MISINFORMATION
The
misinformation machines of Wall Street, the Media, Government and a raft
of corporate Economists are going full blast in their effort to convince
the public or perhaps themselves, that all is well and the only thing that
is necessary to getG-d back into
his Heaven so that all will be right with the world is a measly FED rate
cut. The only question now seems to be the size of that cut, whose crescendo
has already reached as high as 2%. If consumer confidence and the economy
are in such great shape, where does that outcry for a 2% cut in rates come
from?
TO
CUT OR NOT TO CUT
I
have spent the last several letters explaining what interest rates are
and how they work, so I will not explain them again and for those who may
require a little re-education, go back and re-read my last two missives.
Let me bluntly put things back into their proper perspective: A succession
of rate cuts at this time would do a lot more harm than good. The inevitable
result would be to push the economy into recession, leading rapidly into
a world wide depression. It is my fervent hope that, in Berenanke, we have
that rarest of individuals, who has both the guts to resist the tremendous
pressure that is being placed on him and the knowledge to do what is right
for the economy and his country, despite any threats to his personal situation.
THE
RATIONAL FOR NOT CUTTING NOW
For
the last 20 years, the economy has been floating on a tidal wave of ever
increasing debt and ridiculously low manipulated interest rates. Rates that
were so low as to destroy their function of allocating scarce resources
and the proper pricing of risk. Up until a month ago, things had gotten
so far out of hand that BBB rated junk bonds were paying as little as only
2½% over risk-free treasuries; down from a high in the early 90’s
of over a12% premium. I have been advising you for over 6 months now that
the surest and safest investment was a long treasuries,
short Junk bond spread. Don’t you wish you had listened? By the way, it
is still a great trade.
The
premiums that were demanded for risk dropped so low that people with zero
or even bad credit were able to get 1% interest only, $500,000, undocumented,
zero down mortgages. That is how stupid people can get when you interfere
with the free market to the point where proper signals no longer function
to keep the market in balance. What all this nonsense did was create a
completely unsustainable level of confidence throughout every nook and
cranny throughout the world.From
P/E ratios to ultra high inflation of both real estate prices and the level
of construction of homes and offices, we managed to convince ourselves
that the five year 25% compounded increase in prices and in the number
of homes built would all be readily absorbed by our population increases,
most of which was due to illegal immigrants. Believe it or not, the banks
were issuing no documentation mortgages to people without a social security
number. Well last month, like all good things, this too finally came to
an end when one risk manager at Merrill woke up and decided to do his job
and reduce his company’s exposure to the insanity by trying to increase
the quantity and quality of the collateral on one of their loans. Suddenly
the world had its eyes opened to the fact that the Emperor Had No Clothes.
FEAR
TRUMPS GREED
For
the last 20 years or so, we have slowly tossed out all previous methods
of pricing and have developed a one way, “Buy the Dip” mentality. Fear
was dead and buried as recent graduates with no experience, became the
analysts and money management hotshots while age, experience and prudence
were slowly but surely retired from the investment scene. However, eventually
reality rears its ugly head and the predominately under 30 crowd, now managing
most of the money are, for the first time in their lives, learning what
FEAR is all about and that FEAR always trumps Greed.
For
the past 200 years, market peaks coincided with P/E ratios above 15 and
stock market lows were marked by P/E ratios below 8. Yet for the past 10
years, we have convinced ourselves that a new paradigm was in force and
that Bull Markets started with P/Es of 18. Likewise with Dividend Yields;
lows in the past coincided with yields above 8% and 2 1/2% marked overpriced
stock markets. For the last 10 years, the analysts were convinced that
capital gains were all that mattered and Dividend Yields below 1.5% coincided
with beginnings of new Bull Markets.
Historybe
damned. What do Old Historians know anyway, they are always living in the past.
