However, Pimco and Gross are notoriously flaky in their public statements and behavior. In the wake of the financial crisis, it was Pimco who clamored for increased government spending and for a bailout for Freddie and Fannie. Pimco invested heavily in those higher yielding bonds on the basis that the government would bail out bondholders. Only a few years later, we have Gross at the other end of the spectrum, noting the obvious about our deficits and national debt.

So we should all take Gross’ comments at face value and dump our bonds?

The picture shows TLT and the CCI (Commodities). Interesting how Bonds have put in another bottom and have continued their pattern of higher lows. We also note the negative correlation between Bonds and Commodities. Its not a perfect correlation but its an important indicator. The fact that Bonds have put in another bottom and Commodities are well above their long-term moving averages, is reason why we are near-term cautious on Commodities.

The bottom line is one has to study the charts, sentiment indicators and macroeconomic factors rather than listen to so-called experts like Bill Gross, Warren Buffet or any Federal Reserve member. For all we know, Gross could have sold his holdings six months ago and went long days after his public statement.

The inflation trade is raging but Bonds have put in a low. The US Dollar is reaching an oversold extreme in terms of price action and sentiment. This could be the beginnings of a pause or correction in the Commodities bull market. For more analysis and insights, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

Yields have been plummeting. But some of the action is almost certainly due to the Federal Reserve once again buying Treasuries. Since August 19, the Fed has bought $40 billion in government bonds.

But the Fed has no influence over foreign buyers of U.S. Treasuries. And these purchasers have been coming on strong.

Data last week showed that foreigners bought $117 billion in net Treasuries during August. This is the second-highest monthly total of all-time. Just a hair under the record $118 billion purchased by foreigners in November 2009.

Foreign buying of U.S. government debt has been in an uptrend since early 2009. Apparently the death of the dollar isn’t so convincing abroad.

Here’s to help from abroad,

Dave Forest
dforest@piercepoints.com

Copyright 2010 Resource Publishers Inc.

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

Since the market topped in April and has since been trading sideways in this rather large range, everyone has small positions at work but waiting for a decisive move before fully committing to one side. There could be a few opportunities in the coming days using bonds, the dollar and the SP500 if all goes well which I explain below.

Lets take a look at the charts…

SP500 – SPY ETF, Daily Chart

There has been a lot of talk about a sharp rally if the SP500 could break the 1130 level or the neckline everyone is talking about. Well this week Obama was on TV and the market rallied into that, then again after. I don’t really thing investors or traders were buying things up as he said the same boring stuff he always says without anything new. I feel there could have been another force at work, which we can discus another time .

Anyways, the market pierced those resistance levels and I’m sure a ton of traders have switch their view on the market from bearish to bullish. While I prefer to trade with the trend I can’t help but feel this market is still range bound, which is why I am still bearish at these shakeout levels. The SP500 did break resistance BUT the following candle did not close above the breakout candles high to confirm the move.

That said, the market is now trading back down at support and the next couple of days I’m sure will shed some like on the direction.

20 Year Bonds – TLT Fund, Daily Chart

We have seen the bond price pullback in a bull flag formation. It touched support before bouncing to break short term resistance as it looks to have started another rally. The chart below overlays both the candlesticks of the bond price and the SP500 which is the white line. You will notice they have an inverse relationship. If bond prices continue to rally then lower SP500 could start to rollover.

US Dollar – UUP Fund, Daily Chart

The dollar has fallen sharply the past 10 trading session and it looks to be oversold for a couple reasons. The past couple days the price has dropped straight down and gapped lower. This recent drop has reached a gap window which will act as support and could provide a tradable bounce in the coming days depending how things unfold.

Mid-Week Market Analysis Conclusion:

In short, the SP500 is flirting with resistance and has yet to confirm the breakout. Bond prices look to be headed higher which will makes me think equities could start to sell off any day now… It’s also important to note that the big banks GS and JPM shares have been under pressure and they tend to lead the broad market. Another point to add is the fact the oil has not rallied even though the dollar dropped like a rock? What happens if the dollar bounces? Could oil finally start its next leg down?

Gold and silver continue their steady grind up. The price action reminds me of the 2009 Nov –Dec move. Once that train de-rails its going to have a sharp correction…

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

Chris Vermeulen
www.TheGoldAndOilGuy.com

Thanks to all of you who checked in to ask about my wellbeing during the extended absence over the last two weeks. Everything is indeed fine. The only issue being a flat-out, cross-country marketing trip for Sunward Resources, our big focus around the Notela shop these days.

That’s now in the proverbial can. On with the analysis.

And there’s certainly been no shortage of news to analyze lately. One of the biggest items being the Federal Reserve’s announcement that the agency will restart its buying of U.S. Treasury securities.

We haven’t seen this game for a while. In the wake of the financial crisis, the Fed stepped into the Treasuries market in an attempt to keep interest rates low. Between April and October of 2009, the Fed bought $300 billion worth of U.S. government bonds, notes and bills.

Then they stopped. At the time the word was things were now secure in the bond markets. Private buyers were stepping in, eliminating the need for government intervention.

We went nearly 10 months without any significant Fed bond monkeying. (In the meantime, the agency forayed into the mortgage-backed securities market, buying $1.1 trillion in MBS.)

But it appears the good times are back off again in the bond market. Over the last three weeks, the Fed has made good on its promise and snapped up $9 billion in new government bond purchases. As the chart below shows, the trend is once again marching upward.

