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The Great Rally Before the Great Inflation

By Dr. Steve Sjuggerud
Friday, April 24, 2009

Yesterday's DailyWealth might have been the most dire essay we've ever published.

We explained "The Coming Great Inflation," and we shared a few ways to position yourself for when it arrives.

I know this may sound contradictory... but I think stocks could rise dramatically over the next 18 months or so. I believe stocks could have one of the greatest bear-market rallies in history.

I know our government is spending more money than at any time in history... by far. The government is completely tied up with promises it can't possibly pay for – promises like universal health care and Social Security. 

The looming story is the government will print money at a wild pace, driving the dollar down. Then, nobody will want our government debt, so interest rates will skyrocket.

I know the bill will come due some day. And I know it should come back to haunt us. I'm aware of all this. So how can I consider buying stocks now? 

Well, think of it this way... In the near term, all that government spending should translate into more money in the economy. It should translate into more money in people's pockets and more corporate profits. In other words, don't think of it as something to be afraid of right now... think of it as something to take advantage of. 

The market is saying it's OK to speculate right now. I don't tell the market what to do. I let the market tell me what to do. And the market is telling us the bill for the government spending isn't due yet. Risk is subsiding... And the recession will possibly end sooner than anyone thought.

That's what the market is telling us. It's screaming it at us, in fact. Here are just a few of the ways it's screaming it:
  • The rally in gold ran out of steam, which tells us investors perceive that risk is lower and that the fear of inflation is lower than it was.

  • Instead of having runaway inflation today, inflation is NEGATIVE for the first time since the 1950s.

  • Interest rates on risky "junk" bonds are coming down, which is yet another sign fear is subsiding.

  • The Fear Gauge – the stock market Volatility Index (VIX) – is dramatically calming down from where it was six months ago.

  • The U.S. dollar isn't crashing. In fact, it's doing very well against other countries... The euro recently hit one-month lows versus the dollar.

  • Far from soaring, U.S. interest rates are near record lows, with mortgage rates at less than 5% and Treasury bonds at less than 3%.

  • The stock market bottomed last month as "the Next Depression" fears have abated.

  • Things are getting "less bad" on the home front... we could be closer to a real estate bottom than was previously thought.
That's just a quick list. Based on those things, we need to own stocks right now.

I spent the last two issues of my newsletter, True Wealth, recommending speculative positions in stocks good for 12 to 18 months. I expect we'll see rallies of 50% in all the things I've recommended.

As I said, I think what we're seeing now will turn out to be one of the greatest bear-market rallies in history.

I know the bill for the government spending will come due some day. But for now, as long as Bernanke is juicing the economy and keeping interest rates at zero, stocks can run. Take advantage of it.

Good investing,


Market Notes


Want to make close to risk-free profits in the stock market? Consider a "hedged" bet on one of the biggest trends in the world right now...

The trend is the gradual increase of Asian economic power... and the gradual decrease of old European economic power. The bet is going long Asia and short Europe. A hedged trade like this insulates your money from a general stock market decline.

Most European countries have declining population growth and onerous business regulations. Most emerging markets like Asia have healthy population growth and are embracing free markets. For a take on this phenomenon, check out our friend Dennis Gartman's must-read piece on China's pursuit of a better life.

Today's chart shows this trend in the form of a ratio. The ratio is the emerging markets ETF plotted against the Italy ETF. (We're not picking on Italy... any of the "fun to visit, not fun to invest in" countries of old Europe will do.) A rising trendline shows that emerging market stocks are gaining against old Europe stocks. As you can see, it's been in place for years now. After a hiccup last year, it's ready to go higher and it will last for decades.

In The Daily Crux

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