Financial Sense   Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  About Us  l  Contact Us

God Save American Investors
From the Horrors of a Huge Depression
by Robert B. Gordon, Sc. D.
February 23, 2004

PREPARE FOR A LONG AND DEEP DEPRESSION

Robert Prechter, whose opinions I greatly respect, has stated with confidence in his current monthly Theorist that the U.S. economy entered a depression in 2001. He said that no one agrees with his statement since people can not see the signs of its final bottom, such as bankruptcies, bread lines, bank closings etc. The depression is now  in its early stages when it is best for every investor to do what can be done with that knowledge. He adds, what good is there in finding you are in a depression after its over. Economists didn’t discover the last one until 1933 at the market bottom and he predicts that the same thing will happen again this time.

The current weakness in tax receipts, manufacturing and jobs is not typical of a recession, but of a severe depression still in its early stages. No politician in any party is recognizing this fact. All of the problems are being attributed to the lagging effect of a mild recession that ended many months ago. This serious misconception has caused our cities and states to solve their cash needs by floating bonds that may default on their interest coupons when the depression really takes hold. We are all aware of California’s budget problems and of Pittsburgh threatening to declare bankruptcy but the problems are actually nationwide. Prechter included this quotation from the February 17 New York Post.

"New York’s local governments crumble - literally and figuratively - under the weight of out-of-control state Medicaid, tax, environmental and other burdensome policies."

The article then goes on to give the gory details about problems in every one of New York’s up-state cities from Albany to Buffalo plus several large counties.

WAKE UP CALL

For every investor, who has some clue as to what our country is facing right now, there are probably at least 100 without any warning of the great damage a severe depression will do. It will surely be enormous - much greater than in 1929 or any other bear market due to the masses of investors now being forced to build their own retirement fund. The great mass of investors are now super bullish, along with most advisors. In January, they bought a huge record amount of equity funds, probably marking the approaching end of the year long market rally. This fact, coupled with a severe lack of knowledge and experience in building and preserving capital, dooms many millions of investors at all income levels to a financial disaster they do not expect. The scope and size of this problem add up to a major national disaster of enormous magnitude that is impossible to prevent under current circumstances.

For over two years I have been publishing my grave concerns about the economy and stock market on several web pages that have helped a number of individuals and families to recognize the problems ahead and start to do something about it in their investing. But I cannot reach the huge number of bullish investors who are unwittingly sending huge sums to their growth mutual funds and dreaming of a happy retirement which will never happen without a sea change in their knowledge and actions.

I would like to enlist the help of all my readers to spread copies of this warning to their entire family from teenagers to retirees and also to other friends, neighbors and associates as they are able to do so.

BULLISH HYPE IS EVERYWHERE

Ever since the stock market topped in 2000, the American public has been subjected to an enormous campaign of big lies emanating from the Federal Reserve and many branches of our government in Washington, aided by Wall Street advertising and a total lack of objective reporting by our public media. The total failure of our entire economics profession to see that our modest recession was a forerunner of a Great Depression is of course a big cause of the real tragedy about to strike every part of the developed world. For, with a huge depression in the United States, the rest of the world will inevitably be drawn into a global economic nightmare, similar to or worse than Japan’s 14 years of ongoing misery.

When the story of this stock market mania, biggest in the world to date, is finally told, there will be many books naming the preceding stock mania as the true cause of the world’s greatest depression. It is, of course, a major tragedy that the economics profession was unable to determine the basic cause and effect relationship between the 1929 stock crash and the ensuing Great Depression. That heroic work was done by a retired accountant, Ralph Elliot, who wrote a revolutionary book 70 years ago explaining the fundamental nature of stock market waves and the close relationship between stock booms and the subsequent busts in the economy.

MY EDUCATION IN BOOMS AND BUSTS

Sometime in 1995,  I received a flyer advertising Robert Prechter’s revolutionary book titled At the Crest of the Tidal Wave. It was a huge volume with many charts. It took me several years to understand Ralph Elliott’s great contribution, now called the Elliott Wave Theory. At the time I first read the book, I was 80 years old and had been investing for more than 50 years. It was truly a revolutionary event in my life; my entire outlook was changed. Although I had read them before, I reread some of the excellent books on the histories of previous manias from the Dutch tulip bulbs in the 1630s up thru the on-going boom and bust in Japan. I was completely fascinated by their stock charts. Without exception, every past mania ended with the stock price below its starting level. For example, in 1929, the Dow started at 42, rose to over 390 and bottomed at 31 - a very sobering example especially since the  Dow, now above 10,000, started up in the 1970s from about 500. The specter of the Dow eventually dropping below 500 should shock all investors into action, but the problem of getting the scary facts to them is very large.

