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The Last Big Bubble
-- September 26, 2001
I started working on Wall Street when I was ten years old, helping my father at his investment advisory company. Then, when I was 25, I started my own firm, Weiss Research, and he worked for me -- as "Senior Consultant." It's hard to believe that was exactly thirty years ago last month.
Dad was a great resource. He was probably the only investment advisor in the world who made a fortune in the Crash of '29 ... and then lived to do it AGAIN, with me, in the Crash
of '87.
Before he passed away, we talked at length about the speculative bubbles in the world -- such as the Asian bubble, the tech stock bubble, the worldwide real estate bubble, and one of the greatest bubbles of all: the U.S. economy and blue-chip companies. At the time, the Asian bubble was already bursting. We agreed it would be just a matter of time before the others did the same.
Now that time has come.
Unfortunately, I can't tell Dad all about it in person.
But I CAN tell you ...
World Trade Center Disaster Pops The Largest Bubble of All
On September 11, nineteen fanatic terrorists broke America's heart. But even as we continue to grieve for our fallen countrymen and women, the second devastating impact of that contemptible deed is being felt -- on the world economy.
The unsettling new environment guarantees that we are about to experience more than an economic slowdown ... more than a mere recession. We are about to witness the deepest stock market crash and depression since the 1930s.
Please don't misunderstand: Things will not fall straight down. The most powerful institutions and central banks in the world will do everything in their power to prop up their economies and stimulate temporary stock market rallies.
But their efforts are a drop in the bucket compared to the trillions that had already been lost in stocks around the world. Even before the Twin Towers fell on September 11 ...
- THE ASIAN BUBBLE was a distant memory. The Nikkei had lost an incredible 75% of its peak value.
- THE TECH STOCK BUBBLE was in shambles. The Nasdaq was down 66%, $5 trillion in wealth destroyed.
- THE WORLDWIDE REAL ESTATE BUBBLE was ending too. In Japan, prime real estate was selling for a meager ONE-SIXTH of its peak value.
All this BEFORE the terrorist attacks on September 11. But one giant bubble was still standing: The core of the great American economy, held up by just one thin thread -- the confidence of the American consumer.
By early September, the American consumer was living in an increasingly smaller and more lonely world, shielded from reality by credit cards, home equity loans, a couple of SUVs, and the nearest shopping malls.
And, strangely, until late August, consumers were still spending freely despite the bad economic news. Home sales were holding firmly. Retail sales were still OK. Consumers were the last hope for the American economy.
But all that ended when the Twin Towers collapsed. The thin thread of consumer confidence was cut -- irreversibly and irretrievably severed.
Everywhere in America today, consumer confidence is gone. Seven out of 10 Americans are fearful, depressed, or terrified. They feel powerless to restore their sense of physical security. So they are scrambling to restore their feeling of FINANCIAL security, to somehow build a cushion to fall back on during the coming hard times.
Problem: Right now, most Americans HAVE NO CASH. They've been living from hand to mouth for years. In the past, whenever they needed cash, they just grabbed the nearest credit card ... or took out still another loan on their home.
No more. Now, many feel a growing pressure, even a compulsion, to sell something -- anything. Stocks. Property. Goods.
This past weekend, we talked to automobile dealers here in Palm Beach County, Florida. Even though GM and Ford are offering ZERO percent financing for new cars, the dealers are getting no takers. None. Zilch.
Yes, they ARE getting a lot of phone calls. But the calls are from customers who want to SELL their cars -- not to buy. Many families in this area have two cars for transportation. Plus, they also have one or two EXTRA cars for leisure, fun, or just conspicuous consumption. And Palm Beach County is not unique. It's the same in key areas all over the USA.
The CEOs up in Detroit and the economists up in New York figured that, once someone buys a car, that's it. It's off the market. They forgot that the United States has the largest used car market in the world. They never imagined that, instead of consumers making net purchases, you could see them unleashing net SALES.
