The Tycoon Report

INDEPENDENCE DAY: CELEBRATION OR WAKE?

HAPPY 4th of JULY

UNCOMMON COMMON SENSE

For People Who Think

INDEPENDENCE DAY: CELEBRATION OR WAKE?

The central theme behind every one of my missives is an attempt to peer into the future by evaluating the Government’s fiscal and monetary actions of today. It is an accepted fact that there are LAG effects to all changes in policy of anywhere between 12 and 36 months. What that means to you is that what is happening today is, to a large measure, the reaction to policies that were initiated as much as 36 months ago. In plain English, that means that the $1.8 trillion Stimulus Package that was passed 3 months ago will only start being felt over the next 9 months to 2 years. The minor slowing of the economy’s precipitous slide is due to the short term affects of the last $800 billion Bush Stimulus Package and the $780 billion TARP Funds.

Financially and politically, America is in worse shape today than it has ever been in its entire history. Politically, we are kowtowing to our enemies while backstabbing our long standing allies as we continue on in our idiotic foreign policy of trying to buy friends. Did their mothers not teach them that “you cannot buy friends”? Two examples are: We continue to send food to North Korea instead of sending anti-missile destroyers to shoot down their missile launches. AND to make matters worse, even though we are in debt up to our eye balls, we are sending $200 million to Hamas, a Terrorist organization, according to our own Government, while in the same breath we threaten Israel. Even if the money does go towards aiding the Palestinian people instead of buying rockets from North Korea, where is all the aid from the neighboring Arab states that, unlike us, are awash in cash? Do you realize that America has been FEEDING the Palestinians since 1948? And yet they were in the Streets Celebrating 9/11.

But the worst problem of all is that the USA is now on a fast track towards Socialism that is sure to break the back of our Free Market Economy. CAP and TRADE will be the biggest and most regressive INCOME TAX increase in our history, all in the name of saving the planet. Once passed, there will be no stopping our descent into DEPRESSION. Whatever you do get on the phones to your Congressmen and stop it by reminding them that you will remember which way they voted come 2010 and 2012.

AS AMERICA GOES, SO GOES THE REST OF THE WORLD

The German credit crunch deepens as credit conditions are going from bad to worse across much of the country's manufacturing base and the liquidity crunch is increasingly threatening the survival of companies. A recent survey of German industry found that over a third of all large companies are still seeing credit conditions tighten further, if they can borrow at all. Terms are now tougher than they were at the height of the global crisis. Borrowing costs have risen for most firms even though the European Central Bank has cut its key interest rate to an historic low of 1% (the same thing is happening here). The stock market has never been more intimidating than it is right now. We have reached a point where both individuals and companies no longer feel comfortable investing in anything. NOTE: Mr. Driftmann said Germany's €2,500 (£2,100) bonus for trading in old cars had given an artificial boost for a few months, but was now returning like a "boomerang" to haunt the auto-industry. "It was a flash in the pan, not a real rebound," he said.

DON”T JUST STAND THERE, DO SOMETHING

It seems to be the accepted precept that it’s better to do the wrong thing than to do nothing at all. Well nothing could be further from the truth as doing the wrong thing only serves to exacerbate the problem and elongate the negative aspects of all the meddling. And we are definitely doing the wrong things, which is the primary reason for my insistence that a DEPRESSION is looming on the horizon.

The basic fundamentals of our economy have changed from a Capitalistic Free Market Economy rooted in equal protection under the law into a government dominated, semi-dictatorship with the Government’s whim and Ideologue judges, replacing the rule of law in complete disregard of our Constitution. So much so that comparisons with past economic recoveries is at best misleading and at worst completely wrong. There has never been a Mob Ruled, Centrally Planned Government dominated economy that has ever succeeded. Using just our own history as a guide: Every Recession or Depression has been induced by Government meddling in the Financial Markets. The ones that recovered the quickest were the ones where Government’s subsequent interference in the economy was the least. So far, we are on a track that looks far more like the Great Depression (our single most government dominated economy to date) than any of the other recession or depression in our entire history.

