Reviews "Bob Prechter's new book, Conquer the Crash, pro· vidcs a wealth of self.help do's and don'ts. It's a rnus[·read book, which I'm personally putting on my gift list for friends and loved ones." - Marrin D. Weiss. Ph.D. author the I1mianal best seller, The Ultimate Safe Money Guide
or
"This is the most crucial financial period in your life. This book explains why. It also tells you what you should do about it. If you want to preserve your wealth, I urge you to follow Prechter's advice. You will be grateful that you did." -Ian Gordon The Long Wave Analyst "Conquer the Crash provides disciplined investors with a map, compass and survival guide. Don't leave home without it."
-Henry Van cler Eb Presidem, Cabelli Mmhers Fund
.. A compelling exposition of how both the mechanics and the psychology of the business cycle can be encapsulated in market analysis." -Sean Corrigan
Capiml,!nsight.com "Prechter knows the facts like few others. Read his forceful argument carefully. It can save you from financial loss."
-James R. Cook President, Investment Rarities
"Conquer the Crash is an awesome piece of research based upon intellectual integrity, profound realism and logic. The book lays one of the essential cornerstones of capital pres, ervation. If you argue with its premises or dismiss its conclusions, the price could well be your permanent loss of wealth." -Jean~Pierre Louver Founder & CEO, The SafeWealth Group "This book outlines brilliantly and simply the ratio, nale for how and why the bubble developed. Prechter will go down in history as a legend for having predicted the secular bull market and now having provided a lucid description of the economic cataclysm that unfortunately lies ahead. I urge you to read this book and give it to your loved ones, as it provides great tactical advice on how to prepare yourself financially. Reading this book could make the difference be, tween agony and comfort over the next twenty years." -David Tice Prudent Bear Fund
CONQUER
THE
CRASH
CONQUER You
THE
CRASH
CAN SURVIVE AND PROSPER
IN A DEFLAT10NARY DEPRESSION
Robert R. Prechter; Jr.
JOHN WILEY &. SONS, LTD
Copyright © 2002 by Roben Rougelot Prechter. Jr. All rights reserved, Published by John Wiley & Sons, Inc" Hoboken. New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced. storcd in a retrieval system. or transmiued in any form or by any means, electronic, mechanical, photocopying, recording. sc:mning. or otherwise, eJ(cept as pennilled under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior wrilten pemlission of the Publisher. or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center. Inc.. 222 Rosewood Drive. Danvers, MA 01923. 97B-750-8400. fax 978750-4470. or on the web at www.copyrigh\.com. Requests to the Publisher for permission should be addressed to the Pennissions Department. John Wiley & Sons. [nc., III River Street. Hoboken, NJ 07030. 201-748-60 II. fa;( 201-748·6008. e·mail: [emailprotected]. Limit of Liability/Disclaimer of Warr:mty: While the publisher and author have used their best effons in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or eJ(tended by sales reprcselllatives or wrinen sales materillis. The lIdvice and strategies contained herein lfilly not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor lIuthor shall be liable for any loss of profit or any other commereilll damages. including but not limited to special, incidentlll. consequentiaL or other damages. For general infomlation on our other products and services. or technical support. please contact our Customer Care Department within the United States at 800-762-2974. outside the United States at 317·572-3993 or faJ( 317-572-4002. Wiley also publishes its books in a variety of electronic fonnats. Some content that appears in print may not be available in electronic books. ISBN 0-470-84982·7
Typeset by the author. Printed in the United States of America.
10 9 8 7 6
Dedication This book is dedicated to all my friends and colleagues at Elliott Wave International, who put up with three months of my single~mindedness in producing this book.
""
Acknowledgments In puning wgether this volume, I had invaluable help from Roben Prechter Sr., LOll Crandall, Pete Kendall and Jean· Pierre Louver, who provided expert information that enhanced certain chapters in this book. Rachel Webb and Sally Webb did the chafes and formatting, and Robin Machcinski and Darrell King designed the jackcL
"
x
Contents Foreword
xiii
Book One: WHY A STOCK MARKET CRASH, MONETARY DEFLATION AND ECONOMIC DEPRESSION ARE UKELY TO OCCUR SOON
Part I: The Case for Crash and Depression 1; A Myth Exposed............................................................................... 2: When Do Depressions Occur? '.. 3: When Do Stock Markets Turn from Up to Down? 4: The Position of the Stock Market Today 5: Evidence from Stock Participation and Economic Performance 6: The Significance of Historically High Stock Market Valuation........ 7: The Significance of Historically Optimistic Psychology 8: Implications lor the Stock Market and the Economy
5 17 22 32 41 50 63 78
Part II: The Case for Deflation 9: When Does Deflation Occur? 87 10: Money, Credit and the Federal Reserve Banking System............... 96 11: What Makes Deflation Likely Today? 105 12: Timing Deflations: The Kondratieff Cycle 113 13: Can the Fed Stop Deflation? 121 Book Two: HOW ro PROTECT YOURSELF AND PROFTT FROM DEFLATION AND DEPRESS/ON
14: 15: 16: 17: 18: 19: 20: 21: 22: 23: 24: 25: 26: 27: 28: 29: 30: 31: 32: 33: 34:
Making Preparations and Taking Action Should You Invest in Bonds? Should You Invest in Real Estate? Should You Invest in Collectibles? Should You Invest in ~Cash·? How To Rnd a Safe Bank Should You Speculate in Stocks? Should You Invest in Commodities? Should You Invest in Precious Metals? What To Do With Your Pension Plan What To Do With Your Insurance and Annuities Reliable Sources for Financial Warnings How To Ensure Your Physical Safety Preparing lor a Change in Politics How To Identify a Safe Haven Calling in Loans and Paying off Deb!... What You Should Do II You Run a Business What You Should Do with Respect to Your Employment Should You Rely on Government To Protect You? A Short List of Imperative ·Do's" and Crucial·Don'ts~ What To Do at the Bottom of a Deflationary Crash and Depression
Services That Can Help You Survive and Prosper In a Deflationary Depression Media & Misc. References
139 143 151 158 161 175 189 201 206 216 219 224 229 235 241 245 248 250 252 258 261
263 275
Foreword
"Look out! Look out! Look out! Look out!" -
Barry, Greenwich and Monon, via The Shangri~Las
My first OOok. fWot! \Vave Principle, which I wrotc with A.J. Frost. was very bullish. It came out in November 1978, with the Dow at 790. Today the outlook is much different. Now is not the time to take financial risks. It's time to batten the hatches so you can emerge safe from the Storm. As you can see by this book's title, I am once again calling for events that few expect. But this rime, I feel morc trepidation about doing so. Deflation and depression are exceedingly rare. Sustained deflation hasn't occurred for 70 years, and the last one was 50 briefthat it lasted less than 3 years. During the past two ccmuries, there have been JUSt [WO periods thm historians unanimously identify as depressions. The 19 lh century had one, and the ZOlh century had one. Predicting such exnaordinary events is a complex and challenging task. Everyone who has tried it in the past fifty years has failed. Amidst mday's social psychology, merely addressing the ideas of deflation and depression is considered something akin to heresy or lunacy. Survey after survey shows that most economists believe that depression and deflation, considered together or separately, are utterly impossible now if not ever. Most believe that the U.S. economy is in a rising trend of perpetual prosperity with moderate inflation and that if any interruptions do happen along the way, they will be mild and brief. Despite this overwhelming consensus, I am resolute. Book One tells you why, and Book Two tells you what to do if you agree with my conclusions.
XIII
Ifby some bizarre circ*mstance you are already convinced that preparing for deflation and depression is your desired course of action, you can tum to Book Two right now. If not, then you need Book One. Before you can take steps to protect yourself against a deflationary crash and depression, you have to understand what they are, believe that they are possible, and then agree that they are likely. Guiding you to that point is Book One's goal. After you assimilate those ideas, you will be primed to act confidently to insure your survival and prosperity, as outlined in Book Two. Warning
I've been wrong before. The biggest mistake of my career was in the stock market. After identifying the start of the great bull market and later forecasting, "Investor mass psychology should reach manic proportions," even I never imagined that the stock mania would last as long or go as high as it did. So I jumped off the train too early. Regardless, I think my basic interpretation of the long;term financial picture, which we will explore in Chapter 4, is correct. It has never been a matter of whether we would experience a tremendous bull market followed by a historic bear, only a matter of timing and extent. The reason that I remain willing to express my unconventional view is that I believe that my ideas of finance and macroeconomics are correct and the conventional ones are wrong. True, wave analysts make mistakes, but they also make stunningly accurate long~term forecasts. In contrast, those who do not understand waves can't make any useful social predictions at all. It may seem to you that the prospect of taking actions that are contrary to the beliefs of a vast array of experts is a big risk to take. But a practical point virtually eliminates that risk: If
Foreword
you follow the advice in this book and no financial crisis occurs, you cannot get hun. In fact, you should profit nicely from most of these suggestions. Even if my outlook proves incorrect, the worst case is that your money will earn less than it otherwise may have. Compare these outcomes to the opposing scenario: If conventional economists, who in the aggregate have a perfect record of failing to predict economic contractions, are wrong again, you will lose everything that you have worked so hard to obtain. You will also blow the chance to make a fortune beginning at the next major bottom. Here's a bonus: If you end up missing out on some of the investment profits that a decade of prosperity can provide, I hereby truly apologize; I know what it feels like to miss an opportunity, and I will regret that I influenced you to do so. By contrast, if you get destroyed financially by following the bullish advice of economists, money managers, brokers, media experts and the like, they will not apologize. They will claim that the future was unforeseeable, so the rock-hard convictions and platitudes that they cavalierly expressed, the ones that you relied upon (() plan your financial future, were wrong through no fault of their own. There is one catch: I refuse to offer you an excuse to disclaim all responsibility. If you lose your money, your house, your income and your pension in a deflation and depression, at least you can blame the expertS for it. You can cry, "I did what they all told me to do!"!f you rake action after reading this book, 1insist that you do so because you agree with my case, not because you are blindly following my conclusions. To be sllccessful in life, or at least to learn something along the way, you have to think for yourself.
-Robe" Prechrer, March 2002
BOOK
ONE
WHY A STOCK MARKET CRASH, MONETARY DEFLATION AND ECONOMIC DEPRESSION ARE L,KELY
To
OCCUR SOON
PART
I
THE CASE FOR CRASH AND DEPRESSION
Uncomfortable 1.tJ07lWn in caT: "I'm sitting on something!" \V.C. Fields: '" lost mine in the stock market." -International House (1933)
Chapter 1:
A Myth Exposed How many times over the past decade have you heard glowing rcpom abollt the "New Economy"! Hundreds, maybe thousands of times, right? Those of you who have been living on a desert island or who arc reading this Ixx>k fifty years from now can experience the same thing vicariously through Figure I ~ I, which displays the accelerating frequency with which the global media have been referring to the "New Economy" year after year. It's been everywhere. Economists celebrate the broadening user~ vice economy" and proclaim that economic growth in the new Information Age has been "unprecedented" in itS vibrancy, rep silience and scope. Rhetoric is cheap. Evidence is something else. What would you say if you discovered that we have nO[ had anyming near a New Economy, that all that talk is a lie! This chapter is going to show you that the vaunted economic expansion of recent decades in the world's leading economic power, the United States - much less the rest of the world - is far less impressive than you are being led to believe. First take a look at Figure 1-2, which depicts the U.S. stock market from its low in 1932 during the Great Depression all the way to the present. This graph delineates five phasesor "waves" - of rise and fall.
