What about some positions in AMZN and ... Gold!
Regards
PMG
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THE MOTHER OF ALL CRASHES
1929-30 vs. 1999-00 June 2000
"If one wants to avert depressions, one must abstain from any tampering with the rate of interest."
Ludwig von Mises
"The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps."
Ludwig von Mises (1949)
"Margin debt is the noose around the market's neck. It's not a question of: If? Rather, it's only a question of WHEN the market panics, liquidates, crashes, and burns."
Steve Puetz
"Be very skeptical of the market 'guru' who has been right for an extended period of time. He or she is on the path to being very wrong. Conversely, don't write off the intelligent expert who has been wrong for an extended period of time. He or she is on the path to being right."
Richard Russell
It's my task to convince as many people as possible that a dire financial outcome lies ahead. By doing so, hopefully I can convince people to put 10% of their net worth into gold. I think this is the best financial advice in the world because I unswervingly believe that a devastating crash is inevitable. If I didn't feel my views were based on sound economics I'd get out of the gold business, which quite frankly has been a lousy business for twenty years. I'm in the gold business because of what I believe, not the other way around. I'd sell out now if I didn't think a crash was imminent.
To make our case for an impending financial collapse, we need to draw on some history. To do this I've condensed a recent newsletter of Kurt Richebacher, the classical economist. I've added a few comments in parenthesis to hopefully liven up this history lesson. I'm trying to put this across without boring you.
The economic contraction that started in 1929 in the U.S. was the worst in history. Remarkably little is known about it. That's because the conviction exists today that central banks and governments possess superior wisdom and better instruments to keep things under control.
There are two opposing explanations for the unusual severity of the Great Depression of the 1930s. The Austrian School (Mises, Hayek) regards the depression as the unavoidable, disastrous aftermath of loose monetary and financial policies. They believe the severity of the depression depends on the magnitude of the prior money and credit excesses.
Until the early 1960s economists around the world agreed that monetary inflation caused a boom in 1929 that turned into a bust. But one book, Friedman and Schwartz's, Monetary History of the United States, appearing in 1963, radically changed that view among American economists. This book argued that there had been no inflation in the 1920s that could have caused the economy's collapse. They concluded that the Great Depression was caused by tight money. For Milton Friedman, the 42% shrinkage in the money supply was the one and only decisive mechanism that drove the economy into a deep depression.
THE ROLE OF THE CRASH
We would never dispute the importance of the drastic money contraction during those years, but it defies logic to ignore the huge wealth destruction in the stock market. According to Austrian theory, the booming stock market had unduly boosted consumer spending. As soon as stock prices collapsed, consumer spending evaporated, causing a plunge of extraordinary speed and breadth. The economy fell abruptly by 9%. (Milton Friedman disagreed with many of the intellectual accomplishments of the great Austrian economist, Ludwig von Mises. At a 1947 meeting of the Mount Pelerin Society, an organization of free market economists founded by nobel-prize winner Freidrich Hayek, Friedman claims that Mises rebuked him or at the least was rude. At the time Mises was the older man and a revered economic thinker while Friedman was young and unproven. What effect this had in formulating Friedman's views that differ so starkly with Mises remains an interesting question.)
As long as the 1929 stock market kept booming, stocks represented highly liquid assets for their owners. But the plunging market turned stocks into illiquid assets which could only be sold at a heavy loss. We don't have the slightest doubt that the stock market crash was the most important cause of the ensuing depression.
How do the monetary and credit excesses in the late 1920s and in the late 1990s compare? In both periods, credit creation took place overwhelmingly outside the banking system - that is, through the securities markets and the money markets. Also common in both periods is the complete absence of Federal government borrowing. Businesses and consumers did the borrowing and lending.
EXCESSES COMPARED
The collapse of the stock market started in early September 1929 with a price-to-earnings ratio of 13.5, after a high point of 16.2 in January. In comparison with the traditional 10 to one ratio, these valuation levels looked unusually high at the time. Measured against the ratios of today - around 29 for the S&P 500 index and more than 200 times earnings for the Nasdaq - those of the late 1920s appear insignificant. Before the 1929 crash, the total value of listed stocks equaled about 100% of the overall economy. This time, it's almost 200%. In short, present stock valuations vastly exceed those in the late 1920s. (This historical comparison drives home the insane levels of today's market. If a person can take their money out of a stock selling at 150 times earnings and put 90% of it in the bank and 10% in gold and they see no merit in such a move, then what is it they expect? How high do they see stock prices before they sell? Let's face it, some people would refuse to sell at 500 or 1,000 times earnings. In other words, no matter how great the excess, they will never get out. This is the exact mentality found in 1929.)
Between 1925 and 1929 money increased by 10%. From 1995 through 1999, broad money (M3) grew by a stunning 41%, or more than twice economic growth. Credit growth, however, greatly outdoes money growth. Mr. Greenspan has presided over a credit explosion that simply defies reason and comprehension. In 1995, credit expanded by more than $1 trillion and abruptly swelled to more than $2.1 trillion in 1998 and further to $2.25 trillion in 1999. In comparison to economic growth of $459 billion in 1998 and $500 billion in 1999, credit creation has been running amuck. ($4 of credit growth for $1 of economic growth.)