When I moved into my retirement residence in 1997, I gave an illustrated talk on previous stock manias but was unable to convince anyone that another big boom and bust cycle was coming in our future. Actually, both Prechter and I were surprised by the great strength of the stock mania in the last years of the 1990s. But that great show of strength almost surely points to a longer and deeper correction process in the years ahead.

How many investors in our country do you suppose have some knowledge of the perfect cause and effect relationship between stock manias and economic depressions? The answer is surely unknown but my guess is that it’s very small, less than one percent. It is not being taught in our universities. Only one college professor of economics in Chile has written a paper about the Elliott Wave theory. College economics professors Shiller and Siegel are interviewed quite often on CNBC and I have never heard them mention Elliott. In fact, like thousands of economists, they do not seem to see a causal relationship between manias and depressions. In view of their lofty place as advisors to government and business, this is a tragedy. Not only has the relationship been known since Elliott’s work in the 1930s, but his findings have been further advanced by others following his pioneering work.

SOUNDING THE ALARM

How can we get the word to millions of investors who are regularly adding to their 40l(k) account, most likely in a growth fund that will lose much of its present value in the years ahead? Of course, after the presidential election, news of the bad economy will come out if the present office holders are defeated, but it may be much too late for effective action.

If every reader could distribute ten copies of the material that follows, it would be a good start. I worry especially about the financial welfare of my readers. So please get your own affairs in good shape as the first step. The Great Depression of this century will probably hit much harder that that of the 1930s since our country is in so much poorer financial shape.

THE GREAT DEPRESSION OF THE 21ST CENTURY

Many months will pass before the mass public reads about the big D word in the daily media. Our nearsighted economists will continue to read their tea leaves as indicating a slow recovery. So there may be time for alert investors to get their financial house in order but it’s best not to count on it since the next leg down in the bear market can start at any time. More surely, we can count on politicians campaigning for reelection to try and confuse the voters.

With our nation heavily overloaded with debt at all levels of the government, business and  public, I find it very hard to be optimistic for our economy and for the fate of many millions of investors trying to achieve their retirement goals. The Wall Street sales machine will continue its intense efforts to sell growth stocks and funds to investors who are unaware of safer options in a very difficult environment.

Most growth mutual funds will continue to urge investors to invest for the long run since that is all they have to offer. Their sales literature will aim to attract dollar cost averaging for a full lifetime. To counter their sales "pitch", we will offer some alternatives below and ask our readers to help distribute this editorial as widely as possible.

How long the depression will last is impossible to answer, but we can guess it will be a very long time. Our last depression started some time after the 1929 market top and was still in force thru the decade of the 1930s until the industrial build-up for World War II gave a big boost to our economy. In the most recent example, the Japanese stock market crashed at the end of 1989 and their bear market and weak economy still resist all efforts to solve its problems after 14 years. This time a very weak U.S. economy will be joined by the rest of the developed world in a global depression. There will be very few safe places for investors to place their assets and it may cause trouble for experienced investors. The general public will be in a very vulnerable position due to their lack of investing know-how.

IMPORTANT READING

I urge every reader to acquire a copy of Robert Prechter’s just revised second edition of Conquer the Crash. It is an inexpensive paperback available at amazon.com and many book stores. It provides a clear explanation of the Elliott Wave picture leading to the present bear market and devotes the second half to what investors can do to protect their assets in a severe depression.

For those who wish to get an even better picture of Elliott Waves, from 1700 in London to our bull market of the 1990s, read Prechter’s great At the Crest of the Tidal Wave, originally published in 1995 and revised in 1997. This book completely changed my investing life and could do the same for you. For example, it shows the origin of the current Grand Supercycle Wave I in London and the 62-year long bear market Wave II that followed it. Wave III was a 216-year long wave that topped in 2000. We are now in the early stage of a long bearish Wave IV, expected to last for decades. This great book gives the reader a sense of history that is unavailable elsewhere. Look for it in major libraries.

CUT YOUR BEAR MARKET LOSSES NOW

Most of the millions of investors, now building their retirement accounts, need to stop in their tracks as soon as possible and prepare to sell everything in order to make a new start. This means selling just about every growth type mutual fund regardless of whether its price trend is going up or down. For when the next severe bear market starts, virtually every growth stock and fund will be declining. The best performers in the past year will become the worst performers, along with junk bonds and bonds of long maturity.

