I don’t use ancient Mayan calendars. Nor do I subscribe to Nostradamus.
Yet, throughout modern history, if there ever was a year when all the stars were crossed for a millennial tipping point, 2012 must be it.
If I’m right, naïve investors who follow the crowd will confront the greatest threats to their wealth in their lifetime … while independent investors who think out of the box will enjoy the greatest profit opportunities they’ve ever seen.
And even if I’m wrong, the convergence of already-obvious economic forces is destined to make 2012 one of the most dramatic years of the century.
It’s the year when the European debt crisis is likely to reach a climax … when the U.S. budget battle will probably spill over into financial markets … when the world’s largest banks will face their Day of Reckoning … and, whether by austerity or inflation, when the majority of the world’s citizens could be forced to make some of the greatest sacrifices of modern times.
Not coincidentally, 2012 is also the year …
When the government of the world’s only superpower (the USA) could suffer its worst gridlock, as a highly polarized electorate chooses its next president …
When an emerging rebellion in the world’s former superpower (Russia) could threaten to bring its leaders down …
When the world’s next potential superpower (China) could have the greatest difficulty to date in containing its own anti-establishment uprisings …
When the pan-national revolution in the world’s most volatile region (North Africa and the Middle East) could explode, as its “Arab Spring” turns into an “Arab Winter” …
When the anti-American military of the world’s most unstable nuclear state (Pakistan) will have the greatest incentive to stage a coup d’etat …
When the government of the world’s most influential renegade state (Iran) poses its most dire threat to the world’s most critical resource (petroleum) …
When all of these upheavals are most likely to be energized by the hunger, homelessness and economic hardships among the largest number of the world’s citizens, and …
When the most powerful governments of the world will have the strongest motive to take unprecedented measures — to save their banks, revive their economies, stem their domestic rebellions and bolster their military forces.
Plus … it’s when investors of the world are most likely to drive certain investments to bargain-basement prices … and others to unprecedented peaks.
This is why I have gathered the most powerful team of analysts in the four decades since I founded this company. And this is why I am dedicating this issue to their outstanding independent research, analysis and thinking.
I have not asked them to agree with each other or with me. My only request was that they focus on the BIG PICTURE, and they’ve done just that …
Real Wealth Report:
The Panic Cycle
2012 will be a year when almost all markets go haywire on a massive roller-coaster ride that will see many asset classes crater in price … only to be followed by some of the most powerful rallies ever seen.
How do I reach that conclusion?
I call it a “panic cycle” — a type of market volatility that comes along, on average, every 12 years.
The last panic cycle to hit was in the year 2000, which saw the peaks in the Dow Industrials and the NASDAQ and the end of the so-called “peace dividend.” It was also the period that included the World Trade Center attacks.
And prior panic cycles — sometimes bullish, sometimes bearish — were almost as dramatic.
But this time, the panic cycle of 2012 promises to be many magnitudes greater than previous turns in the cycle.
For one thing, the Western world is drowning in debt levels that are an estimated 25 times worse than anything seen in any prior cycle of this kind.
For another, Europe’s experiment with a single currency is failing.
And for yet another, there has not been any recent time in history when so many important cycles have converged at the same time including — the 54-year Kondratieff cycle (suggesting chaos in political systems and strong winds of deflation) … the Kitchens business inventory cycle … the Juglar fixed investment cycle … and more.
For the U.S. dollar, I expect first a great rally, then a collapse. For gold, I see the opposite — first a major correction and then a huge rally. And for the euro, I see nothing other than an utter disaster.
Safe Money Report:
Last Week’s Shocker
Larry is talking Big Picture, and as my readers well know, I have plenty to say about that too. But on this occasion, let me just focus on the here and now …
Last week, the nation’s largest bank — with the most depositors and the biggest hoard of assets — sliced through $5 per share like a hot knife through butter.
I’m talking about Bank of America. And despite a rally later in the week, the stock’s plunge reflects a debt disease that’s both chronic and acute.