And don't forget the mass selling still coming in the stock market. Last week, many investors called their brokers to sell. But they didn't want to seem "unpatriotic." So they mumbled sheepishly that they were doing it "only because they had to" -- only because they "needed the CASH."
Or the brokers called THEM, asking for more margin money. Like the Bass brothers who got a margin call to sell 135 million shares ($2 billion) of Disney. Brace yourself. This is just the beginning of the forced liquidations in the stock market -- to raise desperately needed cash.
Back here in Palm Beach Gardens, where I live, an associate called a handy man this week to give him a small job. The man was practically in tears with gratitude. All his other jobs had been cancelled. He was completely out of cash. He had no idea where his next dollar was going to come from.
In New York, four Broadway shows have closed down. Not just for a few days. Forever! They were out of cash.
The leading airlines in America were equally cashless. They were estimating losses of $2.5 billion for the year before the September 11 tragedy. Now, they say their losses in 2001 will be many times larger. They asked Mr. Bush and Congress for close to $25 billion; they're getting "only" $15 billion. But giving them money is like throwing salt into the sea. Even after 115,000 layoffs and even after flight bookings begin to pick up, they'll still be running way below capacity. If that continues, the $15 billion will be gone like a puff of smoke.
I've dug back into the history of America's 10 largest great corporations -- AT&T;, Ford, GM, GE, etc. -- and found that, before the Crash of 1929, they used to keep as much as $2 in cash on hand for every dollar of current liabilities (bills and debts coming due within 12 months). Now, I see many of those same companies are down to a dime -- one measly alloy dime -- on the dollar. Nearly all American individuals and institutions are equally cashless.
This has been true for a few years. The difference now is that they're desperate to GET to cash, but don't know how. That's the sea change we are now witnessing. You can already hear the sound of millions of American consumers slamming their wallets shut.
Americans will unite behind the President and rally for the country. But will they buy a new gas-guzzling SUV every year? Take luxury fly-away vacations every summer? Gleefully charge their credit cards and go deeper and deeper into debt?
No, those days are gone. Mark my words: It's going to be many, many long years before we see another wave of consumer spending like the one that had energized this economy before the events of September 11.
Your Financial Security Has Never Been In Greater Danger!
You must take action to prepare yourself for ALL the impacts of this crisis -- not just on your investments, but on your home and family, your job, business or retirement, your insurance, and your savings accounts. That's my life's work: Helping to keep my clients safely and profitably invested in tough times. Here's what I suggest you do right now:
FIRST, get most of your cash money to TRUE safety as soon as possible. Don't accept second best. Go for the "Cadillac of safety" in the investment world -- U.S. Treasury bills, 100% guaranteed, with no limit, by the full faith and credit of the U.S. government. Investing in U.S. Treasury bills is not only the best thing for you and your family; it's best for the country as well, helping to finance all the government's efforts to make America more secure.
You can buy Treasury bills directly from the U.S. Treasury Department with their "Treasury Direct" program (800-722-2678; www.publicdebt.treas.gov/sec/secomtd.htm). Or you can buy them through a Treasury-only money market fund such as American Century Capital Preservation Fund (800-345-2021), Dreyfus 100% U.S. Treasury Fund (800-645-6561), Fidelity Spartan U.S. Treasury Fund (800-544-8888), or U.S. Global Treasury Security Cash Fund (800-873-8637). Also, consider our own Weiss Treasury Only Money Fund (800-289-8100).
Ignore the low yields for now. You'll get the higher yields when interest rates shoot back up. For now, just be happy that your money is SAFE!
SECOND, get out of the stock market. I have shouted my warnings from the rooftops. Beginning in early 2000, I mailed five million letters to investors headlining "The Coming Internet Apocalypse," the "Coming Nasdaq Collapse," and "Expect Dow 5000 and Nasdaq 800." I warned you about this well before it began.
But if you didn't act on my advice for some or all of your portfolio, I cannot blame you. Nearly all of Wall Street and nearly all investment advisors in the world were telling you to do exactly the opposite. If you wanted to sell, they told you to stand pat. If you wanted to stand pat, they told you to buy more. I assume you're not listening to them any more. Good.
