out there, it is that “The Obvious Is Obviously Wrong,” which was the other name that I was considering using for my newsletter. Everybody and his mother were looking at that Head and Shoulders Breakdown. All the while, I was warning you that “this is a Manipulated Market” and Goldman, JPM, Geithner, Bernanke et al, needed to create a “Bear Trap” in order to get enough buying power to kick start a short covering rally in the hopes that it would set off a new Bull Market. But be careful not to get trapped again by the euphoria pouring out of Wall Street and the Media.
What we are getting is NOT a new Bull Market, it is the set up for the BIGGEST BULL MARKET TRAP in history. How can I be so sure? Any elementary application of 1st year Austrian economic theory will tell you that the policies now being implemented in conjunction with the record amounts of money creation, debt build-up and monetization of the Government’s debt leave no other conclusion. It is impossible to spend your way out of debt and into prosperity. Worst of all, we are rapidly turning our Free Market Capitalist Economy into an ever more Marxist Socialist Economy. Cap & Trade and Health Care reform will be the straws that break the back of Capitalism.
The street’s beating earnings reports
When CFOs find themselves in the midst of a Recession and in a massive downturn quarter with the talk of Depression and Deflation in the air, what else would you expect but for companies to write off everything including the kitchen sink. They lay off as many workers as they can and write down all their excess inventory and then go hat in hand to the Government and demand if not a complete bailout, at least some serious concessions. Successful or not, they not only cut their Income Tax liability but if they create enough losses, they are also able to recapture past years’ taxes. The result of all this is that the following quarterly earnings reports must by definition be better than the last quarter. The Wall Street, analysts who completely missed the last two quarters, do as they always do and project the past into the future. Naturally, they go from too optimistic to too pessimistic, so most companies’ earnings naturally beat the Street’s expectations. Do beating street estimates now replace real cash flow and real earnings in determining a stock’s value?
A new bull market? Don’t you believe it!
Nothing has changed! All the Government’s initiatives and spending policies are DOOMED TO FAILURE. WE CANNOT BORROW, PRINT AND SPEND OUR WAY INTO PROSPERITY. MARXISM, SOCIALISM, KEYNESIANISM or whatever you want to call it has NEVER worked and what’s worse, has always ended up in a disaster. AH YES, I forgot -This Time It Will Be Different!
The last time our country was under so much Governmental Control was during FDR’s reign. Now I know that he is still considered the Savior of Capitalism and one of our country’s greatest heroes, but between Hoover and FDR, who carried on Hoover’s policies to the extreme, they turned what should have been no more than a 2-3year Recession into a 17 year Depression which took WWII to get us out of.
Lessons of history
According to the “The Economist” a Keynesian magazine, while there are some similarities between now and the 1930’s, the world should be able to avoid a 1930’s Depression due to some big differences. Specifically, in the 1930’s, countries were on the Gold Standard, which restricted their ability to ease monetary policy as economies went into Recession after the Wall Street crash of 1929. Rather than allowing taxes to fall as incomes declined, America raised taxes beginning in 1932 and eventually FDR raised the top marginal tax bracket to 93% to balance the budget .The claim is now that governments have a better understanding of macroeconomics (really? They certainly fooled me) we too are raising taxes dramatically and with public spending taking up a much larger share of GDP, their ability to stabilize demand is greater (a detriment, not an advantage). The third difference between today and the 1930’s is that there were no organizations such as the G7-8-20 or the IMF to oversee the world economy. (Check their track record and see if we are prepared to follow their prescriptions.) These are the thoughts of most of our economic leaders.
Each one of us must challenge these thoughts, for these are only fantasies, not facts, and these fantasies are not based on truth, but rather illusion and PC history. The first claim is that easing monetary policy can reverse a deflationary spiral. Deflation is caused by excess capacity leading to lower prices, leading to falling profits, leading to reductions in employment output and wages. When excess capacity is financed by debt, the need to generate cash flow will lead to predatory actions resulting in a much faster collapse in prices. When the risk of losing jobs is high and prices are falling, people rich or poor are unwilling to borrow to buy even at low interest. With excess capacity and small or negative returns on marginal investments, there is no incentive to invest and further add to capacity. THE ONLY SURE WAY TO END A RECESSION QUICKLY IS TO ALLOW THE RECESSION TO RUN ITS COURSE. THIS GETS RID OF EXCESS CAPACITY AND FREES UP RESOURCES TO FUEL THE NEXT BOOM
Another way (that has always made matters worse) is for the government to ease monetary policy by monetizing its debt and printing money. This is now happening all over the world. Throughout history, whenever a country has wantonly printed money, it has always lead to hyper-inflation and the collapse of the economic system. It will be no different this time. THE NATURAL LAWS OF ECONOMICS NEVER CHANGE. They are Laws not just suggestions. The printing of money destroys the value of money eventually resulting in a loss of confidence in Fiat money and a return to a semi-barter system which further contracts the economy. During the depression of the 1930’s, money was sound, the US owned most of the world’s GOLD (80%) however, that is certainly not the case today.
The second claim of having a much better understanding of macroeconomics is also not true. A steady 75 year Socialist Marxist takeover of our education system has left us with virtually no Free Market Capitalist Economists in any positions of influence. So much so that we never even get any alternative capitalist suggestions from Republicans. With public spending taking up an ever larger share of GDP, their ability to stabilize demand is not greater as almost every state is teetering on the verge of bankruptcy. My previous articles have analyzed the “lies” of current macroeconomic theory and I will concentrate my discussion on how a large government sector affects the response to a deflationary contraction.
