I share with you this investment letter by Aubie Baltin which makes the case of how bad it will get. It is meant to scare the hell out of you, so do not take it to heart.
Without question the US economy has to unwind a lending spree that was huge. The good news is that the rest of the world was simply not so stupid and retains a sound currency and credit system and will inject the necessary equity to clean up the mess. And yes they will extract their pound of flesh as well they should. And the rest of the world is now big enough to do this.
However, it means that equity will be king for a decade in the US as the banking system goes back to behaving like banks. The credit balloon is gone having been stolen, leaving the banks with the fallout.
In the meantime, it is wise to recall that what happens in the wrong neighborhood in Cleveland to mortgage debt is simply the absolute extreme worse case and does not reflect what is really happening in the rest of the country which will ride through this storm very nicely.
The only damage most will incur is a lowering of their expectations. And the need to not drive the car so much.
Also, let us not forget that THAI oil production promises to deliver the necessary crude to our refineries and could do it easily within the current price regime.
We are in the early days of a global transition out of the oil economy and massive volatility is a natural part of this unpleasant process.
YOU HEARD IT HERE FIRST - RECESSION 2007
In my letters dating back to the beginning of 2007, I selected a credit spread between Junk Bonds and Treasuries (buy Treasuries, short Junk Bonds) as my #1 best, lowest risk SURE THING trade. The spread has increased from a near all time low of 3% to a current spread approaching 7.5% and “you ain’t seen nothing yet.”
But that was just a trade, why should you have listened? But that trade was not the only thing that you heard here first. Month after month, there has been a total barrage of optimistic projections from all avenues calling for a continuing Goldilocks Economy, leading to accelerating earnings and an ever rising stock market not only here in the USA but around the world as well, especially in the emerging markets. They were right about the rest of the world, but I stood front and center against this constant harangue of optimism, pointing out the expanding cracks in the dam that everybody else either refused to see or actually did not notice. The seeds of a MAJOR BEAR MARKET were being sown. And it would not be just an ordinary Bear Market like we had in 1998 or 1994 or 1990, but more along the lines of a 50% 1973-74 breakdown and quite possibly a 15 to 20 year 30’s type Depression.. Not very many, if any, analysts agree with me yet, but I no longer hear any of them laughing.
We can never know in advance the actual start date of a recession. It is only after all the numbers, that everyone waits for with baited breath, have been revised 3 or 5 times can we know for sure when a recession started; it won’t be too much longer before my call that we started the recession in the 4th quarter of 2007 is confirmed. And yet the Government, the FED, Wall Street and the Media keep insisting that, at worst, we will just have a slowdown in the first half of 2008 with a resumption to 4% plus growth by the second half of the year. The drop in housing prices is now over 18 months old, the longest sustained drop in history, but we still have no recession? The first people laid off were the illegals, so they didn’t show up in the unemployment figures. What do you think the numbers will show next quarter after the carnage in the financial sectors hits? And I always thought smoking dope was illegal!
All modes of deals that appear like sure things must and will fail for one or both of two reasons. The takeover and buyout private equity craze always sows the seeds of its own destruction as more and more money chases fewer and fewer good deals. They become overpriced and making the deal becomes of prime importance as they worry about the workout later. After all, the deal makers like the Hedge Fund managers, take their money up front and the Banks always are left holding the bag, Secondly, interest rates are so low that risks are no longer being taken into account. Underestimating risk is the surest road to doom and we are already witnessing the consequences. Here too “we ain’t seen nothing yet” as the margin calls begin to fly and there is a scramble to rob Peter to pay Paul, as one deal after another gets into serious trouble and collapses since no provisions at all were made for a possible recession. We are now witnessing what can happen to the biggest and best such as C, CFC, MER and BSC and how many more shoes are yet to fall?
IT WAS THE EXPANSION OF CREDIT THAT LIFTED ALL BOATS AND IT WILL BE THE CONTRACTION AND THE ALMOST COMPLETE DRYING UP OF CREDIT, THAT WILL BRING THEM ALL BACK DOWN TO REALITY.
CREDIT AND LENDING
Most everyone still refers to the sub-prime loans as being the problem. But nothing could be further from the truth. The mere fact that the President, Congress and all of the presidential hopefuls are coming up with plans to solve the effect and not the problem is proof positive that sub-prime is not the real problem. It is the massive 5 to 10 year overhang of unsold homes brought about by the massive over building that five years of 25% plus per year compounded price increases that fueled massive speculation and was exacerbated by the 1% zero down ARMS that allowed even poor people to speculate and rich people to over speculate. Sub–prime was just the beginning as it has already spread to Alt 1-A and prime loans as people walk away from their negative equity, overpriced homes.