The interesting question is: why?

A year ago when the Fed intervened in bonds, yields were running high. The 2-year security stood near 1% yield. The 10-year was 3.8%.

Today, the 2-year bond is half that level. The 10-year yield is 30% lower.

Given that credit flows are still stunted in the U.S., the Fed probably wouldn’t mind seeing yields lower still. But this isn’t the main reason the agency is taking the drastic step of direct bond market tinkering.

A more likely explanation is a covert bailout of the financial community.

Over the last two years, a lot of investment money has flowed into U.S. government bonds. So far this fiscal year, the American public has purchased $1.15 trillion worth of Treasuries. In Fiscal 2009, public purchases totaled a whopping $1.75 trillion.

Much of this was safe-haven buying, as investors looked to wait out the economic storm that touched off late in 2008. With things today looking (somewhat) better on the world economic stage, some Treasuries holders are now selling and moving back into stocks, commodities and other higher-return investments.

An increase in such selling would almost certainly send bond prices lower (and therefore yields higher). Something the Fed doesn’t want to see. To compensate, they are stepping in with increased buying to absorb any paper hitting the market.

This is a new step in America’s money “shell game”. Initially, the government leant money directly to troubled financial institutions. Those institutions in turn leant the money back to the government, by buying Treasuries. Now the government (via the Fed) is encouraging money to flow back again to the private sector by giving them fresh cash for their bonds.

Here’s the big takeaway. Normally, all these flows of funds should move interest rates up and down. Significantly. But the government is orchestrating things, using the national balance sheet to mute any interest rate signals. The reason things look relatively orderly in the bond markets even as we go through massive cycling of dollars.

An important note for anyone expecting the bond market to provide a signal of impending financial troubles. This “early warning system” may be broken.

Here’s to listening for the right chimes,

Dave Forest
dforest@piercepoints.com

Copyright 2010 Resource Publishers Inc.

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

BY JASON SIMPKINS, Managing Editor, Money Morning

Bonds have provided a welcome safe-haven for investors seeking shelter from the financial maelstrom of the past two years. But now many analysts fear bonds have entered bubble territory and pose a rising threat to their holders.

The amount of money flowing into bonds is “probably not sustainable on a consistent basis” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc., told Bloomberg News. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell.”

Bond funds have attracted more investment than stock funds for 31 straight months, which matches the record streak that ran from 1984 – 1987. Bond funds attracted $559 billion in the 30 months through June, according to the Investment Company Institute (ICI). Meanwhile, investors withdrew $209.4 billion from U.S. stock funds and $24.4 billion from funds that buy foreign stocks.

“No one seems to want very risky assets but they still want some kind of yield,” Toby Nangle, the director of asset allocation at Baring Asset Management in London, told Bloomberg. “People generally view corporate debt as not a terribly scary place to be.”

Indeed, while stocks have boomed and busted since 1997, income-oriented investments have climbed steadily, as you can see in this chart of the venerable Vanguard Wellington total return fund (VWELX). The fund kept pace with pure stocks in the stirring run from 1997 to 2000, but then kept on going during the tech bear market of 2000-2002. Bonds were thrashed in the credit bear market of 2008, but have recovered briskly since. In fact, the Vanguard Wellington bond fund has outstripped the Standard & Poor’s 500 Index by six-times since 1997.

But bonds’ exhilarating run-up now has some analysts uttering the dreaded “B” word: Bubble. These analysts say that the surge in bonds is comparable to the technology bubble of 10 years ago.

Indeed, the amount of cash that flowed into bond funds in the two years through June approaches the amount of money that went into stock funds during the dot-com bubble at the start of the decade. Investors poured $480.2 billion into bond funds in the two years through June, compared to the $496.9 billion that went into stock funds in the period from 1999 – 2000.

It’s not just corporate debt that’s raising eyebrows, either. The similarity between the past 10 years’ action in U.S. Treasuries and the tech stock mania that inflated the Standard & Poor’s 500 Index from 1990 to 2005 “should cause anxiety, especially when one considers the high correlation and what it suggests about plausible future trends for bonds,” according to Citigroup Inc. (NYSE: C) strategist Tobias Levkovich.

The coefficient of determination between the two is a whopping 87% according to Citigroup research. The higher that number is, the more closely the two data sets move in lockstep.

Treasuries soared yesterday (Tuesday) with yields on the 30-year and 10-year notes falling to their lows levels in 16 months. The yield on the two-year note approached record low of 0.4547%, reached Aug. 20.

The government yesterday sold $37 billion of two-year securities, drawing a record low yield of 0.498%. The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions.

“In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time,” Lekovich said in an Aug. 20 radio interview with Bloomberg. “I feel the same way when I look at all the money going into bonds.”

Still, for bonds to go bust, a major shift in investor sentiment is needed and few analysts believe investors’ risk appetite will return anytime soon.

“The technology bubble that popped beginning in 2000, the liquidity crisis that began in 2007 and 2008/2009’s deep recession have provided dramatic illustration over the last 10 years that markets hold risk,” Franklin Resources Inc. (NYSE: BEN) said in a report on its Web site. “With the benefit of hindsight, some investors might have chosen to avoid equities during the last decade. But many investors are turning their backs on equities now – after one of the worst decades the stock market has ever seen.”

And while investors remain skittish about stocks, the U.S. Federal Reserve continues to support the bond market. The Fed will purchase about $18 billion of U.S. debt by the middle of September using proceeds from maturing mortgage bonds. The central bank bought $1.35 billion of Treasuries yesterday, taking its total since beginning the program on Aug. 17 to $7.51 billion.

