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Is it ugly out there in the markets or what? Unfortunately, things are likely to get worse before they get any better.
The good news is that I also see a massive profit opportunity coming directly ahead. More on that in a moment.
First, you need to understand what’s happening right now …
The Subprime Mortgage Meltdown
Is Hitting the U.S. Economy Hard
Over $210 billion in mortgages are already delinquent. Foreclosures are at all-time record highs. So are late payments on mortgages. And U.S. property prices are almost sure to fall more.
But as I recently pointed out in the latest issue of my Real Wealth Report, there is a silver lining to the real estate crisis: Internationally, U.S. property prices are relatively cheap. The weak dollar will sooner, rather than later, attract foreign investors into our property markets, helping them to bottom out.
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| Delinquent loans and foreclosures are rising … |
Also, replacement costs on construction have more than doubled in the past five years. That, too, will help to soon put a floor under real estate prices.
So, a buying opportunity will soon come in U.S. real estate. But that doesn’t mean the U.S. economy will stabilize. Far from it. The fallout of tens of billions of dollars in bad mortgages … busted hedge funds … and more … will take months, perhaps even a year or so to work through the markets.
Meanwhile, the Fed Is Pumping in Money and Credit, Trying to “Inflate Away” the Problems
They’ve even gone so far as symbolically trying to lower rates by slashing the discount rate (what the Fed charges for direct loans) by a full 1/2 point.
Make no mistake about it: That is inflationary, no matter how bad the contraction in the debt markets. It means more money is available, even if it’s invested primarily in cash and not lent back out.
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| Ben Bernanke will continue inflating away the debt problems out there! |
No matter how I look at it, the Fed is destined to continue inflating away the debt problems out there by creating more money and credit … sacrificing the value of the U.S. dollar in the process!
Please do not underestimate the significance of this. Without a gold standard, central banks today — especially our own Federal Reserve — have the ability to devalue paper currencies to fight their way out of debt problems.
That means the dollars in your wallet … in your money market and savings accounts … in your investments … will all purchase less and less over time. Unless you hedge against the decline in the value of the dollar, which I’ll get to in a minute.
I Remain Convinced that U.S. Stock
Markets Are Headed Much Lower
I hope you’ve been following my signals on the Dow. I nailed the top at 14,000, and warned you of an imminent collapse back in June.
Since then the Dow has fallen as much as 1,482 points, or just over 10%. And my systems have flashed no less than three weekly intermediate-term sell signals, indicating that the Dow is going to fall to the 11,000 level.
Will the recent actions by the Federal Reserve stop the Dow from falling? No.
What if they cut the Fed funds rate? No, that won’t stop most stocks from falling, either.
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There are many reasons, but the most important are:
- The aforementioned mortgage crisis is going to make consumers and investors batten down their hatches, negatively affecting confidence and spending.
- At price-to-earnings ratios of 20 plus, most stocks are overpriced, especially since they have already seen the peak of their earnings growth in the recent cycle.
- At this time, overseas investors are more concerned with the downside risk in the U.S. than they are with the purchasing power of their strengthening currencies.
- The U.S. government is in no better shape than the mortgage markets. Technically, the Federal Government is bankrupt, with debts of more than $55 TRILLION (counting all IOUs).
Up until now, that hasn’t been much of a problem. But when investors are as frightened as they are now, the government’s finances can suddenly become a very heavy psychological burden on the markets and for investors, especially overseas investors who have largely been financing our debts.
So where’s the good news then? In my opinion,
1. Overseas economies are much stronger and more resilient than the U.S. Don’t get me wrong. I was born and raised in the U.S. … am a U.S. citizen … and think the U.S. is the greatest country on the planet.
But right now, and for the foreseeable future, the U.S. economy is one of the weakest and most vulnerable in the world, for all the reasons and forces I’ve cited previously and above.
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| Throngs of Asians are marching from the 19th Century right into the 21st! |
Meanwhile, Asian economies — especially China and India — are still pretty much firing away on eight cylinders. Never forget, there are more than 2.5 BILLION people in Asia — nearly 40% of the world’s population — and for all intents and purposes they are now leapfrogging into the 21st century, but not from the 20th. They are rushing into the 21st century from the 19th, making giant strides never before seen in economic history.
That alone is unleashing unprecedented demand for goods and services. And in my opinion, it’s enough to keep global economic growth cooking, despite occasional and normal setbacks.
2. Natural Resources! Tangible assets! Just think about the following two forces. Take …
Force #1: 2.5 billion people modernizing at the same time, leapfrogging from the 19th century to the 21st century and creating unprecedented demand for natural resources …
PLUS …
Force #2: Central bankers around the world pumping out money and credit — devaluing paper currencies. The U.S. dollar is losing its purchasing power more rapidly than ever before.
Since most natural resources are priced in terms of dollars, that means more money is chasing fewer available goods. That spells inflation. There’s no two ways about it.
Phase II of the Natural Resources Boom
Is About to Burst onto the Scene
Once the shocks from the mortgage meltdown and the new bear market in U.S. stocks start to pass, I expect that Phase II of the natural resource boom will unfold. This will be when the masses begin to recognize that inflation is what the central banks want.
I expect virtually all natural resources will climb to new record highs. Gold will take off to well above $1,000 an ounce … oil will climb to more than $100 a barrel … agricultural commodities and food prices will soar even more than they recently have … and yes, even real estate prices will start rising again.
So What Should You Be Doing Now?
First, understand what’s happening, as I laid it out above, and keep the longer term picture in focus. That’s how you’ll make the biggest money.
Second, with the exception of select natural resource stocks and core gold positions, stay out of the U.S. stock markets.
Third, keep the rest of your powder dry for now, and wait for new opportunities to present themselves. If you’re a Real Wealth Report subscriber, I’ll tell you exactly what to buy when the time is right.
Best wishes,
Larry
About Money and Markets
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