6
CoNouER THE CRASH
4247
TALK OF THE "NEW ECONOMY" 1985-2002 02002 E-...: w_ ~
L~
,.
'000
Number of references from U.S. and global publications source: ABlllnlonn
900
* annualized
800
based on first three rnooths of 2002
600
"'0 300
1986
1988
1990
1992
t~
1996
1998
2000
2002
Figure 1~l
The nOtes on the chart summarize a shocking fact: The economic expansion during the latest phase, wave V, which lasted from 1974 to Z()(X), was demonstrably weaker than that during the preceding rising phase, wave III, which lasted from 1942 to 1966. Both periods sported a persistent bull market in stocks that lasted about a quarter century, so in that sense, they arc quite similar. One noticeable difference is that the DJIA gained only 971 percent during wave III but a remarkable 1930 percenrduring wave V, cwice amount. This tremendous bull market in stocks in wave V is the great "boom" that people feel in their bones. Yet as you are about to see, the economic vigor and financial health
o.e
1: A Myth Exposed
'0000
2000
...
7
Weaker economy signals pending major cyclic downturn
Stronger economy indicates major cyclic uptrend in force
,
500
MAJOR PHASES OF EXPANSION AND CONTRACTION SINCE THE GREAT DEPRESSION
'00
OJIA Monthly Bar
1932-present
50
""-.
"""
""" '''''''
1970&
""" """
Figure I ~2
of wave V, the one that has received so much radiant press, failed to measure up to those of wave III by every meaningful comparison. Please go through the following citations one by one. (Economists do not have all the data from the 19405. so in some cases, our data for wave III begins later.) After you absorb this infonnation, we will set to the task of finding out what it meaos.
8
CONQUER THE CRASH
Comparative Measures of Economic Health (see Figure 1-3)
Gross Domestic Product • In wave III, from 1942 [Q 1966, the average annual real GOP growth rate was 4.5 percent.
-In wave V, from 1975 through 1999, it was only 3.2 percent.
IndUSlrial Production • In wave III, the average annual gain in industrial production was 5.3 percent.
• In wave V, it was only 3.4 percent.
Key Economic Measures in Wave III vs. Wave V
,........ ReB' GOP
anno.aI growth rate)
4
, 2
iii
Capacity Utlllution
f'It;M!he end 01 NC:h wave)
(aY81'i1g8 ~ ""I
r5
_..
Industriel Production (......-ge ~ "" change)
III
(nllalion
90
rrn:-
7
88
6
88
5
64
4
4
V
,
V
2
62
,
80
o .,,""".......... '-.IrtI _ _
78 76
Figure J·3
, V
2 1
rv
-III"
1: A Myth Exposed
9
Combining GOP and industrial production figures, we may generalize from the reported data that the economic power of wave V was one-third less than that of wave III.
Capaciry Utilization Factories' capacity utilization depicts the energy of an economic expansion compared to the infrastructure's ability to handle it. - In wave III from 1948 (when figures became available), capacity utilization rose 2Z percent to 91.5 percent in june 1966 and stayed high through the late 1960s. - In wave V, capacity utilization was net flat, peaking in january 1995 at 84.4 percent. U.S. plants were producing at only 82.7 percent of capacity at the ensuing peak in june 2000.
Unemployment Rare This is an economic measure of ill health. -In wave III from 1948 (when data became available), the monthly average of the unemployment rate was 4.9 percent. - In wave V, it was 6.6 percent.
Comparative Measures of Debt, Deficits and Liquidity (see Figure 1-4) To grasp the full measure of the underlying weakness of wave V's "fundamentals," one must look beyond economic figures to the corporate, household and government balance sheets that underlie those results.
10
CONOUER THE CRASH
Balance Sheet Items at the End of Wave III
vs. Wave V
(scales alleft)
%
Household LiquIdity Cash on hand minus I;abil~ies asa %
% '00
Feder.r Debt as % of GOP
Consumer Debt as %
% 0' personal income '00
BO
90
90
70
.0
BO
70
70
60
ill
50
60
'0
50
30
'0
20
30
30
20
20
10
10
10 V
H
L.J
L_l0
V
rm
60
m 150
'0
iii
100
50
Per.onal
Federal Budget Deficit
(Average annual
Current Aecount Trade Surplu-.'Delicll
Savings Rale
through 1999)
(at the end of each wave)
(Average or last seven
Sb
160
.
~ears
%
•
-ill
V
120
V
n
-20
80
.
80
-50
100
1-6
tor each wave)
iii
7
140
H
~O
200
50
1-2
'V
250
(Average)
1-12
1-'
as % o! GOP
Prime Rate
%
1-10
'V
Tot!ll Debt
%
300
6
-
40
•
V
2
20
-'00
~
,
-eo Iliil
5
L!..
1 0
02002 aiort8$\'oINo~l~ l Investments ... "r ~ali'~,?"'.i',;.'l/ o u!...(?'!Iv.. .:.~ if;f~ . . - - - - - - - - - - - - , ,~
..-
"
100x EXPANSION IN THE VALUE OF COMMERCIAL 6 INDUSTRIAL LOANS SINCE 1949 .t_",-
..-
TOTAL NON-FINANCiAL DEBT
12_-,
"
•
'" '00
,
"
._---_._-_.,,'-------------' 11150
11180
1'70
11180
lli190
._---
--'-=-:::"'"O-=O-=c-="O'==:J
•L
2000
lli1liO llll15 1170 1t7!> Il1l1O 1 _ '1lllO 1M 2000
Figure J I,]
•
"
..-
TOTAL OEBT
"
'"
" ,
"
,
"
•,...
U.S. CONSUMER CREDIT & COMMERCIAL LOANS
.-
0Mded by Produoer Prices
'"
"ro
...
,
.....
_-,,,,,
_e-..., ... _
Figure 11,3
'"
...,
""
'"
1975
'" ._--,,,,, "" ".,
Figure 11-4
"" """
'"
108
"
CONQUER THE CRASH
TOTAL CREDIT MARKET DEBT AS A PERCENT OF U.S. ANNUAL GOP
JOO
1910-2001
280 260
''0 220
200 190 160 140 120
lOll
..
.........._ ,,-
o.~ "",~ ~'2 oll1 _
OM02€_ ....... _
1910
1920
1930
1940
1950
'''''
1970
1980
1990
Runaway credit expansion is a characteristic of major fifth waves. Waxing optimism supports nm only the investment boom but also a credit expansion, which in tum fuels the invesunem
boom. Figure 11 ~5 is a stunning picture of the credit expansion of wave V of the 1920s (beginning the year that Congress audlQrized the Fed), which ended in a bust, and of Wrts that clients utiliz~ ing the Market Neutral Strategy achieved a return of 54.2 percent for the two years of 2000 and 2001 against an S&P performance of minus 21.9 percent. His website also posts individual managers' largest drawdowns (i.e., the percentage slips in portfolio value from each higher peak to the next trough), so yOlI can assess those as well. Naturally, as with all investments, there are no guarantees, so make sure the chosen plan makes sense for you. The only drawback is that the minimum investment for this program is pretty high, at $500,000. For information, contact the following:
20: Should You Speculate in Stocks?
199
Asset Alloca[ion Consulmms, bd. Website: www.assetallocating.com Email: [emailprotected] Address: P.O. Box 613 Station "Q", Toromo, Ontario M4T 2N4, Canada Phone, 800-638-5760 and 416-762-2330 Fax. 416-762-3793 Portfolio Managers Who Are Not Afraid To Be Bearish You can also find portfolio managers who are not afraid to be bearish. There are surely many in the world. I personally know of only a few, and they mayor may not be the best. In the U.S., examples are Lang Asset Management (www.langasset.com). which selects medium,to,large-cap stocks that look overpriced and shoTts them, staying reasonably fully invested, sometimes "hedging" with options or by other means. In Asia, Marc Faber Ltd. (www.gloomboomdoom.com). and in Europe, Zulauf Asset Management AG (Grafenauweg 4, CH-6300 Zug, Switzerland; phone, (US, 0 II) 41-42-72-45-70), provide bearishly oriented management. Minimum funding requirements range between $100,000 and $3 million. To find more leads, check out the Hedge Fund Association at http://www.thehfa.org and Planet Hedge Fund at http:// planethedgefund.com/catlinks/indi.html. Hedge funds are only as good as their managers. Some fund managers use huge lever· age and can "blow up," losing everything on a bad bet. The more spectacular of those make the newspapers; there are others that just go quietly. If you want to go this route, choose wisely and make sure that you satisfy yourself that the money manager you choose deals with safe banks. I have not investigated that aspect of any of these funds. By the way, Asset Allocation Consultants does monitor many of these managers and can help you decide which ones might be best for you.
200
CONOUER THE CRASH
Temporary Opportunity? The opportunity W make money on the downside in a deflationary crash can hardly be overstated, because you will be making more dollars as the value of dollars is soaring. It's a double benefit. Will it always be there~ I recall only one time when authorities banned buying in a bull market. The Comex fmures exchange banned orders "£0 open" in silver futures in January 1980 to save their own skins, since many exchange members were short. Most investors were long, so their only allowed course was to sell. By changing the rules, the exchange profited and investors got killed. (For more on that story, read Silver Bonanza, by James Blanchard and Franklin Sanders, published by Jefferson Financial, 2400 Jefferson Highway, Suite 600, Jefferson, LA 70121, phone 504-837-3033.) In a bear market, bullish invcswrs always come to be, lieve that short sellers arc "driving the market down," when in fact, the decline is almost entirely due to selling from within their own over,invesred ranks. Sometimes authorities ourlaw short selling. In doing so, they remove the one class of investors that must buy. Every short sale (except when stocks go [0 zero) must be covered, Le., the swck or derivative contract must be purchased co close the trade. A ban on shOTt selling creates a market with no latent buying power at all, making it even less liquid than it was. Then it can dribble down day after day, un, hindered by the buying of nervous shorts. Like all ocher bans on free exchange, a ban on short selling hurts those whom it is de, signed to help. The Japanese govemmenr is currently discussing a ban on short selling. If authorities in your country decide to disallow short selling, the bad news is that this option will be closed to you. The good news is that they usually take such actions near major bottoms, so it will probably be about the proper time to cover shorts and start composing your "buy" list anyway.
Chapter 21:
Should You Invest in Commodities? Figures 21-1 through 21~9 show what happened co com, modities in dollar terms from 1929 through 1938. Pay particular attention [Q what happened in 1929,1932. the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too. You can get rich being shon commodity futures in a deflationary crash. This is a player's game, though, and I am not abollt to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies CO sell shon. Make sure that your broker keeps your liquid funds in T,bills or an equally safe medium. There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a waT scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere [Q go but down during a depression. From 1929 [Q 1933, for example, after oil had already fallen substantially over preceding years, it plummeted another 80 percent in price. The odds of a repeat performance, however, are lessened by the fact that 4/5 of the world's known oil reserves are in Asia. Aside from France, politi~ cal entities in general have squandered their nations' forty-year opportunity [Q have responsible companies replace the cumbersome, costly and dangerous old models of energy production with
Prices of Commodities, 1929 -1938
_..
Corn Futures
Wheat Futures '60 '40
~
~ 120
•w •~ '00 z
w u
'40 120
Avg. 01 Monthly Highs & Lows
,-
Avg. of Monthly Highs & Lows Source: Bel. of Trade
\\
~
•w •
~ zw u
60
60
40
60
40
20 1929
1930 1931
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
1932 1933 1934 1935 1936 1937 1938
RawSu ar Futures
Rubber Futures 3.0
Avg. 01 Monthly Highs & Lows
Source: Commodity Exch.