“Right now, the Federal Reserve is purposefully engineering the rally in bonds to lower mortgage rates and funnel cheap credit to consumers, banks and businesses who want it,” says Money Morning Contributing Editor Jon D. Markman.

“What the consequences will be, and whether this strategy of unprecedented monetary policy support will even work, are questions that will be answered in years to come,” he added. “For now, all we can do is identify these trends and position ourselves to profit from them while they last. That’s why I’ve recommended a selection of bond exchange-traded funds (ETFs). Eventually, though, this latest bubble will burst.”

Indeed, there eventually will come a time when investors regain confidence and return in force to the stock market. But if they wait too long, they risk missing a potential rally.

Jack Ablin, who helps manage $55 billion as chief investment officer at the Chicago-based Harris Private Bank, says institutions are likely to lead a rebound in the stock market ahead of retail investors.

“What will happen is that the market will rally first, and retail investors will eventually jump back in,” he told Bloomberg.

John Sweeney, an executive vice president at Fidelity Investments, cautioned: “Someone who is waiting for stability is likely to miss the upside.”

[Editor's Note: Are you seeking investment protection in the bond market? Have you adjusted your strategy to involve fewer equities and more bonds? Do you think there is a bond bubble forming - similar to the dot-com bubble - that will take some investors by surprise? If you haven't dove into fixed-income securities, then what stocks or other instruments have you included in your portfolio for safety measures?

Send your thoughts, questions and concerns to mailbag@moneymappress.com.

It should go down as a historic moment…

But hardly anyone noticed.

The same day the health care bill passed, U.S. government debt lost its “risk-free” status.

That day, for the first time in over a generation, the U.S. government was a worse credit risk than a U.S. company.

Specifically, investors were willing to accept a lower interest rate to lend money to billionaire Warren Buffett’s company, Berkshire Hathaway, for two years than to lend to the U.S. Treasury for the same period of time.

It shouldn’t be possible… after all, the government prints the money… how can it be less likely to pay off its debts? But it makes sense on the other side, too. You can easily see how billionaire Buffett’s company is less of an actual credit risk than our government, which is on the hook for tens of trillions of dollars of promises.

It’s not even just the world’s richest man who’s grabbing lower interest rates than Uncle Sam… Heck, even home-improvement store Lowe’s can borrow money at a cheaper rate than the U.S. government.

Here’s how my good friend Porter Stansberry explained it earlier this week:

Congress says by spending an extra $1 trillion on health care over the next 10 years and raising taxes substantially (but only on the wealthy, of course), our annual deficits can be reduced… This has to be one of the most outlandish claims we’ve ever seen politicians make. It will so surely end up being a financial disaster that the bond market has actually begun to price government obligations at higher interest rates than highly rated private companies…

We believe the debt of nearly every government in the world will soon trade at a significant premium to the best-run private companies.

The reason is quite simple: As long as they don’t have to pay for it, people will always vote for more government spending. That leads politicians to implement strategies that shield the true costs of government spending from the majority of voters – using debt and steeply progressive taxes. Today, roughly half of all Americans pay zero federal income taxes. As a result, it’s not hard to win an election promising more things, like “free” health care.

This isn’t really a political problem. It’s actually an economic problem. There’s a structural asymmetry between the people who approve the budgets (through elections) and the people who have to finance the budgets. Eventually, this will lead to a complete fiscal collapse. And it’s going to happen a lot sooner than people think because the bondholders aren’t stupid. They can see where the trend is heading. And that’s why, as of today, it costs OBAMA! more to borrow money than Warren Buffett.

The problem is, once creditors begin to fear more and more paper will simply be printed to pay these debts (and, of course, that’s what will happen), interest rates will rise. And they could rise suddenly. That would force governments to spend vastly more money on interest payments than they expect. That’s the big problem right now in Greece, for example. I believe the U.S. will be spending close to 25% of its income tax receipts on interest by 2015. That’s simply not sustainable.

The Obama administration believes the health care bill is “historic.” Obama meant historic in a good way. The bond market recognizes it’s historic in a bad way…

The passing of the legislation marked the first day in decades the bond market thought highly rated corporate bonds are a safer bet than the people who print the money.

The market decided a bet on bonds from our government is no longer risk free… It was a historic day.

The way to play it is simple, and you’ve heard it before… but it’s right. Sell government bonds and buy gold (the currency that can’t be printed).

Good investing,

One of the largest economies is about to declare bankruptcy.

How do I know? Here’s what fund manager Takahiro Kawase had to say…

“The big change for us is that there’s no new money to invest, so we may need to be a seller.” With $1.37 trillion under management, Takahiro Kawase is the world’s largest fund manager…

Uh oh. This is bad news. Today, I’m going to explain how this happens… and show you how to profit from it.

Kawase runs the Japanese public pension fund and has sole discretion over its asset allocation. This fund is enormous… bigger than the 2008 GDPs of countries like Australia, India, and Mexico. It is almost seven times bigger than top U.S. pension fund CalPERS, according to Bloomberg.

Kawase’s favorite investments are Japanese government bonds. He has 70% of his portfolio in them. Needless to say, Kawase is the world’s largest investor in Japanese government bonds.

