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For several years, they’ve been insisting that “Corporate America is healthy,†“inflation is benign,†and “low interest rates are here to stay.†And for several years, there was some room for debate regarding whether they’d be right or wrong. But now, just as we see an outpouring of new evidence that’s tearing their theories apart, they’ve stepped up their bullish rhetoric.
One says today’s stock market is “the best buying opportunity.†Another is telling clients “to expect gains of 100%-plus in the next couple of years.†A third recommends ignoring the news and “investing as fully as your risk tolerance warrants.†Still another is forecasting 40,000 on the Dow! If you’ve been getting my Real Wealth Report, you know that I’ve gone on record with the opposite view. Here are the warnings I published ten months ago, along with an update on where I believe we stand right now … Warning #1 Update: Washington would have you believe that the budget deficit narrowed to $319 billion in the fiscal year just ended September 30, down from the record $413 billion for fiscal 2004. But here’s what’s not factored into the reported budget deficit:
Total amount of new borrowings that are unaccounted for: $182.5 billion! Meanwhile, a new, out-of-control, spending-and-borrowing binge is in full swing: At least $200 billion for hurricane recovery, countless billions for an Iraq war with diminishing chances of ending, and new, unanticipated interest costs as rates rise.
Warning #2: Update: In the past six weeks alone, the price of the 30-year benchmark Treasury bond has fallen by a full six points. Plus, it’s continually breaking down to new lows, continually confounding the experts I just told you about. Indeed, while Wall Street’s bulls keep dreaming, America’s bonds keep falling! What’s driving the decline? In a word, inflation! Look. Most bond investors are not dumb. And unlike many Wall Street gurus, they’re not sticking their heads in the sand. They know all too well that:
This is basic. You don’t need a Ph.D. in economics or a sophisticated macro-economic model to grasp it. Yet, the so-called “pros†on Wall Street still don’t see it … or don’t want YOU to see it. Who’s the most likely to see this picture the soonest and do something about it? Unfortunately, it’s not U.S. Treasury Secretary John Snow or even Fed Chairman Alan Greenspan. It’s foreign investors and central banks holding the largest single chunk of U.S. bonds and other Treasury securities in the world. As soon as they start reducing their buying of U.S. bonds — or God forbid, start selling — the ensuing bond market collapse will make the recent 6-point decline seem puny by comparison. Result: Long-term interest rates, which automatically rise when bond prices decline, will go through the roof. Warning #3 Update: New signs of inflation are everywhere. They’re building momentum. And they’re reaching an explosive stage. Gold had already nearly doubled in price since its low in 2001. Crude oil has quadrupled in six years. Copper has recently hit all-time, record highs, far surpassing its levels of the last, double-digit inflation cycle. Many other commodities and natural resources are either at, or hovering near, record highs. Plus … We now have the equivalent of 14.6% annualized inflation based on September’s Consumer Price Index jump of 1.22% — the biggest monthly increase in consumer prices since March 1980. We now have the worst monthly jump in inflation at the wholesale level in 31 years! And it’s not just the so-called “non-core†energy and food prices. As Tony Sagami showed you yesterday, CORE prices are rising rapidly at critical stages in the production process. Important: This is not just a temporary consequence of the recent hurricanes. Quite to the contrary, the inflation you’re seeing now is being driven by forces that are more powerful and more sustainable than anything we’ve seen in decades. First and foremost, as I told you a moment ago … The inflation is being driven by the rampant, wanton government money printing.