~ '6
•w • "uzw
~
'4 '0 6
II ~
Avg. of Moolhly Highs & Lows Source: NYC. & S.E.
2.5
••" 2.0
~
••w "z
w u
~
'5 '0 0.5
19291193011931 119321193311934 119351193611937 j 1938
Figures
2J~1
1929 1930 1931
through
21~4
1932 1933 1934 1935 1936 1937 1938
~ ~ ~
Ilf
I.I. ~
< ~
Copper Futures
Hides Futures 140 120
Avg. 01 Monthly Highs & Lows Source: Commodity Exch.
.•
ffi
12
•
80
~
80
~
~ 10 ~
~
~
4
,
u
2
"~ ;;-
i5' ~
20
Silk Futures
~
gl
40
4
,.I.
""
20
Avg. of Monlhty HighS & Lows Source: Commodity Exch.
~
< w
14
~
12
•
'u
-'" g
~ 100
14
5
A.. . O. 01 Monthly Highs & lows Source: Commodity Exch.
Cotton Futures
~.=.7::'.'-
i'.
10
•
6 4
lmllml'~111~ll~ll~ll~ll~ll~ll~
Flgu,es 2/-5 rhmugh 21-8
g
204
CONOUER THE CRASH
Scrap Steel
,.,. "
22
Mid-Month Quote Source: Iron Age
20
•" • ,•• z
•u
14 12 I•
•
~ 1929 1930
1931
1932 1933 1934 1935 li36 1937 1938
Figure 2/ ~9
nuclear power plants, which (absent politics) can produce mul, tiples more energy at far less cost, risk and pollution. Because of these policies, many nations are deeply vulnerable to a cessation of oil shipments from unstable nations. So oil may be a good short, but it's a risky one. Be careful with any commodities that could experience shortages. Some people today who are concerned about economic upset are touting commodities, mostly because they look for a replay of the inflationary 1970s. Commodities have been jump· iog higher since October, and advocates are vehement. I do not buy this argument, at least not as of today. As shown in Figure 21,10, the Commodity Research Bureau (CRB) commodity in,
dex has tracked the S&P, with a slight lag, since mid-I998. Gold and silver have also joined in the latest stock rally. As I see it, this correlation means that most assets lately are moving up and down more or less together, probably as liquidity expands and contracts. If so, then any deflation will crush hard-asset prices right along with share prices, just as it always has. Even if I came to expect the prices of hard assets to rise, I still would nor put commodities on the top of my list. I would buy gold and silver, for three reasons: First, unless you own an oil company or the like, you can't own physical commodities; you
205
21: Should You Invest in Commodities?
ROUGH CORRESPONDENCE INDICATES THAT MARKETS ARE RESPONDING PRIMARILY TO LIQUIDITY FLOWS
1600
1500 1_
1915
Dec. 1932
""
,~,
Figure
22~1
bear markN by the time of the 1929 high in the stock market, it still followed commodities and paper assets down during the deflation to a final low in December 1932. There is rarely sufficient reason to bet heavily on cycles doing something different from what they have typically done, and this cycle's hiswry implies that the precious metals' bear market is not quite over yet. If this deflation acts like the last one, then at the coming bottom, we will have a great buying opportunity for gold and silver - maybe the greatest ever. Most gold bugs today assert that gold and silver are a "de~ flation hedge," a "war hedge," and a "depression hedge," claims that the record does not convincingly support. The price history of 1931 is instructive in showing that there was a year,long middepression rally in the price of silver, which ended on a spike,
22: Should You Invest in Precious Metals?
209
indicating brief panic buying. Investors of that time were like· wise convinced that silver would provide coumeHrend solace during monetary difficulty. They were remembering silver's posi· tive performance during the preceding difficult times of 1914·1919, which were inflationary. Similarly, today's precious metals enthusiasts have the inflationary 1970s in mind. How· ever, the actual troubles in the 1930s were, and in this case are expected to be, deflationary. The fact that people "rushed into gold" in the early 19305 has been a mainstay of the gold advocates' argument. They rarely tell the whole StOry. I suspect that the reason that people bought gold then is that the U.S. government had fixed the price, at $20.67 per ounce. While everything else collapsed, gold was soar· ing in relative value, and its value gains were guaranteed. Who wouldn't buy it? If the government had fixed the price of any other substance, people would have invested in that instead. Today, gold, like silver in the 1930s, is free to trade at market price, which means that it can go down during a dollar de(lation. I cannOt guarantee that it will; I can only state that there is no good case to be made that history indicates otherwise. Buy Gold and Silver Anyway
You might be surprised to find that I advocate holding a healthy amount of gold and silver anyway. There are several rea~ sons for this stance: First, it could. be different this time, for some reason I can· not foresee. In a world of fiat currencies, prudence demands hedging against a rush to tangible money. Second, these metals should perfonn well on a relative basis compared to most other investments. Unlike so many com· modities, they will not fall 90 percent from today's prices, much less to zero, like so many stocks and bonds. These metals are downright inexpensive compared to their top values in 1980.
210
Silver today COSts only about 8 percent of its peak dollar value. Relative to home prices and stock prices, the metals have never
been cheaper. So even if the precious metals continue co
de~
cline, they will fall much less in percentage terms than most other assets because they have already fallen so far. Third, the question of whether there will be funher bear market in the merals is really one for specu!acofs and quibblers. Gold and silver have declined in dollar value for over twO decades, which is between 90 percent and 100 percent of the [Oral time I had expected them co fall. It may nO[ be prudent co try co finesse the final months. Fourth, the metals should soar once the period of deflation is over. Notice in Figure 22-) that silver rebounded ferociously after it bonomed in 1932, tripling in just two years, rewarding those who COntinued to hold it. Ifdeflation again keeps precious metals prices down, the rebound after the bottom should be no less robust. Given the likely political inflationary forces, it could well be much stronger. So by all means, you want to own precious metals prior to the onset of the post-depression recovery. Fifth and foremost, if you buy gold and silver now, you'U have ir. If investors worldwide begin to panic into hard assets, locking up supplies, if governments ban gold sales, if gold and silver prices go through the roof, you won't be stuck entirely in paper currency. You will already own something that everyone else wants. Be aware that the present legalities of gold and silver ownership could change. This political risk isn't fantasy, even in the Land of the Free. In 1933, President Roosevelt outlawed gold ownership for U.S. citizens and imposed a ten-year prison sentence on anyone who refused to surrender his gold to a Federal Reserve Bank within 25 days. (The following year, the government began a long campaign of fixing the price of newly
211
22: Should You Invest in Precious Meta/s?
mined silver, though each level was temporary and closely reflected market forces.) The ban on gold stayed in place for over four decades, until President Ford lifted it on the first day of
1975. Should you buy gold and silver now ! The answer depends on how much you are willing to pay for the added breadth in your portfolio and for their currem availability. If you are willing to see the dollar value of the precious metals drop another 30 percem or more before they rise substantially, then I would say, that's the price you're willing to pay for its current availability and for the "insurance" of greater portfoliO stability under an unexpected inflation scenario. If you want to arrange for capital safety in every way that you can manage, then diversification into real money is a necessary part of that effort.
How To Buy Gold and Silver I do not advocate buying gold and silver in paper form by way of futures contracts, gold~backed bonds from the Russian government or ownership certificates connected to commingled accounts at storage facilities. After all, which is better - own~ ing actual gold or some entity's promise to pay id For maximum safety, you should own gold and silver in physical form, outright. One-kilo ba" are widely traded globally, but "standard bars" of 400 fine ounces are the primary fonn of gold and silver used by central banks and recognized by the Comex, the London Bullion Market Association and the Tokyo Commodity Exchange (TOCOM). So that is the most liquid medium for storing substantial wealth in gold form. Coins are a good medium for smaller portfolios. Even larger ones should include their share of coins, because some day, tangible money could once again become a medium of exchange, at least temporarily. To that end, be sure to avoid rare coins that have a "collectibility" premium. Many dealers recommend paying
u.s.
212
CoNouER THE CRASH
up for rare coins because in 1933 some collectible gold coins were exempt from U.S. government confiscation. The "cutoff" point (or rarity was never codified, though, and there is no guarantee that any such law, much less exactly the same law, will go into effec£ in your jurisdiction. Any fucure confiscation in your country may include gold coins with a small collcctibility premium because investment strategies built around rhem are well known. By all means, though, if the argument makes sense to you, pay the premium and sleep better for it. The bes[~knownand most liquid "bullion" style gold coins
are American Eagles, South African Krugerrands, Canadian Maple Leafs and Australian Nuggets. As for silver, Americans should own a bag or two of circulated U.S. silver coins. Most coin dealers can get you these items. After you have a core posi· tion, accumulate the metals at a pace with which you are comfortable, preferably on price declines. Every time myopic central banks and panicked debtors push the price of gold and silver down, buy some more. It is probably not as good an idea to invest in gold stocks, either. In common stock bear markecs, stocks of gold mining com· panies have more often gone down than up except in relatively rare five to ten·year periods of accelerating inflation. Few people know that from the top day in the Dow in 1929 to the bottom day in 1932, gold mining shares rose only slightly even u.ough Ute
U.S. gowmment propped up the companies' product by fixing ill price. Mining shares did nm explode in value until the stock market as a whole turned up. Today the government does nOt fix the price of gold, so in the deflation we currently face, gold mines will enjoy no false advantage over any other companies. Their stocks will probably rally when the overall stock market rallies (as they are doing now), but they have no built·in support as they did in the 19JOs, so they are likely to disappoint those who invest in them. (Of course, if the government's policy on gold changes,
22: Should You Invest in Precious Metals?
213
then so might the outlook for mining share prices.) Also be aware that there are risks auending the independence of mining com~ panies. Owning gold shares means betting that no government will nationalize the mines whose shares you own. Owning gold shares is fine at the top of a Kondratieff economic cycle when inflation is raging, such as occurred in the 1970s, but not in its final years when deflation is raging and political tensions are their most severe. In 1933, Roosevelt's Executive Order stated, "Your pos· session of these proscribed metals and/or your maintenance of a sa(c.deposit box to store them is known to the Government from bank and insurance records. Therefore, be advised that your vault box must remain sealed, and may only be opened in the presence of an agent of The Internal Revenue Service." Most banks were only tOO happy to comply because gold prohibition promised their salvation, or so they believed. If your government decides to con~ fiscare gold, your country's banks will be recruited in the operation. If it happens sometime in the coming crash, the rea~ son will probably be "fighting terrorism." By the way, this potential is a good reason to refrain from keeping any important personal papers in bank safe deposit boxes in any jurisdiction where such an action is possible. Otherwise, you may have to wait a while for permission to access the contents. If you would like to buy gold and silver, your options are much more limited than they were twenty years ago, when ev· eryone seemed to be in the business. Here are some suggestions. If you want to buy at least $lOO,OClO worth of gold and/or silver bars and store them in one or more of the safest depositories in the world, contact SafeStore, Ltd., via the SafeWealth Group. If you want to buy bullion.style gold coins or circulated silver coins inside the U.S. and store them domestically, check out the deal· ers listed below. (Fidelitrade also offers an exchange.approved depository.) Be sure to cross·check prices before buying.