No matter what, IT'S STILL NOT TOO LATE TO GET OUT. The Dow is still not far from its all-time highs. Even if you sell at Dow 8000, that's FAR better than selling at DOW 5000 where I think this freight train is headed next ... or DOW 3500, which could be the next express stop after that.
You say: "But I can't sell now after the worst one-week decline since the 1930s! I want to wait for a nice, big, fat rally before I start selling."
Good point. But who knows for sure whether this week's rally is your last chance to get out or not? My advice:
--> Sell 50% of your stocks right now, regardless of your hopes for a rally.
--> Then when you get a major rally -- whether from these levels or from lower levels -- sell the other 50%.
"But we can't afford to take the loss," say many investors. My answer: That's a myth. The loss is already a historical fact. The only way to evaluate your portfolio is to mark it to market every day, just like the SEC requires brokers, banks, and mutual funds to do.
"But we can't afford to take the profit," say other investors, concerned about capital gains taxes. That's another myth. The tax man is your ever-present partner. He will be with you now, before you die, and even after. Your portfolio never was -- and never will be -- worth more than its value NET of capital gains taxes. So as far as taxes are concerned, it makes little difference whether you sell now or later.
The only thing that really counts is the answer to this simple question: Is the market going up? Or is the market going down? If the market is going down, you should sell.
Period.
Right now, it's going down. Obviously. So, I have three instructions for you: Sell. SELL. S-E-L-L.
Sell your stocks that are in the loss column. Sell your stocks that are in the profit column. Sell the stocks you have at your broker or in mutual funds. Sell the stocks and stock mutual funds in your 401(k) or IRA. Sell tech stocks, blue chips, utilities, common, preferred. It doesn't matter where they are. Just SELL -- half now, half on a good rally.
THIRD, consider a few special exceptions -- select gold mining companies, for example. But limit your holdings to a maximum of 10% of your invested assets.
FOURTH, turn your attention to strategies that can potentially make you huge profits from this crash. And when you do, be sure to rid yourself of any lingering feelings of "guilt" that others might try to lay upon you. Getting rich yourself is the best way to make your country rich and strong financially.
That's exactly what my father did back in 1929. He borrowed $500 from his mother; and when the market rallied in early 1930, he used the money to sell short the stocks he felt would be most vulnerable to the global decline he saw coming. By the time the market bottomed, he had $100,000. There he was, in his early 20s and already a very rich man, while the veteran Wall Street pros all around him had lost their shirts!
But that's only half the story. The other side of the story unfolded when the stock market hit rock bottom.
Here's how Dad describes it, posthumously, in a chapter of my book, The Great Money Panic ...
"It was Friday, March 3, 1933. We went straight to our brokerage firm's main offices downtown. We didn't stop at the midtown branch. We wanted to get our orders in to the man who talked directly to the floor traders. We bought everything we could lay our hands on. We bought GM, AT&T;, GE, and Sears for pennies on the dollar.
"The tape barely moved, it was so dead. No more than 350,000 - 400,000 shares of stock were traded that day. That's less volume than what typically trades in just one large transaction today. But that didn't stop us. We just kept right on buying.
"The order clerk looked at us as if we were from another world. 'How come you guys are buying?' he asked. 'You're the only ones!'
"We didn't tell him. It was none of his business. By the time the day was out, we had bought thousands of shares of stock for ourselves and for our clients, at bargain basement prices. As a matter of fact, they were just about the lowest they had fallen in the entire century."
It was this kind of buying -- by the few who got rich from the crash -- that helped our nation recover.
You can do the same again now. In fact, you can actually do better. Because in Dad's time, the only way to get rich was to take unlimited risks, risks that could wipe you out of house and home. Today, with put options, you can profit from the decline with risk that is strictly limited to the small amounts you invest. That way, you never endanger your keep-safe funds or your other assets.
But your first order of business is to GET TO SAFETY! Then, focus on staking out a position to profit from the crash with a modest portion of your funds.
Best wishes,
Martin
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