I
have not heard anyone even mention the fact that the world’s second largest
economy has been mired in recession and deflation for nearly 17 years even
though they had cut their interest rates to zero. However what did result
was the creation of the carry trade and a major contributor to world inflation
and a mis-pricing of risk. During that same
time period,
MONEY
MAKES THE WORLD GO ROUND
When
this Bull Market started back in 1984 or if you prefer 1975, only 25% of
the public’s, pension funds’ and insurance companies’ monies were invested
in common stocks. Today, upwards of 75% are now invested in common stocks.
For the last 20 years or so, money supply growth exceeded GDP growth by
over 7% per year compounded. In order for the money supply to be able to
grow like that, it required a tremendous amount of borrowing (read confidence)
in conjunction with manipulated, below normal rates of interest. On the
17th of July, this orgy came to a screeching halt. In spite
of the World’s Central Bankers best efforts, the money supply has already
begun to shrink, so where will all the money come from that is necessary
to fuel a continuing Bull Market? There is NO MORE MONEY, HONEY and there
is no chance for the Bull Market to resume.
Record
short interest is enough to fuel one last rally but not a continuing Bull
Market. The talking heads can trot out all the indicators they want, but
all of them are backward looking indicators. Ever increasing amounts of
borrowing (read lending) are required in order to create“out
of thin air” money and that can no longer happen with the increasingly
tightened lending standards occurring all over the world and especially
here in the good ole USA as the Congress now wants to lock the barn door,
after all the horses have escaped. Naturally!
REAL
ESTATE
For
almost five years, 25% more homes were built per year than our economy
could possibly absorb and within a year, all those unoccupied unsold homes
and condo’s along with a million foreclosures
will be just sitting there empty, overhanging the market and driving prices
down. It will take at least 10 years and 50% lower prices before they are
all absorbed. Again, let me refer you back to
IS
IT THE 30”s ALL OVER AGAIN?
Probably,
but maybe not: Although history repeats, it never does so that you can
recognize it until well after the fact. More importantly, it is still not
too late to mitigate the situation. If it was not for the Socialist New
Deal policies, the Depression of the 1930’s would not have lasted more
than three years. We know a lot more about how economics works today than
we did back then, but unfortunately our politicians are not any smarter.
If we once again go down the road of protectionism, anti-business and increased
Government regulation, then we will be forced to suffer through another
10 to 20 year Depression. BUT HAVE WE LEARNED ANYTHING?
THE
STOCK MARKETWHERE TO NOW?
Although
the inevitable 30% to 50% stock market correction is already locked in
place, believe it or not I think there is still one more chance at a new
high between now and January 2008. Remember SENTIMENT, the figures are
still too damned Bearish for it to be a major Bull Market TOP just yet.
Perhaps it is just wishful thinking on my part, but I am looking for a
retest of the recent lows; at which time the FED will be coerced into a
½ point cut or a series of ¼ point cuts. That, in conjunction
with the all time high levels of outstanding shorts should be enough to
generate one last ditch HAPPY NEW YEAR orgy of buying that would push both
the market and the Bullish Sentiment readings to new all time highs. At
that time, there will not be one cent left to sustain the market and a
1000 point down day will soon follow.
TO
BE FOREWARNED IS TO BE FORARMED
If
you have been listening, then you are already 50% in cash and 50% in Gold
Bullion. If we are all lucky enough to get that last ditch Rally, will
you listen this time?
That
first sell-off will be so sudden and sharp that it may pull Gold down with
it to my maximum low target of $550: If it does, then back up the truck
and load up with Gold and Silver Bullion and their Shares. DO NOT sell
your present Gold positions. Gold may not sell off, but rise instead as
it increasingly acts as a safe haven.The
total market capitalization for Gold shares is only around $200 Billion.
It will not take all that much panic to double or triple its price.
BULLS
MAKE MONEY, BEARS MAKE MONEY, PIGS GET SLAUGHTERED.
GOOD
LUCK AND GOD BLESS
Aubie
Baltin CFA. CTA.CFP.Phd.
561-840-9767