Why is the $5-per-share level so important? Many reasons. First and foremost, many funds and institutions can’t hold stocks that trade below that price. So in this case, the breach of $5 could set off a veritable death spiral of selling.
But it’s much more than that. Bank of America is a bellwether for the U.S. banking sector.
It’s been falling virtually nonstop throughout 2011.
It’s been falling despite zero percent short-term interest rates from the Fed and the Operation Twist program designed to suppress long-term rates.
It’s been falling despite the massive European bailouts, and the supposed economic recovery in the U.S.
And it’s been falling despite receiving the massive taxpayer-funded TARP aid in 2009 … and another massive capital infusion just this summer from legendary investor Warren Buffett!
What does that say about the state of American banking and the American economy?
It says that the system is being hollowed out from within! Both domestic and foreign banks are woefully short of capital and earnings power, and that means more failures, and more losses looming for owners of bank stocks and bonds.
Fortunately, you knew this catastrophe was coming for some time. Our team and I have been warning you to avoid bank stocks like the plague. We’ve even recommended select investments that RISE in value as they FALL.
Meanwhile, Weiss Ratings named Bank of America as a vulnerable banking institution long before the 2008 debt crisis and AGAIN, long before this debt crisis.
It’s just one bank. But it’s a metaphor, symptom and CAUSE of much more financial turmoil to come.
International ETF Trader:
The Real Role of Gold
I also want to focus today on just one Big Picture idea: Gold.
I think it’s vital that you recognize this key facet: Gold is essentially another currency, and its price is better described as an “exchange rate.” Currency values are always relative, not absolute. And so is gold’s.
So what I see driving the market right now is less about gold weakness and more about dollar strength.
Global capital goes wherever it can find the best balance of safety, liquidity, and yield.
Where will that capital go? Well, until the rise of ETFs over the last few years, gold was relatively illiquid. Now, it’s more liquid. But gold prices can still change very quickly in response to big moves in currencies.
My long term view: Given our weakening economy, massive government debt and political paralysis, gold is a far better bet than the dollar.
But in the short run, anything can happen. So Larry’s scenario — a plunge and then a surge — is very possible.
The key to remember: Gold is no longer just a counter-dollar asset. It’s also a currency that’s a counterweight to paper money overall.
New Year’s Resolutions
I’m not going to get dragged into a debate about these Big Picture issues …
Instead, I just want to talk about two simple New Year’s resolutions you can make to greatly improve your financial life.
Resolution #1: “I am NOT going to accept paltry yields for another year!”
While the calendar is switching years yet again, you’d never know it by looking at the interest rates posted in your favorite newspaper or at your local bank.
In fact, CDs, savings accounts and money market funds have been handing investors practically nothing for much of the new millennium.
Sure, there are reasons to believe this has to change sometime … but why wait at all? Why risk earning practically nothing for yet another year or two?
After all, there are plenty of dividend-paying stocks that are currently handing out safe, steady yields of 5 percent, 6 percent, even 7 percent and higher right now. There’s nothing stopping you from putting at least some of your nest egg to work in them immediately.
Resolution #2: “I’m not going to take big risks with my money!”
Some folks have probably been avoiding dividend stocks because they consider them “risky.”
Given the stock market’s gyrations lately, I understand why they might think that. And I’ll be the first to say that stock prices can — and do — decline.
But to protect yourself against declines, you can buy good hedges. And in the meantime, you can make excellent returns.
As an illustration, let me give you a quick rundown of how the two portfolios I call the shots on did this year …
For starters, my long-running Dividend Superstars picks had posted a 6.1 percent total return from the beginning of the year through December 19 even as the S&P 500 was DOWN 3.3 percent over the same period.
That means we outperformed the market by more than nine percentage points — something most fund managers would kill to do.
Meanwhile, over the same timeframe, my dad’s actual income portfolio — the $100,000 that I’m helping him invest in a Vanguard IRA — gained more than 4 percent. In other words, it also handily beat the stock market.
And I should note that we had practically half of dad’s money in cash the whole time. The merit of dividend investing has proven itself once again … and should continue to do so.
