I do not purport to be expert in this field. The following text merely echoes the insights and conclusions of many of the world's competent economists and market analysts. There is a vast wealth of factual information available on the
Internet — stuff that you never will hear from official
sources or the milquetoast major media; you are heartily encouraged to take advantage
of that awesome resource. Additionally, there are fine books available on these
topics, as well as free online audio-visual presentations. Don't take
my word for anything; the truth is available regarding today's reality
and tomorrow's prospects; you need only to search for it.
THE WAY IT IS
circa August 2004
THE U.S. GOVERNMENT IS EFFECTIVELY BANKRUPT.
40 trillion dollars worth of debt qualifies. That's right —
an estimated $40 trillion in accumulated obligations, including the unfunded
liabilities of Social Security and Medicare. Yet the deficit increases persist,
to the tune of billions of dollars per day — nearly $400 per
month of additional debt for everyone in this country who has a job. U.S.
Government indebtedness currently exceeds that of all other nations combined.
THE GOVERNMENT'S FISCAL POLICIES ARE OUT OF CONTROL.
The feds are in a record-setting spending frenzy; seemingly that is all they know to
do. The logical solution of reducing the size of government is deemed
unthinkable. Directing attention where it matters
most — at
home — seems equally unappetizing, and foreign meddling is quite
costly. On the national front, the average congressman is afraid not
to approve a spending measure, lest it lose him future votes. The system is
The Federal Reserve (which is a bank, not a federal agency) has a
91-year track record of abject failure. Its charter "to protect the
currency" has resulted in an inflation factor of
2,000%. A dollar
today buys you what a nickel could purchase on the Fed's inception date of 1913.
That is failure on a grand scale. Moreover, the current
deflation-paranoid policy of keeping interest rates at over 3% below the real
inflation rate serves only to exacerbate the problem. One deleterious
effect of this environment is the calculated destruction of the wealth of
mom-and-pop investors, in favor of the fat cats. The folly of Fed policy
already has caused irreparable damage; yet it persists, because the Fed is
trapped in the embarrassment of its own stupidity.
AMERICANS' SAVINGS LEVELS ARE AT AN ALL-TIME LOW, and
AMERICANS' DEBT LEVELS ARE AT AN ALL-TIME HIGH. American citizens have been coerced into accruing debt via easily obtainable credit cards and unrealistic mortgage rates, at the cost of their savings. Credit-card balances are higher than ever. As compared to the GDP, the national debt level well exceeds even that of 1929. When the unprecedented credit and
real-estate bubbles burst, the pain will be severe, with global
implications. Our children and grandchildren will marvel at the unabashed
nonchalance with which their economic futures were trashed.
INFLATION NOT ONLY IS HERE, BUT IT IS RUNNING AMOK.
Despite what the feds and media are feeding you, one has to be brain-dead not to
see inflation all around. Just go into any store and check the prices, as
well as the decrease in the size of many product containers; or buy some
gasoline; or compare your monthly bills with those of a few years past, allowing
for a modest annual increase. Did you ever ask yourself why the three
things upon which you spend most of your
money — housing, energy, and
food — are conveniently excluded from the Consumer Price Index?
In recent years the inflation formulas themselves have been changed several times
solely in order to reduce the numbers. So much for the official inflation gauge,
and for the reliability of official government specs in general.
A "RECOVERY" WITH A NET LOSS OF REAL JOBS IS NO RECOVERY
AT ALL. When a company is able to announce higher profits for a quarter,
yet that gain has resulted solely from having laid off 40% of its work force, what
kind of recovery is that? Then there is the scam of hedonic product
valuations, whereby that new computer officially cost you only a small fraction
of the purchase price, because it runs five times faster. And that new car
didn't cost extra either, because the seat is more comfortable! Another
example of misleading numbers is the relatively new ploy of evaluating a company's
worth based upon
"forward-looking" data. Corporate earnings
projections invariably are biased toward the high side, causing the implicit
price-earnings ratio of their stock to be greater than the reality of actual
Corporations are fleeing the United States, and lately executives have been selling thirty shares of stock for every one share that they purchase. They are telling us something, but it is not that you should invest in their companies. Moreover, there never has been a recovery concurrent with increasing levels of debt. Massive currency shenanigans help to perpetuate the illusion of well-being.
THE AMERICAN STANDARD OF LIVING IS UNSUSTAINABLE.
Having consumed many times our share of the world's products and natural resources for
a long time, the American lifestyle itself is a humongous bubble. When our creditor
nations (primarily China) finally figure out that U.S. Government debt is a scam that no
one has any expectation or intention of repaying, and that purchasing our debt as artificial
support of their own employment rolls is a
long-term loser, the party could be
A LONG-TERM BEAR MARKET HAS BARELY BEGUN. Based
upon major market cycles, in the grand
multi-century scheme of things a depression
already is underway. In the nearer term, after a possible retest of the
all-time highs, expect the DOW to drop below 4000; you might even live long
enough to see a DOW 400 again! Naturally, there will be ups and downs in
stock prices as always; but the general trend will be down for many years.
