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THE FINAL BUBBLE AND THE END OF CAPITALISM By Mike Gasior While trying not to sound like a crybaby, I will admit to being somewhat disappointed at the extreme lack of “way to go Mike” emails I’ve gotten in the midst of the decline of the American economy. I’m always the first to admit that my viewpoints can be a little gloomy at times (to say the least), but given my level of accuracy and timing I still can’t believe you don’t pay me for this advice. Here are a few of my major predictions and the date on which I made them. Imagine if more people had taken this advice. MARCH 24, 2000 (NASDAQ was at 5,068.77) --"The stock market still goes down. We just haven't seen it in a while." --"There are lots of people managing money who haven't got a clue what a bloodbath looks like." --"In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the 'classic' speculative bubbles." --"Of the Internet 'pure plays' trading right now, probably 90% of them will not exist in five years." APRIL 10, 2001 (As of 11-21-2008 the NASDAQ is 1384.35) "It might be a long, long time before you see 5,000 on the NASDAQ again. For example, if you are currently in first grade, it might be sometime not long after your high school graduation. Sorry for that." JUNE 4, 2001 (Five years and two months before the "credit crisis") "The Federal Reserve dropped rates for the sixth time this year, bringing the Fed Funds rate down to 3.75 percent, and are trying their best to stimulate this economy. You need to make perfectly clear in your own mind how amazing and unprecedented these interest rate drops have been. NEVER in my entire professional career (nor my amateur days either), which span in excess of 20 years has the Federal Reserve EVER taken such drastic measures to move rates lower. EVER. You need to understand that our friend Mr. Greenspan and his colleagues at the Fed must think that the U.S. economy is in a 90-degree nosedive and are scared "you-know-whatless" of the future. Perhaps it's a good thing that the average U.S. consumer doesn't have a very clear understanding of what the heck the Fed does anyway, or they might be scared too. Maybe even scared enough to stop the drunken spending spree they have been on for the last three and a half years in which they amassed the highest level of consumer debt EVER. As of last month Americans were paying 14% of their take-home pay to service installment debt. An all-time record." July 8, 2002 (Dow Jones was at 9,274.90) “WHAT TO DO WITH YOUR MONEY? I still think that the 10-Year Treasury Note that is yielding around 4.50% is a tremendous value. With a minimal reinvestment rate, a $10,000 investment in these will result in you having $15,000 ten years from now. I find it very difficult to believe that a similar $10,000 investment in the stock market will offer a comparable return.” AUGUST 5, 2002 (U.S. real estate would peak 3 years later) While I don't think the comparison to the NASDAQ is there with regard to the level of decline that we will experience I am pretty darn confident that the residential real estate market is going to suffer a tremendous blow fairly soon. Housing, as a component of personal income, has never been more expensive than it is right now and I think the low interest rate market is fueling an unrealistic increase in value. Speaking as someone who bought a house at the top of the real estate bubble in the Northeastern U.S. in the late 1980's I see way too many parallels to that time in history which crushed values in the Northeast and Southern California for over a decade. Just because cheaper mortgage money enables homeowners to afford more housing doesn't mean that the real estate is worth what is being paid for it in this current market. As much as it may seem like I enjoy making predictions, I walk very cautiously here since you know my skepticism about anyone forecasting anything. M y gut feeling is, based on the current economic climate and my feelings about the imminent future the U.S. could suffer a 20% to 25% decline in current real estate values in the next 3 to 5 years and then stagnate for the better part of a decade while digesting the downward move. The troubling thing about a move downward in price that far will be the sad fact that many families will be totally wiped out with regard to their net worth since this typically reflects many household's major asset holding." DECEMBER 31, 2002 "I have been telling you readers for months that real estate prices are hugely overvalued and will begin to drop. Much of the credit for this belongs directly at the feet of Alan Greenspan due to the infusion of new money into the markets that allowed for severe asset inflation. The stock market became a house of cards that I felt VERY strongly would collapse and I feel the EXACT same way about residential real estate right now. The next two collapses you are going to witness up close and personal are the market for houses and the load of consumer debt, which has accumulated during the past five years." JANUARY 28, 2003 (The invasion of Iraq would occur on March 18, 2003) "Fact Three: I have thought long and hard about this and I feel that this whole Iraq situation is a lose/lose/lose prospect for George Bush and Tony Blair. The entire thing could very well blow up in their face and cost them both very heavily from a political point of view, with very little or nothing to be gained even if a war goes well. All I had to consider to establish this as fact is that if it were a politically expedient thing to do, or good for poll numbers, Bill Clinton would have attacked Iraq instantly. Enough said." NOVEMBER 3, 2003 "REMEMBER THAT I TOLD YOU THIS - HILLARY IS
