Financial Markets Year End Signals, Q&A's
Stock-Markets / Financial Markets 2010 Dec 27, 2010 - 09:55 AM GMTBy: Larry_Edelson
I hope you had a wonderful Christmas with your loved ones! The holidays are wonderful, and in a few days we have another one coming up — the start of a brand new year.
Now, please be sure you’re watching the year-end signals I gave you in my columns of November 22 and November 29. They’re effective for this Friday’s closing prices for those markets. They are very important and I will be referring to them as the new year unfolds.
Last week, I answered some questions from readers. And today, since so many questions have been coming in, I’d like to do the same. So let’s get started …
Q: Cotton, sugar and other commodities are exploding higher. But many are saying they are in bubbles and headed for a disaster. Do you agree?
A: Short term, they too are a bit overbought and due for a pullback. But long term, I remain bullish on commodities.
Between the money printing and the supply constraints that most commodities are experiencing, coupled with rapidly rising demand from emerging markets — the long-term bull markets in commodities remain intact, with much higher prices coming.
Q: During his interview on 60 Minutes earlier this month, Fed Chief Bernanke said he’s not worried about inflation, and that the Fed can raise interest rates in 15 minutes to head off inflation. So isn’t it possible the Fed can control inflation?
A: It sounds logical, but it’s never that easy. Think about it this way …
The Fed (and Washington) didn’t think the Nasdaq rally into 2000 or real estate going into 2008 were signs of inflation or bubbles. So do you really think they can foresee inflation in other areas? I highly doubt it.
The Fed also failed to foresee the bursting of those bubbles. So do you think the Fed can anticipate how high inflation can go before it acts? Again, I highly doubt it.
Even if the Fed takes action to exit its loose monetary policies and money printing free-for-all, what do you think is going to become of the nearly $2.7 TRILLION the Fed has printed?
Do you think it’ll be able to reign it in, and if so, at what rate of interest? Even the Federal Reserve can’t tell you.
In the end, any statements by the Fed that it can control inflation are specious arguments because they assume the Fed controls the economy, and it does not. If it did, we never would have been in this mess to begin with.
Moreover, based on important cycle studies I have researched, the cycles for inflation point higher for at least FIVE more years, into 2016 — regardless of what the Federal Reserve does.
Bottom line: We are still in the early stages of the “great re-inflation” I’ve been telling you about. I think the Fed will find it difficult to reverse its policies. Even if it does, it will likely be too little, too late (as always) and won’t matter one iota in the grand scheme of things.
Q: Larry, what is your latest view on deflation? Many say that we’re still headed for a deflationary collapse, despite all the Fed money printing. You don’t agree?
A: No, I do not. Chief reason: We do not have the same monetary system we had back during the Great Depression. We are not on a gold standard.
Instead, central bankers are free to print infinite amounts of money whenever they want. Over time, printing money will inflate virtually all asset prices.
Ask yourself a simple question: Our monetary system is the opposite of what we had in the 1930s. So how can one expect the same results?
Moreover, the important question should never be whether the world is heading toward deflation or inflation, but rather, which sectors will inflate, and which will deflate?
For many of the reasons I’ve mentioned in my Real Wealth Report newsletter since its inception — I believe that deflation in the value of our money (its price and purchasing power are falling), and inflation in the value of hard assets will be the dominant macroeconomic force for many years to come.
I also believe that broad stock markets will join in this process and re-inflate, eventually rising simultaneously with the bull markets in commodities. This is exactly what has been happening.
Q: Why doesn’t the Consumer Price Index ever show any inflation?
A: The Consumer Price Index (CPI) is the most manipulated government statistic of all.
It’s jerry-rigged by Washington largely to minimize the actual inflation rate because all Cost Of Living Adjustments (COLAs) for social benefit and entitlement programs are tied to the CPI.
By the time the CPI reflects what’s happening on Main Street, it will be too late. I urge you to not factor the CPI in to any decisions you make.
Q: How much more can the dollar drop?
A: Any fiat currency can theoretically drop to zero. History is cluttered with broken currencies that literally became worthless.
I do not think the dollar will become worthless. In fact, we may see it continue to rally in the first half of 2011 as the euro continues to be plagued by a host of problems.
But long term, and using the Dollar Index as the benchmark, I expect the greenback to lose at least another 50% of its value, if not more, before it loses its reserve status.
That would be the equivalent of the Dollar Index plunging from its current value of about 80 to approximately the 40 level!
Q: Larry, the comparisons of the United States to Japan’s 22-year recession keep coming in fast and furious. Do you agree?
A: In the sense that the U.S. economy will not recover to its pre-crisis levels in terms of “real, inflation-adjusted” economic growth for a long time, yes, I agree.
But I do not agree with the Japan comparisons because …
Unlike the United States, Japan refused to let normal market forces devalue the yen. Instead, until 2005, the Bank of Japan propped up the yen, adding to deflationary pressures.
Also, unlike the United States, cross-shareholdings amongst Japan’s major corporations mired down their economy like a pair of cement shoes.