Unfortunately, Kawase has to give up investing in Japanese government bonds and begin selling them…

Japan’s aging society is the reason. Millions of Japanese are entering retirement and drawing pensions, Kawase has to pay their pensions. Meanwhile, fewer Japanese are entering the workforce, so Kawase’s pension fund receives less money.

The result is, Kawase will have to start liquidating some of his Japanese government bonds and says his fund will be a net seller of bonds for the next few years.

If you thought the U.S. government was heavily in debt, you should see Japan. The Japanese government’s debt has now reached $10 trillion… almost the same debt load as the U.S. government, except America’s GDP is almost triple Japan’s. Japan now has the world’s highest debt-to-GDP ratio of any country in the world except Zimbabwe, according to the CIA World Fact/book.

Dylan Grice, an analyst at Societe Generale, says about a quarter of Japan’s total debt load – $2.36 trillion – will reach maturity in 2010. In other words, the Japanese government has to find new investors for $2.36 trillion in debt – about 45% of its GDP – over the next nine months.

This huge debt rollover comes at the same time as the world’s largest investor in Japanese government bonds has said publicly it won’t buy any more… (Another huge investor in Japan also said recently it’s considering selling Japanese government bonds over the next few years.)

I think the Japanese government is heading for a credit crunch either this year or next year. It won’t be able to roll over its bonds, interest rates are going to rise to attract investors, the government won’t be able to afford the interest, the debt load will get worse… and before anyone can patch up the problem, confidence in Japan’s credit will evaporate. It’ll be a nightmare a hundred times worse than the subprime crisis…

FXY is the symbol for the Japanese yen fund… but the easiest way to place this trade is to buy YCS. It’s a double-short Japanese yen fund that rises 2% for every 1% the Japanese yen falls.

Tom

P.S. This government crisis has huge implications for the Japanese stock market. In today’s issue of DailyWealth Premium, Steve Sjuggerud explains how Japan’s credit crisis will affect Japan’s stocks… and what you can do to take advantage of it… To access DailyWealth Premium for only $5 a month, click here.

It should be pretty clear that I’m bearish on the bond market. The massive budget deficits and debts we’re racking up should hammer Treasury prices. So should the steadily growing concern about the credit quality of sovereign debts.

In fact, Moody’s Investors Service just weighed in again on that front. It warned that both the U.S. and the U.K. are “substantially” closer to losing their AAA debt ratings. A key reason? Debt servicing costs — ongoing interest and principal payments — are surging!

By 2013, the U.S. will have to spend more than $1 of every $10 in revenue on debt service under Moody’s “baseline scenario.” The agency’s “adverse” scenario is even worse — calling for 15 percent of revenue going towards covering our debts. And we all know the ratings agencies have historically been too timid when it comes to their predictions. If anything, things will turn out worse than projected!

Now I want to talk about yet another challenge for the bond market. It’s a traditional one — better economic data.

Recovery May Be Bought and Paid for in
Washington … but It’s Gathering Steam

Let’s be up front about one thing: This is not the kind of blockbuster economy we had in the late 1990s. It’s an economy whose growth has been bought and paid for in Washington — using borrowed money! That means it will eventually collapse under its own weight.

But that hasn’t happened yet. Instead, all the latest data suggests the recovery is gathering steam …

• Housing starts and building permits are holding steady in the 550,000 to 650,000 range, rather than deteriorating further. This fits with the major housing market bottom call I made almost a year ago.
• Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It’s now at a 14-month high.
• Retail sales rose 0.3 percent, while “core” sales excluding autos climbed 0.8 percent. Both figures topped estimates.
• Even consumer credit rose by $5 billion in January, the first monthly rise in a year.

So on TOP of massive budget deficits … on TOP of the biggest rise in U.S. debt ever … and on TOP of increasing sovereign credit risk, you have an economic rebound underway. That’s going to put even more pressure on bond prices, and help to push interest rates higher.

Pressures on bond prices are building and bound to force interest rates higher.

I think that’s especially true now that the Federal Reserve has just weighed in AGAIN with a pledge to keep short-term rates at “exceptionally low levels” for an “extended period.” When the economy recovers, the Fed is expected to start normalizing policy. It’s not — and it won’t do so anytime soon. So I believe the bond market will do it for Chairman Bernanke instead, by driving long-term rates higher!

Some Bond Market Targets

Just exactly what kind of move in bonds do I foresee? Let’s put some targets out there!

Long bond futures were recently trading around the 119 price level. I think we’re headed to the low 100s by the end of 2010.

What about the benchmark 10-year Treasury Note? The yield there has been hanging out in the 3.6 percent – 3.7 percent area for a while. That won’t last. I expect to see the high 4s later this year.

As for other long-term rates, like those charged on 30-year fixed mortgages, they’re going up, too. I’d lock in the 5 percent-and-change rates available right now … before they’re gone! You’re going to be looking at something in the 6s by this time next year.

Bottom line: The days of cheap, ultra-low rates are behind us. It’s time to pay the fiddler!

Until next time,

Mike

by Martin D. Weiss, Ph.D. 03-01-10

Originally Published Here

We have just ended an online video conference to brief investors on major events that could forever change your future.

We made nine new predictions to pinpoint, as accurately as possible, how and when that future is likely to unfold.

We showed how to build — or rebuild — an entire portfolio with a disciplined approach that gives you the specific percentages to put into each major asset class right now — stocks, gold, commodities, bonds, and currencies.

And unlike any of our prior events, we took questions from a live audience.

