The Fed, Gold, Stocks, And China …

by Larry Edelson 12-18-08

As you read this I’m at Bangkok’s Suvarnabhumi Airport awaiting my flight back to the U.S. to get home for the holidays.

And since next Thursday is Christmas Day, and I’m off, I would like to wish you a very happy holiday.

Right now, though, I’ve got a lot of ground to cover with you. So let’s get started. Specifically, I’m going to give you quick updates on gold, the broad U.S. stock market, and China.

But first, you need to be fully aware of the following: All of my warnings are coming to pass.

With this week’s actions — slashing of the Fed funds rate to 0.25% and committing to buying virtually any assets they need to, effectively monetizing bad assets and debts — the Federal Reserve and Chairman Ben Bernanke are pulling out all the stops.

By hook or crook, they are — and will continue to — set the conditions for a deeply devalued dollar … and a re-inflation of asset prices. And they will succeed at doing it.

Now, I have a fascinating tidbit I just have to share with you.

On December 1, the National Bureau of Economic Research, or NBER — the final arbiter and dater of recession cycles in this country — officially announced that a recession started way back in December 2007.

Duh? I announced in my August 30, 2007, Money and Markets column that a severe recession had already started, four months before it actually started and 16 months before the NBER says it started.

We all know the NBER is late when it comes to recognizing recessions. But when their recent announcement came out, it got me thinking …

• “Exactly how late are the NBER announcements compared to actual recessions?”
  
  
  
  
• “What really is the NBER’s track record?” And …
  
  
  
  
• “How do the NBER’s official recession announcements compare to the end of recessions?”

Fortunately, James Stack at InvesTech Research already did the research for me when his December 12 issue came across my desk. It’s mindboggling. I’ve put his findings in a table below, with my additional comments in the far right column.

Check it out …

NBER Recession Announcements Coincide With The End Of Recessions, Not The Beginning Nor Even The Middle!

Check out that data! NBER’s recession announcements come so late they have almost perfectly coincided with the end of the recessions.

• 1980 Recession: The NBER formally recognized the recession one month before the recession ended!
  
  
  
  
• 1990-91 Recession: The NBER formally recognized it one month after the recession ended!
  
  
  
  
• 2000-01 Recession: The NBER formally recognized it the same month the recession ended!

So, judging by the NBER’s track record and its official recognition that December 2007 marked the beginning of a contraction, the current economic crisis is probably far closer to the end than the beginning!

That’s not to say it’s time to plunge back into the markets head first. It’s not. The coast is not clear yet.

But interestingly enough, the above study on the NBER’s track record is one more shred of evidence that confirms all my other indicators and research that say — to the surprise of most — the U.S. and the global economy are far closer to the bottom than they are the top.

And that there’s going to be tons — literally tons — of money to be made in 2009.

Having said that, here’s a quick update on what I’m seeing right now in the markets …

First, gold: Gold has staged a very nice rally over the past week, jumping from $741 to as high as $860 as I write this column. That’s a very solid, sharp 16% gain — in under a week!

The distrust of paper assets and financial institutions is driving investors to gold.

Still, gold is not yet out of the woods. My indicators tell me we need to see gold close solidly above the next target resistance level at the $879 area.

And if it can break through that, the lid will come fully off gold. I would then expect the yellow metal to start making its way to new record highs. Ditto for gold shares.

Either way, continue holding my recommended gold positions. They are designed to capture the long-term macro-economic picture, which is unequivocally bullish for gold.

Amongst the forces driving gold higher … largely, distrust of paper assets and financial institutions … and the very high probability that central banks and governments will inflate away the economic crisis by devaluing currencies.

For my latest recommendations in gold, be sure to see the December issue of my Real Wealth Report being published tomorrow.

Second, the broad stock market: Specifically, the Dow Jones Industrials. Cycles point higher into mid-January. How high can the Dow go? I believe it can get to at least 9700, and possibly 10,200.

Long-term, as I’ve previously noted, there is a very high probability the markets have already made a major bottom. And long-term, I have absolutely no doubt in my mind that a currency devaluation will recalibrate the Dow, sending it substantially higher, even as high as 35,000.

But in the short-term, the broad stock markets are going to merely grind their way higher, with large volatile swings.

Your best bets for now are to stay mostly out of stocks, with the exception of key natural resource plays — oil and energy, and gold mining shares.

The December Real Wealth Report has some new recommendations. Be sure to get that issue!

Third, China: Despite all the bad news you’re hearing about China, I maintain my view that …

Next year, China’s stock market could gain back at least 50% of its ‘08 decline.

China is not in anywhere near as bad shape as the press and other pundits are leading you to believe …

China’s stock market is bottoming and heading substantially higher in ‘09 … retracing at least 50% of its ‘08 decline and pushing the Shanghai Composite to as high as 3,700 — from its current 2,000 level, and …

To the surprise of many, some of the best profit opportunities for the coming year will be found in China.

Why am I so bullish on China? Lots of reasons, chief among them …

A) Beijing now has nearly $2 trillion in cash reserves, more than any other country on the planet, giving it plenty of ammo to protect its economy.

B) China’s banks are now the strongest in the world, with capital ratios far above almost all other large banks in the world and debt levels that are far lower (even allowing for an inevitable increase in non-performing loans).

C) Beijing has recently committed to spending over $600 billion — equivalent to nearly 30% of GDP — on infrastructure, rural development, healthcare, education, and housing. More spending is likely to be announced soon.

D) Interest rates have been cut five times already and will likely be cut further, while bank reserve requirements have also been lowered.

E) Taxes have been slashed on housing, personal income, sales and value added taxes — plus, tax rebates for exporters have just been upped as of December 1.

F) Downpayments on housing have been reduced from 30% to 20%, which will boost domestic spending throughout the economy.

G) Beijing just announced it will pump up money supply to a minimum of 17% growth in 2009.

H) Many great Chinese stocks are now trading at very cheap valuations, as low as 2 times earnings!

Bottom line: Other than gold and my select natural resource and oil and energy stocks recommended in my Real Wealth Report, the only other investments I’d make in these wild and crazy times are in China.

My two favorite long-term core holdings for China …

• The iShares FTSE Index (FXI), which tracks China’s Shanghai stock market
  
  
  
  
• The U.S. Global Investors China Regional Opportunities Fund (USCOX), a mutual fund that invests at least 80% of its money in the China region, from Mainland China to Hong Kong, Taiwan and more.

Both offer incredible profit potential, are easy to buy, and are great ways to play China.

Best Wishes and Happy Holidays,

Larry

P.S. For all of my detailed analysis and recommendations … to set yourself up for a hugely profitable 2009 — be sure to subscribe to Real Wealth Report.

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