The world market will have its way; it is more powerful than any government or
cadre of manipulators.
Currently the stock market is highly overvalued on its fundamentals.
Historically, great bear markets do not end until those same stocks are fundamentally
undervalued. Look for a time when the
(P/E) is approximately equal to the dividend percentage rate (about 7),
when nobody is interested in stocks anymore. Those are the historical
indicators of a market low, and that will be the time to buy —
perhaps 6-10 years from now. Based largely upon population demographics,
some analysts project a market top of DOW 30000-40000 in 5-6 years,
largely on the assumption that the baby-boomers are going to spend lots of
extra money before they begin to drop off the employment rolls in 2010. Where
will they get it? It is a statistical fact that retirees spend less,
not more; moreover, much of what they do spend will go toward increased
medical and energy costs.
OIL WILL BE GONE IN FIFTY YEARS AT PRESENT LEVELS OF
CONSUMPTION AND DISCOVERY. Dependence upon foreign oil is a tremendous
threat to America's national security and
well-being — a fact publicly
acknowledged by President Carter in 1977. Other energy sources exist, such as
liquefied natural gas, nuclear power, and hydrogen fuel cells, but those options pose
problems. Moreover, research and implementation of alternatives have been woefully
inadequate and slow, and the public will fight any such transition regardless.
Global oil production is peaking. There will be a devastating energy crisis,
and our society — rooted in the promise of an endless supply of cheap
energy — will be forever changed. Wars will be fought over oil;
yet there can be no real winner, for the spoils will have been consumed. Perhaps
the collective human race, following the legacy of the dinosaurs, will itself
become an energy source for the next batch of greedy morons a few eons hence!
In any case, the price of gasoline might not go parabolic for a while; in fact it might
even go down substantially during the coming deflationary period. The oil
situation is nevertheless indicative of the ultimate fate of all scarce
resources. It's a simple matter of supply and demand —
THINGS ARE NOT "DIFFERENT THIS TIME". What magical event has caused thousands of years of natural market forces to be suspended? Answer: It didn't happen.
Too doom-and-gloomy for you? Sorry, but that's THE
WAY IT IS. There is no stopping it; there is only getting through it.
The currently touted "perfect world of economic balance and low inflation" is
the same situation as that praised by economists in 1929. In fact, there
simply isn't anything positive on the economic event-horizon. A
record national savings shortfall, a record current-account deficit,
record levels of household indebtedness, record-low levels of personal
savings, and record budget deficits all are being officially downplayed by
officials — because it is their own greed and mismanagement
that are responsible, and because they have no attractive solutions to offer.
Small government and sound money are the only things that can save us,
but virtually no one in Washington is willing to express an interest in either of
those principles (which, by the way, were precious to our founding fathers).
The U.S. economy is an "accident waiting to happen". And it
will happen, but it will have been no accident. America is in denial;
you need to do better.
So what can you do about all of this? Short of liquidating assets and relocating to Nova Scotia? One option is to hang on as best you can for the duration. Some suggestions: (and they are merely suggestions; it's your future, so you decide)
DO NOT go further into debt.
Use credit cards only as accounting conveniences; do not let balances accrue.
If you "need" to charge something, then you cannot afford it.
variable-rate mortgages; if you already are entangled in one of those,
then convert to a fixed-rate setup as soon as possible. Have nothing
to do with a nothing-down loan; ask yourself what will happen when
the principal payments kick in, or what would happen if a financial hardship occurred,
such as a reduction of income or medical tragedy. Never refinance your
precious home just to generate cash, except under catastrophic (that is, medical)
circumstances. Literally millions of home owners who have imprudently stretched
beyond their financial safety zone will pay dearly, forced to walk away from their
unrealistic "American dream" while that monster SUV that they never needed
rots in the driveway.
DO NOT blindly accept investment advice from anyone with
an agenda or something to gain from your participation (another
actually). That group includes the following:
PUBLISHED GOVERNMENT DATA:
These are shamelessly manipulated to make those in charge look
to perpetuate the illusion that "all is well on our watch."
Corporations do the same thing, although recently enacted legislation will curtail
these practices somewhat — in the private sector only.
POLITICIANS: I have observed but one person
in Congress who demonstrates any competence in the field of
Ron Paul (see the reading list). The others seem to have fallen victim to the
time-honored conflict of interest that renders our "democratic" system
so inherently unworkable: selfishness. Power, wealth, status, and
re-election prospects ultimately take priority over the best interests of the
nation. A single-term limitation would result in far better legislation.
