By David Schectman
Why is it so hard for most investors to understand that the problems at hand cannot be solved and that the US dollar and all dollar denominated assets are on the verge of a terrible tumble?
I think that there is a simple answer to this question. First of all, money managers, stock brokers and the Wall Street gang are touting a recovery of the economy and of the stock market by later this year. They are urging investors to "stay the course" and urge investors to take a long-term view. Stocks will come back, they say. The economy will rebound, they say. Yes, they will be right, I say, when I can dunk a basketball! We all like to dream.
A friend of mine was at a fancy health club recently and he spoke to a man who he knows, a retired employee of the Minneapolis Federal Reserve who had just returned from a bankers conference in Singapore. The ex-banker told my friend that they expect the economy to rebound by the fall of 2009. He asked me what I thought of the prediction.
I asked him why he gave credibility to a Fed banker when they have been 100% wrong all along in predicting the economic collapse and worse yet, were primarily responsible for creating it in the first place. If you want to place the blame, look no further then Alan Greenspan and Ben Bernanke. The Fed lobbied hard for de-regulation of the banking industry and no regulation for derivatives. They then flooded the market place with cheap credit which allowed the greedy crooks on Wall Street to kill us all with many trillions of toxic derivatives, which they received billions and billions of commissions for selling. Look no further than AIG.
I say the recovery, when it finally arrives, and I suggest that it will be more like 3 to 5 years minimum down the road, will be weak at best. Meanwhile, the stock market is in grave danger of losing another 50% from where it now stands. I have pointed out many times in the past that, according to Dow Theory, the stock market will bottom when stocks are offered at great values. That is NOT the case even now. The price to earnings ratio and dividends are at least twice as high today as they should be at a market BOTTOM. Think 3500 Dow or lower.
As far as the myth that stocks are a great place to have your money for long-term investing - earlier this week Richard Russell wrote, The Dow's extreme high, recorded in 2007, was 14,164. As I write the Dow is below 6800. The Dow is now selling at less than one-half its peak price. This represents a horrendous loss in a period of less than two years. My interpretation of this violent action is that we are probably heading into another Depression. I don't know how far the Dow is fated to fall, but I do know this -- the stock market is still far away from the values that existed at previous major bear market lows.
Watching the stock market action, I'm getting the feeling (my instinct) that we're heading into chaotic times. We're going to see things that the most recent three generations have never seen or even imagined.
Over the last year I've been warning my subscribers that there's a "hard rain a'comin." The hard rain has now arrived, but it isn't showing up yet in the economy. It will -- I think by the end of the year.
My advice again is to get in cash and gold, and get out of debt. Don't buy anything that will cost you money to carry.
In July, 1932, in the depths of the Great Depression, the Dow collapsed to 41 a low not seen since then. In October 2007 the Dow peaked at 14164. The halfway level of the entire climb from Dow 41 to Dow 14164 is 7082. As I am writing this newsletter, the Dow is at 6870, 212 points BELOW 7082, the halfway level of that prodigious climb.
In other words, the Dow has given back more than half of all its gains since the bottom of the Great Depression. This shows you the mind-boggling damage that decimated the market since 2007. No one is immune. Even Warren Buffet's Berkshire Hathaway lost half its value, so far, in this brutal bear market! And Warren Buffett is now warning us that the US economy will be "in shambles" for the rest of 2009.
When I talk in a negative manner to my friend he usually says "Do you mean we are going to all live in caves?" No, I have never said that, but I do believe that the standard of living in American is going to atrophy by at least 25% to 30% and many Americans will re-visit the 1950s life style. I grew up in the 1950s in Minneapolis and lived in a small two bedroom house (cost $14,500) with one air conditioner (a small window unit), one small black and white TV and one 5 year old car (paid for in cash, of course) for my parents, and my brother and me. I walked 2 miles each way to high school, even in 30 below weather. Truth be told, I didn't have any idea that I had it so bad. We all did fine. We ate well and were well dressed. We were middle class. That was not exactly "Third World" living standards, but it was a far cry from today's McMansion, adorned with multiple large screen TVs, 3 luxury cars in the garage, annual warm weather vacations, every imaginable electronic gadget and all the trappings. The problem is that this elevated standard of living was based on credit. Very few people bought their cars and toys for cash. Very few people put down 20% or more on their mortgage. People tend to live from paycheck to paycheck and are solvent as long as they have two big incomes coming in and can meet the monthly payment schedule. Let just one of the two family incomes go by the wayside and soon the house of cards starts to tumble. You can see it happening all around you with huge increases in credit card defaults and millions of people walking away from their homes.
For a number of weeks now, more than 600,000 people per week have joined the ranks of the unemployed. A large number of them lost high paying jobs, jobs that they will never replace in kind. Professional people, business owners and executives are scrambling to find any work - any kind of a job in order to put food on the tabl e and delay the inevitable when they run out of savings and have to leave their home. My wife's grandparents lost their home in the 1930 owing but $450 on the mortgage. Her grandfather, a wonderful man, never recovered from the loss of their home. He rarely ever smiled after that experience.
In 1982, my wife and I both lost our (high paying) jobs and were on the verge of bankruptcy. I can tell you first-hand how demeaning and depressing it is to lose a job and not be able to find another. Fortunately for me, I landed a job in the precious metals industry and my life turned around in a hurry. But where will the millions of recently unemployed people go to find another middle class paying job? Would you like to support your life style on $10 an hour? Those are the only jobs out there - if you are lucky enough to find one. What will people do when their benefits run out and their savings are gone? This is a human tragedy of epic proportions.
How can the economy recover without millions of new high paying jobs? Where will the jobs come from? How can we compete with Third World countries and their low wage scale? I speak with my oldest granddaughter honestly about her future. I urge her to study hard and very carefully pick a profession that offers a reasonable future. Medicine, engineering, health care. There are a few areas where good jobs can be had, but for most Americans, the middle class will be but a memory. We will have a two class society - a small percentage of very wealthy people (with a huge tax burden) and everyone else. This is the end of the American Dream. God, I hate to write that, but for most Americans it is a fact. The next generation will not live better than we did, and just getting by will be difficult for them.
One of the reasons that I am obsessed with accumulating as much physical gold and silver as possible is so I can give my grandchildren a better chance to succeed. They will need all the help that they can get. If you have the same concerns, do not risk your capital by staying in dollars or dollar denominated stocks. Your losses will be severe and there will be no way to make it up. Gold and silver, on the other hand, are getting ready to explode in price. $2,000 gold in less than 24 months is a reasonable starting point and silver should top $50 an ounce in that environment. That's just for starters.
CEO, Miles Franklin
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