Analysis of Economics

[cdrom]

AN INVESTMENT STRATEGY FOR UNCERTAIN TIMES

The U.S. financial system truly is out of control today. Corporations and individuals now carry the greatest debt burdens in U.S. history. The world, including the U.S. , is drowning in production overcapacity for everything from A to Z, so that competitive price cutting, product dumping, and currency devaluations to make a country's products more competitive in international trade are becoming rampant. The 14-year old recession in Japan (or is it de pression) is now being replicated all over the globe - where for the first time since the 1930s, we have global recessions and a global bear market in securities.

Even as the U.S. economy sinks into recession, job layoffs proliferate, corporate earnings tumble, commercial paper and junk bonds defaults multiply, - energy and other prices are beginning to rise.

Then there is Wall Street, where the pro-stock market hype (disinformation) would make Hitler's propaganda minister Goebbels blush with envy; where speculative leverage is piled high on more speculative leverage, and still more; where naïve, unsuspecting investors are shorn every day like so many millions of sheep; where the Wall Street "red light district" will do any-thing, say anything, sell anything to separate the public from their money and ring its own cash registers.

In recent years, we have seen the Fed, the GSE's and Wall Street create the biggest speculative financial bubble in world history, literally out of thin air - via trillions of dollars of artificial liquidity, with the highly revered Alan Greenspan as the maestro of this financial orgy. And we have seen that bubble begin to collapse with the collapse of the Internet/tech bubble (i.e., a bubble within a larger bubble) with $5 trillion in wealth extinguished in the stock market alone in about 12 months. The gargantuan multi-trillion dollar real estate and derivatives bubbles are next in line for major trouble.

Where do we go from here? In spite of the present interest rate induced rally in the stock market (which could last another month or so) we are still in a long-term bear market. The investing public remains bullish and for the most part will not sell, so millions of Americans will ultimately ride the market all the way to the bottom and lose their life savings over the next few years.

Financial insiders around the world know that Green-span is trying to rescue his friends on Wall Street, which is hemorrhaging red ink because of their massive bond holdings. The world now knows that the Fed has chosen inflation over recession, depression or financial collapse. Greenspan and the Fed (with the help of the GSEs) will create trillions more in financial liquidity if necessary in order to try to avert a collapse. The world has just been given the biggest inflation "red alert" since the 1970s.

Ironically, by cutting short-term interest rates Greenspan hoped to aid Wall Street by reducing the cost-to-carry on their massive bond holdings, especially tech and telecom issues. But the Fed is actually hurting those it is trying to help, because this isn't the '80s or '90s, when bonds rallied on interest rate cuts. This is like the 1970s where interest rate cuts punish the dollar and bonds. Instead of helping the U. S. and global bond market, the Fed's interest rate cuts appear to be hurting it, because, above all, the bond market is terrified of inflation.

Soooo, where do we go from here? The financial system is more unstable than ever. After a bear market rally (perhaps through May) the stock market probably will recommence its bear market decline during the summer. The global recession will not go away. Will it turn into a global deflationary collapse, an inflationary recession (stagflation), an inflationary depression, or will we return to prosperity? Only time will tell, but this writer would bet on global stagflation (i.e., inflationary recession) like the 1970s. Watch the dollar, commodities, and gold for signals as to which way the financial system will move. Also watch the huge global bond markets closely.

And above all, be very conservative with your investments and finances (see recommendations below). Trillions of dollars more in losses are coming for unsuspecting businesses and investors all over the world. It is time for a complete portfolio reevaluation to see if your portfolio lines up with the scenarios discussed in this report. Your most important goal should be preservation of assets over the next two to three years. Keep your powder dry, keep your head down, and watch your back side closely. And choose wisely!

AN INVESTMENT STRATEGY FOR UNCERTAIN TIMES

Tens of millions of Americans have lost 25% to 50% (or more) of their investment or retirement portfolios value over the past 12-18 months. Most of these are in denial, believing (as Wall Street and its media shills have promised) that they will gain it right back and more in the "new bull market." They won't! They will lose even more as the long-term bear market and recession grind down the values of their portfolios even more. They will ride the bear most of the way to the bottom.

Their greed and their gullibility in believing the deceptive propaganda of Wall Street will be their undoing. It is a time for low to no risk; avoidance of losses, and preservation of capital.