GOING TO RUN MARCH 30, 2005 NEWSLETTER TITLE (Real estate would peak months later) "Real estate is over" OCTOBER 3, 2008 (Dow Jones closing level - 10,325.38. TARP Bailout just passed) "Let me summarize my thoughts and predictions about the financial and economic future in light of this "bailout": --Residential and commercial real estate values will continue to decline well into 2009 and very possibly beyond. U.S. residential real estate values may decline another 15% to 20% from current levels. --There will be an acceleration of bank failures over the next 12 months, leading to further consolidation in the industry. --Americans, who are already drowning in debt and losing their jobs at the fastest pace in 17 years, will slow their spending to an absolute minimum in an effort to survive. Savings rates will quickly spike to positive numbers for the first time in almost four years and the economy will continue to slow. --U.S. unemployment will continue to rise and should be in excess of 7.5% by the third quarter of 2009 and possibly by the second quarter. --The Federal Reserve will flood the economy with new money with passage of the "bailout", much as they did in 1999 in preparation for Y2K. This may temporarily keep the stock market from declining, but the end result will be more severe inflation than already predicted and perhaps a decline in the value of the U.S. dollar. --Barrack Obama will win the presidency and the Democrats will secure larger majorities in both the House and Senate. Taxes of all sorts will be increased, spending increased and movement toward protectionist policies regarding trade will all be implemented quickly. All moves will slow the economy further. --As global investors digest and assess the assortment of new debt and liabilities taken on by the U.S. government you will begin to see the slow rise of interest rates on U.S. Treasury securities demanded as compensation for the perceived credit risk. These increases will also raise the cost of capital for homebuyers and corporations seeking to borrow money. --With oil prices somewhat reduced and Democrats controlling the White House, House and Senate, there will be further delay in drilling and exploration for new U.S. energy sources. While there will be debate over pursuing alternative energy solutions, actual progress will be slow. I wanted to get this newsletter out as fast as I could after the passage of this horrific legislation to begin preparing my friends mentally and financially for what the economic future holds. There was no need to try and rush it out in an effort to try and prevent Congress from passing it, since that was a foregone conclusion. As always, I am trying to assess the new landscape in an effort to better try and survive and thrive in the future while others lament and complain. Please stay conservative in your own life and try your best not to lose your job, your money, your house or your mind in the coming few years. It will be a tough slog, but the economy and America will eventually depart this dark tunnel when we figure out what houses, stocks, bonds and the dollar are worth. Unfortunately, this government interference will only make this take much longer than it needed to be and make it much more painful as well.” This month’s newsletter is even a bit more draconian and scary than usual, but first a little business. ADVANCED SECURITIES & MARKETS SEMINAR IN NEW YORK For those of you with training budget still available for this year, I will be offering an extremely timely session in New York in a couple of weeks. During my Advanced Securities & Markets Seminars there is heavy coverage of both structured products like CMO’s, CDO’s, CLO’s and CMBS, but intense discussion of derivatives and recent accounting rules like FAS 157. For a full description of the course and to register, please click the following link: https://www.afs-seminars.com/advsec.html Advanced Securities & Markets THE NEXT AND FINAL BUBBLE Rather than make you wait for what I think the immediate future holds, I will concisely and directly share with you my predictions for the immediate future: --Within the next 12 months, the U.S. government will completely nationalize all major U.S. financial institutions. My price target for the shares of these companies is zero. --Within the next 24 to 36 months, I think the odds of the U.S. government seizing all monies held in 401(k), 403(b), 457s, IRA and SEP-IRA accounts and nationalizing them into a new government sponsored, pension program is 75/25. --In no more than 10 years, the U.S. government will announce their insolvency and suspend payments of principal and interest on outstanding debts. These are the boldest predictions I’ve made in the almost 10 years I’ve been writing this newsletter, but I feel confident in the forecasting. Many of you have considered me nothing more than a “nut-job” or “wacko” for many past predictions, but I’ve been unfortunately right for far too many of them. Before I even get to the nitty, gritty facts and figures that underlie my current feelings, let me make you aware of facts that might have escaped you in the recent crush of news spewing from the financial markets. According to the Peter G. Peterson Foundation for Economic Research, as of this November, the outstanding amount of Treasury debt and the unfunded liabilities of the United States government (Social Security, Medicare, Federal and Military Pensions, et al) are now larger than the net worth of ALL U.S. households. So basically, if the U.S. were to seize all the money of every single person of the United States, there wouldn’t be enough money to pay for the promises already made by the Federal government.