Here’s the transcript …

Nine Shocking New Predictions for 2010-2012
With Martin Weiss, Richard Mogey and Monty Agarwal
(Edited Transcript)

Martin Weiss: The forecasts we made last year are striking at an accelerating pace, as three new and dangerous crises have raised their heads:

First, the White House has announced federal deficits that are far worse than any prior estimates — $1.6 trillion for 2010 … $1.3 trillion for 2011 … and continuing massive deficits for the entire decade.

This is already sending shock waves of fear throughout the globe. It has prompted Moody’s to issue a stern warning about America’s credit rating. And it’s raising the specter of a global collapse in long-term sovereign debt. In a moment, we’ll take a look at the enormous implications this has for your finances and investments.

Second, global investors are attacking. They’re scanning the globe for the weakest links — the countries with the biggest deficits — and they’re dumping that country’s assets. First, they attacked Greece. Then they attacked Portugal and Spain.

Inevitably, they will also unleash their fury on the one country in the world with the biggest deficits of all: The United States of America. And in a moment, we’ll see how these attacks now threaten every dollar you have saved and invested.

Third, we have an unprecedented crisis of confidence among U.S. taxpayers and investors. For the first time in our lives, millions of U.S. citizens are taking to the streets in protest — openly rebelling against Washington! Millions of Americans are fed up with bungling politicians, bureaucrats, and bankers.

Investors are saying:

“You tricked me once — into buying tech stocks with no earnings; those stocks crashed and cost me a bundle. You tricked me twice — into buying real estate and that cost me even more.

“Now, I’m madder than hell and I will never trust Washington or Wall Street ever again! I must have an objective scientific, unbiased way to protect myself and make money.”

So, the questions we must address now are twofold:

1. How can you know, with confidence, which asset classes offer you the greatest profit potential moving forward?
2. How can you create a bullet-proof portfolio that gives you world-class profit potential no matter what Washington and Wall Street do next?

For the answers, I turn to the Foundation for the Study of Cycles, a nonprofit research think tank, founded 70 years ago in the wake of the Great Depression.

This Foundation was sponsored by the head of the Smithsonian Institute, by the chairman of the Carnegie Institution, by the founder of the National Bureau of Economic Research, and by the founder of Fidelity Investments. Former President Hoover and former Vice President Charles Gates Dawes also supported the Foundation.

Since 1940, the Foundation for the Study of Cycles has studied the recurring patterns of history — cycles.

Since 1950, it has identified cycles that predicted — well ahead of time — nearly all major market turns in stocks, bonds, and commodities.

And since 1971, when the gold standard and fixed exchange rates ended, it has done the same for foreign currencies and gold.

Joining us today is Richard Mogey, Research Director of the Foundation.

Richard, you are the Research Director of the Foundation and have been with them for many years.

Richard Mogey: Twenty-two years!

Our research is based on the simple fundamental principle that all of nature — and most of history — is driven by regular cyclical patterns.

Martin: But identifying those cycles is not so simple.

Richard: No. We have sorted through historic data going back 5,000 years, and we have put together data series on most major markets going back at least 300 years.

Martin: And back in the 1960s, long before Microsoft and PCs, you used Fortran programs on mainframe computers to find the most critical cycles for each major market — all of which you’ve published, starting a half century ago.

Richard: Yes. And you asked me recently how accurate the Foundation’s cycles have been in forecasting stocks, gold, etc.

Martin: But to answer that question, you didn’t have to recreate hypothetical scenarios or engage in 20/20 hindsight.

Richard: No. I just went back to the archives of our printed publications. They were all published in real time. I have them right here.

Martin: Great. So what’s your answer?

Richard: The Foundation’s cycles have accurately identified nearly every major shift in market direction … in every one of these asset classes … in advance … since 1971.

Martin: We’ll look at those in a moment. But right now, let’s focus on the main questions readers are asking on our blogs: What are the major market turns ahead? And how can investors build a sturdy portfolio designed to convert those market turns into wealth?

Richard: I will answer the first question. But I am a scientist — not an investment analyst. So I’m not the right person to answer the second question.

Martin: Which is why I’ve also invited Monty Agarwal to join us. Monty has run three global hedge funds, and he has done so without a single losing year. He has just written a book on what the hedge funds have done wrong — and what they must do to get it right.

Monty Agarwal: Martin, the key is to buy the right market research. And of all the Doubting Thomases in the world, I am probably one of the most skeptical. I always conduct my own personal due diligence before I buy anything. You’ve asked me to analyze the Foundation’s research, and I’ve done so with great interest.

The Foundation’s accuracy rate is far superior to any other approach I’ve ever seen. Its work is not perfect, of course. There are a few misses. But the Foundation’s cycles pinpointed, well ahead of time, the onset of the giant bull market that began in 1980.

Martin: You’re talking about the stock market.

Monty: Yes. The Foundation predicted the timing of the Crash of ‘87. It predicted the timing of the bear market of 2000-2002. It predicted the market’s rise through 2007. And it nailed the top of the market prior to the big plunge in 2008 …

Richard: which, by the way, was a market call we published in Barron’s online.

Martin: Is this the Barron’s article where you called the big plunge in 2008?

Richard: Yes.

Monty: Not many people caught that decline, let alone to the month.

Plus, in March of 2009, the Foundation’s cycle work anticipated an intermediate rally.

Prediction #1
Starting this year, most U.S. stocks are
likely to fall in a zigzag pattern for
nearly three long years!

Richard: And now, we have a new signal. Most U.S. stocks are likely to go down. And they are likely to fall — in a zigzag pattern — for nearly three long years.

