Why Hasn't "IT" Happened Yet?

To listen to the Bears over the past few years, you would have thought we would all be in breadlines and soup kitchens by now. So far, all of the ranting about doom and gloom sounds more like the boy who cried wolf than accurate forecasting. But I do believe that when "IT" happens, things are going to get a lot worse than anyone can imagine. Even though the markets at their lows in March of 2003 had lost over $6 trillion of value; that was not IT.

What is IT? Why hasn't "IT" happened and When will "IT" happen?

"IT" is a major financial meltdown followed by an economic contraction." IT" is a sudden and sharp downward spiral that takes everything with it. "IT" will be started by a catalyst, a spark that will get everybody's attention. But "IT" is already built into the system, like a pile of oily rags just waiting for spontaneous combustion, a match or a spark to ignite "IT".

Some of the candidates for the catalyst include the following:

1. Crash of the dollar
2. Stock Market crash
3. Derivative meltdown at a major bank
4. Nuclear terrorist attack
5. Major terrorist attack against the USA (Bio, Chemical or Nuclear)
6. Major corporate debt default (i.e. Ford or GM)
7. Major Municipal or State default
8. Foreign dumping or perhaps simply a refusal to continue buying US Treasuries
9. A rapid increase in inflation
10. A speculative blow-off that creates a vacuum on the downside.

These are just some of the most obvious matches. By themselves, most can be easily weathered. But when combined with the poor underlying fundamentals of the economy and stock market, such as $800 billion trade and $500 billion budget deficits, sitting on top of a mountain of unfunded pension and medical liabilities; then "IT" can turn into an inferno.

Below are some of the oily rags just waiting to be ignited:

• Massive amounts of derivatives ($100 + trillion)
• Over valuation of the dollar
• Overvalued stock market (a P/E of 19 times last 12 month's earnings is overvaluation)
• Massive build up of debt
• Record low percentage cash levels in mutual funds
• Massive build-up of personal debt
• Under-funded pensions (Government & Private)
• Housing bubble
• Deflation or Inflation
• Municipal and State deficits

And last but far from least is the $1.5 Trillion in Hedge Funds leveraged to as much as 25 times, a disaster just waiting to happen? The $6 Billion loss by one fund in less than a week was just the first shot across the bow.

But one thing is for sure, "IT" will not happen when or how anybody expects. Some are waiting to see the writing on the wall; most want to see the fire before they will believe there is danger. Things haven't really changed that much over the past 3 years. Investor attitudes are much too complacent. They see nothing to worry about. Yet liabilities have been outpacing income for six years. Since Year 2000, income growth has slowed while expenses have continued to accelerate.

So why hasn't "IT" happened yet? Thus far the Fed has succeeded in playing Fire Chief by pouring liquidity into the system. But the Fed CANNOT keep the money and credit spigots wide open indefinitely. After all, is that not the definition of inflation? All they are doing is delaying the inevitable, not curing it. Adding liquidity is only making our future economic problems worse. It's the same as waking up with a hangover and trying to cure it by taking a few more drinks. Excessive liquidity was the main cause of the 90's Bubble in the first place and for that matter, every other bubble throughout history. The Crash in 1987 came as a shocker: But Fire Chief Greenspan and his liquidity hose were on the phone to the banks and brokers offering unlimited credit to any institution that needed it. He saved a meltdown with five minutes to spare. The downturn in 1997 was again saved by Alan and his liquidity hose. In 1998, the Long Term Capital Management debacle, a harbinger of things to come, caught everyone flat-footed. Once again, along came the Fed to the rescue. Then came Y2K and the Fed just automatically turned on the printing presses to prevent any problems. All of these tribulations had similar characteristics - they were sudden and solved by the Fed with increased liquidity. Along comes 9/11 and Greenspan once again took out his liquidity hose and drove interest rates down to 1% but it only served to fuel the biggest real estate BUBBLE in history. After 9/11 liquidity was not enough; it required two BUSH Income Tax cuts to halt the recession and get the economy rolling again. He was able to do this because the government was projecting trillions of dollars in surpluses but this time with massive budget deficits looming far into the future, there will be no tax cut to save the day.