The essential question is which government is best able to act to stabilize demand: A government with a large share of the economy, which is running a financial deficit and has a huge overhanging debt load or a government with a small share of the economy which has a balanced budget and minimal debt? The first case describes most of the governments in the world today. The second case describes many of the governments in the late 1920’s. We know from experience that anything that the government undertakes takes 3 to 6 times as long and costs as much as 10 times more than if handled by the private sector. Look at our stimulus package. Only 10% of the money has been spent to date with no noticeable benefit and yet what are we doing? Starting to talk about a new and larger stimulus package.
Today’s economists have their heads stuck in the clouds of model building that have been proven never to have worked. But they and their ideologies are not capable of descending from their ivory towers to come up with real solutions for a real world.
WE ARE REPEATING THE EXACT SAME FOLLIES AS THE FDR ADMINISTRATION AND WE WILL END UP WITH THE EXACT SAME RESULTS ONLY WORSE BECAUSE OUR COUNTRY IS IN MUCH WORSE FINANCIAL SHAPE TODAY THAN WE WERE IN THE 1930’s.
Where to now, Dow?
It’s time to take profits on the Call positions of the “Strangles” that you took 2 weeks ago. Not only are you in substantial overall profit, but there is a good chance that your presently out-of-the-money Puts may also turn profitable if you did as recommended and took long term (Sep/Oct) positions. Another possibility is to Buy Aug PUTS to protect your call profits and let them run; Just in case this Rally explodes in a massive short-covering explosion to 9500 – 10,000. If most of the shorts cover that takes away any underpinning that any sell-off might have had.
If you think that it’s different this time around, IT IS NOT! Unlike all the new BULL MARKET fans who are just now jumping on the band wagon, I called for a 38% (9500) to 50% (10,400) Bull Trap Rally back in early March. Now, just like back in 1930, prominent Analysts, Politicians and Economists were all infected by the New Bull Market virus that seems so prevalent in today’s financial media.
“While the crash only took place six months ago”, said Herbert Hoover in May of 1930, “I am convinced we have now passed through the worst and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”
Back to reality: This is how a Bull Trap develops. It starts out in the midst of the most extreme Bearish Sentiment and the Bearishness continues all the way up to the rally top (the odd-lotters have always been smarter at the extremes) despite the Politicians, Wall Street and Media doing their best to convince us that the worst is over and there is a new dawn.
The evening of March 6, 2009 saw the DOW at the biggest percentage below its 200 day average ever recorded. That and a conglomeration of other readings such as AAII’s most bearish readings ever and other bearish readings prompted me to hastily write and mail out my March 9th BUY signal.
Check the track records of all the Bulls. If they did not see the Crash or the Recession coming, you can safely bet they also did not catch the March bottom. I for one, since March 9th, have been calling for a 38% retracement pullback to 9500 and now that we are approaching our target. DON”T YOU DARE GET CAUGHT UP IN ALL THE NEW EUPHORIA. Nothing has changed – there is a wave of Socialism sweeping the globe and especially here in America. “YOU CAN”T FOOL MOTHER NATURE” not for long anyway.
Is it just a coincidence that the 1929/30 rally lasted from the November 13, 1929 bottom until the April 16, 1930 top, five months and 3 days? Will this dead cat bounce rally, that we are now in, also only last 5 months and 3 days, until August 12? History does not always repeat exactly, but it always rhymes and we are now definitely Rhyming and living on borrowed time.
Bears make money, Bears make money, Pigs get slaughtered.
I know that I have been sounding like a broken record, but I have been right on for over a year. What else can I do? If there is one lesson that you must learn it is that the market will do whatever it has to do to make the majority wrong. I am not going to list for you all the extremely bullish fundamentals that have been developing for the precious metals over the past year. But there are two most important factors that have been overriding all that bullishness and they are (1) We are now in the quiet season for Gold and (2) we have not yet completed the consolidation phase of that wonderful 84 month Bull Market. But keep in mind that those 84 months were only Wave I. We are now completing Wave II with up Waves III and V yet to come. Wave III’s are never the shortest of the UP Wave and when it comes to Gold and commodities, Wave V is usually the biggest and the quickest. So stick with me the best is yet to come. I have not let you down in 7 years and I do not plan on starting now.
Although Gold could explode at any time now, stay with our plan of buying into weakness in either stock or bullion until Gold breaks out above $1050. At that time, load up on the balance of the positions you intended on taking. REMEMBER back in 2005 – my long term target for Gold was $6250. So far, only Alf Field has come anywhere close with his $6000 projection and then for some reason he stopped publishing. I guess he wanted to retire a big winner. Come back Alf, the world need good people especially NOW.
ONE OTHER POINT: Gold most often goes in the opposite direction as does the general markets and yet, while the markets have been rallying strongly over the last 5 months, Gold has held its own. That could be foretelling that both the timing and extent of the explosion will coincide with the BIGGEST BULL MARKET TRAP in history, due at any time over the next few weeks. The longer this stock market extends, the sharper will be the crash.
IF both CAP & TRADE and HEALTH CARE as proposed get passed into law, then I am looking at 1,500 to 2,000 on the DOW. The World will be looking at a 20 year plus DEPRESSION. They called me crazy when I called for Recession back in Jan. of 2007 – don’t make the mistake of underestimating me now.