At the outset of Japan’s recession, 20% of the outstanding stock of Japan’s major corporations was tightly held in cross-shareholdings. This reduced market liquidity and prevented many of the bad debts and losses from rising to the surface, thereby slowing the recovery.
Institutionalized domestic price support schemes in many industries in Japan further acted to hamper recovery and clear markets. And they continue to do so today.
The Japanese mafia, the Yakuza, held a tight grip on industry for almost the entire 1990s.
The Japanese economy is also suffering from an aging population, where there are only 2.25 workers for every 1 person in retirement. This is distinctly different from the United States — where we have 4.6 workers for every retired person.
While many of the underlying causes of the current crisis in the United States and the 1990s recession in Japan are similar, the symptoms, treatment, and healing processes are different, due largely to cultural differences and demographics.
Q: Copper is soaring again. Why?
A: Think Asia. China’s demand for copper continues to soar, as does India’s. Ditto for most other emerging markets.
So much so that the International Copper Study Group’s (ICSG) statistics show that for the first eight months of 2010, copper mine production only increased 1% year-over-year, while usage was up 8.3%.
In addition, the ICSG predicts a whopping shortage of 435,000 metric tons of copper for 2011.
I expect copper to reach $6 a pound in the next couple of years. But wait for my signals before making a move. I expect a pullback in copper, just like I expect in gold and silver.
Q: Oil’s near $90. Where’s it headed next?
A: My short-term target is $107, heading into early next year, but like the metals and other commodities, I expect a pullback in oil.
After hitting $107, I would not be surprised to see oil retest important support at the $80 level during the first quarter of 2011. But then the lid comes off. I expect oil could see new record highs by the end of next year!
Q: Will China revalue its currency higher in 2011?
A: Great question! For years I’ve maintained that China would not revalue its currency higher — not until it built up the world’s largest piggy bank and secured sufficient natural resource stockpiles to weather any global financial storms.
But now, that’s changed. China has $2.7 TRILLION in reserves, and has at least the minimum in emergency stocks needed in grains, base metals, and even energy, in the form of crude oil, gas and nuclear.
Moreover, Beijing is having a tough time controlling inflation, which just hit 5% this past month despite six hikes in its banking reserve requirements this year, and the country’s first interest rate hike (on Oct. 19) in three years.
In addition, although Beijing is resisting outside pressure, mainly from Washington, to push its currency higher — I believe Beijing will succumb in 2011 and start aggressively pushing the yuan higher.
Two chief reasons …
One, Beijing does not want to slow its economy through further rate hikes. This became apparent recently when it was widely expected to hike rates, but Beijing did not follow through, and instead, raised bank reserve requirements again.
This is a clear sign that Beijing does not want to use tight money to try and stem inflation.
Two, Beijing does want to stimulate domestic demand. Increasing interest rates will not further that, but a rising currency that gives consumers more purchasing power will!
So bottom line: I believe China will start selling U.S. dollars and buying up its own currency in 2011, sending the yuan as much as 30% higher against the dollar.
This is going to be one of the surprising developments in 2011: An appreciating yuan, against another decline in the U.S. dollar.
As for natural resources, this will also be extremely bullish. A stronger yuan means that both Beijing and Chinese consumers can buy more. So, it will boost demand for natural resources dramatically.
Importantly, I also believe Beijing will use the stronger yuan to dramatically add to its gold reserves.
Q: If interest rates decline further, why would gold and silver pullback?
A: For the last few years, while it is true rates have declined as gold and silver prices have rallied, interest rates actually have very little impact on their prices.
Case in point: Gold and silver rallied to record highs in the 1980s while interest rates were soaring!
Far more important than interest rates — to gold, silver, and in fact most commodities — is whether or not people have confidence in the public sector, in their governments.
Also important, obviously, are the wild swings we’re seeing in the currency markets, which are in essence, reflections of people losing faith in their leaders.
Q: Do you expect the situation on the Korean Peninsula to come to a head in 2011. And if so, how would a shooting war in Korea affect metals prices?
A: Unfortunately, yes, I do expect the situation in Korea to worsen. But the timing is harder to pin down. According to my cycles work on war, the most likely time period for international conflict is the 2015-2016 time period.
As for how it would impact metals prices, I would expect it would be very bullish!
Q: In an earlier forecast you said that if gold exceeded $1,388 it would blast off. Please explain your change of heart.
A: No change of heart, as I do not use my heart to make any trading or investment decisions. Once gold broke above $1,388, it did blast off — to $1,432.
However, the short-term cycles for gold have peaked. So I am now expecting a pullback. The intermediate and long term remain very bullish.
Q: If exchanges raise margin requirements for gold/silver and mining shares, how would that impact their prices, especially if they were to raise margins when the dollar is being devalued?
A: Raising margin requirements for gold and silver only has short-term impacts. They do not alter long-term trends. As for raising margins on gold or silver mining shares, I believe that would only happen if the Fed were to raise margin requirements on all stocks.
Best wishes, and please have a healthy, happy New Year, and be safe this coming weekend.
Larry
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