am a 60-year-old man with a Ph.D. in history, and I have never seen
or even read about anything remotely like what we are experiencing
in the United States today. The country is politically gridlocked,
top to bottom, right to left. It has been like this ever since the
is in the hands of the Democrats: 50-49-1. Never before has this
happened: an independent as the swing factor in control over the
eight Senate races going on that are too close to call. Half of
the incumbents are Democrats.
We are apparently
going to war, and the voters don’t know why or seem to care one
way or the other.
The two biggest
political issues are the old familiar ones: domestic economic policy
and foreign policy. These two issues are completely absent from
political debate in an election year.
I live in
Arkansas. The Senate race is hotly contested by a pair of lukewarm
candidates. A Republican is in office. He is a first-term Senator.
He is vaguely conservative, a Bob Jones University grad, but he
dumped his wife and got a new one as soon as he got to Washington.
The conservative Christians who were his original political base
are not happy with his marital situation. His “family” ads show
him and his grandson. His new wife is invisible. He is running on
two issues: (1) no Social Security cuts and no hike in Social Security
taxes (a statistical impossibility); (2) free prescription drugs
is running on no issue. I have never seen a TV ad telling what he
At least 95%
of the TV ads on both sides are negative, from what I can gather
from what little TV I watch. It is so bad that the Senator has an
ad in which he admits that his opponent has used negative ads. He
looks into the camera and says: “If those ads were true, I wouldn’t
vote for me.” But his campaign relies on just as many negative ads.
(Negative ads that are paid for under the “independent expenditures”
exemption are not under the $1,000 contributor limit.)
have run ads saying that the Senator has taken money from Big Business.
The Republican ads say that the Democrat can’t make up his mind
about any substantive political issue. I am sure that both accusations
the candidates says a word about whether we should invade Iraq.
Neither says what should be done about the sagging economy, taxes,
or anything else related to the economy.
in New Jersey, the Democrats are running a 78-year-old former Senator
who entered the race illegally (filed too late) — approved
by the state supreme court — and he is ahead in the polls.
and militarily, the United States is at a major turning point, yet
the public is divided. The voters don’t know what they want.
A DIFFERENCE A YEAR MAKES
A year ago,
President Bush announced, “If you’re not with us in the war on terrorism,
you’re against us.” Today, except for Tony Blair and the Israelis,
the entire world is against us regarding the invasion of Iraq. Blair
faces opposition. British voters overwhelmingly oppose the invasion.
A year ago,
President Bush said we would crush Al Qaeda and kill bin Laden.
Today, bin Laden is a free man, and apparently issuing audiotapes.
There are 500 or so faceless nobodies at Guantanamo, but no top
leaders of Al Qaeda. There is no indication that Al Qaeda’s recruiting
efforts have been hurt in the Middle East.
A year ago,
Iraq was off of our foreign policy radar screen. Today, without
any proof offered, an Al Qaeda-Iraq connection is assumed to be
real, despite Saddam’s secularism and bin Laden’s Islamic fanaticism.
Iraq’s chemical and biological weapons of mass destruction —
which the United States government supplied to Iraq during the Iraq-Iran
war — are said to be a threat to America. On our decision to
supply these weapons to Iraq, see Congressman Ron Paul’s speech.
I have not seen anything as good in a brief report on the outright
lies that the Administration is telling about Iraq. Paul also spoke
out against Clinton’s moves to go to war with Iraq. He is a bipartisan
critic of American foreign policy, of which there are few in Congress.
(At last count: one.)
A year ago,
the U.S. budget was in surplus, at least if you don’t count the
deficit in Social Security, which Washington never does. Fiscal
2003, which started last week, is heading for a $200 billion shortfall.
No one in power is saying what the Iraq operation will cost. But
militarily occupying a hostile Islamic country for five years or
more will not be cheap. (Five years may be way too low an estimate.