THIS TIME IT REALLY WILL BE DIFFERENT.

SAVINGS: Just for starters, the savings rate has increased from near 0% to over 6% and climbing in less than 6 months. In actuality, it is much higher than that if we were able to include as savings, all the Gold Coins that are being accumulated for CASH (for fear of an FDR type confiscation of Gold). I expect savings to increase to 12% in short order. That means that consumer spending will drop by at least 12%. Since consumer spending was 70% of GDP that means a new lower level of consumption that will not return to being 70% of the economy any time soon, especially given our 15% (realistic) rate of unemployment.

Capacity utilization is now near 65%. The last time it was this low was in 1937. Anything under 80% is really bad news as there will not be much lift to the economy from investment in the near future as one company after another shrink operations or close their doors completely. We have an oversupply of just about everything from buildings, cars, homes to shopping centers and all manner of strip malls and other retail establishments. What does that mean for the banks going forward? Both the rest of the world as well as the USA are suffering from massive over-capacity in manufacturing as well. To make matters worse, does anyone really believe that businesses in general will be expanding here in the USA with Government picking winners and losers while extolling their strong anti-business rhetoric?

It’s time to BUY the short Commercial Real Estate ETF (SRS). July $18 Call $1.85

ENERGY AND COMMODITIES are once again the hot hedge against inflation investment vehicles of the day, but the hot shot Hedge Funds and Investment Managers like everyone else are fighting last year’s wars. Their excessive price increases are based on pure speculation that the economies will be back in growth phase by the 3rd or 4th quarters at the latest. Don’t you believe it. DEPRESSION looms, led by the USA with Europe, China and the rest of the exporting countries following not to far behind. Short OIL above $70

WHY WORRY? I just heard Larry Kudlow report that consumer spending increased by 0.1% and this is a sure sign that the recession is over. But how does that number jive with unemployment at 9.4%, housing prices down 35% from last year and credit lines being cut in half by the banks? Yet wherever you look, just about every analyst is calling for an end to the Recession by the 4th quarter 2009 and a Depression no where in sight. So WHY WORRY?

REGULATIONS, REGULATIONS and MORE REGULATIONS

How can adding a few more layers of regulations and a slew more regulators be more efficient and/or save money? The whole world is consolidating, while governments are undergoing massive expansion as their source of income (taxes) shrinks. Governments do not produce anything nor can they create wealth.

WHAT ARE THE REAL PROBLEMS?

How can you solve any problem without first finding out what the root cause of the problem really is? They Never Seem to LEARN! Once again, we are hiring Foxes to guard the Hen House and we think we are solving the problems by passing a myriad of new regulations. Since when do rules and laws stop crime? All they do is create a blueprint on how to avoid the New Regulators and their New Rules.

WHO WAS REALLY RESPONSIBLE?

Notice that they never do a study as to what really went wrong with the old rules and there is Never an investigation of Congress. Not one person has been charged, let alone convicted. Not one cent of the $ Billions of Bonuses that were based on the phony profits, arrived at by “Mark to Model” pricing, has been recaptured and not one individual of consequence has been fired. Even an outsider like me knows that the credit crisis could not have happened without the elimination of the Glass Steagell Act (which prevented mergers between Banks and Financial companies as well as restricting what kinds of business each financial entity could enter into) by CLINTON, GREENSPAN, RUBIN, PAULSON AND GEITNER. AIG could not have gotten involved in Derivatives and the Banking and Finance merger mania that created monster financial institutions that were too big to fail and manage could not have occurred. Those were exactly what the study of the 1929 Crash revealed as being the main problems and what the Securities Act of 1933-34 and the Glass-Steagell Act were designed to prevent. It worked for 70 years, but then it got in the way of profits and oops, it was gone.

