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With the markets starting to swing wildly again and with 2010 rapidly approaching … naturally, investors have a lot of questions on their minds.
So today, I will give my answers to the most frequent questions I’m hearing. Then I’ll tell you how to grab some profits off the table.
Let’s get started …
Q: Larry, there’s now a lot of talk about the Federal Reserve’s plans for “exiting” its role in the markets and economy, to stop printing money, to start raising interest rates, etc. Some say it will be easy for the Fed to exit, others say that it will be impossible. What do you think?
A: In the end, whether the Fed can or can’t exit or reverse course is irrelevant. It assumes the Fed controls the economy, and it does not. If it did, we never would have been in this mess to begin with!
Having said that, to the extent that the Fed can influence the economy, it has an inherent tendency, ever since the Great Depression and even more so since the gold standard was completely abolished in 1971 — to engage in “inflate or die” policies. Period.
That means the Fed, and any other central bank for that matter, will always opt for inflationary policies over deflationary policies.
Moreover, based on important cycle studies I have researched, the cycles for inflation point higher for at least SIX more years, into the year 2016 — REGARDLESS OF WHAT THE FEDERAL RESERVE DOES.
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Take a look at this cycle chart I have for you. Notice the 1980 high in inflation … the 1989 low … the most recent crest in 1999 (which produced the real, inflation-adjusted high in the Dow Industrials, which still stands as the real high today in terms of the Dow’s purchasing power).
It also produced the 2007 low in many inflation indicators, and it is now pointing to the next crest, due in 2016, which will very likely manifest itself in natural resources and tangible assets for a variety of reasons often cited in my Real Wealth Report.
Bottom line: We are in the early stages of the “great re-inflation” I’ve been telling you about. Moreover, I think the Fed will find it difficult to reverse its policies. Even if it does, it will be too little, too late (as always) and won’t matter one iota in the grand scheme of things.
Q: Isn’t it possible that we could experience both deflation and inflation at the same time?
A: Absolutely! In fact, I believe that most analysts and investors need to free their mind of the linear black-and-white definitions of deflation and inflation and realize — especially in the absence of any fixed medium of exchange, such as the gold standard — that the two forces can and do coexist at the same time. For instance …
We have already witnessed deflation in real estate prices …
We have already witnessed massive deflation in stock prices …
We have and will continue to experience deflation in the value of the dollar (its price is falling, and it buys less and less) …
We have experienced deflation in the cost of money (the price to borrow money) and its inherent rate of return (interest rates). And …
We will likely continue to experience deflation in new technologies, which is almost always the case.
BUT simultaneously …
We are experiencing inflation in tangible assets …
Inflation in the supply of money (and eventually credit, again)
Inflation in natural resources …
In real estate prices in Asian markets …
In the cost of food and basic necessities …
And more.
So the big question is not — nor is it ever, in my opinion — whether the world is heading toward deflation or inflation, but rather — which sectors will inflate, and which will deflate in the years ahead?
And for many of the reasons I’ve mentioned in Real Wealth Report since its inception — I believe that deflation in the value of our money (its price and purchasing power are falling) … and inflation in the value of hard assets — will be the dominant macroeconomic force for many years to come.
I also believe that broad stock markets and even real estate will join in this process and re-inflate, rising simultaneously with the bull markets in commodities. This is exactly what has been happening.
I call it the “Great Re-Inflation” — a process where you will see virtually everything eventually inflate, except paper currencies, which will continue to lose massive amounts of purchasing power.
Keep in mind, ever since the gold standard was abolished, all fiat currencies have ultimately been destroyed by policymakers — systematically devalued to inflate away fiscal imprudence (budget deficits), and bad debts, both public and private.
It’s how wealth is transferred from savers to debtors … from the private sector to the public sector (to pay off government debts and liabilities).
It’s a shell game, but at your expense. That’s why I consider it absolutely mandatory that you understand this process … and why I harp on it over and over again. Your only chance of financially surviving it is to understand the mechanism, and what the government is doing to your money.