Monty: In the past, almost every recession and bear market in this country delivered solid values to investors. We saw price-earnings ratios (P/Es) in single digits. We saw great stocks selling for five or six times earnings. But this time, the government was so panicked, it never let that happen. And now P/Es are already back up again to grossly overvalued levels.

Richard, you’re talking about giant swings. For a long-term buy-and-hold strategy, those swings are a disaster. But with a more flexible strategy, they can generate giant profit opportunities — in both directions.

Martin: Can you be more specific?

Monty: Go back 10 years and assume you had been following the Foundation’s cycle research before 2000. You could have sidestepped the Tech Wreck that destroyed so much wealth. Plus, you could have pulled out a 37 percent profit from that decline. Then, if you followed its research in 2003, you could have moved back into the S&P and come out with a 146 percent gain from 2003 to 2009.

Martin: What about more recent years?

Monty: Same pattern. If you had used its research published before 2008, instead of the wipe-out losses that most investors suffered, my data indicates you could have made a 37 percent profit. And in 2009, based on the Foundation’s call for an intermediate rally, you could have made another 42 percent profit.

Martin: And going forward?

Monty: Do not expect a similar pattern.

Martin: Why not?

Richard: Because if our cycle work is even halfway right, conditions will change, and investors could make as much — or more — money in other asset classes.

Martin: Instead of stocks?

Richard: Gold! Never before in the history of civilization have we seen a world power like the United States with its finances in such disarray as they are now.

Martin: We’ve seen world powers rise and fall — from Rome to Spain to Britain. And we’ve seen them incur big debts after their decline.

Richard: Yes, but now we have a country that is both the dominant world power and the world’s largest debtor at the same time. This is a massive force that could propel the price of gold.

Martin: When and how far?

Prediction #2
Gold will skyrocket far higher than
$2,000 per ounce by the end of 2011.

Richard: By the third or fourth quarter of 2011, the price of gold should be far higher than $2,000 per ounce.

Martin: Why is this so shocking?

Richard: Because it’s going to happen in the midst of a sinking stock market and economy.

Monty: I don’t think that should come as such a surprise, either. In the last few years, despite two big stock market declines and despite the worst recession since the Great Depression, gold quadrupled in value.

No one knows for sure what the future will bring. But I would take the Foundation’s gold forecast very seriously.

Its cycle work predicted the great bull market in gold of the 1970s.

It predicted gold’s downturn starting in the 1980s.

And it would have got you back into gold in 2001 … urging you to hold on ever since.

Richard: This has been — and should continue to be — one of the greatest profit opportunities of all time.

Martin: We have a question on this that’s very relevant …

Audience: My name is Elizabeth and I am from Fort Lauderdale. My question is: Much has been talked about gold, but what is your opinion on investing in silver?

Richard: In terms of timing, it never ceases to amaze us how closely all precious metals track gold — not only silver, but also platinum and palladium. The differences are strictly an issue of how far each metal rises or falls. Between now and 2012, there will be periods when silver and other metals do better than gold. But when all is said and done, you will find that gold is, by far, the single best performer because of its value as a hedge against the dollar.

Martin: What’s behind this cycle in gold?

Richard: It parallels the cycles in the U.S. dollar. And for the dollar — or for proxies of the dollar — we have cyclical data going all the way back to 1680.

Martin: Before the dollar even existed!

Monty: I have scrutinized the Foundation’s dollar research just as closely as its stock market research.

Its cycles predicted the dollar’s plunge from 1971 to 1980 … the dollar’s surge peaking in 1985 … the dollar’s decline bottoming in 1992 … the dollar’s rally through 2001 … and then, the big plunge since.

Richard: And now, the dominant cycle in the dollar is forecasting the next major move.

Prediction #3
The U.S. Dollar Index will begin to sink in 2010

and will not hit bottom until early 2012.

Richard: A major, new dollar decline, beginning in the third quarter of 2010 and ending in early 2012.

Monty: Currencies are not a beauty contest. They’re an ugly contest. And among many ugly currencies, the dollar usually wins the prize — as the ugliest.

Richard: The real decline in the dollar — and all currencies — will show up more clearly in the doubling of the value of gold we just talked about. Measured against gold, the dollar’s purchasing power will fall by half or more, depending, of course, on the intensity of the global selling that hits the greenback.

Martin: What about oil and other commodities?

Prediction #4
Most commodities will not

make new, all-time highs!

Richard: Oil will not return to its all-time highs. Unlike gold, it is driven less by currency disasters and more by consumer or industrial demand. And we simply do not see high demand being sustained through this period.

Martin: So it would be a mistake to overinvest in commodities right now.

Monty: I agree.

Martin: Most commodities won’t surge because …

Prediction #5
The U.S. economy will suffer a severe
double-dip recession in 2011!

Richard: Because the U.S. economy will sink into another recession.

Martin: Similar to the recession of 2009?

Richard: Probably worse!

Martin: Again, the timing question: When?

Richard: Not right away. Our cyclical data on GDP and on consumption points to a material improvement in the U.S. economy through the first two quarters of 2010.

But starting in the second half of 2010, GDP growth will start to sink fast and we could see negative growth by the beginning of 2011. The worst period for the economy will hit in the fourth quarter of 2012.

Monty: You don’t have to look very far to see the reasons: You have unemployment holding at extremely high levels. You have scarce capital, with lending to households and corporations drying up. You have consumers, businesses, and now even governments strapped for cash.