214
Fidelitrade Website: www.fidelitrade.com Email: [emailprotected]
Address: 3601 North Market Street, Wilmington, DE
19802 Phon" B00-223-1080 and 302-762-6200 Fa" 302-762-2902 CEO, Mike Clark Hanco*ck & Harwell Website: www.ra.regold.com
Email: [emailprotected]
Address, Suite3lO, 3155 Roswell Rd., Atlanta, GA 30305 Phon" 888-877-1782 and 404-261-6566 CEO, Robert L. Harwell Investment Rarities, Inc. Website: www.gloomdoom.com Email: [emailprotected] Address: 7850 Metro Parkway, Suite 213, Minneapolis,
MN 55425-1521 Phon" 800-328-1860 and 612-853-0700 CEO James R. Cook Miles Franklin Ltd. Website: www.milesfranklin.com Email: [emailprotected]
Address: 3601 Park Center Building, Suite 120, St. Louis
Park, MN 55416 Phon" B00-822-8080 and 952-929-7006 Fax, 952-925-0143 CEO, David M. Schecrman
22: Should You Invest in Precious Metals?
215
Straight Talk Assets, Inc. Website: www.coinmoney.com Email: [emailprotected] Address, P.O. Box 1301, Gainesville, GA 30503 Phone, 800·944·9249 and 770·536·8045 CEO, Glenn R. Fried Well~heeled
investors should round out their holdings with platinum. Platinum is a precious metal, and in recent decades, its coinage has established it as an emerging monetary metal as well. Platinum has several advantages over gold and silver, not the least of which is that it packs more value per ounce. If you can afford to diversify to this extent, ask your metals dealer about platinum bars and coins.
Chapter 23:
What To Do With Your Pension Plan Make sure you fully understand all aspects of your government's individual retirement plans. In the U.S., this in· eludes such struccures as IRAs, 401 Ks and Keoghs. If you anticipate severe sysrcm.wide financial and political stresses, you may decide to liquidate any such plans and pay whatever penalty is required. Why? Because there are strings attached to the perk
of having yOUf money sheltered from taxes. You have
do only do with the money_ It reto
what the government allows you to stricts certain investments and can change the list at any time. It charges a penalty for early withdrawal and can change the amount of the penalty at any time. What is the worst that could happen? In Argentina, the government continued CO spend more than it took in until it went broke trying to pay the interest on i[5 deb[. In December, it seized $2.3 billion dollars worth ofdeposits in private pension funds to pay its bills. In the 1930s, the world heard a lot of populist rhetoric about why "rich" people should be plundered (or the public good. It is easy to imagine such talk in the next crisis, directed at requiring wealthy people [Q forfeit their retirement savings for the gcxxl of the nation. With the retirement setup in the U.S., the government need not be as direct as Argemina's. It need merely assert, after a
23: What To Do With Your Pension Plan
217
stock market fall decimates many peoplc's savings, that stocks are too risky to hold for retirement purposes. Under the guise of protecting you, it could ban stocks and perhaps other invest~ ments in tax~exempt pension plans and restrict assetS to one category: "safe" long~term U.S. Treasury bonds. Then it could raise the penalty of early withdrawal to 100 percent. Bingo. The government will have seized the entire $2 trillion held in government~sponsoTed, tax~deferred 401 K private pension plans. I'm not saying it will happen, but it could, and wouldn't you rather have your money safely under your own discretion? By the way, if you are normally in a high tax bracket and find yourself in a year with zero income OT significant business losses, you can cash out part or all of your plan with either less tax, sincc you will be in a lower tax bracket, or no tax, if your earncd~income losses cancel out the income from the plan. If you are under the age of 59\.1, you will nonnally have to pay a penalty, which is currently J 0 percent of the value of the distri~ bution. If you use the funds to pay for college tuition, though, you can even avoid the penalty. When you cash out your plan, you can still keep the money in the same investments if you wish, but then rhey will be in your own name, not in the name of your plan. Be sure to consult a tax advisor before proceeding. Perhaps you have no such opportunity for a tax saving and do not want to pay the penalty attached to premature with· drawal. If your balance is high enough, you may wish to consider converting yOUT retirement plan investments into an annuity at a safe insurance company (see Chapter 24). It is highly likely (though not assured) that such investments would be left alone even in a national financial emergency. If you have money in a captive corporate or governmcnt employee retirement plan with limited options, move it out of stock and bond funds. Park it in the safest money market fund
218
CoNouER TI£
CRASH
available within the plan. Investigate the rules that penain [Q cashing out and decide your next course of action. If you or your family owns its own small company and is the sole beneficiary of its pension or profit sharing plan, you should lodge its assets in a safe bank or money market fund. As an alternative, depending upon your age and requirements, you may consider converting it imo an annuity, issued by a safe insurance company. Such insurance companies are few and far between, but the next chapter shows you where to find them.
Chapter 24:
What To Do With Your Insurance and Annuities If you believe that yOUf fortunes are nOt dependent upon junk bonds, you might be in for a surprise. If you have life insur~ ance, especially if you have a "guaranteed rate of rerum" insurance policy, your policy may be dependent upon the performance of junk bonds. Many large insurance companies failed in the comparatively mild recession of the early 19905 because they backed their policies with junk bonds. The economic contraction that insurance companies now face is three degrees larger than that one (Grand Supercycle as opposed to Primary). Your insurance nest egg, to put it blundy, may be at risk. Some insurance companies guarantee a minimum return on "equity-indexed annuities" while lening you panicipate in
the markee's gains but not its losses. An article in a major financial magazine calls these plans "a bear-proof way [0 ride the market" that "removes downside risk," but the way it's done involves zero-coupon bonds, index options and other exotic vehicles. This scheme will surely blow up, and if it does, the guarantee will stress the insurance companies that sell these poli. cies. Even traditionally safe insurance companies are massively exposed to losses during a major deflation because they invest in
220
CoNou£R THE CRASH
scandard vehicles such as stocks, bonds and real estate. Some venerable insurance companies in Europe have become compromised not from their own inveS[lnems but because banks that today are awash in leveraged derivatives purchased them some time in the past ten years. A deflationary vise will put double pressure on the solvency of insurance companies. As the values of most invesmlcnts fall, the value of insurance companies' portfolios will fall. Conversely, as the economy weakens, morc and morc people will
decide to cash out their policies. Insurance companies become hard-pressed to honor the value of whole· life policies when there is a net outflow of cash at the same time that their propcrcy and stock investments are declining in value.
When insurance companies implode, they file for bank· ruptcy, and you can be left out in the cold. I know, because my insurance broker placed our insurance with, of all the companies in £he world, Confederation Life. In 1994, it collapsed, along with Baldwin United and First Executive Corporation, which were huge institutions. See what happened when I didn't do the necessary research? If you think that you can rely on your broker to recommend a safe insurance company, think again. Brokers shop mainly for price, and when they do look into safety, £hey rely on rating services that don't do a good job (see Chapter 25). As it turned out, I was lucky. Government and industry leaders in ba£h the U.S. and Canada worked for £hree years to distribute the policies to o£her companies. When my policy moved, it car~ ried anOther full year's cash-out restriction, and all the while, I was still required to pay the premiums. The only reason that the deal finally made it through was that the North American fi· nancial boom continued throughout the 1990s, and other insurance companies felt safe taking on the additional obliga. tions.
24: What To Do With Your Insurance and Annuities
221
When a bust is in force, few insurance companies are willing or able to take over a stressed company's policy obliga~ tions, which have little collateral behind them. If your insurance company fails, your investment of a lifetime will be gone. It's happened to many people and will happen to many marc. Whole~life policies are almost always a terrible idea un~ der a fiat money system. During inflationary times, their real value grows far more slowly than it appears, if at all, because the pur~ chaSing power of the monetary unit declines. During deflationary times, the policy your family is counting on to protect against death or old age can disappear if the company fails. One option is to cash out such policies and buy term in~ surance instead. With tenn insurance, you can keep an eye on the fortunes of various companies and switch from one to an~ other. Talk to your insurance broker about the courses of action open to you. On the other hand, an interesting "deflation bonus" can also come available if you're careful. If you have whole~life insur~ ance or an annuity with a sound company, you can actually come out way ahead because lhevaliles and payouts are denominated in currency. During deflation, the value of cash rises. so in terms of purchasing power, each dollar of value in your policy will be able to purchase more goods and services than it previously did. All you need to do is find a sound company.
Where To Buy Your Insurance Policies At minimum, you should move your whole~life insurance policy or annuity to a sound insurer as soon as possible. If you delay one day too long in moving your policy, and the company's assets are frozen, you will have no recourse. As far as I can tell. Weiss Ratings, Inc. produces the most reliable ratings of U.S. insurance companies. Their system is also
222
simple and straightforward. Unlike the maze of gradations such as "Bbb+" and so on that mher services use, the Weiss system simply reads like a report card, from A + down [0 F, adding only a set of"E" grades prior to E Weiss considers any company rated B~ or above to have "good" financial safety but recommends that
you do business with companies rated B+ or better. In normal times, that assessment is probably all you need. However, if you
believe that there is a reasonable risk of that rare and devastating evem, a deflationary crash and depression, why not demand the absolute best! Table 24-1 lists all U.S. insurance companies THE SAFEST U.S. INSURERS Source: Weiss Ratinas, Inc. (based on 12/31/01 data)
Company Name
Domicile Weiss Safety
State
Rating
American Famit Life Ins Co Count Life Ins Co
WI
Northwestern Mutual Life Ins Co'" Stale Farm Life & Accident Asr Co
WI IL IL NY
A+ A+ A+ A+ A+ A+
Total Assets (in millions of $)
LIFE & HEALTH INSURERS
State Farm life Ins Co'" Teachers Ins & Annuitv Asn Of Am ...
IL
PROPERTY & CASUALTY INSURERS A+ Alta Muluallns AL A+ RI Arnica Muluallns A+ IN Associates Ins A+ MI Auto-Owners Ins A+ Canal Ins SC A+ MD Government Em sins A+ Home-Qwners Ins MI A+ CA Interins Exch of the Automobile Club A+ KentucJ( Farm Bureau Mutual Ins KY A+ IN Protective Ins A+ IL State Farm Mutual Automobile Ins A+ TN Tennessee Farmers Asr A+ Tennessee Farmers Mutual Ins TN A+ TX United Services Automobile Asn TJ( A+ USAACasual 100 ~se are among the largest 25 Insurers rated B+ or higher.
Tabk24-1
2,541.2 4,118.9 99,660.8 991.2 29,344.9 124,606.7
1.136.6 2,912.4 529.6
5,514.3 661.2 8.157.9 323.6 3,366.1 1,108.2 412.6 73,397.5 470.0 1,212.3 10.278.6 3,145.5
24: What To Do With Your Insurance and Annuities
223
that Weiss rates A +. 111e three companies on this list that are also on Weiss' list of the 25 largest insurance companies rated B+ or higher are marked with an asterisk. To investigate a larger
list ofcompanies, see Weiss' book, The Ultima" Safe Money Guide. Of course, as prudent as these judgments may be, these ratings do not fully rake into account other considerations that will be crucial in a depression. For example, what bank(s) does your insurer use to hold irs assets and make transactions! If an insurer's main bank implodes, its situation could become cha, otic. This one factor could override even an insurer's A + credit rating. Ratings can change for all sorts of reasons. For maximum confidence, keep abreast of Weiss' ratings as they pertain to the companies you choose. (See contact information in the last sec· (ion of this book.) As if there were not already enough to worry about, the currency denomination of your policy may also prove crucial. If the currency in which you expect to be paid collapses in value, so will your plans for retirement. Again, SafeWealth Group specializes in minimizing all these risks by identifying the safest insurance companies in the world, as well as those among them mat use safe banks as custo, dians of their funds. Better yet, it can identify the ones that also allow you to designate the currency denomination(s) of your choice within their policies. Such provisions for ultimate safety are particularly important for annuity arrangements, estate plan' ning and capital,preservation programs that utilize insurance contracts. The main point is to make sure that you assess the vul, nerability of your insurance policies and annuities now. If you are satisfied, fine. If not, then you can take appropriate action before your insurance company, its bank, or you, become too stressed to adapt.
