Chapter 20
The Recovery
The panic selling stopped. An eerie tranquility spread across the globe. But in the hearts and minds of the people, fear lingered.The average citizen imagined that some faceless bureaucrat, in a final act of desperation, might set off the money presses ... or that one terrorist, a lone survivor of America's otherwise successful campaigns, would embark on a suicide mission to set off a nuclear bomb.
Authorities were concerned that the general holiday would be haphazard and unregulated.
Giant manufacturers feared that the shutdown might be permanent while foreign competitors continued to dump their goods into the US.
Political analysts predicted that the intense economic crisis might bring to power a new breed of quasi-dictators backed by military juntas; that terrorists headquartered in Afghanistan or Kazakhstan might blackmail the world with a secret cache of biological weapons; and that any recovery that might ensue would be sabotaged by ethnic wars in the world's many hot spots. Fortunately, none of these feared events materialized.
The President and his new advisors convened again at Camp David. In response to the question "where is the cash," Fed Chairman Sheppard brought his laptop with an Excel spreadsheet of all the most liquid companies. His assistant had a hard-copy print-out which he placed on the table.
The bond and foreign currency markets expert, John Hartman, glanced anxiously at the names and numbers on the list. Then the assistant stood up and helped him unfold the long sheets across the table and onto the floor. One column showed cash resources; one showed short-term debts; a third showed quick liquidity ratios.
However, after scanning it for a few minutes, Hartman was not enthusiastic. "If this list is typical, the task ahead of us will be more difficult than I imagined. Look," he said, stabbing his finger at the printouts as he held them up in the air, "when the ratios are good, the quantities are small; and when the quantities are big, the ratios are not so good. This is a far cry from the days of J.P. Morgan when all the reserves needed to piece things together after a panic could be scribbled on a few scraps of paper."
No matter how big the names and no matter how impressive the numbers, they recognized that it was still just a spit in the ocean of debt that surrounded them. On the other hand, no matter how unimaginably large the task ahead, they also recognized that something was infinitely better than nothing.
"Before any liquid resources are committed," said one wealthy man in a letter to the President, "certain conditions have to be met."
What were these conditions? The letter referred repeatedly to the "housecleaning process" but complained about the slow progress that was being made. Here are some excerpts:
Wall Street analysts are saying that the latest round of casualties will be the last casualties, that there is no more need for liquidation. But this is not true. By the end of the boom, there were approximately $18 trillion in debts outstanding in the United States ... over $35.9 trillion if you include Western Europe and Japan ... and close to $73.2 trillion if you include all derivatives. But, at the most, less than one-sixth of the private debts have been liquidated thus far.
How much has to be cleared out before it is enough? Maybe a third. Maybe even more. We can't say for certain. But we are sure about one thing: It is time to halt the chain reaction of panic liquidations and begin a rational, orderly period of reorganization.
Meanwhile, at Camp David, one Administration official was visibly upset by the slant of the debate. Echoing a widespread concern throughout Washington for the free-enterprise system, he raised his voice in protest. "Are you gentlemen implying that the President should assume dictatorial powers under the cloak of a national emergency? Are you saying he should take over private industry, preside over market transactions?"
What he failed to realize was that the Great Stock Panic had � for better or for worse � made those arguments academic. Due to the sharp declines in tax revenues, many government programs had been reduced to almost empty shells and the government's power � to tax less, spend more, tighten money or ease money � was reduced to a mere shadow of its former self. To think that the government may now assume dictatorial powers was completely out of tune with reality.
The President was particularly conscious of this change. "The government cannot call a national emergency," he replied, "because we already have a national emergency. All the government can do is guarantee law and order, coordinate meetings, and provide the information needed to put the pieces back together."
The Administration official also complained about the extremely high cost of money.
The President, turning philosophical, responded with this comment: "This is the first time in our history that the cost of money and the cost of things have taken such widely divergent paths. Could it be that the market is trying to tell us something?
"I'm not an economist," he continued, "but one thing I have learned is that interest rates represent the market value of money � of credit, faith and trust. The market is telling us that it needs more trust and more faith. At the same time, low prices are telling us that we live in an era of abundance, that we have an almost unlimited ability to produce but have been producing the wrong things.
"Could it be that this crisis is a flash of lightning that is giving us a brief glance into a future of stronger human relationships and more abundant material goods? I only hope we can make a more conscious distinction between the two � between people and things. Clearly, to force interest rates down artificially will be tantamount to ...."
The President groped for the appropriate metaphor ...
Reopening
At last, the market reopened. Unlike the earlier reopening of September 17, 2001, there was no big volume. No fanfare. But when you looked at the prices, you saw a huge gap from the point at which they closed before the forced holiday and the point at which they were now opening. Although it was not too late to buy, it was too late for the truly great bargains.Separately, the Federal Reserve made it clear that any attempts to lower interest rates artificially would be equivalent to .... "barking at the thunder."
As confidence returned, the big action began. Despite the lack of government intervention, the dollar continued to recover. Thus, the foreign exchange markets � the first to feel the sting of the panic � became the first to snap back. The very fact that the banks and markets were functioning was in itself hailed by overseas investors. A sudden flush of funds, hoarded in cash and Treasury bills, returned to the equity markets.
Would it be enough to sustain a real recovery? Or would the market fall back down again, eventually plunging the nation into another panic and another general holiday?
To this ultimate question, no one will have the answer except you, the reader. If you � and other investors like you � endeavor to build cash and reduce debts before the panic, the answer can be yes. You will join the new "liquid minority" that could lead the nation out of the abyss. But to achieve this end, you must take the steps I outline in the next three chapters.
We have seen the great financial blunders of the 1990s, the great dilemmas of the new millennium, and the new threats of the post-WTC era. But to see beyond the valley is most difficult. What happens next will depend upon what you do now. You have the opportunity to not only survive the panic but to greatly increase your wealth during and after its most confusing stages.
How do you profit from the Great Stock Panic? In principal, there are three ways:
First, you can just sit it out in cash and equivalents, such as Treasury bills. While the value of most others assets fall, your money is safe, earning a decent yield and actually rising in value, in terms of its power to buy other assets. But to make this possible, your cash must be truly safe and liquid.
Second, you can buy specialized, alternative investments that actually go up in value precisely because most traditional investments are falling. These investments are especially designed to help you profit directly from falling markets. And you can buy them with strictly limited risk, without endangering the balance of your portfolio.
Third, when most of the money panic is behind us, the time will come to buy � at bargain-basement prices. In the next chapter, I give you specific instructions.
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