A New Banking Crisis
I agree with everything that’s been said so far. And I’m especially concerned about what Mike stressed — Bank of America’s tailspin and what it means in terms of a possible global banking crisis. So let me give you an entirely novel perspective on that danger.
I’m reporting this week from the Eastern front of the euro-zone meltdown, where an unfolding banking and confidence crisis could be another telltale sign of far worse things to come.
It’s hard to believe it was almost one year ago today, that here in Estonia — the small Baltic EU nation I call my second home — accepted the euro as our primary currency.
Twelve months ago the changeover from the kroon to the euro was heralded with enormous fanfare and celebration — plus a great deal of hope and hype. Parades, festivals, PR campaigns, free euro coin holders were everywhere I turned. However, many people back then also had underlying fears of the change too.
And it seems those fears were more than just valid; they were prescient.
Estonia had imposed strict self-austerity for a number of years to attain the “privilege” of adopting the euro as its currency. As a result, Estonia actually boasts the lowest debt-to-GDP ratio of any nation in the EU at just 6.6 percent!
The “reward” for this fiscal discipline: EU membership and being able to join much larger and much less responsible countries like Greece, Italy, and Portugal, and of course taking on the coveted euro. Estonia felt that by taking on the euro it would elevate the country to an equal footing with Western Europe, or at least put it at the table for discussions.
Instead, it has risked LOWERING itself to equal footing with Western Europe.
Estonia’s banking system, similar to Latvia’s and Lithuania’s, is primarily based outside its borders. Swedish, Norwegian and other Scandinavian interests control the majority of the banks. The big three here are Nordea, SEB, and Swedbank, where I personally bank. There are a handful of others, but those are the primary players.
So for all of the advancements in the Baltics due to the European Union, the tenuous nature of these banks became very apparent just a couple of weeks ago.
The Latvian bank Krajbanka failed and rattled the nation. In fact, it affected my family directly. My wife’s grandfather is a property owner in Latvia, and his business accounts were based at Krajbanka.
At first the Latvian government said accounts would be insured, much like the U.S. does with the Federal Deposit Insurance Corp (FDIC). However, as the depth of the losses became evident, and it turned out that fraud had caused the collapse, it was announced that funds may not be able to be covered by the government program.
What most concerns me is the domino effect. Krajbanka’s collapse actually followed the collapse of its sister bank — Lithuania’s Snoras Bank. Both of these banks’ problems were based on fraud and deception, and exacerbated by concerns over the EU meltdown.
Then the completely unrelated Scandinavian bank Swedbank experienced a classic “run on the bank.” Almost half of Swedbank’s 298 ATMs in Latvia had to be replenished after running out of money just days after the collapse of Krajabank.
Withdrawals rose tenfold. Swedbank raced to assure depositors and managed to quell the panic, at least for now. Meanwhile the EU uncertainty has only added to depositors’ fears of a banking or currency collapse.
Critics say that Swedbank is not even in the same league as the Latvian or Lithuanian banks, and “there is no reason to panic.” Possibly. However putting the money in the mattress for the time being is looking a lot more attractive than any of these banks to many depositors in the Baltics.
Actually many wealthier individuals are converting their money to Sterling and supposedly buying real estate, all in an attempt to avoid the euro and buy hard assets.
Gold sounds even better to me. Even though a sharp correction is always possible, Larry, Mike, Sean and I agree that the bigger move is going to be to the upside. We are unanimous in our recommendation that you should have solid long-term core holdings in gold bullion or equivalent.
Emerging Market Winners:
Mixed Blessings in Brazil
Brazil has about 50 million acres of arable land, a young population of over nearly 200 million, and a $2 trillion GDP.
Before the president’s term is over, it’s poised to overtake France, Britain and Germany. And if Europe’s future is as dire as our team believes, it could happen even sooner.
And it suffers from few — if any — of the debt diseases that afflict the developed world.
In the near term, however, recent news brings some mixed blessings:
Mixed Blessing No. 1: By some measures, the Brazilian real is still the world’s most-overvalued currency, and many local factories aren’t competitive in global markets.
