Economics101 The Big Fix
THE OBVIOUS IS OBVIOUSLY WRONG
Time and again we have been witnessing a variety of actions taken by the FED as well as by the rest of the World’s Central Bankers, each one thought to be the exact right thing to do and met initially with manipulative enthusiasm only to turn back to despair in less than a morning as the market not only stopped rising, but sold off. What is happening and why?
Socialist (Populist) policies always seem at first glance to be the obvious feel good actions that must be taken, but in actuality rarely are for two reasons:
- They never take into account the unintended consequences and ramifications that are always there lurking in the background in any complex economy.
- Even greater importance is the problem that these actions are designed to fix are never the real problem, but are only the effects or consequences of the Real Problem, which by their very nature is never obvious.
THE REAL PROBLEM
From the very beginning, Government interference in the market economy is and always will continue to be the Real Problem; primarily by artificially lowering interest rates, increasing the money supply and lowering lending standards. Initially, these actions were deemed to be very positive in stimulating job creation, but the unintended consequences such as inflation and the elimination of the allocation and risk function of interest rates take a while to build up before they come into play: The obvious ones being inflation but more importantly a misallocation of resources. A good parallel example is drinking high in sugar and caffeine energy drinks. You get an initial burst of energy, but it is not long before you come crashing down. You can try to extend the high by taking more and more sugar and caffeine, but there is a limit and once that limit is reached the crash is much more severe. It is just impossible to keep on going on sugar (Fiat Money) and caffeine (lower Interest Rates) diets. Eventually the body must go to sleep or die. The economy works in exactly the same fashion.
A second problem and perhaps of greater underlying long term importance are the unintended consequences that are always lurking beneath the surface, but remain invisible to all but a very rare few (who are always ignored) such as the reduction in underwriting standards and risk and the capital allocation function. Capital is provided to borrowers who would never have qualified for loans under normal interest rates if the banks were not flooded with newly created out of thin air money.
ECONOMICS 101: THE BIG FIX
If there is one thing that I know for sure, it is that Socialist solutions can never fix economic problems. They are just “Feel Good” actions that merely paper over some of the worst side effects and actually end up making the real problems worse. If we ever hope to repair our banking and financial systems as well as save our Social Security and Medicare from bankruptcy and fix our schools - only Free Market solutions can accomplish any of These objectives
CONFIDENCE AND TRUST: HISTORY REPEATS
The root cause of our most urgent financial problems is the complete breakdown of confidence and trust throughout the world’s banking systems. The economy has reached its maximum levels of caffeine and sugar that it can tolerate. We now also have the automobile industry, SETTING RECORD SALES RIDING THE SAME BOOM that the homeowners rode less than 8 years ago.
No cash down, no document loans. If you have a job earning as little as $350 a week and a driver’s license you ride: Sound familiar? We never seem to learn! Who will buy the repossessed cars and assume the defaulted loans. Where will the bailout come from this time? Most States are already bankrupt and the States (soon to be followed by the cities) and every other group in trouble, all come to the Federal Government with their hands out demanding bailouts. Is there no one but me who can see what we are doing is the exact same thing here and now that we did last time and that Germany’s Weimar Republic did in the 1920’s which resulted in hyperinflation first, followed soon by World War and thereafter by depression.
1: The financial institutions for whatever reason need a large injection of capital, but instead of getting it from the government as they print more Fiat money and socializing the industry, they should be getting their money from their own shareholders along the same lines that the Banks and GE got money from Warren Buffet. However, instead of allowing outsiders to dilute the equity of the existing owners (the common stock shareholders, who are by and large the American people through their Pension Plans), let’s reduce the role of government: instead of increasing it By getting the money from their existing shareholders. BUT HOW?
Last time around, Buffet and the King of Saudi Arabia bailed out the 2 biggest banks, but who will bail them out this time?
By simply suspending the audited statement requirement and simplifying the filing requirements necessary to have a rights offering so they can offer their own existing shareholder the right to subscribe to the exact same deals that were given to the Sheik and Buffett. The reason that the banks have chosen the likes of Buffett to get money from is that they are considered an exempt institution and no prospectus is needed. Raising money from the public requires not only audited financials (which cannot be provided at this time) but at least 6 months to a year to file a complex SEC prospectus and get it approved. By suspending the highly complex government regulations that actually serve no purpose, the banks in no time at all, can easily raise $500 billion minimum from their own shareholders which, assuming a 10% reserve requirement, would immediately make available $1 trillion for loans. Since they already own the common stock the existing shareholders get a better deal with the convertible PFD stock stopping any dilution. Why should the likes of Buffett get a preferred deal?
2: Let us have the FED do what it was initially set up to do; provide short term liquidity in case of an emergency and have the FDIC, guarantee 100% of all deposits while increasing the premiums that deposit institutions pay into the FDIC. After all, when did we pass a law that all men were no longer considered to be equal? And don’t the banks have to pay a premium on all deposits? Why discriminate against small deposits. Does the system not want their money?