ANTI-TRUST LAWS

What about the Anti-trust Laws? The Government could not wait to attack Microsoft for being too big and anti-competitive. The real reason was that they did not contribute to the political campaigns of either party. Bill Gates quickly learned his lesson and now has Lobbyists and makes substantial contributions to both parties - Problems Over. Where was the Government when Goldman, JP MORGAN, Citi, BAM and MER became so large that they became too big to fail? Not one word was uttered to seriously question any of their mergers as long as they gave out No Money Down, Liar Loans and made their annual multi-million dollar political contributions.

The Derivative problems could have been easily avoided if Derivatives had been treated like the options they are and been listed on an exchange and cleared through an independent clearing house. The Madoff Ponzi scheme could not have happened either if there were independent clearing house(s). So why did we not have them then or proposed now? Because each of the players would have had to put up substantial collateral (money) that would have reduced their leverage and thus limited their profit. Can’t have that, after all they are all “Frat Buddies.” Also, AIG could not have gone into the Derivatives market in the first place if Glass-Steagell was in force unless they called it insurance, but then they would have fallen under the individual States insurance laws and regulators.

So let’s blame it all on Capitalism (since nobody knows what Capitalism is anyway). Make a big stink, vilify a few people so as to deflect attention away from the real crooks and then get back some of the only bonuses that were really earned. Since those guys were drones and not part of their insider group, make sure that the public focuses its anger on them and not on the real culprits or the really BIG BONUSES.

GOOD NEWS? The FED is going to get a lot more powerful, but who is the FED? A Government Agency? Why NO, they are a private company owned by the BIG BANKS that they are supposed to oversee and regulate. We never really fix anything. Congress, the REAL CULPRITS, is never investigated. Is there any wonder that the same types of problems reoccur every 20–25 years or so, especially since they are left to fester and compound. Forcing banks to issue sub 5%, 30 year mortgages sets the stage for the next S&L banking crisis once interest rates return to normal levels. “Round and Round we go, where we stop nobody knows.”

WHAT'S BEHIND INTEREST RATES AND INFLATION?

Before we can even begin to discuss interest rates intelligently, we must first define what it is that we are actually talking about. It appears that all the Politicians, talking Media Heads and Wall Street analysts don’t seem to understand what interest is or how interest rates work. The constant barrage of economists parading across our TV screens don’t even know what interest rate’s primary functions are supposed to be.

WHAT ARE INTEREST RATES?

#1 Interest rate is just another word for price. It is the price of time (RENT) for money and it is supposed to be determined exactly the same way as the price of any other commodity, product or service - through the interaction of supply and demand.

#2 However, unlike every other product, commodity or service, interest rates and money do not operate in a free market. Interest rates and the supply of money are manipulated by the FED. They do this by controlling the amount (supply) of money that is available in the banking system through their Open Market Operations (buying & selling Treasury Bonds in the open market) and by changing their deposits that they hold with their individual member Banks. This directly affects Banks’ reserves and thus their ability to lend. They also increase the money the good old fashioned way by printing it, also known as monetizing (by buying Bonds in the open market and paying for it by creating credits on the books of the Banks).

WHAT ARE THE FUNCTIONS OF INTEREST RATES?

# 1 Interest rates determine the propensity of people to either save or consume. When interest rates are manipulated (by the Fed), it influences the degree that people are willing to defer present consumption in favor of savings. If interest rates are manipulated too low, like they are now, people are no longer willing to save. When the interest rate is so low that it becomes negative (the interest rate is lower than the inflation rate) as they were for the last 25 years or so, people, since they are now being paid to go into debt, take on excessive debt and risk because that is exactly what they are being paid to do. Conversely, when interest rates are high, such as in the early 80’s, people forego current consumption in order to avail themselves of the ultra high interest rates and we end up having high savings rates. When interest rates go to 12%, you may forego buying that new car because its price actually doubles in 6 years due to the lost interest you could have received. When the manipulation goes too far a Recession ensues.

# 2 When interest rates are high, the demand for cash is extremely low. People can’t wait to deposit every cent that they can spare so as to earn that high rate of interest. However when rates are low, the propensity to hold cash is very high, because at 1% or 2% interest, there is not much to be forgone by keeping the cash in your pockets. The money turns over quicker, the money supply is increased and a Boom follows.