Martin: That’s an understatement! Look at what’s happening in Greece, Spain, Portugal, and even the UK — and that was despite all the stimulus and bailouts …

Monty: No! Because of all the money they’ve spent on bailouts!

Martin: Right.

Monty: Remember. These are no longer just private banks or automakers going under. They are entire countries!

Martin: Plus, you don’t have to connect many dots to see the consequences of a recession. Right now, the Obama administration says the 2010 federal deficit will be $1.6 TRILLION. Care to guess what the government forecast was for this same deficit back in 2008?

Monty: A lot less, I presume.

Martin: Mike Larson looked back at the forecast made by the Congressional Budget Office (CBO) just two years ago, in 2008. The CBO predicted that the U.S. deficit for this year — for 2010 — would be $249 billion. Now, it’s coming in at $1.6 TRILLION, or over six times more than they forecast.

Monty: They didn’t expect the deep recession that struck in 2009.

Martin: Much like they’re not expecting a double-dip recession to strike next year! My point is that, just like their forecast was dead wrong for this year, it could be dead wrong again in coming years.

Prediction #6
The U.S. budget deficit will
surpass $2 trillion in 2012!

Look at 2012! For that year, the Obama administration is making some aggressively optimistic assumptions for the U.S. economy and forecasting a deficit of $828 billion. Instead, with the economy sinking, it could be over $2 TRILLION!

Monty: Some people may think these huge blunders merely reflect the government’s forecasting errors. But it’s much more than that. Politicians know they’re rigging the numbers. And they’re swearing on a stack of Bibles that it’s an honest estimate.

Prediction #7
Bond prices will plunge because of
out-of-control deficits and a sinking dollar!

No matter what, the big risk is that global investors will sell U.S. dollars wholesale. And they can’t sell them in a vacuum.

Along with the dollars, they also have to sell the assets where they’re holding the dollars — especially long-term Treasury bonds. So you could see a massive plunge in bond prices.

Martin: Translate that into bond yields.

Monty: You’ll see a major spike upward in yields. That could give investors a huge buying opportunity to lock in those higher yields for years to come — provided, of course, price inflation does not run rampant and the U.S. government is still a safe bet at that time.

Richard: The U.S. government — and, indeed, America — faces a great historic test: A test of our power — and our willpower — as a nation.

Martin: Please explain what you mean by that with respect to cycles.

Prediction #8
2012 will be the year of maximum

peak tension in society!

Richard: The great test for our country — an Armageddon of sorts — will come in the year of maximum turmoil in the financial markets, the time of peak tension in society: 2012.

Martin: I assume this has nothing to do with the movie by that name, based on ancient forecasts.

Richard: Of course not! We’ve had 2012 pegged as the year of the “Perfect Storm” since 2002.

Martin: What’s the basis of the perfect storm?

Richard: A convergence of cycles! We have the dollar cycle, stock market cycles, consumption cycles, and GDP cycles all bottoming in this same approximate time frame — between late 2011 and late 2012. Plus, 2012 is also smack dab in the middle of a sweeping transition already under way in our longest term and probably most important cycle of all.

Martin: Which is?

Richard: The 500-year geopolitical cycle. We’ve mapped it all the way back to 670 BC. It is a broad, far-reaching shift in power, wealth, and money — from East to West, or, as is the case now, from West to East.

Martin: We’ve talked about that before.

Prediction #9
2012 will bring a massive wealth shift

to new ones that are created!

Richard: Yes, but I want to add that we’re not only talking about a power shift from West to East. We’re also talking about a major wealth shift from old fortunes that are destroyed to new ones that are created … from countries, companies, and families that were dominant for many decades to new ones that replace them on the other side of this massive upheaval!

Martin: Provided they are well prepared ahead of time.

Monty: And provided they use reliable signals with prudent risk control. No matter what you invest in or how you invest, the real possibility of losses is something you always have to be aware of.

Martin: Yes! On our blog, though, many readers tell us they make decisions largely based on gut, which implies not only analysis, but also intuition — and emotion. They admit that, more often than not, that’s their basis for deciding how much to invest in each asset class and when.

What would be your standard allocation to those five asset classes, based on your analysis of the Foundation’s work?

Step 1
Diversify Across All FIVE Asset Classes

Step number one is to diversify across all FIVE asset classes — stocks, precious metals, other natural resources, bonds, and currencies.

Martin: Years ago, it would have been virtually impossible for the average investor to do that. You’d need a lot of money or you’d have to take a lot of risk — with futures, in the currency markets.

Monty: Today, all five of these asset classes are readily available to average investors through hundreds of exchange traded funds — ETFs.

Martin: And, of course, you can also choose from thousands of mutual funds, tens of thousands of individual stocks, hundreds of thousands of bonds.

Monty: Yes. But this step alone — diversification — puts you heads and shoulders above investors stuck in stocks or bonds alone.

Audience: The subject is diversification. The more I hear that, the more it bothers me. Because that tells me that if I am investing in, say, five different major areas, I will probably have four losses and only one win.

Monty: Let me address that by telling you how Wall Street works. Wall Street touts diversification as if it were a panacea. But their notion of diversification is spreading your money among several different U.S. stock sectors. That’s not going to work because nearly all stocks are linked in some way. In a truly diversified portfolio, stocks are just ONE of five asset classes.

Martin: Plus, Wall Street still seems to assume we’re back in the 20th Century when bull markets were long in duration and bear markets were short. That’s not the case today.