3: Begin applying the most basic of all capitalistic principles; that of Supply and Demand by increasing interest rates, NOT lowering them. Who in his right mind wants to lend money at 1% or some such ridiculous low rate, which is in reality a negative 10%, if you take inflation and taxes into consideration? That is why the banks are hoarding their cash. Let the banks start offering 5% to 10% CDs and you would see a flood of money from all over the world come pouring into our banking system: The banks, now flush with cash, could start lending at reasonable rates of interest; between 8% to 15% and higher depending on the risk and credit worthiness of the borrowers. Even today, despite record high delinquencies, the banks are still soliciting people to take out new credit cards, the simple reason being that they can charge upwards of 30% on credit card debt, which more than compensates them for any increase Risks. (At the same time, limit the amount that they can charge their credit card debtors to 15% while reducing fees to a maximum of $5 for late fees). It is about time we allowed interest rates to accomplish one of their primary functions; that of allocating scarce capital to only the best projects as well as allowing risk premiums to be built into the rates.
4: Set up a modern RTC: History tells us that when even a small real estate bubble bursts, it takes between 8 to12 years to clear the overhang of unsold, overbuilt homes. An aggressive RTC can clear the foreclosures from the bank’s balance sheet that they cannot handle while taking all the under priced CDO’s that they have on their books at a punitive rate of 30% of face value. That would encourage the banks to work out their own solutions as much as possible and only sell to the RTC if they have to, while at the same time reducing the eventual cost to the taxpayers. Why, at that rate, we may even end up turning a profit. The negative is that the prices of most homes not in foreclosure would also drop for a time, but not for long or as far as they will eventually fall to anyway. In so doing, we could probably clear the deck in 3 to 5 years, instead of 15 or 20, while providing affordable homes to the masses at 7% 30 year fixed mortgages, which they could now afford to pay for as their taxes and insurance premiums would also be less based on their now lower priced affordable homes.
5: Five years of undeserved bonuses must be returned by all senior executives on anything over $100,000, since it was all paid out on Phantom Earnings. Franklin Rains, of FNM fame, took home over $90 million in bonuses plus a golden parachute, even though he was forced to resign after having to restate $5 billion of profits (on which his bonuses were based) into $5 billion in losses.
6: FNM and FRE are bankrupt, so declare them as such and then recapitalize them in the same fashion as we are recapitalizing the banks in conjunction with offering all of their outstanding Preferred stock and debt holders 50 cents on the dollar in 4%, 50 year U.S. Treasury Bonds. It’s no longer a matter of what is fair or not fair. It is a matter of saving the world’s financial system. It’s a matter of getting 50 cents with interest or ending up with nothing and a collapsed system.
There is more, but I am not writing a book here, it is just a bare bones example how we could restore confidence and trust virtually overnight by simply announcing Capitalistic plans for a Capitalist economy. Every person with a modicum of common sense, except the Ivy League Keynesian Economists, would understand immediately the beauty and simplicity of the plan. After all, are not all good plans simple? We would also be demonstrating a sense of fairness to the public; that the fat cats cannot get away with their white collar crime living high on the hog while our country and the world sinks into depression due to their reckless (I am being kind) behavior, especially since it was not their own money that they were gambling with.
GOLD: THROWING OUT THE BABY WITH THE BATHWATER
We have witnessed on more than one occasion what a margin induced SELLING PANIC looks like. Even though everyone knows that you are supposed to cut your losses short and let your profits run, common sense goes out the window once panic sets in. When there are margin calls flying across the board (not to my subscribers) and you need money and you want out, you dump what you can and still have a profit in thinking, take the profit before you lose it. Plus you sell what you have that can raise the most cash. They dumped their Gold to raise cash. They knew it was a mistake, but they figure they will buy it back later after things calm down and with a little luck, they will be able to buy it back at less than what they sold it for. But we all know that rarely if ever happens.
WHAT DO WE DO NOW?
My gold projections of $1300 to $1525 for this year remain the same. The Junior Gold’s such as NXG are now selling at under 5X earnings and I am continuing to accumulate. Gold Bullion is still in its consolidation phase and will continue to fluctuate between 1150 and 1300 until it finally explodes to the up side. Continue to buy on weakness or on a breakout to new yearly highs. Buy the 3 Royalty stocks that pay realistic dividends and Sell call options against them to increase your yields. You can also sell deep out of the money put options to further increase you yields and maybe end up buying more cheap stock should they sell off enough for you to get put.