The best evidence: M3, the broadest measure of money supply, is surging. Just one year ago, in October 2004, the month-to-month increase in M3 was only $11 billion. Since then, the monthly increase has been growing by leaps and bounds and is now roughly nine times greater than a year ago. That’s right. Money supply (M3) is surging by about $100 billion per month! And never forget what’s really behind all this: Whenever government leaders feel threatened by a slowing economy … by war … by natural or man-made disasters … by corporate bankruptcies … or by their own financial ruin … their natural, knee-jerk response is to let loose the money printing presses. That’s precisely what’s been happening now. Second … The inflation is being driven by a new, unprecedented demand surge for limited natural resources from nearly half the world’s population. Never before has such a large mass of humanity — three billion people in India, China and Russia alone — modernized at the same rapid pace as we’re witnessing today! And never before have we seen such a rapid depletion of the planet’s available natural resources! Mother Nature simply cannot pony up enough to feed this boom. Whether some individual economies are strong or weak, there simply isn’t adequate oil, gas, food, gold, even potable water to go around. What do you get when you crank up the supply of paper money to chase a diminishing supply of natural resources? Precisely the kind of inflation we’re beginning to see right now! It all makes sense. It all fits. And yet, most of Wall Street still has its head in the sand. Is It Any Wonder That Interest When you buy a bond for $10,000, you’re making a loan for $10,000. And when the bond reaches maturity, the deal is they’re going to pay you back the $10,000. In full. But suppose the money they pay you back is worth 10% less. Suppose that, in terms of its purchasing power, the money you get back is actually worth $9,000. How much more in interest should they be paying you to cover that decline? At least enough to make up for the loss, which would be about 12%, right? In theory, that’s how it’s supposed to work. But in reality, the extra interest you get is not always in synch with the amount you lose to inflation. Right now for example, given the government’s horrendous finances and the many uncertainties of our era, if you’re going to commit your hard-earned money now with no payback of principal for thirty long years, you should be getting a solid 5% in interest per year, net of inflation. But that’s not what the U.S. government is giving you. Even in nominal terms, they’re giving you less than 5%. Worse, they’re likely to take back all or more of that interest with inflation, leaving you with a net return of zero … or worse. So even if inflation grows no further, interest rates need to go much higher. And as inflation explodes higher, interest rates will have to go up at least as fast, probably faster. This is precisely what we see starting to happen now. It’s why those long-term bond prices I told you about are falling. It’s why long-term rates are suddenly starting to jump … and why it’s a virtual shoe-in that Greenspan is going to jack up short-term rates again a week from next Tuesday. He has no choice. And some pundits still see the Dow going to 40,000?! Hah! All This Is Bullish In fact, all this is extremely bullish for gold and oil! But if you’re watching every wiggle and squiggle in any market, it’s easy to lose your perspective. That’s why, in times when short-term market moves are going against you, it’s critical that you step back and look at the long-term charts.
First, consider energy: Oil and related markets have taken it on the chin lately. But has the longer term trend changed? Not in the slightest. As this updated chart shows, not only is the price of oil still well within an uptrend, the recent price correction could very well be a major buying opportunity. Ditto for heating oil and unleaded gas. At the same time, gold has also started to correct, taking a breather from its recent thrust to new 18-years highs. Not to worry.
The recent decline in the yellow metal is a mere blip on the radar screen. The uptrend is solid. And if anything, investors should prepare to add new positions! What can I see on the visible horizon that might change these long-term trends for gold and oil? Nothing! What will keep them going? Everything I’ve just told you about — the government’s financial troubles … the money printing .. the inflation … and the chronic, worldwide shortages of critical natural resources. The Best of Both Worlds This gives you the best of both worlds: You have every reason to believe the big-picture trends will continue. Plus, at the same time, you have a normal — and convenient — correction in each of the major markets that are impacted. Here’s how to take advantage of this unique situation … First, with any money you have that is not invested in my recommended sectors, or with any money sitting on the sidelines right now — be sure to stick with a money market fund, preferably a Treasury-only money market fund. Second, stay focused on the big picture. Markets are going to be swinging wildly. Rumors of bond defaults, hedge fund problems, and more are going to be buffeting prices left and right. That will make markets nervous and emotional. The best two ways to handle it: Step back, keep the fundamentals in focus, and stay in touch with my regular updates. Third, get ready for a whole new round of great buying opportunities very soon. I’ll do my best to tell you when. And if you are a subscriber to my Real Wealth Report, I’ll provide all the specific instructions you need, along with the follow-ups that I feel are a must for taking profits or cutting losses. Fourth, hold all still-open, core gold portfolio positions. This includes gold bullion, gold shares and the two gold mutual funds I’ve been recommending — Scudder Precious Metals (SGLDX) and The Tocqueville Gold Fund (TGLDX). If you’re a Real Wealth Report subscriber, you’ll see that some of the positions I’ve recommended should have been sold based on the stop orders I provided. On the balance of your positions, maintain all the protective stops. Ditto for your energy shares. Fifth, for your speculative funds, take advantage of this lull to pick up bargains and aim for the many windfall profit opportunities now opening up. For details, see my latest report on the fabulous new possibilities emerging in energy and my report on the equally good situation now coming up in gold. Plus, for another outstanding opportunity — with interest rates about to rise yet again at the next Federal Reserve meeting just 12 days from now — consider Martin’s latest report. It describes one of the best ways I know to transform rising interest rates into windfall profits. Best wishes, Larry Edelson About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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 inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
Three Warnings Coming True
I’m writing you today to tell you about three warnings that are now coming true … and about one more danger that is also a threat to your money: The Wall Street “experts†who continually miss the big trends and steer you the wrong way. 
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