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Seeing Through the Financial Markets Panic to Profits …

Stock-Markets / Emerging Markets Oct 31, 2008 - 09:26 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleLarry Edelson writes: First, some important news no one else is telling you: The Dow is now trading at the equivalent of the 2,500 level, down a whopping 77% from its high.

Yes, you read that right. In terms of “honest” money — gold — the Dow Jones Industrials has already lost 77% of its value!


Now, how could that be, you ask.

Simple: It's because the world no longer uses “honest” money and instead economies — and asset prices — float on variable currency exchange rates with nothing but “a promise to pay” backing them.

So to really understand what's happening to values — the nominal prices that you see in the markets whether they be for stocks, bonds or commodities — you must look at them in terms of the one asset that always holds its purchasing power: Gold.

For instance …

In 1999, when the Dow hit its real inflation-adjusted peak of 11,210, it bought 44 ounces of real money, gold.

Today, the Dow buys less than 10 ounces of gold.

That means the Dow now buys 34 ounces less gold, a purchasing power loss of 77%. That essentially means the Dow is already trading at the equivalent of 2,578.

Now, you might argue, as others do, that it's mostly because the price of gold has soared so much over the last eight years.

But that argument actually reinforces my point: Your money, even after the recent rally in the value of the greenback, is worth a whole lot less than it was a year ago, two years ago, five years ago, eight years ago, even ten years ago. And so on.

This is a hard concept to understand at times, but it's so important that you do. Why? Because only then will you know how to position your portfolio to profit in the months and years ahead.

Savvy investors like Warren Buffet, Jimmy Rogers, Mark Mobius, and Barton Biggs understand it.

Smart investors like Barton Biggs, Jimmy Rogers, Warren Buffett, and Mark Mobius look past fear toward opportunities.
Smart investors like Barton Biggs, Jimmy Rogers, Warren Buffett, and Mark Mobius look past fear toward opportunities.

Indeed, just a few days ago, Warren Buffet wrote the following in The New York Times …

“Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.”

He's right.

Of course, Buffet has the capital and staying power to jump into the markets now and buy, whereas many investors don't. So for most of you, I think holding cash and gold right now are the best and safest investments for almost all your capital.

Even so, that shouldn't change your view or understanding of the world and what's happening.

And it certainly should not prevent you from preparing for some of the greatest buying opportunities of a lifetime in all types of assets.

To see how assets inflate over time, ask yourself the following questions …

Arrow If you could go back to the depths of 1932 and buy stocks or commodities, would you? You bet you would.

Arrow If you could roll back time to the severe 1973 — 1975 recession and buy stocks or gold, would you? You bet you would, especially gold, which soared from the $130 level to $850 by January 1980.

Arrow If you could buy stocks after the 1987 stock market crash, would you? You bet you would!

Arrow If you could turn back the clock and buy stocks or commodities during the 1990 S&L crisis, would you? You bet you would!

Arrow If you could go back to the Long-Term Capital Management and Asian currency crises of 1997 and 1998 and buy assets, even real estate, would you? You bet you would!

Arrow If you could go back to the year 2000, or even 2001 post-9/11, and buy gold, other commodities, even real estate, would you? You bet you would!

The ONLY difference between the current crisis and past crises is, yes, that this one is larger and more severe in scope.

But that doesn't mean it will be resolved differently. Quite to the contrary, it will be resolved the same way all past financial crises have been resolved, through inflating away debt. Because no matter how you slice it, the historical record shows that without gold backing currencies, inflation is baked into the cake via monetary policy.

Another market that's quickly becoming a huge bargain: China

In fact, I see five major reasons why China continues to offer excellent long-term potential …

Reason #1: Contrary to popular opinion, China's exports continue to grow!

The talking heads in the media want you to believe that China's exports are getting hammered. But that's simply not true.

While exports to the U.S. are down 10% this year, all told China's exports through September are up an astounding 21.5% over the same period last year.

Where are all the exports going, if exports to the U.S. are declining? They're going to Vietnam, Thailand, Indonesia, Malaysia, and more.

In other words, China's exports within Asia and Southeast Asia are up, big time.

That's a testament to rising consumption within Asia as much as it is to China from a purely export point of view.

And speaking of consumption …

Reason #2: Retail sales are exploding higher.

Retail sales over the Chinese New Year holiday jumped 16% over 2007 even while bad weather crippled the nation's transport infrastructure during the holiday period.

More recently, during its week-long national holiday between September 29 and October 5, China's retail sales surged 21% year-on-year.

That's not all. In September alone retail sales soared 23% over last year — that's close to the fastest pace in at least nine years!

What's more, January through August retail sales volume in China rose 14.3% versus 12.9% for all of 2007, while the value of the retail sales rose to a 12-year high.

And in the months ahead, retail sales and domestic consumption appear set to rise even more as Beijing cuts interest rates … slashes taxes … and lowers the downpayment requirement for first-time homebuyers from 30% to 20%.

Also announced on October 22, a reduction in the property deed tax to 1% from 3%-5% for first-home buyers and for those who purchase properties smaller than 90 square meters … plus, a whopping 30% discount on mortgage interest rates!

That is sure to help propel retail sales growth in the months ahead.

Reason #3: Government Spending. Having nearly $2 trillion in its piggy-bank is a nice way to weather this global financial storm.

It's why growth in urban fixed-asset investment in China is 27.6% higher in the first nine months of this year from a year earlier.

And it's why up to $400 billion in new investment has been earmarked for rural China with a growth objective of doubling rural incomes of 750 million Chinese within the next three years.

Reason #4: Monetary policy is being relaxed.

Inflation has cooled a bit in China, so monetary authorities are loosening up their grip, cutting interest rates and bank reserve requirements for the first time since 2002. And more cuts are in the offing.

Reason #5: China's stock market is trading at dirt-cheap price-to-earnings ratios.

China's market has been hammered hard and it's now trading at almost unheard of levels, with P/E valuation multiples as low as 5 to 1.

Cheap? You bet they are. Can they get cheaper? In this panic environment, of course they can.

So what does all this mean and what should you do? You have to see through the panic to the profits. Once-in-a-lifetime bargains are going to be popping up all over the world.

Stay tuned for my signals!

Best,

Larry

P.S. To position yourself for the once-in-a-lifetime profit opportunities I see coming, subscribe to Real Wealth Report . For just $99 a year, get 12 monthly issues, all my analysis and recommendations, flash alerts and more! It will be the best $99 you've ever spent!

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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