This brings us to one of the most important and most striking differences between the two periods. In the 1920s corporations took full advantage of the abundant availability of cheap capital and issued bonds and stocks vastly in excess of their investment needs. Many of them could finance their investments for years to come with the funds they had raised during the speculative mania of 1928-29. Today's corporations have frantically depleted their liquidity and embarked on an unprecedented borrowing binge to finance acquisitions and repurchases of their own stocks. The corporate sector is the big net buyer in the stock market through soaring acquisitions and stock buybacks. Purchasing shares that have record-low dividend yields of around 1% at sky-high prices with borrowed money that costs at least 6-7% is folly. (According to newsletter author Leo Hood, "The reason for this mass stupidity is directly a function of the stock mania. The officers and directors of publicly traded corporations receive huge amounts of their wealth from stock options. What may be a sound and wise fiscal strategy for the company over the next ten or twenty years is subordinate to what will be good for the price of the stock next month or next quarter.)
In the new economy, buying an existing plant beats creating a new plant. The creation of paper wealth by driving up stock prices takes precedence over creating wealth through building new factories. Hot stock prices foster runaway consumer buying, to the point consumers now dominate the economy. (The consumer buying binge has pared U.S. savings rates down to less than ½ of 1%. Savings are the building blocks of civilization. By comparison, in 1980 Americans saved 8% of their income. In 1990 the Japanese saved 20%. The consumer is massively in debt, blowing their savings and risking bankruptcy to keep on shopping.)
NEW PARADIGM OR BUBBLE?
Comparing present economic and financial conditions with those in the late 1920s is a shocking exercise. In the 1920s there was zero inflation. Today, despite substantial statistical manipulations, the U.S. inflation rate is above 3%, the highest rate among industrial countries. America has the lowest domestic savings of all time and the biggest trade deficit of all time. On top of being a low-saving, low investment economy, America is now a capital-consuming country, reflected in the fact that the current rise in foreign debt exceeds net domestic investment. (We're running up debt faster than we spend capital on plants and equipment.)
Ominously, corporate profits, as measured by the official income statistics, have been virtually flat for more than two years, even though the economy has been booming at record growth rates. The stampede of both corporations and private households into debt during recent years is without precedent. (Whenever this credit and lending spree begins to slow down the boom is over. Unwise borrowing decisions are liquidated in the bust that follows.)
The financial excesses and economic imbalances are far too big for a happy end to be possible. Their huge scale essentially implies a disastrous bust. Under the influence of the monetarists, most American economists hold the view that it lies in the hands of a central bank to prevent any such bust from happening by simply "printing money." But by focusing narrowly on the banking system and the money supply, they overlook two snags. One is the monstrous scale of credit creation to which the U.S. economy and its financial system have become addicted to in the last years. The other is that credit creation is overwhelmingly taking place outside of the banking system, through the financial markets. Any disruption in these financial flows has the same adverse effect on economic activity as a disruption in bank lending. The early indicators of such disruptions are declining asset prices and widening interest rate spreads between papers of different quality. (That's exactly what's happening now.)
Considering the vast sums involved in the markets, it should be clear that the biggest danger to the U.S. economy looms in the financial markets, not just stocks and bonds but also the currency market and the derivatives market. Trouble will begin when the economy shows more distinct signs of slowing and disillusion about the economy and Mr. Greenspan set in.
(On top of the classic signposts of a bear market which are rising interest rates, budding inflation and grossly overvalued assets, we are hearing warnings recently from officialdom. Treasury Secretary Sommers spoke on the absence of Federal mortgage guarantees and Mr. Greenspan warned bankers about derivatives. He also told the banks that they and others can't count on a federal bailout in a crisis. Recently the tone of things has switched. It's time to hedge yourself with 10% in gold. If I am right, you will someday thank me for any part I played in convincing you to buy gold. Each and every day now the greatest economic events in history are unfolding and they will have the most profound impact on your financial affairs. Read and think carefully. For most people a financial collapse can only bring despair. You should strive to be the exception.)
A CLIENT'S REMARKS
Our customer, Horace McCracken, pointed out several differences between today and 1929.
· "There was virtually no national debt, and the private debt was modest by current standards.
· "1/4 of the population still lived on farms, so that many people from the cities could go back down on the farm and mooch off the old folks.
· "We still had a very large proportion of the population who accepted the idea that when times were hard, one worked harder. Now we have two whole generations of people who believe that the government owes them a living; the 'safety net or last resort' fallacy. When they get desperate, they rationalize that it isn't stealing, because they really need it.
· "The population of the earth has doubled and redoubled since the twenties."
RISK
No doubt you've heard the financial term "systemic risk." It means system-wide risk or risk to the entire financial system. I believe you're going to be hearing a lot more of it. That's because there is systemic risk and as future events unfold everyone will be using these new buzzwords. The more you hear them, the more you'll know I could be right.
