A Financial Blood Bath Directly Ahead

“Washington’s answer to a self-inflicted financial crisis reminded Americans why they so deeply distrust the political class.”  --- Ron Fournier

Any way you cut it, whether stocks are in a final (minor e wave up) (or the beginning of a larger V-up) to new highs for the rally from 2009 or whether stocks are inside a corrective rally, retracing 60% to 80% of the January 2014 decline, a massive stock market crash is definitely in our not too distant future; probably Beginning sometime in the Late February to March period, or sooner if the current rally of the past few days is corrective. The Industrials have already retraced 55% of the January decline, the S&P 500 has retraced 78% and the NDX, which was a three wave decline, has retraced almost 100%. The rally from February 5th is now in overbought territory

Mining stocks look to be topping short-term, as they finish their final up leg of their declining bullish wedge.  Silver, like Gold and the S&P, is also bumping up against the upper boundary of their declining expanding bullish wedge. They all look to need one more sell-off to finish their patterns. Then a massive rally should begin that could last years.

The structure the January decline is telling us that something is very definitely wrong with the stock market. The violent rally since February 5th tells us a lot of investors do not believe that and see the decline as a buying opportunity. The stock market is sending a message, a loud and clear warning, that this is not a buying long opportunity.

Short-term, some major averages may hit new rally highs from 2009 over the next few weeks, while others will not. This situation would be an inter-market bearish divergence often seen at major tops. The S&P 500 has a good shot at beating its January highs. The Dow Industrials probably will not beat their December 31st, 2013 top. The January decline was vicious, and the bounce from February 5th has been very strong as well. However, volumes were lower in the February rally than volumes were in the January decline.

Gold should be topping, its wave d-up move, left something to be desired as the short term HUI indicators remain indecisive. We should NOW expect what will hopefully be the final down wave; setting the stage for a major change in direction. Once the bottom arrives, a significant large intermediate degree up wave Rally will begin: Which hopefully should shoot GOLD to $3,000 an ounce or more before any meaningful correction sets in.

Why? Because Gold will then be entering its Elliott Wave large degree wave 5-up. Wave fives are typically the largest wave which should then kick off a powerful rally in precious metals? Coinciding with A sharp decline in stocks driving folks to the safe haven of Gold would be one good reason; another would be a Black Swan event.  If I knew what that was, then I would have a crystal Ball and or it wouldn’t be a Black Swan event.

ALL GOOD THINGS MUST ALWAYS COME TO AN END

Did you see what just happened in Japan?  The stock market of the world’s 3rd largest economy is imploding; a precursor to what will happen to the NYSE? In one day, the Nikkei fell by more than 610 points.  If that sounds like a lot, it is.  The largest one day stock market decline in U.S. history is only 777 points.  So far, the Dow was only down about 1,000 points during January Feb.  “correction”, but the Nikkei is down more than 2,300 points.  The Nikkei has dropped more than 14% since the peak of the market and a few top analysts believe that this is only the beginning.  Those that have been waiting for a full-blown stock market collapse may be about to get their wish. 

Japan, even worse off than the USA is absolutely drowning in debt, their central bank is printing money like there is no tomorrow and they, like us, are locked into the Keynesian BULL SHIT TRAP; which we too have been locked into Since Bernanke started the limitless money presses rolling. As far as economic fundamentals go, there is very little real good news as far as Japan or the US is concerned.  So will an Asian financial collapse precede the next great financial crisis in the United States?  And will they together, set the basis of a worldwide financial crisis? What happened to the Nikkei on Tuesday was Scary.  The following is how Bloomberg described the carnage… “At the end of January 2013, Japanese stocks trailed only Portugal for the biggest rally among developed markets. Now, the Nikkei 225 Stock Average is leading all stock market declines, slumping 8.5% last month and a 14% drop from its December 30 peak.”  Portugal is not far behind. Lesson Learned?

Losses snowballed in Tokyo during a global retreat that has erased $2.9 trillion from equity values worldwide this year amid signs of slower growth in China and stimulus cuts by the FED.

Much of the blame for the financial problems that we are seeing all over the world right now is being wrongly  placed on the Federal Reserve when in reality, the real culprit is the Keynesian Socialist Philosophy that has taken over the world beginning in the 1930’s with FDR in the USA and the 1940’s in Europe.

The Fed and Congress pushed this bubble by pumping trillions of fresh dollars into the global financial system and now that they pushed this world wide bubble to the point of exploding, they are starting to cut off the flow of easy money while making absolutely no attempt to reduce government spending and/or interference in the economy.  Both the World’s Political and Academic Economics are so entrenched in Socialist Philosophy that they have no clue as to how to correct 100 years of ever increasing economic insanity!

This is something that I warned would happen when the Fed decided to taper and now RBS is warning of a “market bloodbath” unless the Federal Reserve immediately stops tapering.  But the truth of the matter is there are no good solutions. Should the tapering stop, it may only serve to kick the can down the road for only a very short while”  providing, us, the SHORTING opportunity of a lifetime as the result would be to push the DJII up to maybe 17,500 and Gold down to maybe $1,100.