So it should not come as a surprise its economic growth has stalled: It grew just 2.1 percent from the same period a year ago, a sharp decline from last year’s 7 percent-plus. Yet, its outlook is still a lot healthier than that of the developed economies, where growth is grinding to a halt, or worse.
Mixed Blessing No. 2: Another concern is that Brazilian multinational companies are bringing a lot of their capital back home.
Typically, when Brazil is going gangbusters, its big companies send capital to their branches abroad. Between January and September 2010, for example, the cumulative outflow was nearly $6 billion, according to the Bank of Brazil.
But recently, the trend massively reversed. In the same period in 2011, the central bank registered an inflow of more than $10 billion.
And Roberto Messenberg, with the Brazilian government-linked economic research institute Ipea, says that after discounting all this investment reallocation, foreign direct investment (FDI) estimates are worse than the official figures.
A time to forget about Brazil? Absolutely not! If the recent news brings further corrections, the sharper they are, the better the buying opportunities will be.
Global Forex Alert:
Asia Screeches; Dollar Zooms
It never ceases to amaze me how complacent many investors still are regarding Asia, China in particular.
The main reasons: The global scarcity of dollar liquidity, the euro-zone banking crisis, and the Chinese housing bubble.
But I’m not the only one voicing these concerns. Reuters concludes that the European banking crisis has a negative impact on Asian liquidity and funding. And the EconoMonitor has demonstrated the precarious position of China’s housing market, with the first signs of a downturn showing up as early as August, when unsold property inventories surged 46 percent from the previous year.
This is just one symptom of the global flight to quality that’s driving the euro down, the dollar up, and setting the stage for the big correction Mike and I have been warning about.
Asia Stock Alert:
The Main Reason China Is Slowing
I agree China is slowing down. And I agree its stock market could suffer from a temporary flight of capital back to the dollar.
But what’s the main force behind this slowdown? Is it a big decline in domestic demand? Or is it the financial train wreck in Europe?
For now at least, it’s almost entirely the latter.
The global economy desperately needs any engine of growth it can find, and that certainly isn’t going to come from Europe or the United States. In fact, whatever growth the world sees is going to come from the one part of the world that is still relatively healthy and growing: Asia.
That doesn’t mean Asia is immune to recessions or stock market declines. It just means that that’s where the bigger opportunities will be — not just in the near term, but for decades to come.
The Big Picture facts have not changed very much at all:
- China has a $3 trillion treasure trove of cash, and it’s NOT sharing it.
- The World Bank expects the Chinese economy to grow by 8.4 percent in 2012 and at roughly the same pace for the foreseeable future.
- China’s developing Asian neighbors — excluding Japan, Hong Kong, Taiwan, South Korea, Singapore and India — will grow by 7.8 percent in 2012, leveling off a bit from this year’s 8.2 percent expansion. (Admittedly, those figures are down somewhat from the 2011 rates, but those are still extremely strong growth numbers.)
- China is now the second-largest economy in the world, second only to the United States, and is the largest exporter in the world. China produces 9.6 percent of the world’s exports and is followed (in order) by Germany, the United States and Japan.
- On average, Southeast Asian countries have foreign reserves equivalent to 50.4 percent of their gross domestic product. That means that if exports dropped to ZERO (which is never going to happen) those countries would have enough cash to cover 8.9 months’ worth of imports.
The bottom line is that a country with low debt and lots of cash won’t feel that same pain as cash-poor, debt-burdened countries like Greece, Italy, Portugal and the U.S. That is as true of households as it is for countries.
So I wouldn’t lose much sleep over China. Instead, what the rest of the world SHOULD be worried about is that China is not going to become a global sugar daddy.
Rapid Growth Portfolio:
How to Hedge Your Bets
This has been a challenging year for a lot of investors, amateurs as well as professionals. Buy-and-hold mutual-fund type strategies have simply not worked. Trends have disappeared too and have been replaced by sideways markets that see monstrous moves — in either direction — in the blink of an eye.
In this environment, trend followers and even fundamental analysts have suffered. And I don’t see this changing any time soon.