Step 2
Take Advantage of DOWN Markets!

Monty: That’s the key to step number two. In today’s era, especially as we head toward 2012, if you want to make money, you must not rely exclusively on up markets. You must also take advantage of down markets.

Martin: That also used to be very hard for the average investor to do. You had to sell short.

Monty: Not anymore! In every one of the five asset classes, ETFs are readily available whether you want to profit from rising prices or falling prices. You never sell stocks or commodities short. Your goal is strictly to buy them low and sell them high, like any ordinary stock.

Step 3
Diversify Dynamically!

Step number three is to diversify dynamically. Don’t just keep a fixed amount of money in every asset class all the time. Sometimes, you’ll want a lot more; sometimes, a lot less.

For example, if the Foundation’s signals say gold is going to greatly outperform stocks and bonds, you may need to double the percentage of the portfolio in gold. Or let’s say we see a major decline coming in long-term bonds. You’ll probably want to clear out of long-term bonds entirely.

Step 4
Periodically Rebalance Your Portfolio!

The next step is to periodically rebalance the portfolio. Hypothetically, let’s say you go ahead and double the gold allocation from 10 to 20 percent. Then, let’s say gold itself doubles in value. You could find yourself with 40 percent of your portfolio value in gold.

Martin: That’s a good problem to have.

Monty: Yes, but you still have to DO something about it! You can’t sit back passively while a major market move — up or down — upsets the balance in your portfolio. That’s where periodic rebalancing comes into play. You sell on strength and you buy on weakness. But you do so intelligently. Not based on a whim.

Step 5
Risk Protection

Step five is risk protection.

Martin: Don’t you get a good measure of risk protection with the broad diversification across the five asset classes and with the portfolio rebalancing?

Monty: You do. But for an additional layer of risk protection, you also need stop-loss mechanisms. If you’re wrong about a particular stock, bond, or ETF, you have to set a clear limit on how far you’re willing to be wrong. If it surpasses that limit, you need to get out right away.

Plus, let me say one more very important thing: I respond promptly to major market turn signals. And I don’t shift just small amounts of funds. Gradual, incremental shifting is the right thing to do in a conservative, slow-moving model portfolio. But that’s not what I do, especially when I have clear, strong signals like these we’re getting from the Foundation. When I get a major signal, I move, and I do so very quickly.

Martin: Assume you used the Foundation’s signals and your five steps for building a portfolio. Please share with us now what the results could have been.

Monty: Let’s say you started at the beginning of 2000 with $100,000.

The black line on this chart shows the results you would have achieved simply by buying and holding the S&P. Result: You would have lost $14,000.

Martin: And that’s despite tying up your money for 10 years, despite all of Washington’s efforts to save the economy.

Monty: Correct. Now, assume you took this one step further. You blindly invested 20 percent in each of the five asset classes we’ve been talking about. No intelligence. No change. That step alone could have transformed a 14 percent loss into a 61 percent gain.

Martin: The red line in the chart.

Monty: Right. But it’s the green line that I want you to focus on. It shows what happens when we add the intelligence from the Foundation and the simple steps I just talked about. In this scenario, instead of a 14 percent loss, you could have seen a 111 percent gain. While investors in the S&P 500 were losing $14,000, you could have made $111,000.

Martin: That’s past. What about the future?

Monty: What happens in the next 10 years will inevitably be different from what happened in the last 10 years. That’s all the more reason you must not lock yourself into a blind, fixed allocation that cannot adjust to changing conditions.

Martin: Please also show us your analysis going back further in time, including all kinds of market conditions.

Monty: Sure. Overall, since 1971, our approach could have multiplied your money more than 25 times over — enough to turn $100,000 into more than $2.5 million. That’s four times better than the S&P 500.

Moreover, since 1992, we’re talking about 18 consecutive winning years, in a wide range of conditions — in inflation and deflation, in bear markets and bull markets, during economic booms and busts. All with no debt! No options. No leveraging.

Martin: Don’t you like leverage?

Monty: I do in other circumstances. But in this program, I assume none whatsoever. If you can achieve relatively rapid and consistent growth without leverage, why be greedy?

Martin: What would be the standard amounts you would allocate to each asset class?

Monty: I would allocate 30 percent of the money to the asset class “stocks,” with a very substantial allocation to inverse ETFs to profit from a decline in stocks.

Martin: What about bonds?

Monty: 10 percent, mostly short term.

Martin: Gold?

Monty: 15 percent.

Martin: Energy and other commodities?

Monty: Also 15 percent — but carefully selecting the commodities most likely to benefit from growth in major emerging markets.

Martin: What else?

Monty: The last asset class is currencies. That’s very important and has a very clear long-term trend. I’d bet against the dollar with 30 percent of my money — but not in the euro or any country with oversized deficits.

Bear in mind that some major new forces are now ready to hit markets. So these allocations may change pretty significantly when I release them.

Audience: With the declining value in the dollar, what are the best currencies to invest in?

Monty: The currencies I would pick are the currencies that benefit from the growth in the emerging markets. For example, I like the Aussie dollar and the Canadian dollar.

Audience: I understand that the Foundation has a great track record and an impressive history. My question is: Why haven’t we heard of you before?

Richard: For 60-plus years, we have been studying cycles without any marketing. We are terrible at marketing. But I think we are great scientists.

Martin: Thank you, Richard. And thank you, our viewers, for joining, and have a great day!

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