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12.01.2010

The Final Option


Eventually all paper money returns to its intrinsic value--worthless.     Voltaire.
The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.       Friedrich Hayek
THE REAL REASON FOR QE2
The day after the election, the Federal Reserve announced another round ofQuantitative Easing (QE2): This euphemism attempts to hide the fact that the FED is creating money out of thin air and "Cheating, debasing, and inflating," or in plain English, stealing the public’s money and savings. 
A few other economists, analysts and I (two prominent examples are Doug Kassand El Erian) believe that the FED actions will not only not help, but will actually make conditions much worse. 
Mr. Bernanke's performance was a charade meant to hide the fact that the Government is now illiquid and has reached the point where it can no longer pay its bills. If the Fed does not buy Government Bonds (print money), checks will stop for programs such as Social Security, Medicare, Medicaid reimbursements, military pay, etc. There are no longer enough bond buyers or taxpayers to pay for the profligate Government spending, so they must resort to stealing it from everyone who uses US dollars as a means of exchange and savings. And I am no longer alone in my assessment as more and more responsible economists and analysts have begun to see the light. 
The root cause of the liquidity problem is insolvency. QE2 provides liquidity, but does nothing to solve the insolvency problem. QE2 may mask the insolvency problem for a while, but it is impossible to solve the insolvency problem using only SMOKE and MIRRORS.
The Fed will be buying $110 billion a month in Treasuries for the next 8 months or on an annualized basis, it's $1.320 trillion.  Fiscal 2010’s Federal Budget deficit was $1.3 trillion.  Looks to me like we are completely monetizing the debt.
THE ROAD AHEAD
QE2 is just another step towards disaster. We are on the same road traveled by Argentina, Brazil, Zimbabwe, Weimar Germany, and others who have destroyed their currencies in the name of saving their economies. None of them intended for that to happen. Each step was justified based on the expediency of keeping the government going. In every case the government had already failed. Its attempt to survive made matters much worse for its citizens. QE2 by its name tells us that it’s not the first step, but its effects could be disastrous; especially if it sets off currency or worse, Trade Wars. Pimco's Bill Gross anticipates it will produce a 20% decline in the value of the dollar. While Bernanke may succeed in kicking the can down the road a ways, his actions will not prevent the government collapse -- it will ensure it, along with the collapse of the currency, economy and Stock Markets. BUT for now QE2 is holding up the Stock markets.
Since talk of new money-printing first surfaced a few weeks ago, 30-year bond yields have exploded from 3.46% to 4.32%. That's a 25% surge and it's showing no signs of slowing. Yields surged again after a lousy auction of 10-year Treasury Notes. Then they surged AGAIN after the sale of $16 billion in 30-year Treasury Bonds bombed. The good news is that WE are finally starting to make some money on our long TBT positions.
Funny Thing: This is exactly what Bernanke said would NOT happen: Something akin to unemployment not going above 8% if we only had a little Stimulus.
In fact, the Fed Chief's main excuse for printing $600 billion over the next eight months is that the money is needed to buy up bonds and LOWER long-term interest rates! OH, who wouda thunk it?
The Fed actually wants more inflation now, (BUY MORE TBT NOW) clearly a negative for longer-term bonds. Stocks, in the U.S. and around the world, as well as commodities were expected to continue to Rally as being beneficiaries of inflation, global growth and easy money. But as usual, “The Obvious Is Obviously Wrong.” Nobody seems to have bothered to examine the past that teaches us that rampant inflation is BAD for every body. By any normal measure, stocks and maybe even commodities are overextended in the wake of their big run-up of the last 2-1/2 months. But they justify their over-valuation saying that interest rates will remain very low. OH REALLY? Corporate earnings have been strong (nothing to do with inflation?) and are likely to continue their advance. Demand for commodities, mostly from fast-growth emerging markets, should stay robust, continuing to project the recent past into the future ad infinitum. Is that the lessons time and historical evidence have been teaching us? Is this the time for an eye toward buying stocks and commodities on weakness?  If the economy is so strong and the companies are really making the kind of money that is being reported and the economy and unemployment numbers have really turned around, why the desperate need for QE2?
HOW WILL ALL THIS END?
 There is no pleasant ending. Political activity over the past fifty years guaranteed that. As Ludwig von Mises observed, "Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general Depression.”
MISSILE FIRED IN ESCALATING CURRENCY WAR?
World Bank Chief Robert Zoellick continued to warn G20 leaders that they can’t ignore Gold’s growing role as a monetary asset. He called it the “elephant in the room” during last week’s conference in Singapore.