In the 4th quarter of 2007, we saw the biggest increase in auto loan delinquencies in 8 years, in conjunction with $350 million loss to Sally May and a suspension of all types of securitization sales by 1st Marblehead Corp. And don’t forget the 26% increase in credit card delinquencies. THE DOMINOS HAVE JUST BEGUN TO FALL.
More importantly is the fact that banks must shrink lending 20% to 25% and call in loans in an effort to return their capital ratios to their mandated levels. Brokers and Hedge Funds must also curtail their borrowing at somewhere between $18 to $25 for each $1 lost.
THE PSYCHOLOGICAL FOUNDATION OF LENDING AND THEREFORE LIQUIDITY IS CONFIDENCE. When confidence is lost and the credit spigot is shut off, it ties the hands of the FED so that they can do nothing about increasing the money supply and all the rate cutting has and will go for naught: Except to weaken the Dollar.
In 2007, the consumer represented 72% of GDP and in the face of a crashing real estate market, which involves an all time high 70% of the population, THEY kept on insisting that consumer sales would not be affected even in the face of $100 /bbl oil. Be careful to whom you are listening to. Go back and check what your favorite analysts have been saying over the last 6 months to a year or so. If they could not see the 10 foot high writing on the wall then, what makes you think that they can do anything else but follow the crowd in the future as they all continue in their myopic ways all the way down to the eventual bottom If you want to stay abreast or even ahead of what is coming, don’t forget to mail in your subscription to “UNCOMMON COMMON SENSE.”
Last month, we were hit with a 0.8% per month inflation number, which annualized comes out to an inflation rate of over 9.6% per year and they claim it was only a one month aberration, that there is no inflation. If everyone is still insisting that inflation is not anything to worry about, then why is Bernanke not cutting interest rates by at least 50 basis points if not a full 100 basis points in order to get ahead of the curve? What is wrong with all these so called experts? Are they still living in a dream world refusing to admit to themselves that the party is over? INFLATION is, despite all the manipulation, beginning to roar. Don’t they realize that rampant inflation always leads to a crash?
WHAT DO WE DO NOW?
.The first thing that you must do is to GET OUT OF DEBT, especially margin debt. Those of you who have been following me are now sitting comfortably in cash and have sold into the December rally. Although it did not make the new all time high that I was hoping for, it was nevertheless a good enough rally to have allowed you to get OUT of all your long positions in great shape. If you were smart enough to have gone short, it is time to take your profits and wait for the coming bounce to re-establish your shorts.
SPECIFIC STOCK RECOMMENDATIONS ARE RESERVED FOR SUBSCRIBERS.
GOLD AND SILVER
For those of you who have been long time readers of my letters, you should have at least 1/3 to 1/2 of your liquid assets in Gold and Silver Bullion as well as their underlying stocks. For both old and new fans, you can start accumulating the higher quality Juniors and buy Bullion and the Majors on any $45 to $75 pullback in the price of Gold. THERE IS NO RUSH. The first major Wave I has probably just been completed even if only at the lower end of my target range. But have no fear, we still have up Waves III and V to look forward too. DO NOT TRADE YOUR CORE GOLD POSITIONS.
SPECIFIC BUY AND SELL RECOMMENDATIONS WHICH I HAVE NEVER GIVEN IN THE PAST ARE RESERVED FOR SUBSCRIBERS ONLY.
Pardon the shortness of this letter, but it is only an interim letter that I don’t usually write. I just thought that, given the situations in the markets, a little hand holding was in order. Even I would not mind a little hand holding from time to time. As far as my own portfolio is concerned, I had a terrific month so far: I covered most of my shorts yesterday (Tuesday) into the close and I sold a few calls against some of my Gold positions on Monday. I know that I don’t have a crystal ball, but maybe I have a crystal eye or better yet, a little good luck. I’ll take luck over brains any time. Next week, my letter will be all about how to make the most money out of a MAJOR BULL MARKET IN GOLD. For those of you who are not lazy and would like a head start, go back into the archives at gold-eagle.com and re-read “RIDING THE GOLDEN BULL and 21st Century Gold Rush.
GOOD LUCK AND GOD BLESS January 16, 2008
UNCOMMON COMMON SENSE:. Start date is February 1st Subscribers will be receiving it two weeks early and it will contain specific buy and sell (sell short) recommendations. The fee is $199 per year and there is a 100%, satisfaction guarantee
Aubie Baltin CFA. CTA. CFP. PhD