“Quick and easy is winning the war.”

On January 1st, Londoners woke up to a rather perplexing reality: all of the cashless Oyster card readers on the city’s buses, rail and tube stations had stopped working. With cash as good as banished from the London transport system, attendants had little choice but to wave passengers through open ticket barriers and onto buses without paying, until the problem was fixed.

Serious Pause for Thought

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I’m often asked what I think are the most common, most ruinous mistakes that investors make. Unfortunately, there are a lot of them.

There are things such as risking too much money on a single trade or investment … not using protective stops … not using disciplined money management … trading too often … not doing your homework … taking on too big a position in any market … not diversifying enough … and so forth.

But in today’s column, I want to cover what I think is the most dangerous mistake investors make, bar none.

It’s what I call getting caught up in all the “market myths” that are always out there. Or put another way …

It’s having a set of preconceived notions
about what markets can and can’t do.

The fact of the matter is that markets can do whatever they want to do.

Markets are never wrong. Markets are never irrational.

They are what they are and if you don’t understand a market, it’s not the market’s fault, the fault lies instead with your analysis.

For instance, have you ever heard someone say “a market is defying all logic?”

Or that a market is “disconnected from its underlying fundamentals?”

I’m sure you have. I hear those kinds of phrases all the time on shows such as Bloomberg and CNBC.

But the fact of the matter is that …

Markets NEVER defy logic. 
And they never defy the fundamentals.

Only people defy logic. Only people can make such statements about fundamental forces as well, because when a market is allegedly defying fundamentals, what it’s really doing is operating on fundamental forces that the analyst or investor simply hasn’t figured out yet.

I fully realize that what I’m talking about here is hard to grasp at first. But if you take the time to think deep and hard about what I’m saying, you will elevate your trading and investing to a whole new level. Markets are never wrong. Only people are.

Especially dangerous for most traders and investors is
getting caught up in the various “market myths” that are out there.

For instance, how many times have you heard that rising interest rates are bad for the stock market, and that declining rates are good for stocks?

If you’re like the average investor, you’ve heard that theory literally hundreds, if not thousands, of times before. Tune into any media show today, and I’m sure you’ll hear it at least once, if not more.

Most stock brokers, and the majority of analysts and newsletter editors espouse the same causal relationship between interest rates and stock prices.

But the fact of the matter, the plain truth, is that there is no “standard relationship” between interest rates and stock prices. Period.

Consider the period from March 2000 to October 2002, where the Federal Funds rate declined from 5.85% to 1.75%, and the Nasdaq plunged 78%. Put simply, stocks and interest rates went down together! Exactly the opposite of what most would expect.

Or the period from March 2003 to October 2007, where the Federal Funds rate more than tripled and rose from 1.25% to 4.75% …

And the Dow exploded higher, launching from 7,992 to 13,930 — a 74.2% gain! Stocks and interest rates went higher together!

The fact of the matter is that the relationship between interest rates and stock prices varies considerably depending upon a host of factors, including the value of the dollar and where the economy is in terms of its economic cycles.

But the bottom line is this: Never assume anything and never, ever get caught up in conventional thought about what a market can or can’t do — or you will most likely lose your shirt.

Let’s look at another market myth. Almost everyone believes that gold and the dollar cannot go up together.

And so, they also believe that the dollar and gold can’t go down together.

But that’s completely inaccurate. There have been plenty of times when the dollar and gold have gone up together … and there have also been plenty of periods when they have gone down together.

In fact, in the not-too-distant future we are probably going to see another such period for gold, where it and the dollar go higher together.

Indeed, when the European Union really disintegrates, which is not that far off, that’s probably exactly what we will see: A mad rush of European money into the dollar and into gold — and out of the euro.

Or consider the normal view about a country’s widening trade deficit. The common theory is that a widening trade deficit is bad for stock prices and a narrowing deficit is good.

But history proves that to be entirely wrong, and nothing more than a myth.

Fact: From 1976 to 1998, the U.S. trade deficit ballooned from $6.08 billion to $166.14 billion, and guess what? The Dow Jones Industrials went from 848.63 to 9,343.64!

In truth, the relationship between the trade deficit or surplus and stock prices is exactly the opposite of what most pundits claim.

Or consider the myth about corporate earnings that says they have to rise for stock prices to continue higher. Yet from 1973 to 1975, the combined earnings of the S&P 500 companies rose strongly for six consecutive quarters — and guess what? The S&P 500 Index fell more than 24%.