Former Secretary of the Navy James Webb has put it at 30
to 50 years.)
us to the economy. We are back in the guns vs. butter swamp that
Lyndon Johnson led us into in 1965. He promised both. Bush is assuming
both though promising nothing. Greenspan’s FED is providing the
credit. The result in the late 1960’s was the beginning of the price
inflation that led to Nixon’s closing of the gold window in 1971
and Carter’s era of price inflation, high interest rates, and gold
at $850 (for one day).
market is slowly grinding investors’ dreams into powder, but the
expert forecasters keep telling us that it’s a great time to buy
stocks. They have told us this all the way down, yet they are still
quoted by the media as if they weren’t blithering idiots without
a clue. Do they think the public is blind? If so, they are correct.
Investors are as gridlocked over their stock market holdings as
they are over politics. The Bible has a phrase that describes them
And in them
is fulfilled the prophecy of Esaias [Isaiah], which saith, By
hearing ye shall hear, and shall not understand; and seeing ye
shall see, and shall not perceive (Matthew 13:14).
Let me help
you to see more clearly. Consider the performance of the Standard
& Poor’s 500, the Wilshire 5000, and the NASDAQ. You need to see
this with your own eyes. Take a look at the three-year charts.
The S&P 500
is more representative than the Dow Jones Industrial Average. It
is the index used by most stock market index mutual funds. The Wilshire
index is the broadest based index. The NASDAQ is the valley of death.
these three charts. You need to see them to appreciate just how
bad things are in the financial markets. Seeing may not be believing,
but it surely is awakening.
What you see
is devastation. The dreams of tens of millions of American families
are shattered in these charts.
of comfortable retirement. Well, that dream was always as phony
as a 3-dollar bill. Most Americans had so little money invested
anywhere in January, 2000 that the Dow 36,000 would not have given
them the retirement they dreamed of. They had almost no savings.
Most of them got into stocks late in the game, which has now backfired.
“Buy high (then), get paralyzed (now), and sell low (soon).” Today,
with the FED’s policy of expending money, and with American businessmen
in shell-shock, refusing to invest, short-term interest rates are
so low that nobody who is not worth $3 million could live on interest
payments in middle-class comfort.
My wife owns
a $1,000,000, ten-year, level-term life insurance policy on my life.
(She owns it and pays the annual premium by writing a check on her
personal, exclusive checking account, so it won’t go into my estate
for estate tax purposes. A word to the wise is sufficient.) She
bought it cheaply here: http://www.termonly.com.
If I died tomorrow, the interest generated by that policy would
be under $15,000 a year. Thanks, Alan!
and Medicare have not begun to go belly-up. I fully expect to outlive
Social Security. (So does the life insurance company that sold the
policy to my wife.)
had a major advantage. Beginning in February, 2000, that the crash
was coming. If they listened and acted accordingly, they didn’t
get creamed. If they didn’t listen, then they did get creamed, assuming
they stayed in stocks. But at least all this has not come as a shock
were wrong in 2000, 2001, and 2002. Nobody with a large audience
has warned the public. Nobody saw this coming. This has put so much
egg on Wall Street’s face that the brokerage firms are unlikely
to get back investors’ confidence without a spectacular upward move
in the stock market.
But what would
provide such a booming scenario? The public is thinking, “If the
market ever gets back to where it was when I bought, I’ll sell.”
The public today is not interested in committing vast quantities
of new money to a market that has smashed their hopes without mercy.
The public is not going to listen to Abby Joseph Cohen and James
Cramer, who did not see it coming and who told their now-shorn sheep
to buy more all the way down.
the one who bothers me the most. On the day that the stock market
re-opened after 9/11, I saw him on MSNBC. The other commentator
was being calm but cautious. He was trying to warn people of the
terrible market risk. Cramer was really hostile, arrogant, and assured:
the stock market was the place to be. He had just placed an order
for shares in General Electric to demonstrate his faith in America.
See how well that investment decision has paid off:
GE was in
a slow motion crash by September 11. It had fallen from $60 to $40.
By the time the market re-opened, it was at $35. It then fell like
a stone to $28. Weeks later, it moved back up to $42, but now is
at $22. GE has lost almost two-thirds of its value from its peak.
In my October
1, 2001 issue, I wrote this about Cramer’s TV performance. I reproduce
my comments here because we are about to go to war again. Also,
you need to remind yourself of the arguments stated with total confidence
by stock pitchmen. They are using the same arguments today. At what
point will these people stop pitching?
