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You’re keenly aware of Force #1 — the far-reaching consequences of the mid-term elections, now only eight days away.
And you probably also know about Force #2 — a new round of mass money printing by the Fed likely to be announced just nine days from today.
Plus, this morning, in this unusual joint communiqué, we want to bring you up to date with three MORE forces, ALL of which could add great power and momentum to the market trends we’ve been forecasting here.
It just happened this weekend. So we won’t know for sure how U.S. markets will react until they open a couple of hours from now. But for anyone expecting a major accord, it’s bound to be very disappointing.
Look! With Larry taking the lead, we warned about the currency wars many months ago. We told you that governments would battle each other to see who could devalue their currencies the most. Plus, we said that, until the entire system could be thoroughly revamped, every effort to end the currency wars was doomed to fail.
That’s precisely what’s happened this weekend at the G-20 meeting in South Korea: Despite a massive effort by the U.S. and some of its allies, the only thing the ministers could agree to was a vague, toothless promise to TRY to avoid currency wars.
Meanwhile …
• Emerging market countries, which see themselves as the primary victims of the currency wars, pushed for — and have just gotten — more voting power in the International Monetary Fund at the very same G-20 meeting where the U.S. failed to get its way.
• Not ONE single nation at the G-20 conference agreed to give up its right to devalue or hold down its currency as much as it wants, using any means at its disposal.
• Even as the “currency peace talks” were still ongoing at the G-20 meetings, major countries such as Japan, Brazil, and South Korea continued to take steps to devalue their currencies — or at least hold them down.
• Most revealing of all, two of the most powerful countries — China and Germany — attacked the U.S. as the number one culprit in the currency devaluations. By running its money printing presses, they argued, the U.S. Federal Reserve is doing precisely what the Americans are telling everyone else NOT to do — wantonly devaluing its own currency!
This is definitely NOT the “currency stabilization pact” that markets were hoping for last week. Quite the contrary, it opens the gauntlet to a whole new round of currency battles in the weeks ahead.
The last time we saw currency turmoil of this magnitude was before the Plaza Accord of 1985. In the months that followed …
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Gold exploded higher, soaring more than 75 percent from $284.25 in February 1985 to $499.75 in 1987.
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U.S. Treasury bond prices plummeted, sending long-term interest rates from 7.12 percent in July 1986 to 10.25 percent in 1987.
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The double whammy of a plunging U.S. dollar and soaring long-term interest rates precipitated the stock market crash of 1987.
Today, China has the largest trade surplus in the world … as well as the largest stash of dollar reserves.
And today, the U.S. is in a recession that makes the early 1980s look like a Sunday walk in the park.
So despite sharp intermediate rallies, the pressures for a dollar decline — whether driven by the markets or by some kind of global agreement — are even more powerful today. Specifically …
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If the currency wars continue, the U.S. will CONTINUE to devalue its dollar even more. And …
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If some kind of an agreement is reached in the days and weeks ahead, it will be because the U.S. has succeeded in getting China to push its currency higher.
That could have an impact on markets similar to what we saw after the 1985 Plaza Accord, also sending the dollar lower.
Result: Gold will soar; bond markets will plunge; and the U.S. stock market could also get hit hard.
According to a recent Bloomberg news release, Pacific Investment Management Co.’s (PIMCO) $252 billion Total Return Fund, the world’s biggest bond fund, is slashing its exposure to U.S. Treasury bonds.
It has cut its investments in U.S. government debt to 33 percent of assets, from 63 percent of assets in June.
In other words, one of the largest players in the bond market has now dumped almost HALF of its U.S. government debt holdings.
But PIMCO is not alone!
Instead, PIMCO’s a trendsetter among bond funds all over the world — not only for mutual funds and hedge funds, but also for sovereign governments.
Among them, China and Germany clearly see the handwriting on. That’s why they berated the U.S. at this weekend’s G-20 meetings. And that’s also why they are likely to dump U.S. bonds in increasing quantities.
In the 30 days ended October 18, corporate insiders dumped more than 205 million shares of their stock, compared to purchases totaling a mere 32.4 million — a ratio of more than six to one.
Moreover, in terms of market value, their sales add up to almost $3.5 BILLION, versus only $236 million in buys — $14.83 in stock sold for every dollar bought.
Does this necessarily mean the stock market will plunge tomorrow? No. But there’s no question that U.S. stocks are overpriced given the wobbly American economy.
And there’s no question that the U.S. stock market indices are vulnerable to fears of austerity in the wake of the upcoming elections … any disappointment in the Fed’s November 3rd announcements … any further failures by the G-20 … any plunge in the bond market … or any sustained large selling by insiders.
What You Should Be Doing NOW …
First, if you own long-term bonds of any kind, sell them. Don’t wait. That includes municipal bonds and corporate bonds. A plunge in U.S. Treasury bonds would be felt throughout virtually all bond markets.
Second, greatly reduce your exposure to U.S. stocks — especially those that do not benefit from a falling dollar.
Third, build a solid, diversified portfolio of investments that have consistently gone up when the dollar has fallen — not only obvious dollar hedges like precious metals, but also select natural resources, foreign currencies, and emerging markets. Among our favorites: gold, agricultural commodities, the Australian dollar, Brazil ETFs, and others.
Fourth, the five powerful forces we’ve covered here this morning create amazing opportunities. But they’re also volatile and sometimes difficult to predict. So you can’t simply buy, hold, and forget about it.
Best wishes,
Larry and Martin