In other words, rising corporate earnings does not guarantee rising stock prices, by any means. Nor do falling corporate earnings guarantee falling stock prices!

There are many myths or biases out there about the relationships between economic fundamentals and markets, about stocks, or between markets and other markets.

But the fact of the matter is that almost all of them are exactly that: Myths, and nothing more.

The bottom line: To avoid making the biggest investing and trading blunders …

1. Never assume anything when it comes to the markets …

2. Question everything, and most of all …

3. Think independently!

Happy New Year, stay tuned and best wishes,

Larry

For this week’s column, I’m getting so many questions from readers, I decided it would be best to answer the most important ones. So let’s get started!

Q: Larry, you were right as rain about gold again this year. It crashed and came close to one of your targets at the end of November. Is the bottom in yet?

A: It could be, but it’s really too soon to say. By that I mean we have no proof of a bottom. Yes, gold has tested major support at the $1,048 level and it did so at the right time, cyclically speaking. So that’s good.

But, gold has not yet climbed enough above overhead resistance to issue a buy signal that would confirm the low. If it fails to do so, then gold could easily move lower into early January. 

The specific support and resistance levels and buy and sell signals for gold are of course reserved for members of my services. But for now, generally speaking, keep an eye on the first initial level of major resistance at the $1,095 level and support at $1,036. A close above or below either one of those figures (nearest futures) will determine the next big move. 

For silver, you want to watch $15.46 on the upside and $13.75 on the downside. Yes, that’s a big range, but in between those two figures for silver is effectively no-man’s land. Other than for short-term futures traders, there is nothing to do in silver at this time (same for gold).

Q: Why isn’t inflation a big problem now? I just don’t get it and there are still so many experts out there saying it’s coming. 

A: As I’ve said all along, printing money by itself is not inflationary if the majority of investors and consumers don’t want to spend or borrow money. That’s been the case for years as consumers, investors and businesses — the private sector — all retrench …

Either by their own volition, or where it’s been forced upon them by governments via financial repression of higher taxes, confiscations, capital controls, and more. Which has been the case in many countries in Europe. 

There are many more reasons, too many to discuss in a short column. Two biggies though are A) Global debt is now well over $200 trillion, so printing $5- or even $10- or $20 trillion is hardly going to make a dent …

And B) Banks are reluctant to lend. In fact, most of the money printed by the Fed has been reinvested by banks back with the Fed in what are called “excess reserves” … which are bank reserves that banks don’t need to keep on hand.

The European Central Bank (ECB), unlike the Federal Reserve in the U.S., is actually charging banks that place excess reserves back with the ECB in the form of negative interest rates. The theory there is that if the banks get charged for not lending, then penalize them and they will start lending.

But it’s not working, at all. That shows you just how intense the deflation is, and the money hoarding is.

Q: Where do your war cycles stand?

A: Precisely as forecast, they continue to ramp up big time. You can see it all over the world, in Syria, with ISIS, in Asia between China and Japan, in social unrest in Europe, in increasing terrorism and more. 

The war cycles point up all the way into 2021, so fasten your seatbelts.

Q: You’ve been forecasting that the U.S. stock market will take a moonshot to as high as 31,000 — over the next few years. Is that forecast still on target?

A: Absolutely. There is no doubt in my mind we will see the Dow move to at least 31,000 and possibly much higher. And not despite turmoil in the world, but because of it. The Dow and other blue-chip type stocks can and often do act just like gold, as a safe haven for capital and as an inflation hedge.

But the Dow has not yet completely broken out to the upside. A sharp, swift correction is still way overdue. When that comes, I will be giving the signal to back up the truck for stocks. But not until then.

Q: You really nailed oil on the head Larry, predicting it would fall well below $40. Has oil bottomed now?

A: No, but I think a bottom is very close. My models show it coming the first week of January, so stay tuned. I should have some very important comments coming about oil, right after the holidays.

Q: Has the mining sector bottomed? You saved my entire life savings by getting me out of the way back in 2011. Thank you!

A: You’re most welcome. The carnage in the mining sector is one for the record books, losses of 90% on average for most publicly-traded mining companies. 

The bottom is not in yet, but it could be right around the corner. So stay tuned!

That’s it for now, stay tuned — my models are showing that this month and next will be pivotal for almost all markets, leading to major trends unfolding and a slew of new profit opportunities. 

Best wishes, 

Larry

So now that we know the Federal Reserve hiked interest rates, what does it mean to your finances?

The short answer is “a lot.” But different products will behave differently now … and how they behave down the road will depend on what the Fed does in 2016.

