We have joined here today to restate and underscore an important change in our near-term outlook for the world economy, the U.S. dollar, natural resources, and emerging markets.
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Until early this year, our outlook had been that, although the U.S. and Europe would suffer severe declines, other markets would not.
Although most U.S. stocks would fall sharply, alternative investments like natural resources and select foreign stocks would continue to do well.
Although some sectors — such as housing — were deflating, inflation remained a powerful force.
In recent months, however, our outlook has shifted. We have declared plainly that DEFLATION was emerging as a more powerful force and that the tide might be shifting. Moreover, well before this downturn got under way …
- We introduced an entire new portfolio of inverse ETFs to our ETF trading services to protect subscribers and even profit from the declines.
- We launched our Crisis Opportunity service to give you even more powerful protection and profit opportunities from the declines.
- Every single one of our editors has taken steps to reduce your exposure and/or buy hedges for additional protection.
- Separately, our affiliate, Weiss Capital Management, Inc., reintroduced its Weiss Bear Strategy — designed especially for this environment — in August of last year. And since 2007, they have added inverse mutual funds or ETFs to their other money management programs to hedge and potentially profit from declining stocks.
- At the same time, their Weiss Treasury Only Money Market Fund (founded in 1996) and their Weiss Managed Treasury Program (introduced in 1989) help their clients invest in the safest investments in the world today: U.S. Treasury securities.
The unique feature of all these services is that they are flexible and nimble, adapting quickly to changing market conditions. And now, with the deflationary forces gaining momentum, we feel the time is now to underscore the importance of our changing world outlook.
The good news is that, considering the potential magnitude of the deflation we see ahead, it should be over and done quite quickly. We’re not expecting a long, drawn-out deflation. We are looking at a deflation that could be as short as it is dramatic.
Most dramatic of all, in our view, will be the subsequent bull market in key sectors. Our favorite markets should recover sooner, more swiftly and with far greater vigor than any other investments. So if you made money in the prior phase of the bull market in resources and emerging markets, wait till you see the kind of money you can make in the next phase. In sum, looking beyond the current events, we continue to see massive opportunities in gold, silver, oil, other natural resources, and emerging markets.
But we must not ignore the events that are taking place right now! In fact, it could be next to impossible to profit from the future bull markets UNLESS we pay close attention to what’s happening; unless we batten down the hatches to get through the current storm. Here’s how we see the storm emerging:
First, we have a continuing global contraction in a very key ingredient for economic growth: CREDIT. Credit markets are failing.
Yes, governments are trying to offset that contraction with massive pumping of money and other radical measures. But their efforts to reinflate are only partially and temporarily offsetting the deflationary pressures.
Second, we have the first phase of deep recessions in the U.S, Europe and even Japan. In total, the world’s GDP is estimated at about $54 trillion. But these three alone make up close to $40 trillion of that total. That means that the scale has now been decisively tipped to recession, or, at best, much slower growth — not just for certain countries, but for most of the planet.
Third, we have a potential collapse in several emerging markets, the first signs of which became most evident this week. Earlier, many of us believed that, since they were growing at such high rates, the worst that could happen to them is to slow down to more normal rates of growth. However, with few notable exceptions, the picture that’s now emerging is very different. Now …
- Most emerging markets are beginning to suffer a massive flight of capital.
- Most emerging markets are beginning to suffer a collapse in their credit and equity markets.
- They are beginning to suffer a collapse in their currencies, and …
- Based on these collapses we should not be surprised to see a sharp reversal from rapid economic growth to actual economic contraction.
Fourth, we already have more than a 50% decline in petroleum prices. Moreover, the global recession, which could drive energy demand down even further, may be just beginning. Therefore, another sharp decline in oil from current levels is not unreasonable to expect.
Fifth, the dollar benefits in this scenario. Despite America’s big debt troubles, the U.S. is still at the core of the world’s economy. And when the investors of the world rush from risk to perceived safety, they rush back to the core — to the home base, which is the dollar.
So despite the dollar’s long-term fundamental weaknesses, this crisis is not a dollar collapse crisis. Quite the contrary, a side effect of the crisis is a dollar rally, and the greater the crisis, the greater that rally could be.
A temporary dollar rally? Yes. A small rally? Absolutely not. Due to the magnitude of the crisis, the dollar rally could be very large, as nearly all other currencies fall. The only exception: The Japanese yen, which also is the beneficiary of a massive flight to safety.
Sixth, gold is also vulnerable to further sharp declines in this scenario. In a situation like this, investors do not pay much attention to theory. They don’t care if gold is, indeed, the best place to be. If they have deep losses in their stocks and real estate … or if they just need the cash to keep their business running … they will rush to cash in their best investments as well, including gold. They toss out the baby with the bath water. It’s not the right thing to do. But they do it anyway.
And if that happens, it can drive gold prices down sharply.
This is why …
We have been recommending
that this is a time for several
important steps:
1. It’s a time to lay low. Invest much more selectively. Take less risk.
2. It’s a time to build cash. If we’re right about deflation, cash will buy you great bargains as soon as the deflationary forces have exhausted themselves.
3. It’s a time for income — ideally steady, recession-proof income.
4. It’s a time to hedge. To the degree that you continue to hold special situations that we feel will buck the trend, hedge against the downside risk in this new environment with investments that are designed to go up while these markets are falling.
5. It’s a time to look forward to the next major bargain-hunting opportunities. The more markets decline now, the better the bargains will be.
6. It’s also a time to be patient. Don’t expect the declines to be over in a day or a week or even a month. It could be several months or more.
One word of warning: When we do hit bottom, buying will require courage. Once we get down there, the negative commentary about the U.S. economy, gold and oil, India and Brazil, mining and agriculture … will be deafening; and the negative sentiment, downright depressing. To get to the other side and take full advantage of the new opportunities, you will need to walk calmly and resolutely across the aftermath of that bloody battlefield.
But don’t worry. We will be there to guide you.
In the meantime, continue to build up savings and CASH. And follow our recommendations to get through this storm. (For your cash assets, be sure to follow the recommendations in our 1-hour commercial-free Q&A webcast, now available online for your immediate viewing.)
Remember: There are also major profit opportunities during a storm — both the special situation investments that go up despite the broad market declines and those inverse investments that go up because of the market declines.
Also remember: No market goes straight up or straight down. So even in the midst of sharp declines, there are bound to be some major intermediate rallies — opportunities to make any needed adjustments in your investment strategies. With investments that you want to buy, wait for days when the price is down. With investments you want to sell, wait for days when the market is up.
And if you are working with a money manager, make sure he is experienced with both up AND down markets, deploying appropriate strategies for each, based on your personal investment goals.
Best wishes,
Sean Brodrick, John Burke, Jack Crooks,
Amber Dakar, Larry Edelson, Mike Larson,
Nilus Mattive, Ron Rowland, Tony Sagami
and Martin D. Weiss, Ph.D.
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM 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, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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