A. PRINCIPLES OF SUCCESSFUL INVESTING

The following principles (reprinted from the December 2000 MIA) are worth rereading several times. Are you presently applying them (all of them) to managing your own port-folio or retirement assets. If so, then your assets will do well and be protected in the unfolding bear market, recession and financial crisis. Most of the people presently losing their shirts in the stock market are violating some or most of these principles and those who are will probably die poor.

PRINCIPLE #1: Avoid losses or keep them to a minimum - If you take a 50% loss, you have to have a 100% gain to get even; if you take a 66% loss (which is common in today's markets) you have to have a 300% up move to get even.

PRINCIPLE #2: Learn to manage risk - Never buy a single investment that can jeopardize more than 5-10% of your portfolio. Avoid speculative investments. In a primary bear market, 85% of all stocks will decline. A long-term buy and hold strategy exposes your portfolio to great risk in a long-term bear market.

PRINCIPLE #3: Diversify your portfolio - Don't put all your eggs in one basket, or even several similar baskets. Diversify as to kinds of investments - not just a lot of different stocks, different pieces of real estate, etc.

PRINCIPLE #4: Avoid greed - Avoid investments that promise to make great profits very fast. They usually don't. If they are too good to be true, they usually are not true.

PRINCIPLE #5: Only buy value - That is, investments which are very undervalued and which are probably being totally overlooked by the great majority of investors. This is the cornerstone of Warren Buffet's investment philosophy. Also of Bernard Baruch's "buy straw hats in January…" approach. Value buyers never got burned in the speculative "no earnings" dot.coms, because they avoided them.

PRINCIPLE #6: Avoid buying what everyone else is buying - If there is already mass acceptance of an investment, a group of stocks, etc. then that acceptance has al-ready been priced into the investment (i.e., such as the Internet/high-tech stocks over the past year or two). Re-member, the majority is always wrong!

PRINCIPLE #7: Avoid get rich quick schemes or in-vestments - Most investors who are driven by greed (which is a very powerful emotion) end up losing. Re-member, the tortoise won the race, not the hare and the ant eats better in winter than the grasshopper.

PRINCIPLE #8: Anticipate trends before they are obvious to the crowd - For example, defense stocks will do well in a period where the U.S. must rearm over the next few years. Raw materials will rise with oil prices and Middle East turmoil. Gold and silver will rise as the central banks of the world (led by the Fed) move to re-inflate.

PRINCIPLE #9: Be patient and aim for a reasonable return (i.e., 6-12% per year). A cabbage grows faster than an oak tree - but which one ultimately grows bigger and lasts longer. In a speculative time of quick riches, instant gains, and no-brainer investments, this principle is very unpopular. After a primary bear market, this principle will become very popular.

PRINCIPLE #10: Learn and utilize the principle of compound interest - The biggest buildings in most cities (i.e., the banks and insurance companies) are owned by people who utilize this principle. The wealthiest people on earth understand and apply this principle. It is the investment application of the tortoise and the hare race. (And all the better if you can compound on a tax deferred or tax exempt basis.)

PRINCIPLE #11: Understand the times - If you get your information from the mainline financial press, the financial or mainline media, from brokerage analysts, or from Wall Street, you will not understand the times. You will understand only what they want you to understand to get you to buy more stocks and make Wall Street more money.

PRINCIPLE #12: Learn some history. Learn what great values are, learn what overpriced stocks look like, learn about bull and bear markets. Study some historical charts. You can't run your own business without a knowledge of your industry. And you can't run your own money without a knowledge of how the markets work.

PRINCIPLE #13: Learn to ignore the words and predictions of Wall Street's gurus. Learn to trust the market and only the market. The trouble with most of Wall Street's strategists and gurus is that they don't have the vaguest idea of how markets work. They don't even understand that markets discount the future, that markets move before the economy moves. These guru-strategists are amateurs. They never did their homework. They don't understand what is happening. And for the most part they never will.