That’s because the European Union (EU) refuses to realize the gravity of the financial mess they’re in. And unless they devalue the euro by printing euro bonds they, along with the rest of the global economies, will continue to be sucked into the black hole of recession.
So what are you supposed to do?
I’ve been a hedge fund manager for several years. So let me give you one of the hedge fund strategies that has worked for me: It’s the “long/short” approach.
In this approach, you can take advantage of the market turmoil by pairing trades. In other words, buying an asset that you feel is cheap and taking an inverse position in an asset that you feel is expensive.
Now here are two ideas using this strategy that I feel could help grow as well as preserve your portfolio in 2012.
My first idea is to bet on a rise of one major region vs. the fall of another.
You’re probably thinking Asia versus the U.S. But actually, my favorite idea in this genre is very different — Africa vs. Europe.
Over the past 10 years the African markets have outperformed the U.S. market as well as the emerging markets.
Africa is rich in natural resources. A very young population is driving a long-term rise in domestic consumption. And we see increasing capital inflows from smart money. This is all very evident. And yet very few people are even aware of it!
If Jack is right about China, yes, Africa could suffer a setback. But not for long!
In contrast, clearly the biggest basket case in the world right now is Europe — along with its equities. As the governments in Europe adopt severe austerity measures, we’re witnessing shrinking GDPs. This growth reduction will affect the corporate earnings, which will translate into lower stock prices.
My second idea dovetails nicely with everything that’s been said before: Long gold, short oil!
As Ron made absolutely clear, gold has been — and will continue to be — the safe haven of choice against depreciating currencies, falling stock markets, sovereign debt defaults and geopolitical tensions. And as a catastrophic environment unfolds, gold is bound to go higher.
I also agree that gold will NOT do well if the U.S. dollar rallies a lot further. Therefore to hedge against this risk, consider taking an inverse or “short” position in oil.
OPEC has stated that they don’t want to see oil rise much higher than $90 … as a higher price would sharply reduce the demand. Additionally, there is no growth in the developed markets, while China is trying to slow its growth. So oil will have a very hard time rising and could fall sharply as the dollar rallies.
Global Resource Hunter:
The Next Leg of the Commodities Bull Market
I love commodity price corrections! Like Larry has said repeatedly, they give us the opportunity to back up the truck and buy at bargain prices.
But let’s not forget the Big Picture: Even the sharpest corrections are taking place in the context of a massive super-cycle commodities bull market. And this past year brought a good illustration of that trend.
Here’s a chart showing select commodities and the S&P 500
You can see that both gold and crude oil were recently outperforming the S&P 500 for the year, while agriculture and copper were both laggards.
Looking ahead to 2012, we expect plenty of volatility. But as long as the big uptrends in commodities don’t break, these pullbacks will be buying opportunities.
A commodities outlook for 2012 is also a geopolitical outlook; I can’t remember a market in my lifetime that was so dependent on political forces rather than fundamentals.
As Martin cited at the outset, going into the new year, we are starting off with far more questions than answers …
- Will Europe pull its financial fat out of the fire?
- In the United States, will Democrats and Republicans be able to find common ground to get the country moving forward?
- Are the central banks of the world going to cry havoc and let slip the dogs of inflation — or will they sit on their hands and let austerity strangle a wobbly economic recovery?
The answers to these questions will help define the big trends for commodities in 2012. Many people think they know the answers; but unless they’ve bugged Ben Bernanke’s limo, I don’t see how certainty on these issues is even possible.
We have a clear, broad vision of the future. But I think I can speak for everyone on this great team with this conclusion:
The only thing we know with absolute certainty is that you must expect the unexpected — both good and bad.
So you have to stay flexible and nimble.
But that should not be difficult at all. We’re in touch with you every single day of the year. As soon as we see important changes, we will let you know almost instantly.
We don’t always agree on the all the particulars. And we’re not always right. But the combined wisdom of this team — and the tremendous value it provides — is eclipsed by none that I’ve ever known.
Best wishes for a wonderful holiday season!
The entire Weiss Research team
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