The fall in
the market in the week following the attack was a bad one —
the worst in 70 years, several media sources reported. The week
began on MSNBC with the most intense stock market cheerleading I
have ever seen on-camera. The New York Stock Exchange had not yet
opened. The cheerleader was Jim Cramer of The Street.Com. He was
adamant: this was a great buying opportunity. His company had committed
money to the market. This was the bottom. Get on board now! Another
person being interviewed was judicious, saying that there were reasons
not to be so optimistic. Cramer pitched the opposite line with great
intensity and confidence. This man did not lack confidence.
TheStreet.Com (TSCM) opened for trading at $70 a share in March,
1999. It is trading around $1.20 today. [It is at $2 today.]
Then the market
opened. Instantly, it was down 50. It kept going down, down, down.
It was down by 250 within an hour. Cramer kept saying this was a
great time to buy. About the time it had dropped 500, he began to
modify his cheerleading somewhat. He said that it would be unwise
to commit all of your money today. Save some extra money for the
rest of the week, he said. . . .
An hour before
the stock market opened, Greenspan’s FED had lowered the short-term
federal funds rate by half a percentage point. This did no good.
The market ignored it. . . .
are scared, they slow down their spending. They stop buying discretionary
items. This has now begun. Economists call the turnover of money
per unit of time the velocity of money. When it slows, it is deflationary
in its impact. This is why Greenspan has more leeway to lower rates
again by creating new money. We are heading into a massive slowdown
of spending. Consumer confidence was way down in the week before
won’t solve the problem of reduced sales. Lower rates allow businesses
to borrow more money, but businesses today are not interested in
borrowing more money. Capital spending has fallen like a stone for
a year. Even before the attack, entrepreneurs were convinced that
the public was not going to buy what businesses produce. Despite
all the cheerleading on TV and in the financial press, businesses
decided a year ago that the consumer was tapped out. That’s why
businesses pulled the plug on capital spending long before September
11. . . .
There is no
more talk about a second half recovery of the economy or the stock
market. That was the Party Line six months ago. Now there is endless
chatter about the Big V. The V means a sharp downward move, followed
by a sharp upward move. Presto: “It won’t hurt any more! Uncle Alan
will kiss it and make it all well.”
What V? Where
was the sharp downward move? In the NASDAQ, which is still under
1500, down from 5040 a year ago March. So, where is the sharp upward
move? It takes two moves to make a V. One move makes a cliff. The
upward half is nowhere to be seen. . . .
These TV news
commentators with their blown- dry hair are sales people. They are
on-camera because the networks want to sell air time to advertisers.
The news media are there to sell products, first and foremost. Viewers
watch these shows because they want to believe that watching them
will somehow make them rich. That’s why these shows are “for bulls
only.” Bearish sentiment drives away viewers. . . .
Do I expect
a V recovery for the stock market as a whole? No. Some stocks will
do well, but as a whole, the market’s boom phase is over. It was
fun while it lasted.
The two questions
now are: How far down will it go? And for how long?
We still do
not know the two answers, but we know this much: when I wrote those
words, there was a long way down to go. There was a brief upward
move based on patriotism, but patriotism doesn’t sustain stock markets.
Stock-buying does. Former buyers now have the picture. Don’t buy
All the hype,
all the chatter about the V recovery: it was all wrong. The talking
heads on Tout TV did their best to pretend that the good old days
were just around the corner, but the good old days are still missing
in action. I think they are gone for good in this generation. The
depressing effect of the escalating cost of supporting retirees
in the Social Security systems of the West will keep the good old
days at bay.
victims of the bubble are many. They are not happy, but they don’t
know what to do with their money. They have been misled too often.
We are witnessing
a great shift in public opinion. The boom in the eighties and nineties,
fueled by income tax cuts in the higher brackets and also by fiat
money, when added to the fall of the Soviet Union, persuaded millions
of investors and voters that a new economy had arrived. They forgot
about Reagan’s huge FICA tax hike to bail out Social Security in
1983. They forgot about his TEFRA tax hike in 1986. They never knew
about the business cycle theory of the Austrian School economists,
which teaches that fiat money produces a boom, then a bust. I have
written a mini-book on this topic, if you are curious:
got bigger, 1982-2002, and the economy became dependent on the FED’s
fiat money to sustain the boom. Now even fiat money at double-digit
rates cannot revive it. Like a drug addict, the economy has adjusted
to the daily fix and is demanding more, just to get out of bed in
I don’t think
the public cares what Abby Joseph Cohen and James Cramer think.