Chapter 25:
Reliable Sources for Financial Warnings Salety Ratings lor Financial Institutions The most widely utilized rating services are almost ai, ways woefully late in warning you of problems within financial insticu[ions. They often seem to get news about a company around the time that everyone else does, which means that the price of the associated stock or bond has already changed [Q reflect that news. In severe cases, a company can collapse before the standard rating services know what hit it. When all you can see is dust, they just skip the downgrading process and shift the company's rating from "investment grade" to "dcfau\[" S[a[US. Examples abound. The debt of the largest real estate de, veloper in the world, Olympia & York of Canada, had an AA rating in 1991. A year later, it was bankrupt. Rating services missed the historic debacles at Barings Bank, Sumitomo Bank and Enron. Enron's bonds enjoyed an "investment grade" rating four days before the company went bankrupt. In my view, Enron's bonds in particular were transparently junk well before their col~ lapse. Why? Because the firm employed an army of traders in derivatives, which is an absolute guarantee of ultimate failure even when it's not a company's main business. Sometimes there are structural reasons for the overvaluation of debt issues. For example, investors buy the debt offerings
25: Reliable Sources for Financial Wamings
225
of Fannie Mae, Freddie Mac and the FHLB because they think that the U.S. government guarantees them. It doesn't. All that these companies have is the right to borrow money from the U.S. Treasury, $2.5 billion in the case of Fannie and Freddie and $4 billion in the case of the FHLB. That credit line represents less than !4 of 1 percent of each company's outstanding mort~ gage loons, so it is a drop in the bucket. Worse, because of that advantage, the bonds that these companies issue are exempt from SEC registration and disclosure requirements because they are simply presumed to be safe. Managers of these companies are go~ ing to be utterly shocked when a depression devastates their portfolios and their earnings. Investors in these companies' stocks and bonds will be just as surprised when the stock prices and bond ratings collapse. Most rating services will not see It com~ ing. A few companies take a stringent approoch to rating in~ stirutional safety. I listed three good U.S. bank~rating fimlS in Chapter 19. Weiss Ratings, Inc. has quite reliable, detailed rat~ ings on a brooder range of U.S. institutions. For example, while most analysts never saw the Enron disaster coming, Weiss placed Enron on irs "Corporate E3mings Blacklist" in April 2001 and cited the company as being "highly suspect of manipulating its earnings reports." Two quarters later, the scandal broke, and countlcss employees and investors - people who hadn't the fog~ giest notion about taking the precautions I'm suggesting to you in this book - lost everything. SafeWealth Group uses an even morc stringent "surviv~ ability indicator" for financial institutions globally, caking not just the present balance sheet and corporate structure into ac~ count but also the institution's projected viability in a financial crisis or depression. SafeWealth is not in the ratings publishing business, but in response to inquiries, it will intrcxluce qualified individuals, companies and trusts to its highest-rated institutions.
226
CONOUER THE CRASH
Investment Advice from Brokers Throughollt my career, I have advised people nO[ [Q trust a brokerage finn's "fundamental" (as opposed to technical) ana~ lysts to warn you about anything. Brokerage firm analysts arc notoriously poor at market timing. Besides being beholden [Q their corporate clients, which gives them an extreme bullish bias, most of these analysts use the wrong tools. Even when they afC
independent thinkers, they are usually not students of market psychology and thus have no idea how to figure out when a stock is probably rapping. In fact. brokerage firm analysts afC typically cheerleaders for a stock just as it is topping out and during most of its fall. Over 20 years ago, when I worked as a Technical Market Specialist at Merrill Lynch, I watched as an analyst kept a "buy" rating on a maker of CB radios while its stock dropped from 19 to I. Nothing has changed. According to reports, II out of 16 analysts covering Enron had a "buy" (some even empha~ sized "strong buy") on the stock four weeks before the company declared bankruptcy and well after the decline in the stock price had wiped out its investOrs. As most people have subsequently learned, brokerage finn analysts almost never use the word "sell." If they really think a company's stock is dangerous, they label it a "hold." The problem with trying to follow this guideline, though, is that they usually label a stock that way after its bear market has run most or all of its course. To avoid being hurt by these strategists, you need independent market analysis.
Useful Newsletters in a Bear Market Most newsletters these days are wet behind the ears. Their focus is touting stocks to buy. That was fine for the bull market, but it probably isn't now. At all times ideally, but particularly in a global bear market, you need input from seasoned analysts who cover the financial world with healthy skepticism and are as good
25: Reliable Sources for Financial Warnings
227
at warning you about what investments CO avoid as they are at suggescing what actions to take. Besides myown company's publi, cations (see final section of this book), here are a few that I like:
The Gloom, Boom & Doom Reporr Website; www.gloomboomdoom.com Email: [emailprotected] Address: JJO The Center, 99 Queens Rd. Central, Hong Kong
Phon" (U.S. dial 011) 852-2-801-5410 FaX' 852-2-845-9192 Editor: Marc Faber
Grant's Interest Rate Observer Website: www.grantspub.com Email: [emailprotected]
Address, 30 Wall S"eet, New York, NY 10005 Phone, 212-809-7994 Fax, 212-809-8426 Editor: James Gram
The lnreTlUllional Speculawr Website: www.dougcasey.com Email: [emailprotected]
Address, P.O. Box 5195, Helena, MT 59604 Phon" 800-433-1528 and 406-443-0741 FaX' 406-443-0742 Edicor: Doug Casey
Safe Money Report Website: www.safemoneyreport.com Email: [emailprotected]
Address' Weiss Research, PO. Box 109665, Palm Beach Gardens, FL 33410
228
CONQUER THE CRASH
Phone' 800 236 0407 and 561-627-3300 F.,e 561-625-6685 Editor: Martin D. Weiss
SafelVeallh Report Email: [emailprotected] Address: SafeWealth Advisory Ltd. - Service Center, P.O.
Box 1995, W;ndsor, Berkshire SL4 5LL, U.K. Phone' (;n U.S., dial 011) 44-1753-554-461 Fa" (in U.S., d;al 011) 44-1753-554-642 Production Manager: Jane
v. Scan
All that most of these services can do is offer you ideas. In the end, you will have to make up your own mind with the evidence that they present.
Chapter 26:
How To Ensure Your Physical Safety In essence, bull and bear markets are social mood trends. Social mood trends have consequences. A positive social mood has positive social consequences. The great bull market of the past quarter~century cre~ued a won, dcrful world. Major antagonists in the areas of politics, religion
and race kissed and made up. The Cold War ended. Commu, nism collapsed. Markets became global and sophisticated. The world embraced, [Q one degree or another, capitalism and free, dom. The Information Age was born. Even country music got raucous and happy. In the 19905, people felt secure, and today wealth abounds. Generally speaking. that environment has been safe, prof, itable and fun. However, social mood trends are a tWQ·way street. When the positive trend ends, a negative one takes over for a while. Those trends have social consequences, [DO: destructive ones, which affect finance, the economy, politiCS and all kinds of social relationships. This book focuses mostly on finance. If you get oU[ of investments that will lose most of their value in a crash and keep your money safe, you will be quite wealthy in terms of your pur~ chasing power. Unfortunately, that's nor all there is to a major bear market. Depressions are a mess. You may have money, but cerrain goods might be scarce or rationed. You might be finan~ dally smarr yet get caught in a war zone.
230
CONQUER THE CRASH
h may not be much fun to contemplate the social effects of downtrends, but it is important. It's true mat if you become financially devastated, you can't take advantage of great invest· mem opportunities. But if you encounter physical risk, you may not even be around CO try.
In order co profit from and enjoy an uptrend, you and family must be fully protected during the preceding downtrend. Then, at the bottom, you can rise above the general despair and take full advantage both financially and emQ[ionally of the next expansive increase in positive social mood. EliioH waves portend many social changes, and you can anticipate them [Q some degree by undersmnding what I call socionomics. There is nOt room CO explain the idea in this book. yOUf
For a taste of how useful socionomics can be, review these com~ ments on one result of social mood change that the forecasted bear market was expected to exhibit: ftporeigners will commit terrorist acts on U.S. soil.. .." - At the Crest of the Tidal Wave (1995) Chapter 21, p.435 "The impulse to build shows up in the construction of record~breakingskyscraper buildings at social~mood peaks. At troughs, few buildings are built, and many of those already in place may be burned or bombed out of existence."
- The Wave Principle of Human Social Behavior and the New Science of Socionomics (1999) Chapter 14, pp.229.230 "The Middle East should be a complete disaster. You've got at least three major religions in that area that all dislike each other, and the truce of the bull market has already been tenuous, so that area is going to blow up." - The Elliott Wave Thearisf, August 2001 issue
26: How To Ensure Your Physical Safety
231
The 9/11/01 attack on the World Trade Cemer and the ensuing war in Afghanistan have borne out mese observations, and we are as of yet only two mild years into the bear market. By the way, some commemators write as if the terrorist attack caused the recession, but the stock market topped out a year and a half earlier, and the economy began comracting half a year earlier. Attacks such as this result from negative social~mood trends, which is why a socionomist can generally anticipate me tenor of behavior that manifests in such acts. Such manifesta~ tions are always a matter of frequency and degree. There is always some social unrest, even in the late stages of a bull market, but conflict always escalates in a bear market, For more on this theme, please see Chapters 14~ 16 of The Wave Principle of Human Social Behavior and the New Science of Socionomics. For a fuller discus~ sion of what [Q expect socially in the bear market, please read Chapter 21 of Al the Crest of lhe Tulal \Vave.
Polarization and Conflict The main social influence of a bear market is [Q cause society [Q polarize in countless ways. That polarity shows up in every imaginable context - social, religious, political, racial, corporate and by class. In a bear market, people in whatever way are impelled to idemify themselves as belonging to a smaller so~ cial unit than they did before and to belong more passionately. It is probably a product of the anger that accompanies bear mar~ kets, because each socialunir seems invariably to find reasons [Q be angry with and to attack its opposing unit. In the 1930s bear market, communists and fascists challenged political institutions. In the 1970s bear market, studems challenged police and blacks challenged whites. In both cases, labor challenged management and third parties challenged the status quo. In bear markets, ral~ lies, marches and protests become common events. Separatism becomes a force as territories polarize. Populism becomes a force
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as classes polarize. Third panies, (OUM parties, and more, find constituents. Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups and wars. In the area of personal behavior, part of the IX>pulation gets more conservative, and part gets more hedonistic, and each side describes the other as something that needs refonn. One reason that conflicts gain such scope in depressions is that much of the middle class gets wiped out by the financial debacle, increasing the number of people with little or nothing to lose and anger to spare.
The Erroneous Timing of Previous Concerns In the late 19705 and early 1980s, survival was a big topic. There were million-seller books about where to buy electric generators, how to choose bulletproof vests, storing dried foods and so on. This occupation of course coincided with an approaching major bouom in a 16·year bear market (in inflation·adjusted tenns). By then, you shouldn't have been wasting your time with it; you should have been buying stocks and bonds. TI,e ideal time CO address safety concerns is at the beginning of a downtrend, not at the end. In 1999, near the all-time high in stocks, many people were again concerned for their physical safety, but this time, it was for the wrong reason. They feared that the "Y2K" computer glitch would shut down the civilized world. In the heat of the international obsession over this issue and in answer to many emails to the Message Board on our website, I answered that the free market would take care of that problem. Until the social mood trend turned down, as evidenced by a major downturn in the stock averages, there was little to fear on that scale. Anticipated events such as those rarely cause global disruption. Major trends of increasing pessimism, anger and fear do cause global disruption, and tha['s what a bear market is. After
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January 1,2000, all the worriers over Y2K evaporated. Complacency reigned again, just when financial risk was at its greatest. That's also when physical safety should have become a real con~ cern. The eruption of terrorist activity in recent months is a product of a bear market. so you see my point.