AN INVESTMENT STRATEGY FOR UNSTABLE TIMES II

1. AVOID THE STOCK MARKET 100% -- including equity mutual funds, common and preferred stocks - except for gold stocks, some defense stocks, and some energy related stocks. Avoid utility stocks. The history of utility stocks in bear markets is not positive. In 1971, the D-J Utility Average hit a high of 128. By late 1974 (toward the end of the bear market, the D-J Utility Average had sunk to 57 (down 55%). This time utilities will have the added pressure of the energy crisis, the California utility debacle, etc.

If you are still in the stock market, ignore the present disinformation from Wall Street and its media shills and get out. The bear market, like the one in the 1930s and the one in Japan today has a lot further to go on the downside. We could see 5,000 on the Dow and 1,000 or less on the Nasdaq before we reach the real bottom. If you have losses, take your lumps now, before they become greater and don't look back. If you have gains, sell and pay your taxes, before you have no gains left to pay taxes on. If you ignored MIA's recommendation to sell your tech stocks over the past 18-24 months, and are now faced with steep losses, sell half of that position now and half on the next (or present) rally. If for some reason, you absolutely cannot sell, then buy LEAP put options. But it is better to sell.

This writer agrees with Richard Russell that when in a primary bear market (which we are in) it is not the time to be "clever" or "brilliant." The idea is not to make money - the idea in a primary bear market is not to lose money - and that could be more difficult than you think. In a long-term primary bear market you should be more interested in the return of your capital than you are in making capital gains.

2. CUT BACK ON REAL ESTATE HOLDINGS - to no more than 25% of your net worth. Reduce or eliminate outstanding debt on your real estate. Real estate (the biggest remaining bubble in the U.S. except for derivatives) will ultimately see prices drop sharply (i.e., 25-50% or more) in the coming recession. California and New York real estate are likely to be the first to implode.

3. REDUCE YOUR DEBT AS RAPIDLY AS POSSIBLE - Excessive debt is killing businesses and will push millions of individuals into bankruptcy in the emerging recession. Leverage may work well in a long-term rising economy or bull market, but in a long-term bear market (which we are in - the recent rally notwithstanding) it is like poison to your finances. Pay off credit card debt monthly or don't use them.

4. MONITOR THE SAFETY OF YOUR BANK, S&L OR INSURANCE COMPANY via a Weiss rating. If you have money on deposit or under management, that institution should have at least a B rating. Very few such institutions have been in trouble in recent years, but many will be over the next year or two - due to cascading debt defaults. To get a rating, call International Collectors Associates at 1-800-525-9556.

5. FORGET HIGH RETURN INVESTMENTS FOR THE FORESEEABLE FUTURE - FOCUS ON PRESERVATION OF ASSETS - Do not enter into any speculative, high risk investments, avoid junk bonds or any fund portfolios containing same; avoid illiquid investments; avoid investments which you cannot understand. Apply the KISS principle to your investments: "keep it simple stupid."

6. AVOID MONEY MARKET FUNDS unless they are T-bill only funds. As described above, they utilize derivatives and invest heavily in commercial paper - some of which is very shaky. Some have very heavy exposure to the mort-gage finance and GSE markets. They are not the conservative money vehicles they are purported to be and could implode if the Fed loses control of the speculative bubble it helped cre-ate. Also avoid federal agency bonds or notes, which do have higher yields than T-bills, but have heavy exposure to the real estate bubble, derivatives, and the massive overleveraged mortgage finance debt pyramid.

7. UTILIZE TREASURY BILLS FOR UP TO ONE-THIRD OF YOUR PORTFOLIO - Why T-bills? Because they are the shortest income vehicles that enjoy the full faith and credit of the U.S. government. Why not longer governments (i.e., T-bonds), which give you a higher return? They have several problems. If the dollar tanks (a strong possibility in coming months) long bonds would be hit hard.

If long interest rates are forced up for any reason (such as the government defending the dollar), the long bonds would be hit hard. If the Fed pursues its premeditated policy of massive re-inflation (and it will) this is very bearish for bonds. (Note the sharp drop in bonds since Greenspan's fourth interest rate cut on 4/18. The world is now on a high inflation alert.)

Short to intermediate term municipal bonds (AA or AAA rated General Obligations only) can be utilized as well as Treasury bill money market funds (only those which utilize no derivatives to boost their yields).

