Chaos Striking Now is the headline of my Real Wealth Report going to press tomorrow.
Why so bold? Because I believe that, beneath the seeming calm of several major markets stocks, bonds, currencies, gold and more major fissures are starting to appear.
You can see it in the stock market, which by every measure I follow, is as overvalued now as it was at the peak in 2000.
Another telling sign of cracks about to break open in stocks: Over the last two months, the swings have become noticeably more brazen, with the high-to-low sell-offs in the Dow growing in depth 215 points, 330 points, 336 points.
It would be one thing if the Dow were making new highs each time. But its not.
You can also see the cracks in the long-term bond market, where yields were stubbornly low and out of whack with short-term rates … but are now starting to move higher.
You can see them in the jittery oil markets, where investors and traders know oil is heading higher, but right now, are buying and selling like crazy out of fear of holding anything but short-term positions.
You can see a similar phenomenon in the currency markets, where the dollar and the euro are duking it out for worldwide prominence.
Most worrisome to me: The action in the Volatility Index, also known as the VIX. When the index is rising, it indicates that investors are alert to the many dangers out there. Conversely, when its low, it indicates investors are overly complacent.
Right now the VIX is at its lowest point in 10 years, showing extreme complacency on the part of investors. Its a kind of irrational exuberance the view that, no matter what, everythings going to be OK, or even better than OK.
Just when investors should be more cautious, they have no fear.
And precisely when everyone has let down their guard is when markets lash out like a cobra, digging in their fangs.
Were very near that point now.
My advice: Stay very alert. Do NOT let your guard down. All of my indicators are pointing to very turbulent, very dangerous and potentially very profitable months ahead.
At $61 a barrel, were not even close to a top in oil prices.
Reason: On an inflation-adjusted basis, I figure oil should be trading at closer to $75 a barrel right this very moment.
And thats without taking into consideration growing demand and current threats to supply, which as you know, is already stacked heavily in favor of higher prices.
Throw those into the equation and I have little doubt we will see $100 oil next year. That would translate into about $3.50 a gallon of regular unleaded gas.
Will it be a problem for the economy? You bet it will. But dont expect a slowing economy to choke off inflation. No.
Instead, youll see what I call The Big Squeeze. Thats where excess capacity gets squeezed out of the system, generating even more inflation down the road. One of the main factors will be …
Asias Next Big Export: INFLATION
How could Asia possibly export inflation? Isnt its 2.3 billion population producing goods at a tiny fraction of the equivalent costs in Japan, Europe, or North America?
Yes. But consider the flip side: As their production capacity grows by leaps and bounds, so does their per-capita income. And with the income boom, were witnessing a burgeoning consumption boom thats not about to stop any time soon. For instance …
- Chinas consumption of four basic commodities grains, meat, coal, and steel has already eclipsed that of the United States.
- China bought 64 million tons of meat in 2004 almost double the amount consumed in America.
- Steel use in China is also now more than double that of the United States!
- Coal consumption, responsible for nearly two-thirds of energy needs in China, has soared to 800 million tons, easily exceeding the 574 million tons burned in the U.S.
- Chinas demand for oil is off the charts, UP 34% in 2004, and a minor single-quarter decline in consumption, reported yesterday, does nothing to change the trend.
Meanwhile, in India, after incubating and smoldering quietly for decades, consumption is also exploding …
- Indias GDP is now $650 billion. When adjusted for its lower domestic purchasing power, thats the GDP equivalent of $3 trillion, surpassing the adjusted GDPs of Germany, the U.K. and France, and catapulting itself to the rank of the FOURTH largest in the world.
- Retail sales are exploding at an annual rate of 10%.
- Indias growth in passenger vehicles last year (1,044,597) hit 25%, outpacing Chinas estimated 15% growth. India has the fastest growing automobile industry in the world.
All this demand is pushing up the prices of natural resources across the board. It is inflationary in itself.
And now, theres a new trend emerging in Asia. Rapidly rising wages!
In Shanghai, Beijing, Guangzhou and other major urban centers of China, wages are going up at annual rates of 10% or better.
In Thailand, the minimum wage is about to jump 6%.
In India, wages in the technology sector are rising at the rate of 14% per annum.
This is the new cradle of a global wage inflation!
Reason: As wages rise in Asia and as Asia consumes more and more natural resources the cost of living will inflate around the world.
Next phase: More wage pressures in the U.S. and Europe, driving inflation higher.
This is not going to happen overnight. But it is an unstoppable trend. Years from now economic historians will look back and see that through it all, the rise of Asia was more inflationary than deflationary.
Gold is the only asset proven to have held its purchasing power for thousands of years.
Politicians can and will print money and credit like crazy, to overcome every economic bump they see on their road to re-election.
As Richard Russell of the Dow Theory Letters recently put it
Leave your grandchildren twenty thousand of todays paper dollars, and only God knows what that will buy them when they reach the age of 21.
Leave your grandchildren twenty thousand (current) dollars worth of gold, and when they reach age 21 they will have a good chunk of spending money, Ill guarantee it.
As many of you know, I have been bullish on gold since its low at $285 in 2001. Im even MORE BULLISH now.
Gold has successfully held chart support on several of its recent price corrections. Moreover, with investor complacency as low as it is right now, I can assure you that smart money is quietly moving into gold, accumulating some hefty positions.
If just ONE of the threats I see coming stocks in a sharp decline, oil launching higher, a bond market sell-off, or currency markets in disarray busts wide open, gold should skyrocket.
My advice: If you own any gold shares, hold them. If not, right now the best plays for the average investor are my two favorite gold funds Scudder Precious Metals (SGLDX) and The Tocqueville Gold Fund (TGLDX). I recommend a maximum of 5% of your net worth, spread equally between the two.
Im very worried about what I see happening right now to investors. Their complacency makes them vulnerable, and their vulnerability implies almost inevitable financial pain.
Dont let that happen to you. Stay on your toes, and batten down the hatches.
Get out of tech stocks, even blue chips, and definitely out of long-term bonds.
Own some gold. Own some natural resource stocks.
Follow the specific instructions in my Real Wealth Report.
Speculate, but wisely, and only with money you can afford to lose.
And above all, keep a big chunk of your money in cash, with all your cash in a safe and liquid short-term investment, such as a Treasury-only money market fund.
Best wishes for your health and wealth,
Larry
About MONEY AND MARKETS
MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss.
2005 by Weiss Research, Inc. All rights reserved.
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