Some Thoughts on Preparedness Exactly what wdo about your physical safety is a difficult problem. Living in a populous area or near a military installation or an important infrastructure site is somewhat dangerous in times of social unrest. If you arc physically tied to a job in such a spot, decisions about relocating are even more difficult than otherwise. I know people who have farmland in the country, a retreat in the mountains or a self~sufficient home. Others buy guns or learn self~defense. These are fine ideas. if you can fit them into the requirements and desires of your life. But for such prepa~ rations to be useful, you have to find yourself in a position where you need them. Usually in a major bear market. you are less likely to encounter a mob, a criminal or a terrorist than to face Slatesponsored controls within your own country or military attack from without, and there may be little that a retreat or karate can do for you in those situations. Nevertheless, if you detennine that you need this type of preparation, now is a good time to dig out that old list of "Y2K" items and buy from it whatever you would like to have - such as an electric generator, a few months' worth of emergency dried foods, a video surveillance system, defensive weapons, etc. some at half the prices that they were selling for in late 1999. Being prepared for terrorism is hardly an unreasonable idea. Here are some web locations to help you with aspects of physical preparedness. Some of them link to other sites, so once you get in the loop, you will find many more resources.
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Disaster Preparedness www.globaldisasrer.org/nbcrescen.shtml http://www.oism.org/nwss/s73p908.hrm http://www.fema.gov/pte
Basic Survival hnp;f/www.survival~center.com/index.htm
http://www.ki4u.comfnuclearsurvivalflisr.hrffi
Home Security, Disaster Information www.joelskousen.com Dried Foods www.alpineaire.com www.fcs.uga.edu/pubs/curren[/FDNS~E~34~CS.html
www.nal.usda.gov/fnic/emerg.html
Water Testing www.calcon.net/-prt
Air Testing www.envirotester.com
Self Defense www.kravrnagainc.com Some disaster,relared literature can be more upsetting than helpful. Always stop and think: Is this course of action nee, essary? Is there a more sensible alternative! There is little point in taking much time and effort and cost to prepare for disastrous events that are highly unlikely or which can be judiciously avoided.
Chapter 27:
Preparing for a Change in Politics The Elected Leader's Fortunes Figure 27-1 uses U.S. electoral history to show that when the stock market is rising, reflecting a positive social-mood trend, voters tend to maintain the incumbent leader. When stocks collapse, the leader is thrown out ill a landslide or by other means; though the insmnces are rare, there arc no exceptions [Q this rule. Voters do not appear to care which parry is in power at such times; they just throw whomever they perceive to be in charge, and his party, out of power. National leaders always make things worse for themselves by (1) claiming credit when the economy does well, thereby implying that it's their fault when it doesn't, and (2) vowing to enact economy-boosting measures when the economy weakens, thereby supporting the fiction that they can control it, which puts their opponents in a position to claim that those policies
failed. A leader doesn't control his country's economy, but the economy mightily controls his image. When the economy contracts, that image suffers, and the voters throw him our. This is true of elected rulers all over the earth. For an instructive case in point, study the fortunes of U.S. president Richard Nixon, who won a second term in a landslide in late L972 at a major tOp and was hounded from office less than two years Later as the Dow
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=alirics. That much I can guarantee in the upcoming depression. Who wins the battles or the war is nOt scripted beforehand, except that the incumbents perceived to be in power lose. In recent years, voter turnout has been low, races have been lackluster and close, and politics have been middle,of-theroad, with little difference between the major parties. Get ready for dramatic political changes. In the U.S. stock collapse of 1835,1842, a brand-new political party (the Whigs) won the presidential election in 1840 and another (the Democrat Republicans), which had held power for forty years, soon afterward dissolved. In the election of 1860, following the stock bottom and deep recession of 1859, politiCS were so polarized that many states did not list all the presidential candidates on their ballots. A new parry (Republican) won its first election. The following year, the Civil War broke out. The election of 1932, near the bottom of the Great Depression, was less tense but still a watershed, which led to the transformation of the United States into a semi-socialist state. Given the projected size of this bear market, look for na, tions and states to split and shrink. Look for regional governments
27: Preparing for a Change in Politics
239
to challenge national ones. There is no way to know exactly where such splits will erupt, but they will erupt somewhere. Intemational polities will become increasingly dangerous. The number of annual nuclear explosions, whether for testing or attack, waxes and wanes inversely with the stock market. (For a graph, see Chapter 16 in The Wave Principle of Human Social Behavior.) Look for an increased number of nuclear explosions during the bear market. Debt and fiat money create political risks. Overseas investors and central banks own 45 percent of the U.S. Treasury's bonds in the marketplace. The largest investors are Japan and China. Ultimately, the turmoil of a record~breaking debt liqui~ dation could force the Treasury or the Fed to renege on some of its obligations, which could have extreme political consequences and turn global sentiment viciously against the U.S. On the other hand, an irony arises in the area of currency. The Fed's Septem~ ber 200 1 bulletin reports that an estimated 90 percent of the new $100 bills ordered by the Federal Reserve Bank of New York are used to "satisfy foreign demand." According to a 1994 New York Times article, "In Russia, Romania, Tajikstan, China, Vietnam and other countries [the U.S. dollar] has become 'the official unofficial tender.'" Since 70 percent of doUar currency is overseas, a major dollar~based credit deflation would transfer 70 percent of the surviving dollars' expanding purchasing power to non-U.S. holders of dollar bills. Americans hold a larger percentage of 10Us, while others hold a larger percentage of the real thing, that is, to the extent that it is real. What political decisions such a situation may cause are anyone's guess, and so are the consequences.
What To Do If You Have Political Aspirations If there is a major stock market crash, you want to run for office near the bottom. You will be revered by the public and historians if you win. George Washington, Abraham Lincoln,
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CONQUER THE CRASH
Franklin Roosevelt and Ronald Reagan were all elected at or near the bottom of severe downtrends, and all have an exalted place in American history. Third parries do well in cough times; so do outsiders and radicals; incumbents do poorly. So if you are a non~incumbent political animal, you can plan now to take advantage of the situation. If you want to be a politician, plan to run for office on any parry ticket but that of the leader(s) in your country who rode the trend down.
Why Politics Matter in the Context of This Book At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to usc force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property. You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.
Chapter 28:
How To Identify a Safe Haven As I said in Chapter 26, the real risk of social unrest will probably involve not so much roving itinerant bands looting your home - a classic fear that is rarely realized - as much as imerna~ tionaI conflict and domestic relJression. In a bear market, both international and domestic tensions increase, and the resulting social actions can be devastating. Far more people in the past century had their Jives wrecked or terminated by domestic implosions than by war. Wherheryou lived in Russia in the 19205, Germany in the 19305, Europe in the 19405, China in the late 19405, Cuba in 1959 or Cambodia in the 19705, the smart thing to do early was to get out of Dodge. However, if you ever make slich a decision, you will have to be lucky as well as smart. The people in Europe who decided in 1937 to move away before things got worse were the prudent ones. But one or twO of them might have said, "Let's go somewhere far away and safe. Let's go out to the Pacific and live on one of those sleepy islands in the Philippines." In other words, you might guess wrong. One good guide to the world's developing crisis spots is Richard Maybury's Early Warning Report. If you are an Asian, African or Middle Eastern resident, his analysis is especially per~ tinent. Maybury has also published some excellent primers on
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inflation and justice. You may contact him through the following means:
Early Waming Report Website: www.richardmaybury.com Email: [emailprotected]
Addre,,, P.O. Box 84908, Phoenix, AZ 85701
Phone, 800-509-5400 and 602-252-4477 Fa" 602-943-2363 Editor: Richard Maybury
If you live in a country with unstable politics, you should think about where you might go if things get oppressive. Like everything in a developing crisis, it is imperative to be prepared weU before you have to make a final decision. Some readers, admittedly only a few, may find merit in the idea of spending some time outside of their home countries while a depression unfolds. After researching the international scene for free and smble Western-style English-speaking countries, I find five top candidates: the United States, Canada, Australia, New Zealand and Ireland. The world's # 1 choice for refuge is the United States. Indeed, the philosophical foundation of the United States and its (sometimes dormant) embodiment by many of its citizens bodes well for a low likelihood of severe domestic repression. Nothing is impossible, of course, and some people argue that the history of civilizations suggests that, on a multi-century basis at least, the peak of U.S. world power is at hand and repression will follow. Potentially more dangerous is the international threat. The U.5.'s penchant for involving itself in other countries' disputes has made it a prime target for terrorists and certain governments. Any sustained or coordinated effort by America's enemies could make domestic life highly unstable. Alternatively,
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if authoritarians assume power at the federal level near the botrom of a depression (which happened throughout Europe and Asia in the 1930s and 1940s), difficulties could arise from domestic sources. A great way to get to know other countries from your armchair is by way of the Eyewitness Travel Guides, by Darling Kindersley Publishing. They are not only packed with information, like most travcl guides, but they are also loaded with breathtaking and informative photos. Their current cost is $24.95 each. For specific information about these countries' visitation and extended visitation policies, investigate the following websitcs: United States: www.ins.gov Canada: www.cic.gc.ca/english Australia: www.immi.gov.au New Zealand: www.immigration.govr.nz Ireland: www.justice.ie Some of these sites are easier to use than others; you may have to poke around to find what you want. Sometimes web addresses change. If any of these sites move, or if you wish to investigate countries other than those listed above, just perform an Internet search on key words. Most immigration offices have their own websites. I thought about filling up a couple of chapters with the pros and cons of these and other nations, but in the end, what really matters is what matters to you. Some of these countries have a bettcr sct of laws, others better weather, others a bctter culture, others better infrastructure, othcrs more convenience. I am unfamiliar with non-English speaking countries that other people have been recommending, such as Argentina, Chile and Costa Rica, partly for the reason that I am unconvinced that
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CoNovER THE CRASH
they would be stellar havens of peace in a global depression. There are also many beautiful small island countries around the world, which rarely seem CO be the focus of international conflict. You will have to sift through the data, the books and the brochures and decide for yourself. Of course, the best way CO approach such a question is to visit selected locations personally. They make great vacation spors, SO you will hardly regret it. Who says con, templating a depression can't have itS pleasures?
Chapter 29:
Calling in Loans and Paying off Debt People and institutions that best weather the system~wide debt liquidation of a deflationary crash and depression are those [hm take on no debt and extend no risky credit. This is the ideal situation for most people mOst of the time, anyway.
Handling Credit In this book, we have already covered many tOpics that pertain [Q the problem of risky credit. Make sure that you do nO[ lend your money to a weak debt issuer, whether corporate, gOY' emmental or any mher entity. If you have already done so, trade it (or something better. There is also the question of personal credit extension. Have you leO[ money [0 friends, relatives or co·workers! The <XIds of collecting any of these deb[S are usually slim to none, but if you can prod your personal debtors into paying you back be~ fore they get further strapped for cash, it will not only help you bur it will also give you some additional wherewithal to help those very same people if they become destitute later.