8. MINING SHARES (GOLD, SILVER, OR PLATINUM) - 5-10% of a portfolio. These have begun to rise over the past few months and are a leading indicator for the metals. They are more speculative than the underlying metals but in a metals bull market should rise 5-10 fold if history is any precedent.

9. PRUDENT SAFE HARBOR FUND (5-10% of a portfolio) - Like the mining shares, this fund is also a hedge against the decline in the dollar. It devotes a portion of its assets to non-U.S. debt securities and invests in gold bullion and common stocks of gold mining companies. As, if, and when the dollar weakens or moves into a bear market, this fund should do very well. Its sister fund, the Prudent Bear Fund, was up 52.5% in the year ending 3/31/01 . Among other things, it shorts the stock market. For more information, visit www.prudentbear.com or call 1-888-778-2327. [ED. NOTE: David Tice, CEO of these two funds, is a friend whom this writer holds in very high regard. His web site, www.prudentbear.com; which includes Doug Noland's weekly Credit Bubble Bulletin, is an excellent in-depth source of information on current economic/ financial developments.]

10. GOLD, SILVER AND PLATINUM COINS (SEMI-NUMISMATICS AND BULLION) - 20-33% of a portfolio. Gold and silver (now at 25-year lows) have long been suppressed by powerful central bank and bullion dealer interests who have large financial interests in their bear (shorting) operations. However, as inflation returns and the dollar weakens, it will no longer be in the central banks' interest to suppress gold, and in a rerun of the 1970s, gold, silver, and platinum prices should explode.

All three metals (both coins and bullion) are already in very short supply. So, with any upward movement in the metals, the coins will move up dramatically. Alan Greenspan and the Fed, repeating the mistakes of the 1970s, but with infinitely larger credit (money supply) creation, have inadvertently put the entire world on an inflation alert - the biggest since the 1970s.

They have in effect said that "we are willing to inflate our currency (the dollar) to oblivion to avert (or try to avert) a depression." We are about to move from the day when financial assets were king (i.e., the past 20 years) to the day when real assets are king (i.e., like the decade of the 1970s).

And, as in the '70s, we are likely to see stagflation (i.e., inflationary recession); weak equity markets; a weak dollar; rising commodities prices (including precious metals); rising metals mining stocks; and a far less positive general environment on Wall Street. Ultimately, free market forces (not the Fed) may drive interest rates through the roof as they did in the late 1970s when interest rates, inflation and gold all rose together.

And if your Treasury bills, CDs or other paper assets lose purchasing power in an inflationary environment, it will be more than made up for (offset) by your metals holdings. Frustrated precious metals investors should take heart. Their long patience is about to be rewarded. Already gold mining shares (a leading indicator for the metals) have begun to rise. The day of hard assets is not far away.

Investors should be aggressively acquiring precious metals (including silver and platinum coins) at this writing. Included should be semi-numismatic U.S. and European gold coins; U.S. silver dollars; junk silver and silver bullion (all in short supply at this writing); and platinum coins.

All three should be held in a portfolio , and as the prices move at different rates should have the percentages adjusted (i.e., swaps) to increase the number of ounces held. There is currently (with a gold/silver ratio of about 60 to 1) an excellent swap opportunity from gold to silver bullion or coins - which in time, is likely to increase the ounces of gold when you ultimately switch back into gold from silver.

In addition to acquiring gold and silver coins at what will ultimately be seen as ridiculously low prices; and swapping between gold, silver and platinum when the price is right, there is another strategy which makes a lot of sense to this writer. Namely, that of acquiring a few low mintage, rarer European gold coins each year in a collection which, with or without a rising gold price, or with or without rising inflation, should rise 10, 20, 30-fold or more.

The first of these collectors’ coins is a low mintage (i.e., 4,000 coins) European coin - the Danzig 25 Gulden gold coin, which is integrally linked to the history of World War II. One of these very rare, high grade coins, priced at $2950, could put your child or grandchild through college in 10 to 15 years - if past history is any guide. (Several of these coins have sold at auction in the $8-9,000 range).

Such a collection of coins, accumulated a few at a time over the next 5-10 years, is no substitute for owning gold/silver and platinum bullion or semi-numismatic coins, but is a way to upgrade your metals portfolio and increase its profit potential.
http://www.mcalvany.com/AnInvestmentStrategyforUncertainTimes.asp