For starters, you should understand exactly what the Fed did. When the Fed “raises rates,” it doesn’t single-handedly raise every single rate in the marketplace. It raises the federal funds rate, which is an overnight rate at which banks borrow money from each other. This time it also raised the discount rate, the rate at which banks borrow directly from the Fed on a short-term basis. Both moves were 25 basis points, or a quarter of a percentage point.

Since the funds rate is a very short-term rate, it has the most direct impact on very short-term Treasuries and very short-term yields. The so-called “prime rate” moves in lock step with Fed hikes. And the 2-year Treasury note (not to mention Treasury bills with maturities of one, three, or six months) are particularly sensitive to current and future Fed moves.

Case in point: Anticipation of a Fed move had already driven the yield on the 2-year note higher. It was at 0.2% a couple years ago, but surged to and through 1% this week for the first time since 2010.

The rates on many Home Equity Lines of Credit (HELOCs) and variable-rate credit cards are tied to the prime rate. The prime rate, in turn, tends to move in lockstep with the funds rate. So you can expect your interest rates on those products to rise by a quarter-point, and the cost of carrying revolving balances on them to rise slightly.

Rates on short-term Adjustable Rate Mortgages, such as 1-year ARMs, will likely rise slightly in response to the Fed move as well. The same is true for shorter-term auto loans, though it may not be an exact one-for-one increase of 25 basis points.

What about the bread-and-butter 30-year fixed-rate mortgage? That’s where things get a bit trickier. Rates on longer-term mortgages depend much more on how the longer-term portion of the bond market reacts to this Fed move, and expectations about whether it will be followed by a series of future moves.

Investors are somewhat skeptical about the outlook for inflation and economic growth, as well as the Fed’s ability to launch multiple hikes next year. For evidence, just look at how 30-year Treasury Bond yields have behaved.

They fell from almost 4% in January 2014 to around 3% at the end of last year. Then after a brief trip all the way down to 2.25%, they’ve remained anchored around 3% for several months. As a matter of fact, on Fed day, the yield only rose one basis point. So it will clearly take increased optimism about the world economy to really get longer-term mortgage rates rising.

Want some good news? A rising funds rate puts upward pressure on the yields banks offer on Certificates of Deposit. Ditto for money market accounts and money market funds. So you can expect to earn a little more interest on your CDs and keep-safe funds.

Hopefully, this clarifies the outlook for your loans and deposit products in light of the Fed hike. When it comes to potential coping strategies, there are a handful of steps you can take:

* Consider transferring any balances you’re carrying from a variable-rate credit card to a fixed-rate one. Card companies often give you financial incentives to do so anyway. 

* If you have a HELOC with a large balance on it, check to see if your bank offers a fixed-rate option. Many institutions allow you to fix the rate and payment on a portion of your balance, often at the cost of only a small fee. That move could protect you from a substantially higher interest bill if we end up getting a series of Fed rate hikes.

* Don’t lock in today’s low yields on long-term savings products like 3-, 4-, or 5-year CDs. Instead, wait to see if we’ll get more Fed hikes as that will boost the yields banks offer on them.

* Regardless of what the Fed does, consider using online-only banks for your term or money market deposits. They tend to pay higher yields because they don’t have physical infrastructure costs to cover by offering lower returns to deposit holders.

This is just a sampling of important pointers and strategies. I’ll have much more on additional post-Fed moves to consider in future columns.

I give more immediate guidance and precise “buy” and “sell” signals in my Interest Rate Speculator service. I’ve been sending out multiple recommendations in recent weeks to profit from increased turmoil in the interest-rate and equity markets, and I’d love to have you on board in light of the renewed Fed focus these days.

Until next time, 

Mike Larson

Panic has hit Wall Street and Main Street – or at least that’s what the financial headlines would lead you to believe.

Last week the Dow Jones Industrial Average, broad-based S&P 500, and technology-heavy Nasdaq Composite suffered through their worst week in years. The Dow shed more than 1,000 points, the Nasdaq dipped more than 340 points, and the S&P 500 fell around 120 points. Unless you were a noted short-seller of stocks, it probably wasn’t a good week.

The closing price for the Dow also signaled its first official correction since 2011. A stock market correction is defined as a drop of at least 10% or more for an index or stock from its recent high. With the Dow sitting almost 1,900 points off its all-time high set back in May, the Dow has now shed 10.3% from its highs, officially putting the widely followed index in correction territory.

What you should know about a stock market correction…read more HERE