Why the World’s Best Investors Are Wrong

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It’s a common saying in markets that you should always, ‘Follow the trend.’

It sure sounds simple, though most don’t manage it. If you do, you can make some respectable gains.

But the really big money, the kind that can change your life, isn’t made by simply following the trend. It’s made by correctly punting on the point when the trend turns.

For example, billionaire George Soros became famous by shorting the British pound on September 16, 1992. He broke the bank of England with this one trade. While his punt seems straightforward today, at the time it wasn’t. Soros placed his chips at the right time — just before the pound started to crash.

That’s why I always say that the trend is your friend, until it ends. If you can jump on the bandwagon just as the trend turns, you can make a lot of money.

With this in mind, let’s talk stocks, gold, and a turning point I see approaching.

 

Looking for the next turning point…

I recently discussed my macro view in a Resource Speculator special report. Here’s a snippet:

‘I believe that we’re looking at a 20–30% stock market correction from the [recent] high on the Dow Jones Industrial index. That means the Dow could drop down to about 13,000 points. As you know, the Aussie market tends to follow in the US markets’ footsteps. But, unlike US markets, the ASX has more exposure to mining stocks. For this reason, the ASX 200 could fall to 4000 points.’

It sure doesn’t sounds like a pretty future. For this reason, while it’s worthwhile punting on a few speculative stocks, I recommend mainly sitting on the sidelines until the picture becomes clearer. This stock market party should end soon.

Thanks to excessive taxation and ever-so-burdensome regulation, the world economy is getting worse. At the same time, global debt has skyrocketed.

The world has added around US$60 trillion of debt since 2007, pushing the global total to nearly US$230 trillion by December 2014. That’s nearly three and a half times the size of the world stock market and economy. Remember, that figure takes us only to 2014; we don’t yet have fresh debt tallies from last year…or this year. (At least from what I can find.)

While the world continues to get drunk on debt, the stock market has taken off to new highs.

Fortunately for stocks, the debt party has been fuelled by a wave of central bank money printing, record low interest rates, and the probability of helicopter money. While this sounds great, if you thought 2008 was bad, the combination surely can’t end well for stocks.

I’ve warned multiple times in Money Morning that the European banking sector looks set to crumble. Deutsche Bank — the region’s largest bank — will probably go under in the months ahead. Hundreds of other banks should then collapse across Europe.

Reviewing history, when the US banking sector was on its deathbed in 2008, the smart capital shifted into bonds seeking safety. At the time, central bank balance sheets weren’t overly stretched and bonds looked good.

But times have surely changed. Government bonds have become largest debt fuelled bubble in history, with roughly US$13 trillion of them trading in negative territory world-wide. That means you’re paying the government to hold your money.

No thanks…

The government wouldn’t know how to run a lemonade stall. It would probably buy too many ingredients on credit, make too much lemonade, not be able to sell any, and then ask the creditor for another loan to try it all over again. Unfortunately, this is how the government actually runs the world, on the promise it will pay all the debt back. But it never has — not even once in history.

 

Connecting the dots

As I’ve explained before, the global debt market is connected in Europe. To be politically correct, the banks own the majority of sovereign bonds. When banking system goes under, and institutions stop bidding for their bonds, what do you think will happen next?

It’s clear that governments won’t be able to continue their Ponzi scheme — issuing new debt to pay back the old stuff. They will either default on the debt entirely, extend the maturity dates, or delay interest payments. When this happens, capital will rush out of bonds quicker than you can say ‘crash’.

When bonds start to crash, the financial meltdown should turn global…

Sovereign Wealth Funds (SWF), pension funds and institutions own a lot of bonds and banking stocks worldwide. The two sectors have been reliable and paid decent dividends in the past. Unfortunately, the party can’t last. A fair amount of SWFs and pension funds are mandated to hold a 70% exposure to government bonds in their portfolio. These funds probably won’t survive the coming financial meltdown.

Government bonds, banking shares, property, stocks, and precious metals…everything should crash initially. When this happens, looking around the world, there are few places for smart capital to hide. That is, other than the US dollar.

The US dollar definitely has its flaws. But, when the going gets tough, the smart money should move sharply into the US dollar — it’s the world’s reserve currency for a reason. That’s exactly what happened during 2008–09, and the Great Depression of 1929-33.

Since we’re looking at a far more devastating financial crisis,even more capital should shift into the ‘safety’ of the US dollar. The US dollar could see its biggest rally of all time. Aside from most other stocks and businesses, priced and run in US dollars, that probably won’t bode well for commodities and precious metals.

When the US dollar bull explodes higher, I strongly believe that gold should collapse to US$931 per ounce — or lower.  I believe that Resource Speculator readers will make life-changing gains buying the best gold stocks near the low and holding them for the medium to long term.

 

Surviving the future

Many of the world’s smartest investors fear the worst and hate stocks, but love gold. If you ask me, that doesn’t make any sense. The US dollar is the only proven safe haven. For this reason, and many others, I believe that the best in the business are dead wrong on gold. Take a look at the correlation between gold and the US dollar yourself. Here’s the past year.

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Source: Macrotrends

While he doesn’t agree with my short term bearish outlook, Greg Canavan agrees that we’re in a long-term gold bull market. Greg acknowledges there will be corrections from time to time within the longer term bull trend. And while he and I might disagree on the size of the coming correction, we both aim to take advantage of it for our readers. So far Greg has been on the right side of the trade, bringing in some great results. I recommend checking out his gold stocks and strategy, here.

Alternatively, I’m preparing Resource Speculator readers for the worst possible scenario. In my view, readers who are cashed up to take advantage of the coming distress selling should make the most money in the years ahead. I’ll recommend the best stocks to buy for readers when the time is right, so they can sit back, relax and enjoy the good times ahead, beyond the crash.

When European banking system starts to crumble, it should take down the stock market. That includes gold stocks. I’d argue that the majority won’t know what’s wrong. So, selling all assets, they will flee into cash and US treasuries.

When the smart money wakes up and realises that the government debt market is in trouble, capital should shift into stocks, gold, art, property, and corporate debt. That’s why we’re facing a 20-30% stock market correction, and not a crash. When the banking system and government debt goes under, there is really no better place to hide from the nightmare than the best equities and assets.

There’s a lot more to this story. The finer details — and my overarching strategy — is documented in a few special reports, which I’ve written exclusively for Resource Speculator readers. You can start by clicking, here.

In my view, you should be able to buy the best resource stocks for bargain prices in the months ahead. That’s great news if you want to make huge profits in the medium to long term. While we wait, I’ve found three stocks that could make you huge profits in the months ahead.

Article taken from Money Morning
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