While we await perhaps two of the most important developments this year — the next Fed rate hike and the Brexit vote on June 23 — I thought I’d take a little time and bust some of the myths that many investors get tripped up on.
Let’s take a look at my five favorite market myths, myths that cost investors tens, if not hundreds, of billions of dollars.
Myth #1: Gold can’t go down when there’s so much money-printing going on. This one is my favorite. All the shrills out there who constantly talk about fiat money and money-printing have egg all over their faces.
They said gold could never go down when central banks are printing so much money. I said bull: Listen to that garbage and you will lose your shirt.
And that’s what happened to oodles of investors who didn’t listen to me when I said gold had topped back in September 2011. Despite even more accelerated money-printing, gold crashed, losing as much as 46% of its value.
The facts of the matter are this:
First, what goes up must go down, and vice versa. There is a time for every move in the market, based purely on cyclical and technical factors. So if you get stuck to any one particular theory, vision, or even a set of fundamental forces you believe in, if you don’t realize that there is a time and place for every move the markets make, you will get caught — with your pants down.
Second, money has always been fiat! It was fiat even when the dollar was tied to gold. Why? Because the powers that be, the rule makers behind the monetary system, always have the power to change the rules, and devalue the dollar, as Roosevelt did in 1932.
In fact, Webster’s dictionary defines the word "fiat" as "an official order given by someone who has power: an order that must be followed."
So as long as there are authorities who can change the rules, money, no matter what it is tied to, is always going to be fiat.
Moreover, money is merely a medium of exchange, not a store of value. Throughout history, money has always been fiat. It was fiat in Roman times, fiat in Byzantine times, fiat in every great civilization and economy in the world, from Asia to Europe.
You might argue that some currencies are more fiat than others. Sure, I can agree to that. But my point is that all money is fiat. Consider even Bitcoin, which is entirely fiat and secured only by its cryptography and the confidence — or lack of confidence — its users have in the digital currency.
|Don’t buy into the fiat money nonsense when it comes to gold.|
Bottom line: Don’t buy into the fiat money nonsense when it comes to gold. Sure, it’s a part of it, but we already saw that part of the fiat argument play its hand in gold’s first leg up, from $255 to its high at $1,920.
That force is now dead, kaput. Gold’s next move higher will largely be due to the war cycles and how they are now showing massive social and geo-political unrest breaking out all over the world for the next four to five years!
Myth #2: Stocks can’t go up when interest rates are rising. Another great one. Fact: Most strong bull markets in equities occur when interest rates are rising!
Why? It’s simple: When rates are rising, they are rising because the demand for money and credit is going up. And if the demand for money and credit is going up, that in turn means that either …
A. The economy is improving, or …
B. That investors want to take on more risk for potentially greater returns, due to other motivations, like getting away from sovereign bonds, investing in stocks as a safe haven against government bank confiscation, and more.
The bottom line is this, especially at the turning point we are now in with historically and artificially low interest rates: Rising interest rates should be nothing to fear and instead should be music to your ears for the equity markets.
Myth #3: Hyperinflation is the end result of money-printing. I used to subscribe to this one. Until I realized that throughout history there has never been a major core economy that experienced hyperinflation. Not one.
Hyperinflation only occurs in peripheral economies that do not have deeply liquid stock, bond and currency markets or that have been bombed out and have little or no infrastructure to them.
If you want to bring up Weimar Germany, fine. The Weimar Republic had no bond market, no stock market and in the aftermath of WWI, no infrastructure either.
As I have been saying now for some time, the U.S. will not suffer hyperinflation. Deflation, yes. But hyperinflation, no.
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Myth #4: The dollar is dead. Likely to be replaced as the world’s largest reserve currency — yes. But dead, NO.
We all know the existing debt-based monetary system with the dollar at its core no longer works in today’s globalized economy. And that a new monetary system is needed.
A new Bretton Woods, if you will, that learns from all the errors of the past and designs and implements a new monetary system without a single currency at its core and certainly not one based on debt.
That time is coming. That is where the world is headed, toward a new electronic reserve currency unit that is used for international trade and transactions only and with all countries maintaining their existing currencies for domestic use only.
The dollar will lose its reserve status, but long before it does, it will also gain incredible strength. Put another way, the U.S. dollar will eventually lose its reserve status because it becomes too strong, not too weak.
Myth #5: Real estate prices are sure to collapse again as mortgage rates rise. I love this one, too, since so many pundits subscribe to it.
But in my opinion and research, it’s a bunch of baloney. Mortgage rates typically negatively impact real estate prices when and only when they exceed the real rate of inflation and/or the anticipated appreciation in property prices.
Plus, at this juncture in the real estate cycle, as mortgage rates do begin to rise, potential homeowners will want to buy now, rather than later, in anticipation of still higher mortgage rates, helping to push property prices higher.
There are many more market myths I could go into, but you get the picture.
The bottom line is this: Wipe your head clean of all the junk you learn from the supposed pundits out there, even the bigwig names from places like Yale or Harvard.
Instead, use common sense, think things through on your own, and question everything. I can virtually guarantee you that by doing so you will make much more money, both over the short term and the longer term.
Speaking of which, keep your eyes glued to the dollar and to gold right now. They’re both signaling big developments lie dead ahead.
Best wishes as always …
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