Zoellick made a splash with an op-ed in the Financial Times urging the G20 leaders to adopt a new monetary system with multiple reserve currencies, and a role for Gold when assessing inflation expectations. The best solution is for Mr. Bernanke to cease and desist his QE policy. That would require the political class to face its problems. It would require a massive rollback of the welfare state and shrinkage of government. It would require resizing government to a level that productive citizens could and would support. Transitional hardships would occur, including civil unrest and possibly a depression. There really is no other options.
This fantasy would only make sense if it was written by Disney writers.
The worst solution is the one that Mr. Bernanke has selected. If he stays on this course, our money will become worthless. So will Social Security checks because they will have vey little purchasing power. Fixed incomes and savings will be virtually wiped out for the same reasons. The middle class will be financially destroyed. Markets will cease to function except on a barter system. Food and other necessities will be in short supply, resulting in un-imaginable civil unrest. A Greater Depression is assured. Unlike during the first Great Depression, where citizen’s purchasing power of their savings increased; this time around their savings and fixed income will have been stolen from them via hyperinflation. In short, it would be the worst economic hell imaginable.
For the third straight month, the U.S. Department of Agriculture has cut its forecast for the corn crop. “The combined production shortfalls and dramatic potential stock draw downs mean a much tighter supply picture than just a few months ago,” says the USDA’s report.
 Mr. Bernanke is unwilling to tell you what is happening. His actions have moved us into the eye of a massive storm. Do not be lulled into complacency, for as VonMises stated, "A fiat money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy."
HOW NOW DOW
The Stock Markets made their last ditch blow off rally last week, although it was not exactly as I was expecting: It took a little over 7 trading days to achieve what I expected to take only 2 or 3 days. Nevertheless it gave us the perfect opportunity to pick and chose our short positions. You should now be short (long Puts) using about 5% of your money (remember USE STOPS) and continue holding on to your Gold, Silver, Uranium and Rare Earth positions. We will increase our short positions once we get confirmation of the resumption of the BEAR MARKET. Another close of 200 points down should do it.
The key issue for ALL financial markets centers around the fact that the FED wants Dollar devaluation and the rest of the world led by China doesn’t. How this conflict is resolved will determine the fate of stocks, commodities, bonds and most importantly the US Dollar. 
INFLATION! INFLATION! Head for the Hills! Preserve, Protect and Defend Your Wealth! Dig for Coal, Copper, Zinc and Gold! – This headline says it all,
 
THE PROMISE OF G-20?
We are witnessing the beginning of a complete breakdown of international cooperation on monetary and fiscal policy; just as I have been expecting and warning you all that the global money war will escalate.   But NO WORRIES -We are positioned to take advantage of the combined stupidity of the World’s politicians (Leaders  LOL).
USE any pull-backs in Gold, Silver, Uranium and Rare Earth Stocks to increase your positions.
GOLD
While most of the mainstream media readily announces new "highs" for the price of goldThe New York Times just published an article pointing out that "The actual record high was set 30 years ago, when the price of gold, in today's dollars, hit $2,387, or 65% higher than it closed on Friday."
 
It's important to remember that gold's price has much further to run before it matches inflation adjusted highs set in 1980. AND any panic sell-offs in precious metals should be looked upon as an opportunity to increase your positions. 
 
Many investors might be wondering if gold will meet or surpass that $2,387 number - but as I have emphasized many Times in the past, Gold is "a hedge against a weak dollar, not just a hedge against inflation." My long term target is still $6,250 by 2017. So relax, we still have a long ways to go. Besides we have only scratched the surface of the political stupidity yet to come

So as long as the Federal Government continues to print money in order to pay for its expenses, we can expect the dollar to continue its long term downward trend (the occasional 2 to 6 week rally notwithstanding) - and gold to continue to rise.
SILVER
On November 9th, the Chicago Mercantile Exchange raised its silver futures trading margins by 30% to $6,500 an ounce from $5,000 an ounce (more to come) inducing a rapid sell-off in both Silver & Gold (as well as in the stock and commodity markets).  Erstwhile, analysts relate this move to the trick the financial authorities pulled in early 1980 when Nelson Bunker Hunt and Herbert Hunt had nearly cornered the market in Silver and are therefore expecting a crash today, just as happened back then. 
But the situation today is exactly the opposite as it was back then. The increase in margin was not against the long positions, which are held by 100’s of 1000’s of investors all over the world and not just by 2 Hunt Brothers trying to corner the market using maximum borrowing. This time around, I expect it was because the FTC succumbed to pressure and raised margins to protect t\he public against the four BIG BANKS that own 80% to 90% of the short positions without holding any hard assets to back their positions and are losing 100’s of billions of dollars. The knee jerk initial sell off will undoubtedly result in much higher prices as these shorts finally see the writing on the wall and start covering their short positions as all those stupid gutless longs scramble to get back in.
Just as bond vigilantes brought the near hyperinflation of the 1970s to an end by selling government debt, today it is "dollar vigilantes." There are 6 billion people around the world who are slowly awakening to the 3 Card Monty game of fiat currencies and central banking and are casting their own vote to sell dollars in favor of real assets such as Gold, Silver, agriculture and energy.
WHAT TO DO NOW?
The Bear Market to end all Bear Markets started in October 2007 and fell in its 1stwave down leg through March of 2009, wiping out over 50% of the stock market. Corrective Wave II has thus far corrected a normal Fibonacci 62% of Wave I down and lasted longer than I had initially expected.  Although I got all kinds of Sell Signals Thursday and Friday, the resulting sell-offs were not as sharp as a 3rd Wave down would normally be since Wave IIIs are usually the most severe of all waves. This leads me to speculate that there may still be one last rally attempt before Wave III begins in earnest. Corrections are always the most difficult to trade especially now that the terms of reference, the US dollar, is no longer stable having dropped 14% in the last 3 months alone before bouncing. That, along with the fact that there are now multiple exchanges trading NYSE stocks so that only 25% of all trades are now executed on the NYSE, plus stocks trade round the clock making exact readings almost impossible to get. Hence the uncertainty over the entire Correction as to whether this sell-off is the beginning of Major Wave III down or not. Nevertheless, a down wave has started and confirmation as to whether or not it is THE Wave III will be confirmed if this decline falls below the August 2010 peak of 10,720 in the Industrials and 1,130 in the S&P 500. 
STAY THE COURSE: All of my long term readers were not surprised by the shenanigans of the last few weeks. It was all discussed and called for over my last few letters. There are rarely any major surprises once you analyze recent political events with an open mind and without pre-conceived Ideological positions.  The most frequent mistakes I usually make are ones of timing. I seem to continually underestimate the stupidity and ignorance of our Keynesian Economists and Politicians who are continuously lying to the public.
 GOOD LUCK AND GOD BLESS

Aubie Baltin CFA, CTA, CFP, PhD.                                   
2078 Bonisle Circle 
Palm Beach Gardens FL.  33418