We fully realize how difficult it will be for many investors to sell their favorite stocks and funds. We also know that, if they do not change their allegiance quickly to very stable securities, most of their invested assets will disappear. History is full of the horror stories of investors unwilling to sell in severe down markets. Unfortunately, many investors who failed to sell on the first leg down, were encouraged to gain back some of their losses in the one year bear market rally. They will be very reluctant to sell on the second bear leg and will probably lose most of their invested assets unless some friend or relative can help them make a difficult sell decision.

SUGGESTED LIST OF STABLE ASSETS

We have been diligently searching for stable asset classes for a number of years and have acquired a short list of mutual funds that could be investigated further by our readers. There is more information available at Morningstar and other web sites that should be studied before any purchase. Here are some suggestions to be considered:

U.S. Treasury Securities

• Build a 5 year ladder of U.S. Treasury  notes maturing in 1, 2, 3, 4, and 5 years. Replace the maturing one-year note with a new 5-year note and keep the ladder going.

• Buy a U.S. Treasury money market fund.

• Buy a short or intermediate U.S. Treasury bond fund

• Buy PRRDX, a 5 star Pimco fund holding Treasury Inflation Protected bonds.

Foreign Government Bond Funds

• Go to a fund screener like www.bloomberg.com and search for Global or International Bonds

• Go to www.morningstar.com for fund details and its star performance rating.

Hedged Special Bond Fund

• Go to www.hussmanfunds.com for details of an unusual fund that holds U.S. bonds and dividend paying stocks and may buy foreign bonds, gold and place a 30% hedge against losses.

Stable Income Funds

• There are several very old and stable funds holding 60-70% bonds and balance stocks that are in the Morningstar category of Conservative Allocation funds. Check them out.

Unique Portfolio Funds

• Permanent Portfolio PRPFX, owning a fixed portfolio of U.S. Treasury and Foreign bonds plus precious metals and 15% stocks. It has a fine 30+ years of performance.

• Merger Fund MERFX holds only securities involved in mergers and acquisitions and has a stable performance record. It holds no conventional securities. Read their literature.

Charts of any of the above funds' performance can be viewed at www.bigcharts.com

DIVERSIFICATION IS VERY IMPORTANT

Most of the portfolios from readers I see are not adequately diversified for a normal market. For the almost completely unknown markets ahead, real serious diversification is extremely important in my view. I would suggest a minimum number of 5 asset classes for the smallest portfolio and perhaps ten for a reasonably large portfolio. In the above list of different asset classes, I might use two funds of the same type but having different managers. For example, from the above list I would pick two different foreign bond funds and two different stable income funds to get the expertise of different managers.

Please note that the above list does not include a single conventional stock fund of which there are thousands at this time, many of which will disappear during this long bear market. Any investor in this market will do much better by staying away from the crowd.

Consider buying an equal percentage of U. S. and foreign bonds to negate the drop in the value of the dollar against other currencies. I will be pleased to answer general questions from readers but regret that I cannot provide information in any more detail than given above.

DO YOUR OWN HOMEWORK

It is extremely important that every investor reading this urgent message gain as much confidence as possible in any potential new investments. There is much information on various web pages and especially on that of each fund family. When the bad news is in the headlines, you will need confidence in your portfolio selections. Having a good knowledge of their past performance will help you make good decisions. It will not be helpful when times get tough to do a lot of fund switching. That will be a time to batten down the hatches and stay on your chosen course. So make your best choices and stick with them. Good luck to all readers.

WHAT ABOUT PRECIOUS METALS?

I have an unorthodox view on accumulation of gold and silver as I expect a volatile market in precious metals for at least the near future if not longer. Right now, we are confronted with a real dilemma. Untold numbers of "gold bugs" are convinced gold is in a bull market and filling the gold web pages with their views. On the other hand we have Bob Prechter and his organization saying from their Elliott Wave patterns that gold and silver are in a decline to much lower levels. I have adopted a wait and see attitude until we get more information. Both Prechter in his latest book and I are bullish on gold in the long run.

The only path I feel confidant in suggesting is that it’s OK for individuals to buy gold and silver coins and bullion on a dollar cost averaging basis for the long run. If Prechter is proven correct in saying gold will drop to $200, then he and I will be heroes and the gold bugs will be very unhappy. A key gold price support exists at about 360 and should be watched closely.

Go Top

© 2004 Robert B. Gordon, Sc. D.
Dr, Gordon's Editorial Archive

Robert B. Gordon, Sc. D.
Sun City West, Arizona
February 23, 2004
Email

Financial Sense   Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  About Us  l  Contact Us