THE ECONOMY AND STOCK MARKET
After a troubled two nights even though I have been right, and all I was doing last week was covering my short positions, I spent all weekend taking a long hard look back in time, examining all of my own as well as others research into Thursdays and Fridays action which seem to me to be screaming for at the very least, a temporary oversold bottom. As you all know, I was looking for a bottom last Thursday or Friday. We got a climatic sell off, but I did not foresee the degree of devastation that we ended up getting. However, even though it certainly was climatic deserving of a Dramatic Rally, I DO NOT THINK IT WAS THE BOTTOM. The expected bottom here will only be a technical corrective bounce (a zigzag 3 wave or possibly a 5 wave triangle consolidation). The economic fiasco that I have been warning about for almost two years now has not yet hit home: Panic has not spread to the non-investing public nor has it yet infected Main Street severe enough for a major low to have been made, but still good for 1500 points or so.
The bailout plans have been an utter socialistic failure. A major worldwide recession, leading into a major depression is just starting and nobody seems to recognize that or have a clue as to what should be done about it. All they seem to be able to even talk about is doing more of the same as what got us into trouble in the first place. Although the hunt is on for scapegoats, the one thing that the politicians will definitely not do is look at themselves; the ones who are really responsible.
Confidence and trust in markets and the government is gone. All the bailouts thus far have proven to be ineffective. I will leave it to others to describe all the problems, which are in reality only effects of the real problem that few are as yet addressing.
THE STOCK MARKET
We recently got a new Dow Theory Primary Bear Market Sell Signal, which can be deemed a reconfirmation of the previous Dow Theory SELL SIGNAL that we got almost a year ago and that was NEVER been invalidated. I also found two more new proprietary long-term sell signals, which is suggesting to me that this Bear Market is just in its formative stages. It means that the coming Rally will just be a corrective if spectacular, dead cat bounce, even though it may be dramatic. (It would have been a lot more dramatic had they actually made some positive changes: And if they don’t know what they are, its time to replace them with some people who do. They can never do that since people like me are referred to as Fascist Pigs. Putting this all together, means that the decline from the recent highs is just the completion of the 1st wave 1 down of a 3 or 5 wave Bear Market selloff. Last Friday's closing low also came on the one-year anniversary of the all-time high in October 2007, and exactly six years after the October 2002 Bear Market bottom. Is it not amazing how often history repeats and it has a kind of poetry to it. Whether this short term low came last Friday, or this coming Monday or next Friday, this will only be the bottom of the first leg down of a 3 or 5 phase Bear Market. The Jaws of Death are about to break this market wide open.
The coming LEG UP could last as much as a week or two, with a great deal of volatility mixed in. Stay Tuned: Volatility means big profit opportunities! Once the corrective up wave is just about completed, sometime in the middle to late February, the next main move down should prove to be a WHOPPER and break down to below the 2002 lows of 7250. It will feel like the end of the world is near. All investors must continue to get out of DEBT and raise cash into the coming bounce. Stay tuned in for short opportunities into a later 38% retracement target area of 10,000 +/-. If the rebound is 50 percent, we are looking at an upside target of 11,000 +/-. A 62 percent retrenchment would have a target 11,800 +/-.
CAUTION: A bottom may be at hand, but I make no guaranty that it was made Friday or that it will be made Monday.
Bonds are as sure a short Bet as there ever was. They are rallying purely because of panic in Europe, Japan and Russia and a desire to get into cash that is not held at a bank. The manipulators have convinced the public that Gold and Silver are no longer safe havens but they will shortly be proven wrong: So too for Treasuries that are now acting as a safe harbor: But not for much longer) only because all the scared money is pouring into the US Dollar. But who in their right mind would lock in a negative rate of return with absolutely no chance for profit? Answer: Someone who just wants to keep his money and does not mind paying a slight premium to do it. They have the mistaken belief that US TREASURIES will continue to appreciate against all other currencies.
Remember: Back about a year ago, when I told you all that the only sure thing bet that I ever saw was to sell Junk (BBB) Bonds and buy Treasuries at a measly 250 basis point spread, I guess you all wish you had listened? Check out the spread now. I took most of my profit by selling out my Treasuries, but I am still held on to my short position in the BBB junk bonds.
I am also still holding to my 2005 projection that GOLD will HIT $6,250 by 2017. We will soon find out who has the last laugh.
GOOD LUCK AND GOD BLESS
SHORT AND SWEET: If you’re looking for the means of protecting yourself from the coming Economic and Stock Market crash, you can pick up a 5 month trial subscription of UNCOMMON COMMON SENSE for only $69 with money back guarantee if not 100% satisfied. A SPECIAL one year subscription is only $149. You can get a 2nd year for only an additional $100. Extend your subscription now so as to not miss an issue when you will need it the most!
Uncommon Common Sense
Dr. Aubie Baltin
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
This letter/article, like all my others, 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. Although I include recommendations from time to time, being a bi-monthly publication, it is not meant to be a trading letter. 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.