THE FEDERAL RESERVE (and all central
banks): The Fed Chairman's
self-professed vendetta against the natural
capitalist down-cycle is ludicrous. Such a cleansing is both necessary
and inevitable; the market is bigger than the Fed. Toying with the natural order
of things merely escalates the level of eventual suffering. This is quite a
disappointing performance from Alan Greenspan who, in the 1960's, indicated that he
did have a clue. He, of all people, should be aware of the fact that central
bankers callously ignore — that they are not smarter than the
collective market, and that the only long-term winning strategy is to
leave it alone.
Additionally, the Chairman has publicly upstaged Pontius Pilate himself
in recent speeches, by absolving himself of blame for both past and
future economic catastrophes. He claims that there was no way that
he could have foreseen the
dot-com bubble that his own policy created
(when in fact, many analysts did see it and made manifold references to it
at the time); apparently he also cannot see the monstrous credit and housing
bubbles that he also has created, in order to prevent the normal capitalist cycle
from being completed. We need a word combining the meanings of asinine,
destructive, and immoral. The history books will portray the Greenspan Gang
most unfavorably. That is, if those journals haven't been burned (or classified)
by that time.
CNBC, THE WALL STREET JOURNAL, etc:
The mass media are in the entertainment business. Period. Expect to
learn from the talking heads only what they think you want to
namely, their standard "perma-bull" mantra combined with whatever the
Government instructs them to say. A perfect example is Larry Kudlow's prediction
of "DOW 50000", just before the market topped in year 2000 at a level
that you and I might never see again. To whom would you rather entrust
your portfolio — a network-salaried cheerleader, or Warren
Buffett? Their advisories are guaranteed to differ. Far from being
objective, the demonstrated mission of the WSJ (and many other financial publications)
is to further the cause of Wall Street, which is easily defined: "To promote
increases in the prices of stocks, irrespective of their actual worth, so that they can
then be dumped upon a gullible public". At the very least, try to avoid
being brainwashed by such sources as the blatantly biased Fox Network, which is on
record as proclaiming — in a court of law, no less — that
there is no law requiring published "news" to be the truth.
STOCK BROKERS: This is a tough one,
because most investors feel the need to trust somebody. Be aware,
however, that brokers have commissions to
earn — another built-in
conflict of interest. If you are not a repetitive buyer, then they are not in
business. Moreover, the major brokerage firms mdash; purportedly housing
the top analysts — statistically under-perform the general market
by several percentage points per year. Being prisoners of the brokers' hype and
job-preservation tactics, their clients would be far better off in an index
DO conserve capital, and increase savings.
The world probably will not come to an end, and some projected scenarios
could take a generation or so to play out. Just don't plan on improving
your long-term lot by blindly holding onto stocks and bonds. The old
buy-and-hold strategy — formerly successful at times —
will prove suicidal henceforth, especially in U.S. stocks.
DO plan an investment in precious metals at some
juncture — either stocks or bullion; they are the ultimate hedge against
all that ails the world economically. Gold, in particular, is anathema to the
central bankers, so they do their utmost to keep its popularity in check; but they
cannot control it forever, as it is the only honest money on the planet.
The best time to buy would be when the sector is in disfavor among the media and most
traders, and the public is totally disinterested. That superlative scenario
could be years away, however, and the world's financial time bomb might not wait for
such a "golden" opportunity to materialize. When the dollar finally
dies completely, the U.S. government will be forced to revert once again to a currency
gold standard. For its citizens, owning the metal will once again be declared
illegal, and you will be forced to sell — but at a high multiple of your
DO consider shorting the stock market via an inverse mutual
exchange-traded fund, thereby circumventing the unlimited risks inherent
to the short-selling of stocks. I realize that most investors have a
built-in irrational aversion to any tactic other than "buy, buy, buy";
but what can I say? You do not need to own stocks; you do need to
be on the right side of the long-term trend. If you must purchase
something, buy commodities; that's the market of the future —
those scarce resources. Plan to get back into equities when the near-term
corrective cycle is complete — perhaps around 2010-2014.
All that cash that you saved by lying low and living within your means will pick up
assets at a fraction of their current prices. The right time will be when
prospects seem particularly bleak and nobody is interested in the market anymore.
DO read articles by those with a proven history of economic competence and savvy. A partial listing:
Jim Rogers — George Soros — Warren Buffett — Peter Schiff
Marc Faber — Ian Gordon — Richard Russell — Robert Prechter
Representative Ron Paul — Bob Moriarty — Bill Bonner — Suze Orman
Anyone from the Ludwig von Mises Institute (the Austrian School of Economics)
The Kondratiev Winter (look it up) is upon us. When it is over, prospects should brighten. Perhaps the humbling experience will encourage the politicians to mend their ways. Perhaps they will embrace a renewed respect for the values and principles upon which our wonderful nation was founded, and which made it the former envy of the world.
Yeah, and perhaps they will put Humpty Dumpty back together again, too. Meanwhile,