http://www.iie.com/institute/board.cfm In addition, if you think my feelings are insane that the government might seize pension assets of individuals in order to roll them into a federally sponsored program, it would seem a lot crazier had the Congress not already held hearings on the matter. On October 7th, 2008, House Education and Labor Committee Chairman George Miller (D-CA) held a hearing entitled, "The Impact of the Financial Crisis on Workers' Retirement Security” where the panel debated whether 401(k) and other pensions programs should be nationalized. This, of course, was almost a month prior to an election that gave Democrats an overwhelming majority in government. Times have changed dramatically, and it has been a slow process over the course of the past 25+ years. For much of our recent history, the United States no longer relies on industry for its growth. The economic backbone of America is money. America finances the globe's corporations and emerging markets, its dollar is the world's preeminent reserve currency, and its citizens' purchasing power allows for the monstrous consumption that accounts for over 60% of the world's largest GDP. It is sad, that of all nations, it is this nation that faces a liquidity crisis out of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that advantage. Since the 1970s, America has gradually shifted from being an industrial production superpower to a consumption-based financial center, concurrently going from a significant creditor nation to debtor nation. It was able to do this because of the leverage it had on the rest of the world's economies. Trade deficits were allowed and even encouraged because of the supreme strength of the US Dollar as the world's most important reserve currency. Newly capitalist post-Cold War economies stemming from the Soviet Union's collapse offered huge new markets that America financed and invested in, again providing leverage for debt. The United States was the safest investment in the world, with its strong currency, economy, and liquidity. Then came Alan Greenspan. As Federal Reserve Chairman, Alan Greenspan manufactured a credit bubble in the 1990s through a series of interest rate cuts. Because of an extremely inaccurate new methodology of inflation calculation introduced by Bill Clinton, interest rates were manipulated to artificially ease credit, which grossly misdirected capital and created a series of bubbles, in information technology, dot-coms, equity markets, real estate, and credit in general. The 90s were a period of ridiculous economic growth in America, but it was substantially artificial as overconsumption pervaded the perceived growth Borrowing using artificially free credit financed this overconsumption. True purchasing power was significantly below perceived wealth, and thus asset values shot up and, now are shooting back down twice as hard and twice as quick. Now that the credit market has collapsed (as well as credit-dependent markets, namely housing and automobile), purchasing power is going to begin a quick descent to real terms. Americans are going to lose wealth quickly, especially through their invested capital in mutual funds and pensions funds, as well as their homes. To ease the flow of credit to get Americans borrowing once more and consequently consuming, propping back up the American economy, the Fed has been lowering interest rates again. But this time there is going to be an added problem - inflation. The recalculation of inflation is now manifesting itself in a weakening dollar, and eventually valuations will finally come to represent true inflationary levels, most likely around 8% already. The problem is the American government is trying to stimulate consumption once more by originally planning to re-liquefy banks by buying out bad mortgage-related assets, especially derivatives, but choosing instead direct capital infusions. The issue is that consumption does not drive economic growth in the long term; capital investment does. Capital spurs technology, adds liquidity, and increases output, something America has not experienced since its backbone was industry. America has enjoyed strong inflows of foreign capital in recent times because of its equity markets and strong currency, but neither of those are incentives for investment any longer. The government's plan to buy equity interests in big banks to bail them out is in fact worse for its long-run economic growth, because it weakens the dollar even further. The US dollar is now essentially backed by common stock investments in banks that were effectively bankrupt, and the only thing propping it up right now is temporary relative strength as the rest of the world experiences its own credit crises and the dollar remains the fundamental reserve currency. But how long can this possibly last? American national debt is the last bubble to collapse, and in fact it is still inflating and will continue to until a weakened global economy will force nations to call in their debts