A few months ago, I started warning that …

- We’d see a short-term rally in the dollar, mainly against the euro.

- Europe would kick the sovereign debt can down the road a bit with money-printing (thereby weakening its currency).

- The U.S. economy would start to look a bit better.

- China would largely engineer a soft landing, and the yuan would appreciate.

- Commodities would enter a short-term period of disinflation.

Let’s see how things have panned out so far.

- Since the first of the year, the U.S. dollar, judging by the U.S. Dollar Index that’s traded on the New York Board of Trade, is essentially flat. In the last few days, however, it’s started a renewed uptrend — and the euro has started to sink.

Given the dollar’s rally last week, I think the trend will continue, as Europe’s economy — due to the extreme austerity measures being taken — sinks into a depression and the euro suffers from it.

The European Central Bank (ECB), meanwhile, has indeed printed a lot of money — over $1 trillion. This is doing nothing but keeping the banks alive, kicking the debt crisis down the road, and threatening to further pressure the euro lower.

- At the same time, we’ve seen noticeable improvements in the U.S. economy — mainly in employment. Don’t get too used to it, though. I don’t think the U.S. economy is going to do much better in the short run. It’s only looking better because Europe is in such bad shape.

- China’s economy also has indeed softened, even a bit more than I expected. Nevertheless, all the stats I study tell me China has indeed engineered a soft landing — with GDP running at 8.4% for this year’s first quarter … industrial production is already starting to rebound … retail sales are still pretty vibrant at 14.7% annualized growth … and property prices are starting to stabilize.

As I told you in a recent column, there will be no implosions in China, no disasters. Mind you, Beijing has engineered this soft landing with plenty of ammo left. Which means they have plenty of options available to boost growth, should they need to.

Meanwhile …

- Commodities have indeed entered a disinflationary period. One that won’t last long, but one that could be very sharp indeed.

Already …

• Coffee prices have fallen 23.8% from their high earlier this year.

• Cocoa prices are down 16.4%.

• Cotton prices are down 10.25%.

• Wheat’s down 7.4%.

• Corn’s down more than 15% from its high last June.

• Platinum’s down 8.6% since early March.

• Crude oil’s fallen more than 8% since early March (and 13.3% since last May).

• Cattle prices are down more than 10%, just since February.

• Natural gas prices have plunged almost 36% since the first of the year.

I say this not to boast, but to prove to you one major point: There can be big disinflationary waves in commodities, even when there’s money-printing going on.

Why’s that important? Because nine out of 10 investors (and analysts) think all too linearly about the markets.

They think that, if there’s money-printing going on, in any part of the developed world, it’s inflationary. And that commodity prices must therefore go up.

Not true. The markets are dynamic, complex systems. If you’re to get the big picture right, you simply have to throw out all the old rules you’ve been taught or told — and stop thinking about the markets linearly.

Instead, you have to realize that markets can do anything at any time. They can defy linear logic … they can defy the fundamentals … they can defy the news. They can also defy the authorities. The biggest traders and investors in the world. And more.

Just consider gold. It’s down more than $300, or 15.6%, since its record high of last year … and upward of $151, or 8.4%, since its high at the end of February. This, despite massive European money-printing … continual bad news out of Europe … alleged buying of gold by Beijing … and an improvement in the U.S. economy, which should be a tad inflationary for gold.

Silver’s down even more — a whopping 38.1% since its record high last year and 16.4% since its high just six weeks ago.

The markets also take no prisoners. John Paulson’s main hedge fund was down a whopping 51% in 2011 … and a reported 13% so far this year. Yet he’s one of the biggest and savviest money managers in the world.

The thing is, the disinflation you’re seeing in commodity prices is bound to continue. Through September of this year, according to my models. By then, we will likely see the majority of investors throw in the towel on the commodity sector — which will then make it an optimal time to go back in and back up the truck and buy.

What about the U.S. stock markets? A reader recently wrote in questioning me on my long-term forecast, wondering how in the heck the Dow Industrials could ever run to substantial record new highs (my forecast) if the U.S. economy is never going to fully recover and instead, slip to No. 2 in the world, with China rising to No. 1.

Defies logic, right? On the surface, yes. But it’s happened before. Just go back to the 1932 to 1937 period. The U.S. economy sank deeper and deeper into depression, yet the Dow Industrials soared 287%.

Why? Because even though the U.S. economy was sinking, Europe’s economy was sinking even more. Capital fled the European stock and bond markets in droves, pushing the Dow substantially higher.

The same thing will happen again. Only this time, it will push both U.S. and Chinese stock markets substantially higher. Gold will soar to more than $5,000 an ounce as well.

But we’re not there just yet. More pullbacks are coming in the commodity sector, and in stocks.

When those pullbacks are finished, it will, in my opinion, represent the buying opportunity of a lifetime, in commodities and stocks.

What about the recent talk of the Fed abandoning a third round of quantitative easing and not printing any more money? That’s temporary.

As sure as I know my name, the Fed will come back in and print record amounts of money. We’re not there yet either, though. Expect it later this year, when commodities and stocks look terrible.

Stay tuned …

Best wishes,

– Larry EdelsonSource: Uncommon Wisdom Daily

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