The fabled excess liquidity that Wall Street crows about doesn't really exist. In fact, the Fed's solutions have once again driven stock prices to levels of irrational exuberance. Too much liquidity has destroyed the allocation of scarce capital function of interest rates. The world is awash in money, BUT Fiat Money is not capital! Corporations and individuals have taken on unmanageable debt loads. Excessive liquidity has not only driven the housing bubble, but is now driving the TAKE-OVER BUBBLE that has always coincided with stock market blow-offs.

By definition: Too much liquidity must eventually weaken the Dollar forcing the FED to raise interest rates to much higher levels than anybody expects. As a matter of fact, all the talk now is about when the FED will start lowering interest rates.

WHAT HAS HAPPENED TO COMMON SENSE

Why is the Market racing to new all time highs when every analyst is expecting a slow down beginning in the first half of 2007? Looking across the divide is supposed to happen at bottoms not at tops that have not arrived yet. Our Economists and Anal-ists can't accurately forecast even next month's level of interest rates, GDP growth or inflation rates and yet they are pretending to accurately project the end of a Soft-Landing (recession) that hasn't begun yet? Who is kidding whom?

Adding more liquidity won't solve any of these problems it just exacerbates them by delaying the inevitable and most probably will make matters worse: The Bigger the bubble, the Bigger the bust. It is now taking ever increasing amounts of money and credit just to hang on to where we are. The USA requires an inflow of almost $3 billion per day to keep our dollar afloat and we will not be able to do that with lower interest rates.

When will "IT" happen?

"IT" is already beginning to happen all around us. The "oily rags" are there for everybody to see. Debt continues to pile up. The market is becoming more and more over valued. The most popular way to increase earnings is by buying back stock at the high; is that the best use for company's money and is that not a sure sign of a company stagnating? Is shrinking the capital stock of a company a reason to increase their P/E? Why is the Dollar is just barely holding on in the face of new all time highs in the stock market? No, these aren't things that have "always been going on" as some pyromaniacs on Wall Street would have you believe. No, they haven't happened yet, but we are getting close. The potential for a stock market crash is always there with the market so overextended. The amount of derivatives outstanding is growing ever larger, now totaling more than $100 trillion, according to the Comptroller of Currency. The total amount of derivatives is 9 times larger than the entire US GDP. How risky is that?

What are the odds of any one of the catalysts happening? Since I don't have a crystal ball, I don't know. I put the odds of a nuclear war very low, but rising quickly. I imagine the North Koreans or Iran might think differently. The odds of a derivative meltdown taking down a major bank are much higher. Barings Bank's failure and Long Term Capital's failure have shown us that derivatives can cause a financial disaster overnight. Warren Buffett has warned us that the derivative explosion is a disaster just waiting to happen. Do we just selectively listen to his advice and only take the advice that suits us at the time? The top banks are playing with matches, big matches, and there is almost no Federal regulation over derivatives. Warren Buffet has also referred to derivatives as financial time bombs. The odds are that the catalyst will come from the credit markets. Maybe one foreign bank will start to dump US bonds which would cause US long term interest rates to spike up and the dollar to crash. Could this happen? Could this have a domino effect? Japan, with its 40% savings rate, has been the biggest buyer of our bonds both public and private; it now looks like she is finally starting to come out of her 17 year recession and will, sooner rather than later, need some if not most of their savings to invest in their own economy. Their stock market is deeply undervalued when compared to ours. It is not a matter of If but when will they start selling their massive holdings of Treasuries. What about China? Their holdings of US treasuries are now over a trillion dollars. Now that the Democrats have taken control of both houses, what happens if that idiot Schumer gets his 27% tariff? As Yogi once said, "it's history repeating all over again." Has anybody even mentioned the amount of interest that must continually be paid on our ever increasing debt? A 7% interest rate doubles the debt in a little over 10 years.

Anyone of the above mentioned perils could lead to a market decline/crash. Long term rates look like they may start climbing again should inflation numbers force the FED to resume increasing rates. The stock market is once again climbing a wall of worry as it breaks out to new all time high. Could the wall of worry turning euphoric be the trigger? Has the Big Hook that I have been looking for, for almost two years now in sight?