outstanding from the United States. This will be the coming of age for the next wave of economic titans: Singapore, Hong Kong, India, China, Australia, and Russia. This will be the downfall of the American Dollar and its replacement as the world's pervasive reserve currency. This will be the true liquidity crisis, as the United States will essentially be forced into bankruptcy with no surplus to pay off debts and no way of financing through an illiquid banking structure. This will be the end of capitalism in America. Socialist programs of the '60s and '70s foreshadowed the economic collapse, Alan Greenspan ushered it in, George Bush and his debt-financed wars worsened it and Barack Obama and his socialist taxpayer-funded big government programs and bailouts will make it a perfect storm. I see in the future the possibility of an economy characterized by free credit but no demand and no purchasing power based on ridiculous inflation. If you were the student of economic history that I am, this would sound eerily similar to 1930s Germany to you. It is hard not to wonder who will be America's demagogue? Quite frankly, I am struggling personally in what to do to protect myself from these coming changes. I’ve never really been an advocate of buying precious metals to save yourself and I haven’t really changed my opinion there. Venture capitalists are a dying breed since there are no new IPO’s coming down the pike and no new industry. Worst of all, the currency is going to be worth much less if hyperinflation kicks in, and there is no demand curve growth in sight. America's only hope? After four years of Obama, Barry Goldwater is resurrected from the dead to preach Austrian School capitalism and libertarian social policy. I’ve truthfully never been at such an impasse myself with regard to for the future. I held a massive short position in the S&P 500 that I had established back in March, which I closed several weeks ago when the Dow Jones was around the 8,100 level. I thought the credit markets had actually begun to heal a little and took my profits and rolled them into closed-end mutual funds that held several varieties of bonds selling at steep discounts from their NAV and offering handsome yields. After a couple of weeks of steady increases in price and nice gains for me, all of them are now at least a little underwater from what I paid as the bond markets have started to weaken badly once again. I’ll be damned if the government is going to take my retirement account or anything else I’ve worked hard to earn and even harder to save to use my money to bail out some homeowner who made a bad decision or General Motors who was even stupider. I love this country and have paid more than my fair share over my lifetime, but I’m prepared to completely cash-out and head elsewhere if it’s necessary to protect what’s mine. Americans seem horribly scared and open to any sort of solution they think may save their future and the future of the country. I’m just hoping that can’t fool all of the people for even a short period of time. A TERRIFIC ILLUSTRATION OF THE CURRENT U.S. TAX SYSTEM Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: The first four men (the poorest) would pay nothing. So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers, he said, 'I'm going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80. The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share? They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so: The fifth man, like the first four, now paid nothing
(100% savings). Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. 'I only got a dollar out of the $20', declared the sixth man. He pointed to the tenth man,' but he got $10!' 'Yeah, that's right', exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!' 'That's true!!'shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!' 'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!' The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill! And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier. This wonderful illustration of the current tax system in the United States was created by the Dr. David R. Kamerschen, Ph.D. who is a Professor of Economics at the University of Georgia. I like his explanation very much. YOUR NOVEMBER BRAINTEASER Given the current state of the markets I figure that people might appreciate somewhat lighter fare this month. So instead of a brainteaser, this will be some interesting trivia relative to the stock market. Here it is: "What was the first stock to ever be listed on the New York Stock Exchange and what year did it become listed?” I’ll give you a fairly minor hint in telling you that this company’s stock is STILL listed on the NYSE. Good luck, and when you can't take it anymore you will find the answer at the following link: http://www.afs-seminars.com/brainteaser_Oct2008.html Copyright 2008, Michael Gasior. All Rights Reserved AFS Seminars LLC |
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November 2008 Newsletter