Handling Debt If at all possible, remain or become debt·free. Being debt· free means that you are freer, period. You don't have to sweat credit card payments. You don't have to sweat home or auto
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CONQUER THE CRASH
repossession or loss of your business. You don't have w work 6 percent more, or 10 percent more, or 18 percent more just to stay even. If you can afford it, the best morrgage is none at all. If you own your home outright and lose your job, you will still have a residence. \Vhen banks are throwing mhcrs out of their homes, you will still have a place to live. If you can't pay the rem on your business space, you can move your business inco your house. And so on. I would rather own a crackerbox outright than have a mansion with mortgage paymems I can barely make. Consider the bank's situation in times of financial stress. Suppose you have paid off enough of your mongage so that yOLl own 50 percent of yOUT home, which reflcecs the average equity held by homeowners nationwide. Suddenly, you find that you can't make further payments because of money problems in a depression. At that poine, even if house prices had fallen by a whopping 50 percent, your bank would see it as no drop at all. It can place your property (actually its property) on the market. If the house sells for only 50 percent of its peak value, the bank gets 100 percene of its outstanding loan back. You can see why banks are pressured [Q sell properties in such situations. Of course, you end up homeless after slaving [Q pay off half the mortgage on the house over many years. That's what happens [Q many homeowners in a depression. I suppose it might be possible [Q be creative in an other~ wise impossible situation. Some people might decide [Q rorrow as much of the home's value as possible, put the proceeds in a safe moneY~lnarket fund and use those funds tlj meet the mortgage, thus assuring no missed payments for the duration. The problem with this idea is that many people are their own worst enemies, and they lack the discipline to protect the needed cash. They can find themselves roth broke and homeless either way.
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One way out of a debt load is personal bankruptcy. I don't recommend it because it isn't honest. People lent you their hard~ earned money; you should pay it back. If you truly are a victim of unforeseen circ*mstances and must declare bankruptcy, apologize to your creditors and tell them that you hope the experience taught them a lesson about under~collateralized lending.
Chapter 30:
What You Should Do If You Run
a Business
Avoid long~[erm employment contracts with employees. Try to locate in a state with "at-will" employment laws. Red tape and legal impedimems to firing could bankrupt your company in a financial crunch, thus putting everyone in your company out
of work. If you run a business that nonnally carries a large business inventory (such as an autO or boat dealership), try to reduce it. If your business requires certain manufactured specialty items that may be hard [Q obtain in a depression, stock up. If you are an employer, start making plans for what you will do if the company's cash flow declines and you have to cur expenditures. Would it be best to fire certain people? Would it be better co adjust all salaries downward an equal percentage SO that you can keep everyone employed? A cynic might recommend that if you are an employer, you should try to pay in stock or options, but if you share the expectations presented in this book, that course of action would be dishonest, Besides, an employee who gets gypped is hardly going to serve your company well. Don't forget, depressions don't last forever; when the next upturn comes, you will want a loyal staff to help you prosper in it, and they will want a healthy company to help them prosper, too. To encourage that result, pay what and how you need to for the talent you require.
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If you manage a bank, insurance company, money man~ agement firm or other financial institution, ny to work out of your speculative derivative positions, particularly bullish ones. Reduce srock market risk as much as possible. If you must be heavily invested in stocks - for example if you manage a stock mutual fund - hedge your positions with options. Tidy up your mortgage portfolio. Get rid of all second,tier debt paper. If you have invested in municipal bonds, consumer debt, real estate debt, junk bonds or anything other than top'grade paper, sell it at today's lofty prices. Get on a solid footing with investments that are high quality, liquid and commonly understood. Perhaps most important, plan how you will take advan~ tage of the next major bottom in the economy. Positioning your company properly at that time could ensure success for decades to come.
Chapter 31:
What You Should Do with Respect to Your Employment Over the past decade, more and more companies have been compensating employees wid\ swck options instead of money. In 2001, over half of America's large public companies were paying over half of their employees in srock options. As a market analyst, I am fascinated with the value of these figures as a reflection of society,wide stock~market optimism. As someone trying to help you, I see them as a trap that you should avoid. If you have no special reason to believe that the com~ pany you work for will prosper so much in a contracting economy that its stock will rise in a bear market, then cash out any stock or srock options that yOllr company has issued to you (or that you bought on your own). If your remuneration is tied to the same company's for~ tunes in the form of stock or stock options, try to convert it to a liquid income stream. Make sure you get paid actual money for your labor. If you have a choice of employment, try to think about which job will best weather the coming financial and economic storm. Then go get it. If you are entrepreneurial, start thinking of ways to serve people in a depression so that you will prosper in it. For example,
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I am writing this book. Think about what people will need when times get hard. Some people automatically think that providing services for strapped people is the right choice when they think "depression." Certainly, opportunities are there. At the same time, that's not where much of the money is. Many people will nO( have their assets tied up in the stock market or other risky investments, and if deflation occurs, their real purchasing power will soar. At the bottom of the Great Depression, 70 percent of the population had jobs, and they were quite well off. You can prosper by providing services to the solvent and the wealthy. Offering services to creditors may also yield steady employment. For example, because so much of today's debt is consumer debt, the repo business will probably thrive. There will also be a boom in bankruptcy services in a depression; maybe you can keep out of debt by helping others manage theirs. If you have charitable impulses, this is the time to exercise them. Govemment services will shrink in a depression, and many people will be suffering. If you are really creative, find a way to help destitute people and make money doing so. Unfortunately, I don't have all the answers for your situation. You know your skills and tastes better than I do. Now is the time to take account of them.
Chapter 32:
Should You Rely on Government To Protect You? In one sense, the answer is yes. You always have to live somewhere. If you are fortunate enough to live in a safe, free country, you can probably tell that those benefits are greatly a product of its philosophy of govemment. To that extent, you should rely on the best government you can find. Other than that, government can be a disappointing guardian.
Compounding the Problems Government is rarely prepared for national financial ca~ lamities or economic depressions, and when it is, they are unlikely co occur. This is nO[ a result of personal failures so much as an aspect of collective human nature. People are often prepared for the past bU[ rarely for the future. Generally speaking, the intelligent way for an individual to approach the vagaries of his or her financial future is to have savings or buy insurance. Governments almost invariably do the opposite. They spend and borrow throughout the good times and find themselves strapped in bad times, when tax receipts fall. Like their counterparts around the world, the Social Security, Medicare, Medicaid and "welfare" systems in the U.S. have been dispersing billions of dollars throughout decades of mostly good
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times. Even today, political forces are trying to raise the government's payout:s, for example to include coverage of men, tal as well as physical illness, which seems to be another express ticket to insolvency. When the bust occurs, governmems won't have the money required to service truly needy people in unfortunate cir' c*mstances. They are likely then to make things worse by extending "unemployment benefits," which sucks money away from employers and makes them layoff more workers, by raising the cap on retirement benefit taxes, which takes money away from employees and makes them unable to save and spend, and by increasing taxes generally, which impoverishes productive people so that they cannot spend and invest. It's sad, but the pattern is almost always the same. Dependencies To Avoid Don't rely on government programs for your old age. Retirement programs such as Social Security in the U.S. are wealth,transfer schemes, not funded insurance, so they rely upon the government's tax receipts. Likewise, Medicaid is a federally subsidized state,funded health insurance program, and as such, it relies upon transfers of states' tax receipts. When people's earn, ings collapse in a depression, so does the amount of taxes paid, which forces the value of wealth transfers downward. Every conceivable method of shoring up these programs can lead only to worse problems. A "crisis" in government wealth,transfer pro' grams is inevitable. Don't rely on projected government budget surpluses. A couple of years ago, the U.S. government declared a budget surplus, projected it years into the future and predicted healthy trends for its wealth,transfer programs. Was that a proper conclusion r Well, in 1835, after over two decades of economic boom, U.S.
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government debt became essentially fully paid off for the first (and only) time. Conventional economists would cite such an achievement as a bullish "fundamental" condition. (Any time an analyst claims to be using "fundamentals" for macroeconomic or financial forecasting, fun, don't walk, [Q the nearest"exit.) In actuality, that degree of government solvency occurred the very year of the onset of a 7 ~year bear market that produced twO backto~back
depressions. Government surpluses generated by
something other than a permanent policy of thrifc are the prod, lIct of exceptionally high tax receipts during boom times and therefore signal major tops. They're not bullish; they're bearish and ironically poncncl huge deficits directly around the comer. Don't rely on any government's bank-deposit "insurance." The money available through the FDIC, for example, is enough to cover only a small fraction of bank deposits. As Japan's troubles increase, its government has proposed lowering the value of insured deposits; that could happen in any country. The whole idea of having other banks and taxpayers guarantee bank deposits is theft in the first place and thus morally wrong and thus ultimately practically wrong. Government sponsored deposit insurance has lulled depositors into a false sense of security. After the 1930s, when thousands of banks failed, depOSitors became properly wary of profligate banks. Today they don't know or care what their bank officers are doing with their money because they think that the government insures their depoSits. Deposit insurance will probably save accounts in the first few distressed banks, but if there is a system-wide money and credit implosion, this insurance won't protect you. Don't rely incautiously on government's obligations to you if you are a retired government worker. In Argentina in recent weeks, the government suspended state pension payments to 1.4 million retired state employees. It had no money to pay
u.s.
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because times gOt cough, and it had never saved when times were good. The same thing could happen to many governments around the world, whether national, state or local, which pay billions of dollars annually in pensions. All of them are dependent either upon wealth transfer or upon managed funds that mayor may not be properly invested. Don't rely on all governments to pay their debts. In the 1930s, Fulton County, Georgia, in which I grew up, was formed from twO bankrupt counties that defaulted on their bonds. By 1938, state and local municipalities had defaulted on approximately 30 percent of the total value of their outstanding debt. Much of it was eventually resolved; some wasn't. U.S. investors today own billions of dollars worth of municipal bonds, thinking they are getting a great deal because that bond income is taxexempt. This tax break may be a bonus in good times, but like so many seemingly great deals, this one will ultimately trap invescors into a risky position. Governments that have borrowed to the hilt were running deficits even in the booming 1990s, so the risk of default in a depression is huge. If the issuers of your tax~ exempt bonds default, you will have the ultimate tax haven: being broke. Quite a few munis are "insured," which salesmen will tell you means the same as "guaranteed." Such guarantees work fine until defaults drag down the insurers. That is to say, when you really need the supposed guarantees, they can fail. Given the huge extent of coday's municipal indebtedness, such failures are inevitable. Don't rely on your central bank, either. Ultimately, it is not in control of your country's stock market, bond market or interest rates. It mostly reacts CO market forces. People think that the Fed "lowered interest rates" in 2001. For the most part, the market lowered interest rates. Declining interest rates are not a "first cause" designed co induce borrowing; rather, a dearth of
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CONOUER THE CRASH
borrowing is a "first cause" that makes imerest rates decline. In~ rerest rates on perceived safe debt always fall when an economy begins to deflate. So the record~breakingdecline in shorHerm U.S. interest rates last year was nm any kind of "medicine," It was not primarily administered but an effect. Japan's prime inter~ est rate fell to nearly zero over the past decade because of its ongoing deflation. That drop in the cost of borrowing didn't change the economy. Why? Because the economy was in charge of the drop. The most that a central bank can do is distort nor, mal market trends and make credit a bit tighter or looser than it would otherwise be. Unfortunately, every such distortion has a counterbalancing market-induced correction later. The Fed's record-breaking monetary looseness during 2001 has revived the economy and propped up asset markets for a few months, but it probably won't last much longer than that. Ultimately, it will simply serve to make the contraction worse. Don't rely on government to bail out the banking sys~ tern. When Barings Bank failed, the Bank of England declined to save Barings' depOSitors. The World Bank and the IMF did not bailout the banks that collapsed in Southeast Asia in 1997. The Japanese Ministry of Finance has not been bailing out troubled Japanese banks. No one is bailing out Argentina's banks today. The French government bailed out Credit Lyonnais in a series of bailouts from 1994 through 1998 that drained more than $20 billion from France's tax intake. This was not much of an exception, though, because the bank was state-owned. Financial institutions and the u.s. government, through the FSLlC and then the Resolution Trust Corporation, bailed out the Savings & Loan industry a dozen years ago to the tune of $481 billion. These were unfortunate actions. Yes, unfortunate, because they lulled French and American bank depositors, who might otherwise have become wary, into thinking thar they are protected
32: Should You Rely on Government to Protect You?