There's $23 trillion of debt in the country spread across the corporations, consumers (households), government and government agencies (Fanny Mae, Freddie Mac, etc.). The economy totals $9 trillion of which $4.5 trillion is paid out in wages and $600 billion is after-tax business profits. Debt service for the private sector comes primarily from these sources. If there's a contraction or slowdown, incomes will drop and asset values (collateral) will depreciate. In other words, the debt is much larger than ever before (over twice the size of the entire economy) and in a downturn an unknown percentage of it will default.
Overall credit growth and total debt have risen to unprecedented levels. It's our view that this debt can never be repaid anywhere short of hyperinflation (always a possibility if the government wants to whitewash its debt by creating vast amounts of new money, but highly unlikely because foreigners would then sell their dollars). About the only outcome available for the biggest debtors is bankruptcy.
Nobody knows the future. I can only give an opinion and an educated guess at what will happen. Here's my advice - begin to think about getting your money away from the brokerage firms and into the banks. One possible danger zone: high-yield money market funds (junk bond funds) that hold the bonds of highly-leveraged companies that will be in trouble come a depression. Think seriously about keeping all of your money in the bank for a while with 10% in gold. Sit out this correction. You'll hear a lot more about systemic risk until the financial system actually goes kaput. By that time you should be positioned to weather the storm. Just remember nobody's going to ring a bell right before the greatest financial collapse in history. But they are going to talk about systemic risk.
OLD GOLD
According to the dictionary a genuine antique must be 100 years old. Some of the loveliest examples of antiquity are made of gold. We have gold coins available with dates in the 1880s that are genuine antiques. These gold artifacts are examples of numismatic treasures that were struck at the U.S. mint and circulated through the hands of energetic Americans building a great industrial nation in the 19th century.
We have put together a 15-coin set of these antique gold coins in extremely fine condition from the 1880s. The set contains:
5 - $20 Liberty Gold coins (.96 of one ounce of gold)
5 - $10 Liberty Gold coins (.48 of one ounce of gold)
5 - $ 5 Liberty Gold coins (.24 of one ounce of gold)
The cost is $4,365 per set. Call 1-800-328-1860 and order today and we will make two of the $20 gold Liberties dates in the 1870s.
These coins should be purchased now. Powerful undercurrents in the gold derivatives market and accusations of market manipulation are stirring the pot of gold as never before. Dramatic predictions of explosive price rises against a backdrop of massive short selling and a possible squeeze on bullion dealers makes for interesting reading. Only time will tell the outcome of this clash of opinions.
An analyst on financial TV argues that there is no inflation because gold has not risen. But the inflation of money and credit (inflating) has been enormous the last few years and gold has not risen. Either gold is being manipulated or it has been forgotten and disparaged in the "new economy." It's not logical to believe that gold's 6,000-year history of monetary certitude is permanently erased by the over-optimism of today's equity markets. Gold will come roaring back and when it reestablishes its age-old relationship to fiat money it must surely become dear. In my new novel, Full Faith and Credit, A Novel About Financial Collapse, gold rises to $2,000 an ounce. I personally think that's a reasonable possibility in the not-to-distant future.
Nobody knows the future but given the colossal amount of debt and the valuation extremes in America today, it's easy to have strong opinions about the future of the yellow metal. Buy gold now. We are in for the biggest financial storm in history. Gold is the one and only perfect hedge against the inevitable crisis. I can't stress enough the degree of total protection gold will provide you in the dark and gloomy circumstances that will unfold as financial markets plunge into chaos. If you do no other thing, get 10% of your money in gold.
Sincerely,
James R. Cook
*Prices subject to market fluctuations.
P.S. Enclosed is a page about my new book. Rarely does a novel carry enough impact to change the way you think about the future. Full Faith and Credit, A Novel About Financial Collapse tells a powerful story of economic distress that goes right to the heart of your financial well-being. In this exciting novel a lone speculator maneuvers through a panic and a market crash to pile up a great fortune. As depression and crisis unfold he becomes the focus of national attention. Don't miss this spellbinding tale of fame and fortune set against a backdrop of a nation's failing economy.
P.S.S. Lately, a rash of our old customers have dealt with small companies and smooth talkers who convinced them to convert their core gold holdings into high-priced rare coins. It upsets me to see these people make such a bad decision. You need your gold. Forget costly rare coins unless you're a hobbyist. Be especially careful of anyone who initially misleads you that they're calling from my company. Also, be fearful of any company that wants to send a Fedex to pick up your coins. Remember that most new companies fail. Over 40 have gone down in Minneapolis since I started. Call me directly for advice before you deal with anyone in our city.
P.S.S. My forecast of future events can be wrong. It's quite difficult to hold a strong opinion that's contrary to the main stream. I study economics and work at it constantly. But my conclusions can be in error. However, if you'll grant me one chance in ten of being right, then you need one dollar of ten in gold.
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Investment Rarities Incorporated has prepared this material for your private use. Although the information in this publication has been obtained from sources which Investment Rarities Incorporated believes to be reliable, we do not guarantee its accuracy and such information may be incomplete or condensed. All opinions expressed in this publication are those of Investment Rarities Incorporated and are subject to change without notice. Gold, silver and rare coins are not necessarily a medium appropriate for every individual. |
