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The Markets Take No Prisoners …

 March 12, 2013 03:06 PM


It was just about this time last year, in my columns in Uncommon Wisdom, that I started warning …

That we'd see a short-term rally in the dollar, mainly against the euro.

That Europe would kick the sovereign debt can down the road.

That the U.S. economy would start to look a bit better.

That China would largely engineer a soft landing, and the yuan would appreciate.

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And that commodities would enter an interim period of disinflation.

Let's see how things have panned out so far …

U.S. Dollar Leaping Higher

Since March of last year, the U.S. dollar, judging by the U.S. Dollar Index that's traded on the New York Board of Trade, has gained nearly 4 percent.

That's not a lot. But the latest in the dollar is telling. It's starting to rally strongly, mainly as the euro starts to tumble again due to Europe's sovereign debt crisis.

The dollar, on my system, has much more to go on the upside over the next few months, as Europe and Japan begin to devalue their currencies.

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Mind you, currencies are a relative gain. The dollar is going to rally, but it too remains in a long-term bear market. It's only a matter of time before the dollar succumbs to Fed money-printing and Washington's fiscal follies.

As for Europe, it indeed did kick its sovereign debt can of worms down the road a bit over the past year. But the latest results and stalemate in the recent Italian elections has renewed Europe's crisis, and now, the euro is plunging anew.

As to the U.S. economy, I said it would start looking better. And indeed, it has, with unemployment coming down a tad, corporate earnings surging, durable goods orders robust, and more.

But don't kid yourself. The U.S. economy is improving a bit mainly because it's bottom-bouncing and because Europe's economy is looking so bad.

Don't get too used to it, though. While there may be further improvement coming, I don't think the U.S. economy will get back to where it was pre-financial crisis anytime soon, perhaps not even in my lifetime.

As for China, woe to all those China pundits who predicted a crash in China's economy. It didn't happen, and it won't happen.

Instead, China's economy put in a soft landing, and started taking off again, with full year 2012 GDP coming in at 7.8 percent.

What about the latest fears on China's economy, due to Beijing clamping down in property speculation again?

No, China's economy is not going to implode. It's not even going to slow down. Beijing's efforts to reign in property speculation are largely targeting second home purchases, not the entire property market. China's economy is going to pick up further steam.

Commodities Hit Hard

Now, to that sector that we all love so much, commodities. Since my warnings of just about a year ago …

•  Coffee prices have fallen a whopping 30.14 percent

•  Cocoa prices are down 15.69 percent

•  The price of sugar is down 21.78 percent

•  Cattle prices are down 17.59 percent

•  Copper is down 10.46 percent

•  Platinum is down 8 percent

•  Silver is down 16.89 percent

•  Crude oil has fallen more than 19 percent

•  Gold is down 9.23 percent

I say this not to boast, by any means, but to prove to you one major point: There can be big disinflationary waves in commodities, even when there's massive money-printing going on.

Why's that important? Because nine out of 10 investors (and analysts) think all too linearly about the markets.

They think that, if there's money-printing happening, in any part of the developed world, it's inflationary. And that commodity prices must therefore go up.

Not true. The markets are dynamic, complex systems. If you're to get the big picture right, you simply have to throw out all of the old rules you've been taught or told — and stop thinking about the markets linearly.

Instead, you have to realize that markets can do anything at any time. They can defy linear logic … they can defy the fundamentals … they can defy the news. They can also defy the authorities.

Just consider gold. It's down $343 since its record high of $1,925 in September 2011, a whopping 17.8 percent decline. This, despite massive European money-printing … continual bad news out of Europe … alleged buying of gold by Beijing and other central banks … money-printing in Japan …

And the biggest money-printing of all time by our own Federal Reserve!

Silver's down even more — a whopping 41.1 percent since its high in April 2011!

Look. The markets take no prisoners. Be the least bit stubborn or biased, and the markets take your money.

That's why I always stress being open-minded when it comes to markets and to investments and trading …

Why I always stress that you question everything and everyone, myself included.

And why I think it's imperative that you throw all of the old rules out, and instead, think dynamically.

My Forecast for the Dow

Many readers have recently emailed me questioning my long-term forecast for the Dow, wondering how the heck the Dow Industrials could ever run to substantial new record highs if the U.S. economy is never going to fully recover and even lose its status as the world's largest economy, falling behind China.

But here we are, at new record highs. My answer is the same as before. Just go back to the 1932 to 1937 period. The U.S. economy sank deeper and deeper into depression, yet the Dow Industrials soared 287 percent.

Why? Because even though the U.S. economy was sinking, Europe's economy was sinking even more. Capital fled the European stock and bond markets in droves, pushing the Dow substantially higher.

The thing is, this time around, the flight of capital out of sovereign bond markets will be worse. Not only is Europe in trouble, so is Japan and the United States. Therefore, the gains in the Dow — despite the economy and what else you might throw at it — could soar even more.

What about the disinflation we're seeing in commodities? It's bound to continue. Right now, savvy money and investors want their capital out of bonds and into something that is more liquid than commodities, so they are putting their money largely to work in the equity markets, where they can buy great companies with great balance sheets, not to mention all the great income producing stocks out there.

Later, when the sovereign debt crisis fully infects Washington, you will see commodities bottom and stocks and commodities go up together hand-in-hand. Even if the economy looks bad, and even if interest rates are rising.

I'll go on the record right now: We are now entering a period in the financial markets unlike anything we've seen before in our lifetime. One that will require new ways of thinking about the world.

Stay tuned …

Best wishes,

Larry

P.S. The March issue of my Real Wealth Report publishes this Friday. Don't miss it! If you're not a subscriber, simply click here now to join. At a mere $89 for an annual subscription, it's a bargain.


This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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