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against anything. How many more bailouts can France afford? Or the u.s.? If many big banks get in trouble, prudence will dictate that even the richest governments stand aside. If instead they leap unwisely into bailout schemes, they will risk damaging the integrity of their own debt, triggering a fall in its price. Ei~ ther way, again, deflation will put the brakes on their actions. Don't expect government services to remain at their cur~ rent levels. The ocean of money required to run the union~ bloated, administration~stultified public school systems will be unavailable in a depression. School districts will have to adopt COSt~cutting measures, and most of them will result in even worse service. Encourage low~cost free~market solutions, which will benefit both children and teachers. The tax receipts that pay for roads, police and jails, fire departments, trash pickup, emergency (91 I) monitoring, water systems and so on will fall to such low levels that services will be restricted. Look for ways to get better services elsewhere wherever it is legal and possible. Don't rely on government "watchdogs." They rarely fore~ see disasters. U.. regulators did not anticipate the Savings & Loan industry collapse. Subsequent investigation revealed sev~ era I years of immense corruption. Eoron created some 850 suspicious partnerships and employed an army of "inventive" accountants. Still, the SEC and the FASB were clueless about anything being amiss. A $68 billion company collapsed, impov~ erishing countless employees and creditors. ow the watchdogs in Congress are holding "hearings." Do you think this will help the employees and investors who bet the farm on Enron? Well, when the Insullutility trust similarly collapsed in 1931 ~ 1932, no investor was reimbursed a nickel; no manager ever went to jail. With 20/20 hindsight, Congress passed a few new laws. Be smart. Don't let your financial future end up depend~ ing upon proceedings covered by C~Span.
Chapter 33:
A Short List of Imperative "Do's" and Crucial "Don'ts" Recall the old Chinese character that entwines crisis and opportu.nity in the same glyph. Position yourself to take advan· [age of what's coming. Don't:
• Generally speaking, don't own stocks. • Don't own any but the most pristine bonds. • Generally speaking, don't invest in real estate. • Generally speaking, don't buy commodities. • Don't invest in collectibles. • Don't tfust standard rating services. • Don't presume that government agencies will protect your finances. • Don't buy goods you don't need just because they are a bargain. They will probably get cheaper.
33: A Short List of Imperative "Do's· and Crucial
~Don'ts·
259
• Fight the inertia that will keep you from taking action to prepare for the downturn. Start taking steps now. • Involve your significant others in your decisions. Put your home or business partners in tune with your think~ ing before it's too late. • Talk to heavily invested parents or in~laws who may be planning to pass on their investments to you. See if you can get them to become safe and liquid. • Think globally, not juSt domestically. • Open accounts at two or three o( the safest banks in the world. • Invest in short~term money market instruments issued by the soundest governments. • Own some physical gold, silver and platinum. • Have some cash on hand. • Make sure you have insurance policies only with the safest £inns and make sure they deal with safe banks. • If you are so inclined, speculate conservatively in an~ ticipation o( a declining stock market. • SelI any collectibles that you own (or investment poses.
pur~
• If it is right for your circ*mstances, sell your business. • Make a list of things you want to buy at much lower prices when they go on "liquidation sale."
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CoNovER THE CRASH
• If you want to have kids, hurry up. Statistics show that fewer people feel like doing so during a bear market. • Give friends a copy of this book. • Keep up with our Bear Market Strategies page, a COil' tinually updated repoft on-line at http://www. ellio[nvave.com/conquerthecrash.
• Contact the services mentioned in dlis book! I am a market analyst and forecaster, nm a banker, insurer, money manager, institution rater or depression strategist. These services can help guide you through the maze. Some of them can help you design your whole strmegy in a maner of days. • Plan how [Q rake advanrage of the next major uptrend. For example, go back to school during the decline and comc out with extra skills just as the economy begins w recover. Apprentice in a job for low pay and learn enough to start your own business at the bottom so you can ride the next big upwave of prosperity. Investigate troubled businesses to buy at the bottom at deep discounts. • Smile! because you will not be jumping out of the window; you'll be preparing for the incredible opportunities listed in the next chapter.
Chapter 34:
What To Do at the Bottom of a Deflationary Crash and Depression At the bottom of a crash and depression, reverse most of
Chapter 33's investment "do's" and "don'es." When the Elliott wave pattem in the major stock market averages indicates that the collapse is over, take a good portion of your safely stored cash and do the following: -Cover shorts and buy stocks of surviving companies at fire sale prices. • Buy depressed bonds from issuers that have survived. • Buy morc gold, silver and platinum. • Buy prime pieces of investment property from distressed
banks. • Buy your favorite uninhabited home or mansion at pen· nics on the dollar. • Buy the undcHcnted office building or the abandoned business facility you need for the COSt of back taxes. • Buy yOUT favorite art and collectibles at bargain prices.
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CONQUER THE CRASH
• Buy your o-.yn business back, start a business, or buy a distressed business cheap. • Keep an eye on commodities. Generally, one would wait aboU[ cwo decades, when inflation begins to accelerate as the Kondratieff liquidity cycle approaches its peak, [Q buy them aggressively. Because a financial crisis could ignite hyperinflationary political (orces at the botcom of the deflation, you might decide to buy some commodi~ ties then as a safety hedge. If the futures market survives the crash, the Rogers Raw Materials Fund should provide an excellent vehicle. It invests in an international basket of 35 commodities, continually adjusting it to maintain constant percemage weightings for each com~ modity. These maneuvers are a mechanical method of buying relative weakness and selling relative strength, which helps the fund's profimbility. You can learn more aoout the fund at itS website, www.rogersrawmaterials.com
or by calling 800-775-9352 or 866-304-0450. • Choose your location well and remain watchful of world affairs, because wars often break out during or shortly af· ter depressions. (For more specifics, see Chapter J 6 of
The Wave Principle of Human Social Behaviar.) • Sit back and watch the investment marketS in which you have invested turn up strongly and surprise the world. You've survived! Now prosper!
SERVICES THAT CAN HELP
You
SURVIVE AND PROSPER IN A DEFLATIONARY DEPRESSION
A Word on Suitability Most of the services listed in this book are suicable for all inveswrs. Some are suited only for those of a ccnain level of expertise, wealth and/or income. In pursuing your chain of in~ quiries, you may occasionally discover some financial services that are unavailable to certain investors who fail to meet legal and financial criteria required by their nations' Accredited, Quali. {ied and/or Professional Inveswf rules. These rules are intended for public protection and may prohibit your access to services not deemed suitable for you. Entities that need to comply with such rules should be able to explain which rules, if any, pertain to you. Most good service providers will try co ascertain whether their services are suicahle (or you and tell you honesdy if they are not. As you explore and judge various courses of action, please forgive any entities that refuse to fulfill your desires because they are following legal requirements or their own stricter criteria for your protection. I have endeavored to provide enough avenues of inquiry in this book so that readers at all strata of wealth - small to large - will find useful methods of protecting their wealth in times of deflation and depression. If you discover any of which I am unaware, please let me know so that I may investigate them for possible listing at our continually u(XIated site for readers of this book at www.elliottwave.com/conquerthecrash. I have experience with most of these service providers or know their CEOs personally. You will probably get even better service if you mention that you read about them in this book.
$ef\lices That Can Help You $uf\live and Prosper
265
Consultant for Locating Top Money Managers Asset Allocation Consultants, Ltd. Website: www.assetallocating.com Email: [emailprotected] Address: P.O. Box 613 Station "Q", Toronto, Ontario M4T 2N4, Canada Phone, 800-638-5760 and 416-762-2330 Fax. 416-762-3793 CEO, Mark Edward "Ted" Workman Minimum: $500,000
Consultants on the World's Safest Banks, Insurance Companies and Precious Metals Storage Facilities
InlToductions to international wealth preservation managers, privare banks. general inqlliries, ere.: SafeWealth Group - Service Center Email: [emailprotected] Sr. Vice President: Cari Lima Address, World Trade Centre, c.P. 476, 1000 Lausanne, 30 Grey, Switzerland Phone, (U.S. dial 011) 41-21-641-1640 Fax. (U.S. dial 011) 41-21-641-1390 Qualified institutions' typical minimums: Insurance companies: 100,000 Sfr Precious metals storage: $100,000 Bank" $300,000
Insurance company introduCtions: SafeWealth Services SA Email: [emailprotected] President: Imogen Collis
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CONOUER THE CRASH
Preciotf.'i metals acquisition and storage: SafeStore Ltd. - Service Center Email: [emailprotected] President: Michael Amos Wealch preservarion private consulting:
SafeWealth Consultants, Ltd. Email: [emailprotected] Sr. Vice President: Cari Lima
Customized Dynamic Index Allocation Invesdex, Ltd Website: www.invesdex.com Email: [emailprotected]
Address, PO. Box HM 1788, Hamilton HM HX,
Bermuda Phone, 441-296-4400 Fa., 441-295-2377 President & CEO: Valere B. Costello Minimum: $100,000
Inverse Index Mutual Funds
Bear ProFund, UltraBear, UltraShort 100 Website: www.profunds.com Address: ProFunds, 7501 Wisconsin Ave, See 1000,
Bethesda, MD 20814 Phone, 888-776-1970 or 240-497-6400 Minimum: $15,000
Ursa Fund, Arktos Fund, Tempest Fund, Venture Fund Website: www.rydexfunds.com
Address, Rydex Series Funds, 960 I Blackwell Rd, Ste 500, Rockville, MD 20850
Services That Can Help You $UMve and Prosper
267
Phone: 8OO·8Z0·0888 and 301·Z96·5406 Minimum: $10,000 Managed Bear Funds Gabelli Mathers Fund Website: www.gabelli.com/mathers.html Email: [emailprotected] Address: Bannockburn, IL Phone: 800·96Z·3863 Minimum: $1000 Prudent Bear Fund Website: www.prudenrbear.com Email: [emailprotected] Address: 8140 Walnut Hill Lane, Ste. 300, Dallas, TX
75Z31 Phone: 800·711·1848 and Z14·696·5474 Minimum: $20c0 Newsletters for Staying Globally Informed
Early Warning Report Website: www.richardmaybury.com Email: [emailprotected] Address: P.O. Box 84908, Phoenix, AZ 85701 Phone: 800·509·5400 and 6OZ·Z5Z·4477 Fax: 6OZ·943·2363 EditOr: Richard Maybury
The Gloom, Boom & Doom Report Website: www.gloomboomdoom.com Email: [emailprotected] Address: 3308 The Center, 99 Queens Rd. Centtal, Hong Kong Phone: (U.S. dial 011) 85Z·Z·801·5410
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CoNovER THE CRASH
Fa'" 852-2-845-9192 Editor: Marc Faber
Grant's Interest Rare Observer Website: www.grantspub.com Email: [emailprotected]
Address' 30 Wall Scree