Way back when, the public listened to Henry Kaufman. He called the
bull market in the summer of 1982, which hurt his reputation as
“Dr. Doom.” He lost favor. His word could no longer move markets.
So, no one paid any attention to his June 5, 2000, speech to the
New York Society of Securities Analysts.
Practices will Pose Problems When Economic Conditions Deteriorate
profession is not up to date. We do not get full reporting of
the activities of financial institutions. Transactions have become
too complex to be captured by conventional accounting procedures.
Problems will arise if the availability of credit shrinks.
in financial institutions has shifted from the top to the middle.
A trader might make more money than a CEO, and so may take risks
not apparent to top management.
deterioration in corporate balance sheets, occurring for only
the second time in the post-war period. Yes, corporate profits
are rising, but looking at the book value of corporations, we
see that liabilities are going up, while equity positions are
not. More credit ratings of corporate bonds are going down than
are going up.
not predict the stock market collapse we have seen, but he warned
against the worst features of the securities industry. But when
a boom is in progress, no one wants to hear bad news.
The boom is
over. Now, people are listening to bad news. They just aren’t acting
on it. They have not gotten out of this stock market. The are in
paralysis mode. They won’t buy, but they won’t sell. And so, week
by week, the minority of sellers are bringing the market lower and
lower. The holders have not yet thrown in the towel. That’s why
this market is still in denial phase. This far down, yet the experts
are only beginning to get the word: we are in a secular bear market.
Most of them are still bullish. In a bear market that is almost
three years old, this is a bad sign. There should have been a panic
sell-off by now. But there has been no wild selling. There has only
been the same old mantra: “Buy and hold for the long haul.”
Look at those
three charts again. The buy-and-hold strategy has failed utterly
for the NASDAQ. The NASDAQ is a minor factor today, a blip, an also-ran
of historic proportions. It has taken the capital and dreams of
millions of investors and flushed them down the drain. It’s finished.
index has fallen by almost 50%. This is the broadest index. It tells
us what has happened to American corporate capitalism. It has been
for you to decide what to do, I know. Who is the expert now? Experts
change, usually after a big market move.
thing is that you have a long-term strategy for maintaining your
lifestyle even if the stock market goes lower. You need to reduce
your dependence on a dream that calls for big profits in the market.
You can get gains if your timing is right. But just don’t become
emotionally dependent on a rising market to make your golden years
golden. For that, in my view, you will need gold — a lot of
it. That’s because I don’t trust the government to fight a cheap,
short war, and I don’t trust the FED to do anything except keep
the money spigot open.
But, in the
final analysis, gold won’t do it, either. You need productive work
and buyers of your output. That is the most important economic message
I can bring you.
want you to write checks, sit back, and trust them when they say,
“Now is the time to buy.” The problem is, they have been saying
this all the way down. They have been wrong all the way down. When
it really does come time to buy — and it will — they won’t
be saying it any more, and nobody will be listening to those few
who say, “this is the bottom.”
is not yet afraid. This is because most people were not heavily
into the stock market. They have no savings to speak of, so they
view the plight of those 20% who do own most of the stocks as a
curious but irrelevant affair in their lives. They trust Social
big problem is this: there will be a dearth of new capital available
when this market bottoms. These who had a lot of paper wealth in
early 2000 will have seen it melt away. They will not be buyers
of stocks. They committed their money in 1996-2000. They have no
more to commit. It takes cash flow to commit new money to any market,
and people will not want to commit to a market that has shredded
are staying in this market mainly to get even by means of the vehicle
that had promised them wealth. They want to prove to themselves
that they were correct in 1999. They weren’t. When they at long
last see the truth — “I can’t get even with the stock market
by staying in the stock market” — they will decide to get out.
When that happens, there will be a massive sell-off. Then there
will be a new Warren Buffet who buys companies that pay high dividends.
The game of musical chairs, of the greater fool theory, will end.
Investors will then seek value, and decades to grow wealth. “Get
rich slowly” will be the new standard.