# 3 The velocity of money (how many times the money supply turns over during the year) and therefore the calculation of the money supply itself is greatly affected by the level of interest rates. When rates are outside the normal range, the FED cannot calculate the velocity until long after the fact. Thus, they lose track of what the money supply really is and its effect on the economy, leading to the interest rate conundrum.

# 4 Interest rates are a primary determining factor of which investments should or should not be made, by the investments’ expected rates of return. When interest rates are manipulated too low, a great many investments and risks are undertaken that should not have been, because these poor investments will fail at the first signs of weakness in the economy or with the eventual rising interest rates. This is the main underlying cause behind the business cycle. The imbalances (wasted resources on poor and mediocre investments) in the economy must be liquidated before the economy can stabilize enough so that the misused scarce resources become available for the next growth phase.

# 5 A neutral rate of interest is the rate that neither stimulates nor restricts the economy. Greenspan was and Bernanke is in a conundrum as to what that rate is or should be. Previously, that rate was thought to be 1.5% to 3% over the inflation rate. In the past, when the Fed did not manipulate the rates, except at the extremes, the market was able to determine what that rate should be through the interactions of the free market. For 15 years, the US savings rate hovered around zero and the CPI and interest rates were being highly manipulated. That was until the crash when, in less than 3 months, the savings rate ballooned to over 4%. With the FED being unable to measure the velocity of money, they do not have a clue as what the neutral rate should be.

# 6 The Discount Rate is the rate that the Fed charges banks who need to borrow money from the Fed to meet their reserve requirements. The FED was originally created to be “the Lender of Last Resort”, avoiding bank runs and liquidity squeezes. The Discount Rate charged used to be a punitive rate; a rate that was somewhat above the Fed Funds Rates (the rate at which Banks lend to each other in order to meet their overnight reserve requirements). But today, the Discount Rate is below the Fed Funds rate, drastically lowering the banks’ cost of money and reducing the amount of interest they are willing to pay for deposits. Now massive amounts of money are being borrowed from the FED without having to worry about the excess demand increasing interest rates, greatly increasing the banks’ ability to create money out of thin air. (This completely negates the supply/demand function in setting interest rates.) This breakdown in the function of a free market led to the creation of “the Carry Trade.” In so doing, the Fed has completely lost control over the banks’ and near banks’ (FNM, FRE, GE, GMAC etc.) ability to create money and have therefore lost control over the money supply. This has led directly to the creation of the Stock and Bond Market Bubbles and the disastrous Real Estate Bubble. Regardless of the ever increasing demand for loans, interest rates continued to decline. That is not the way the Laws of Supply and Demand work, but eventually the piper must always be paid.

THE FED’S CONUNDRUM

The FED’s Chairman once again raised the conundrum of the divergence between short-term and long-term rates during his recent testimony before the Joint Economic Committee of the US Congress just as Greenspan did in May 2005. The yield on the 10-year Treasury-Note stood at 4%—well below the 4.6% rate in June of last year when the Fed Funds Rate was only 1%. Back then, Greenspan like Bernanke today blamed some mysterious “pressures” for the divergence between the Federal Funds Rate and long-term rates. Careful examination shows that there is no mystery. The so called mysterious pressure is in fact the natural outcome of the Fed's own loose monetary policies. The Laws of Supply and Demand always win out.

THE AVAILABILITY OF MONEY

When it comes to the economy, what matters most is the availability of money and not the purported interest rate stance of the Fed. For example, in order to maintain a given interest rate target in the midst of a strong economy, the Fed is forced to push more and more money into the system to prevent the Fed Funds Rate from rising above their target rate (slowing down the growth before it reaches Bubble proportions). However, this causes inflation to increase, which in turn causes long-term rates to increase. The opposite will happen should the economy go through a period of weakness. Given that they are always behind the curve, they end up exacerbating the problem. In June 2004, despite raising the Fed Funds Rate from 1% to 4 ¾%, the Fed has actually hiked the pace of pumping money into the system, creating a flat to negative yield curve. In short, the Fed was talking tough while acting like a very loose pussycat. This caused huge Bubbles resulting in the situation that we are now in today. This is another example of the FED attempting to thwart the Laws of Supply and Demand.