Most Americans simply do not realize that our financial markets no longer resemble a Free Market system.  Instead, they are highly manipulated and distorted by the central banks and the trillions of dollars of “hot money” that the Fed and Euro among other central banks have poured into the global financial system, which has infected virtually every financial market on the planet primarily by distorting the world’s units of measure, our currency.

On Wall Street, they call it “hot money”—that seemingly endless flow of cash that goes to the most profitable country du jour—but the real economy gets very little if any. That hot money has come mostly in the form of a low-yielding US Dollar Treasuries, which investors have borrowed en masse to fund investments in other higher-yielding currencies across the globe. The so-called carry trade has helped fuel an investment bonanza across the world that has boosted risk assets, thanks primarily to the US as well as other Central Banks easy-money policies.

But with the Fed tiptoeing away from what initially was an $85 billion-a-month infusion of liquidity, investors are beginning to prepare themselves for a world of rising rates in which the endless cash flow to both the USA and emerging market economies begins to dry up and then ceases. This will cause the so called sure Bets to turn into sure losses.

We never fixed any of the fundamental problems that caused the last financial crisis.  Instead, the Fed seemed to think that the solution to any problem is just to create more money.  It was an incredibly stupid approach and now our fundamental problems are worse than ever. Total credit as a percent of the global economy is now 30%+ higher than it was at the start of the economic crisis in 2007. To top it all off, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system and that is where the worst of economic slowdowns begin.

So what comes next?  Well, unless the Fed or other central banks intervene, we are probably going to have even more carnage. At least that is what Dennis Gartman of The Gartman Letter, told CNBC on Tuesday…“I just think you’re going to have a very severe, very substantive and really quite ugly correction that will probably make a lot of people wail and gnash their teeth before it’s done.” (Or worse)

Only a few Other analysts share his pessimism.  According to Doug Short, the vice president of research at Advisor Perspectives, the US stock market “still looks 67% overvalued.”

Most sobering of all is what Richard Russell is saying.  In his 60 years of writing about financial issues, he has never been “so filled with foreboding regarding what lies ahead…  “I’d be lying if I said that I wasn’t worried about the way things are going.  Frankly, I’m truly scared for myself, my family and the nation.  I have the distinct belief that the stock market is on the edge of a crash.  If that happens, investor sentiment will turn very quickly bearish.  And the bear market will start feeding on itself.  Ironically, the recent action occurred in the face of almost insane bullishness on the part of the wall St. crowed and on the part of investors as well as most Financial Advisors.”

There are a few smart heads and institutional money managers who, know that the US is semi dead in the water. But they are all locked into the game of following the Leader.  And all the talk about an improving economy is just Pipe Dreams and Governments Propaganda.  Bernanke’s (and Yellen’s) dream of a flourishing new economy, improving without the need of the Fed’s help, is nothing but an Opium Den’s Pipe Dream.

I’ve been writing about the stock market for over 40 years from the point of view of Austrian Economic Theory and I have been let go many times because of it. Not because I was wrong, but because I would not follow the Party line and being proved right only made my employment situation worse. Being a TEAM player is more important than being right.  That is why I have worked for myself for the last 25 years or so. I cannot remember a time when I was more filled with foreboding regarding what lies ahead.  The primary trend of the market, like the tide of the Oceans is irresistible.  What scares me the most in this current situation is that I see no clear island of safety, except GOLD and SILVER and to a lesser extent, Reverse ETF’s.

US stocks may not totally crash this week, this month or even this year, but without a doubt, a day of reckoning is coming.  As a society, our total consumer, business and government debt is now equivalent to approximately 345% of GDP (and rising rapidly), which is clearly unsustainable.

The only way that the game can continue is to keep pumping up the debt bubble even more.  Once the debt bubble stops expanding, it will start collapsing even more rapidly than its expansion.

Those who foolishly still have lots of money in the stock market better hope that the Federal Reserve decides to intervene in a major way very soon: Because if they don’t, we will have a “market bloodbath” on our hands.

WHAT DO WE DO NOW?

These are the stocks that I have purchased on sell-offs as per my last six months of bi-weekly letters have been recommending. 

My November 2013-January 2014 Portfolio:

Quality

GOLD CORP (GG) December 18 @ $21

FRANCO NEVADA (FNV)  December 8 @ $38

GDX November 18 @ $31

GDXJ November @ $31

Speculative

ALLIED NEVADA (ANV) December 21 @ $3.50

RUBICON (RBY) November @ $0.65

ENDEAVOUR January 5 @ $3.50

MAG SILVER (MVG) July @ $5.25

Uranium

uranium energy corporation $1.65

CAMECO CORPORATION $18.10

SHORTS

Next week, I will send you my preferred list of Short ETF’S and their respective Options.

GOOD LUCK AND GOD BLESS

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UNCOMMON COMMON SENSE                                                               

Aubie Baltin CFA, CTA, CFP, PhD.

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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.