DON"T WORRY BE HAPPY

IRRATIONAL EXUBERANCE: If there is any doubt that the world's investment community is suffering from irrational exuberance, just look at the German and French Stock Markets. In the face of 12% unemployment rates, less than 1% growth rates and Communist rioting against economic reforms to look forward to, their economies can only stagnate at best and yet their Markets are making new five year highs, all in the face of Paris burning from Muslim rioting and an ever increasing immigration problem throughout Western Europe. And you think we have an immigration problem? At least our immigrants, legal or otherwise, don't want to blow up America.

BULLS MAKE MONEY, BEARS MAKE MONEY, PIGS, THEY ALWAYS GET SLAUGHTERED

There is certainly enough smoke to warn us that there are problems brewing with stock and bond markets all over the world. Anyone who is tired of hearing about all of the dire predictions from the Bears should be doubly careful since some of the most die hard Bears have finally tossed in the towel and turned bullish: When the last Bear turns bullish or neutral, watch out below. Anyone who is waiting for "IT" to arrive before they act is playing a very dangerous game. Now is the time to act to protect your assets. If you wait for "IT" to be obvious, it will be too late as you will get trampled in the mad rush for the exits.

SO WHAT'S THE NEXT MOVE

If you still have long positions in any long term bonds or in any stocks around the world, start selling NOW. The top could come anywhere between tomorrow and January. Warning, you are playing with fire. The break, when it comes, will be fast and furious and everyone who then tries to get out will be trampled by the rush to the exits: You really don't want to get caught up in that. Why chance it when one of the biggest bull markets in history is just beginning to unfold.

GOLD

We have recently completed Wave II at $560, an almost perfect Elliott Wave 36% (38% WOULD BE PERFECT) pull back from its Wave I high of $730 reached in May, which was another almost perfect five wave $475 ($730 - $255) point move. We are now in the early stages of the Third Wave of Gold's 21st Century Bull Market. For those of you who are unfamiliar with Elliott Wave Theory, third waves are never the shortest of the three impulse (up) waves and are usually connected to the first wave by a ratio of either 1.38 X 1 or more commonly 1.62 X 1 giving us a target for Wave III of $1215 OR $1330 {1.38 x $475 = $655 + $560 = $1215 or 1,62 X 475 = $770 + $560 or $1330). That would not mark the end of the bull market: It would be just Wave III of five and that's assuming that there is no extension for Wave III. Then, after a Wave IV consolidation, we still have Wave V to look forward to, but we will leave that analysis until after Wave III has been completed. With that kind of scenario, why are any of you still in anything besides precious metal stocks.

SILVER

As far as silver is concerned, its fundamentals may be even stronger than gold's but it's not MONEY; so my personal preference is gold even though it is quite possible that silver could go up even more than gold. Also, I would not argue against some combination of the two.

STOCK SELECTION

Please note: I AM RETIRED and therefore I do NOT make individual stock selections for anyone but myself, so please do not call or email me for suggestions, I will not answer you. However, comments and opinions are always welcome and answered. There are plenty of qualified people and services advertising on this sight for you to choose from or you can't go wrong by investing in any of the established Precious Metals Mutual Funds or listed ETF's.

GOLD VS OIL AND BASE METALS

Please note:
You are about to witness what I have been preaching to you for years; OIL and Gold are NOT, I repeat linked. GOLD is in its own BULL MARKET and is independent from everything else except maybe Silver. As the Stock Markets around the world begin to break down and the full force of the bursting real estate bubble makes itself felt, the USA will head into recession and the rest of the world will then soon follow suit. The USA will then show a 3% drop in oil consumption and you will not believe how far down the price of oil will drop. The world is awash in both OIL and Fiat Money especially US dollars. The next best thing to owning Gold is shorting OIL. Buying both Oil and Gold is not a smart diversification unless you want to lose everything you will make in Gold to oil. The same holds true for base metals, they cannot maintain their lofty prices once the world heads into recession. With GOLD we are talking money, and the only substitute for fiat money is GOLD and Silver. Improper diversification is for fools who don't know any better, and are just trying to CYA.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
aubiebat@yahoo.com
561-840-9767

November 25, 2006

DISCLAIMER
The above is my personal opinion, and in no way be deemed investment advice to buy or sell anything. It is submitted purely for informational purposes, based upon my understanding of the markets.

The Demise of the Dollar... and Why It's Great For Your Investments