INFLATION

Everybody should know that inflation (money supply) is at all times a monetary phenomenon. If you keep printing money (beginning in 1994) at a rate that is 10% a year above the economy’s real rate of growth, inflation must eventually ensue and it has despite Government manipulation of the CPI. It first showed up in the stock market, then found its way into the bond market and eventually into real estate and finally commodities. Then, despite all the Government’s manipulation of Gold and Silver, inflation continues to grow insidiously even though the government has thus far managed to convince everyone that there was and is no inflation. If there is no inflation, why are commodities going up in the face of an increasing worldwide Recession?

YOU CANNOT SERVE TWO MASTERS

NOTE: The US FED, unlike the European FED (whose only responsibility is a stable currency and prices), is trying to serve two masters. One is a stable currency and stable prices, the other is full employment. The two are mutually exclusive and are thus incompatible over time. What we are witnessing today is their follies coming home to roost. The Government is more interested in the short term, unemployment numbers than they are in their manipulated inflation numbers. But everyone who shops and has to pay their bills knows the truth. Inflation is still growing even though we are in the worst Recession since 1973/74 and it’s getting worse. By ignoring what our tremendous deficits are doing to our currency, we are only making matters worse. If we continue on this path, the US dollar will lose its RESERVE CURRENCY STATUS. Then what?

WE SHOULD BE GIVING LESS POWER TO THE FED, NOT MORE.

HOW NOW DOW? “THERE IS A TIME AND A PLACE…”

The market is still consolidating the tremendous Dead Cat bounce rally off of the March 6th lows. Although I picked both the March low and this rally’s highs and even though I was and am still anticipating as much as a 500 to 700 point sell-off, I am still recommending to stay in CASH and GOLD. The Market is setting itself for the BIGGEST BULL TRAP in financial history and you certainly don’t want to get caught long because you are trying to scalp some trading profits. Stay liquid especially since the information that we are getting is either wrong (out and out lies at worst and/or misleading at best). It is very difficult and dangerous to trade a manipulated market, however if you took your profits by being stopped out on your TBT and TLT trades, it’s time to get back in. You can buy Sept. Bull Spreads on the 50-55 TBT for a debit of $2.00 to $2.25. That’s a $200 risk to get back $5 at 55 or higher by the 3rd Friday in September.

GOLD

I apologize once more for sounding like a broken record, but I have been right for over a year now and the consolidation is not yet over. JUNE marked the very minimum time period for consolidation of the 84 month first wave of the GOLDEN Bull Market and it could last until November-December, even though the fundamentals for Gold and Silver are getting stronger by the day. But like night follows day, time cycles always play out and woe be it to those who ignore nature. However, since the minimum time period has now elapsed, GOLD could breakout at any time now. For the time being, the strategy is to continue to accumulate both stocks, especially the Juniors and Gold on weakness down to the $850 area and watch for an explosion through $1050 at which time I intend to load up as my target for this year remains $1500 to $2000. This is not a day trading letter, but it is a making money one with an emphasis on protecting your assets. Continue to accumulate Gold Coins at a less than $5000 clip as your financial insurance policy.

GOOD LUCK AND GOD BLESS

I have spent my entire career studying history and reading between the lines and applying GOD’S Natural LAWS of Economics in trying to identifying new major trends that will be developing in the markets and figuring out how to profit from them. These are trends that will be happening in the near future; trends that most everyone else notice only long after they have already been well established and we have made the majority of the easy money.

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Aubie Baltin CFA, CTA, CFP, PhD. JUNE 27, 2009

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

aubiebat@yahoo.com

561-840-9767

Please Note: This article 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. 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. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities. I am not a registered investment advisor.