Most Investors Are About To Learn This Lesson The Hard Way

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June 27, 2013 11:36am NYSE:DIA NYSE:SPXU

wall-street-etfLarry Edelson: Millions of investors are soon going to learn about the financial markets the hard way — through giant losses.


Why? Because they’re confusing normal times with abnormal times.

Let me explain. In normal times, rapidly rising interest rates and Fed credit tightening would typically be bearish for commodities and stocks.

But these aren’t normal times. We’re coming out of a period with the lowest interest rates in the history of the country. A period that was fraught with financial failures, even the near-total collapse of the monetary system. And a period when the Fed deliberately kept interest rates at record lows.

Thing is, most investors aren’t making the appropriate distinction. They’re reacting in a knee-jerk fashion to the recent rise in interest rates. So they’re dumping gold and other commodities, and unloading stocks as if a giant bear is back on the scene.

But based on all of my research and long-term indicators, I’ve concluded that those same investors are going to be very sorry.

Why? Because this rise in interest rates, occurring during abnormal times, is going to have precisely the opposite effect. Instead of being bearish, it’s going to be resoundingly bullish for a lot of markets.

Simple logic explains why.

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A rise in interest rates, occurring in abnormal times such as we have now, will be bullish for a lot of markets.

First, rates were at record lows because almost nobody wanted to borrow. The demand for credit simply wasn’t there.

So as rates and the cost of money and credit rises, guess what happens? Demand goes up too. Potential homeowners and businesses will want to suddenly borrow again before interest rates go any higher. And that, in turn, will stoke all sorts of demand, from housing, to commodities, juicing corporate earnings and the stock market.

Second, interest rates are way below the true rate of inflation, which is running north of about 8%. In other words, we would need rates to move higher than the true rate of inflation ― higher than 8% ― to negatively impact any markets. Until that point comes, if at all, rising interest rates will actually become fuel for higher prices, once the knee-jerk selling has passed.

Third, there will come a time in the not-too-distant future when our foreign creditors start to sell U.S. sovereign debt as they lose confidence in our government’s ability to manage its affairs.

The resulting rise in interest rates will be very bullish for most markets, as money leaves the bond market in droves and seeks out alternative investments for appreciation and safety.

So you see, right now millions of investors are selling everything from gold to stocks because they think we’re in normal times, or approaching normal times.

But these are abnormal times. So you simply can’t apply the old rules.

You have to think out of the box, or you’re going to get buried in the box with a whole lot of losses and missed opportunities. And that’s not what I want for you.

Instead, I believe what’s going on now in the markets is a huge gift for savvy investors. For the following reasons:

  1. It’s helping gold slide into what should prove to be a major low. Ditto for silver. .
  2. It’s helping the dollar rally. A rally that will, in turn, be aided by Europe’s coming demise. That, in turn, will eventually lead to a huge opportunity to short the dollar, because, ultimately, its long-term bear market will resume, offering you enormous profit opportunities.
  3. It will eventually drive huge amounts of money into gold. Other commodities as well.

Right now, though, the selling can continue. So don’t be afraid to make hay with it in the short-term.

For instance, if you’ve followed my suggestions in this column, then you’re short stocks via the ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU) and you’re long the dollar via the PowerShares DB US Dollar Bull ETF (NYSEARCA:UUP). Hold those positions.

As to gold and silver, I’m loving that they are falling now. Why? Because the declines are setting up one of the greatest buying opportunities of all time.

Larry EdelsonWritten By Larry Edelson From Money And Markets

Money and Markets is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Money and Markets or its editors.


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