So at any signs of distress whatsoever, you can expect the Federal Reserve and other central banks around the world to continue to monetize debts to pump up and levitate their economies by printing money. Period. No matter what. And no matter how much it takes.
Q: What is your opinion of investing in collectible assets such as coins, antiques, art, jewelry, etc.?
A: Collectibles are, and will, soar in value in the years ahead, especially rare coins.
But unless you have very deep pockets and an expert guide whom you trust without any doubts, those markets are fraught with pitfalls and dangers. Therefore, I don’t recommend them for the average investor.
Q: How much more can the dollar drop?
A: Any fiat currency can theoretically drop to zero. History is cluttered with broken currencies that literally were not worth the paper they were printed on.
Most people think nothing so drastic will happen to the U.S. dollar. But do the math. If my expectation that gold will reach more than $2,300 an ounce proves true, it will have to appreciate 109% from its current level of about $1,100.
Since gold and the dollar usually move as mirror opposites, that implies the dollar stands to lose a heck of a lot more of its current value.
In fact, I think the dollar can lose at least another 50% of its value, if not more, before it loses its reserve status.
For reference purposes, we’re talking about the widely-watched U.S. Dollar Index plunging from its current value of about 75, to approximately the 37 level!
Q: There’s now a lot of talk about China finally allowing its currency to appreciate. Do you agree?
A: I get this question a lot. My answer is “no.” Beijing will not allow the yuan to appreciate in any meaningful matter until …
A. It has sufficiently expanded the currency’s role in Asian trade, which it has begun to do.
B. More importantly, it has accumulated enough gold and other natural resources not only to secure supplies, but to hedge against the long-term decline in the value of the U.S. dollar and the uncertainty surrounding the replacement of the dollar as the world’s reserve currency.
C. China’s economy is far less dependent upon exports, which is at least a decade away.
So while you may hear a lot of talk that Beijing is now considering letting the yuan appreciate, I would not bet much money, if any at all, on it happening.
However, I view Chinese stock markets as being in a very powerful long-term bull market.
Q: Many other editors I follow tell me that gold bullion ETFs could backfire someday and go belly up. Their reasoning: The ETFs may find themselves in a position where they cannot buy or redeem enough gold to meet investor demand if there were to be all-out panic buying in the gold market. Do you agree?
A: No, I do not see that as a problem. Interestingly, many of the editors who propose that theory are also gold dealers; so, there appears to me to be a conflict of interest in making those kinds of claims. They would rather you buy gold bullion coins or other physical investments from them or their affiliated companies than invest in an exchanged traded and regulated fund.
There is one exception however: I believe that inverse gold ETFs — funds that are effectively a short, downside bet on gold — could blow up some day. So I do not recommend inverse gold ETFs, except for very short-term trading to catch a dip in the gold market.
Q: I’ve been tracking the recommendations you’ve made in your column since March. I acted on quite a few of them and have pretty large gains, some as much as 81%. What should I do with those positions? You don’t cover them that often in your column.
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A: Yes, indeed, I’ve suggested quite a few recommendations in this column. For everyone’s benefit, to the right is an updated table of the “open” recommendations.
As I write this, the gains run as high as 81% … and there are 21 winners, and only four losers.
Right now, I recommend you consider holding all of them with the exception of the ProShares Ultra Real Estate ETF (URE).
Recommended in my June 29 column, just over five months ago, this position has the biggest gain at 80.8%. If you own that position, I suggest you consider grabbing those huge gains off the table NOW.
As to the rest of the positions, keep in mind any recommendations I make in this column are of a general nature, meaning I do not give specific buy and sell prices. Those are reserved for subscribers to my Real Wealth Report and to my VIP trading services.
That being said, from time to time I will give specific instructions on what to do with positions recommended in this column. So my best advice is don’t miss a single one of my columns! Read them every week to make sure you’re fully up to date with my thinking.
Best wishes,
Larry
About Uncommon Wisdom
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Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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