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Given yesterday's action, I thought some might find this report
pertinent. Keep in mind it is from one of the Bear Kings yet he makes
interesting points. Is he running scared or is he right?
John
FROM THE DESK OF ...
MARTIN D. WEISS, PH.D.
January 2, 2003
Dear Safe Money Subscriber,
Today's the first day of the new year, and I'm writing you
from my home in Palm Beach Gardens, Florida.
Usually, my wife and I would spend the holidays in Brazil
with her family, on their farm near Sao Paulo. But this
year, her family decided to come to visit us in Florida for a
change. So we have a full house, including our nephew's
three young children, who are like grandchildren to us. (As
to our own grandchildren, our only son, who is 21 years
old now, says: "Don't hold your breath, Dad.")
Despite the holidays, my mind has continually drifted to the
markets, to the economy, and to your investments. So
early this morning, I decided to sneak away to my home
office, sit quietly at my computer, and share my thoughts
with you about where we are and where I think we're
going.
Looking strictly at the events that have just transpired,
I see:
THE WORST HOLIDAY SALES SINCE 1972!
THE LONGEST BEAR MARKET SINCE THE 1940S!
THE WORST DECEMBER DECLINE IN THE DOW SINCE 1931!
Retail stores are like a battlefield, the day after a major
defeat. Retail executives went into the holiday season with
hopes that were highly inflated by the early Thanksgiving
crowds, but have come out with the worst sales growth in
thirty years.
Investors around the world are equally shell-shocked. At
the beginning of each and every trading day throughout
December, they waited patiently for the faithful Christmas
rally. But every one- or two-day triple-digit rebound was
totally wiped out by a tortuous decline that immediately
ensued. End result: The stock market had its worst
December since 1931, which, itself, was the worst year of
the 1929-32 debacle!
If this were just a one-month phenomenon, I'd seriously
consider the suggestion that December could be a fluke.
But the miserable December comes on the heels of the
longest bear market since World War II.
Today, the first trading day in January is more of the same --
a triple-digit rebound, to be followed by new declines and
new lows.
Meanwhile, I also see:
* The worst mortgage default rates in history, with more on
the way
* The most personal bankruptcies in history, with more
records to be shattered
* The largest corporate failures in history, with more to
come
* The largest banks in the world (in Japan) in de facto
bankruptcy, with no rescue possible
* The greatest corporate scandals, with no end in sight
* Another sharp decline in consumer confidence
Looking immediately ahead, I see an imminent war with
Iraq, a new crisis on the Korean Peninsula, a worldwide
spike in oil prices, and an acceleration in the worldwide
economic decline.
And yet, despite all this, unbelievably, the talking heads on
CNBC, Fox and CNN-fn are still spouting essentially the
same material -- "how much the Dow will go up this year"
(no matter how last year's Dow forecasts may have fared) ...
"how soon the economic recovery will gain more steam"
(regardless of the horrible data on consumer spending and
confidence that's now pouring in) ... and "which hot stocks
to buy for 2003" (despite the devastating losses in those
stocks already incurred).
I will have my FULL response to these widely touted 2003
forecasts in the upcoming issue of the Safe Money Report
which will be mailed to you January 8 and available at
www.safemoneyreport.com on the same day, complete
with instructions on what to do next.
For now, suffice it to sum up my reaction to the prevailing
views in one word: Baloney!
Just ONE of the shocking facts I have cited for you -- such
as the plunge in consumer confidence and spending --
blows a gaping hole in nearly every economic theory,
forecast, or phrase coming out of Wall Street and
Washington, raising serious doubts about any rally
attempt, including today's.
They are sleepwalking right through the greatest economic
landmines of several generations, and no one has
bothered to wake them up.
I WISH I COULD BRING YOU MORE OPTIMISTIC NEWS,
BUT I CAN'T
I sincerely wish I could tell you the worst is over, a
recovery is finally underway, and it's time to buy up stock
market bargains with both hands.
But I cannot. To do so would be a violation of my ethics
and a betrayal of your trust. I must tell you what I truly
believe, based on all the evidence I have before me, with
no bias and no conflicts of interest. I must continue to
warn you -- to urge you to get to safety and stay there.
Some people seem to think that pessimism is part of my
nature, but they are wrong. I am a born optimist, a deep
believer in my fellow man and in the future of our country.
However, I also believe that government intervention to
artificially and prematurely pump up the economy will only
prolong the agony, and postpone the day when I can turn
bullish on the market.
The more quickly it all washes out, the sooner we will be
able to find a true bottom and go on to bigger and better
days.
That's why, I think it is actually for the better that ...
MR. BUSH AND MR. GREENSPAN ARE POWERLESS
TO FIGHT THE TIDE
Washington has thrown absolutely everything at this
market to stop the bleeding.
The Fed crushed short-term interest rates down to nearly
zero, and pumped big money into the banks.
Mr. Bush has promised a new round of tax cuts.
And over the holidays, regulators settled with Wall Street,
letting the big investment banking firms off the hook with
fines and penalties that amounted to a meager $14 for
every $100,000 that investors lost in the market.
Yet, despite all the heaving and shoving, the bear market
continues!
I repeat: This is the longest bear market our country has
seen since the Great Depression. In this context, the
latest rally is nothing more than just another blip. Nothing
has changed since 2000 -- not on the charts, and not in
the fundamentals.
(CHART NOT AVAILABLE IN TEXT FORMAT)
Look at this steady three-year downtrend! And look at
all the failed rallies we've seen so far! No matter what
Mr. Bush and Mr. Greenspan do, they cannot change
this trend.
They cannot change the fact that Japan and Europe are
sinking.
They cannot change the dire reality that deflation is
beginning to turn the entire world economy inside out and
upside down. Nor do they have the experience to deal with
deflation.
They cannot make the ballooning federal deficit go away --
let alone change the fact that Uncle Sam is going to have
to borrow hundreds of billions of dollars to finance it.
They cannot stop giant corporate dominos from falling.
They didn't lift a finger to save Enron, WorldCom, United
Airlines, and now, Conseco. And yet these were the
biggest bankruptcies in the history of the world! They
know that it would have been financial and political suicide
for the government to throw good money after bad in bail-
outs of that magnitude. The fact is, giant, sick companies
are not too big to fail, as people used to think. THEY'RE
TOO BIG TO SAVE.
What Mr. Bush and Mr. Greenspan do not seem to realize
is that the giant, sick world economy is also too big to
save. But they will soon find out.
Saving the Japanese economy would probably cost about
$3 trillion -- one trillion for the banks to get rid of their bad
debts, one trillion to bail out their sick economy, and
another trillion to help get their stocks out of its 12-year
bear market.
To save the sickest European economies would probably
cost even more.
For Latin America, figure another trillion or so.
And in the US, just to get America's consumers,
companies, cities, states, and federal agencies back to a
livable level of indebtedness, I figure it would take another
$5 trillion.
All told, it would probably cost close to $13 trillion to
rescue the world economy from deflation and depression.
That kind of money simply doesn't exist -- ANYWHERE.
The authorities couldn't scrape up one-tenth of it. And
even if they could, any such massive rescue attempts
would backfire because investors would dump their
government bonds in any country that tried to spend its
money so lavishly.
For decades, no one had to confront this day of reckoning
because inflation and growth always helped paper over the
debts and postpone the huge bankruptcies. People could
always count on higher incomes and bigger profits -- plus
cheaper money -- to make it easier to pay back their debts.
No more!
Now, the circumstances have reversed. With deflation
and falling incomes, paying off debts is more expensive
and more painful for everyone across the board. That's
why thousands of tech companies and nearly
200 telecommunications companies have gone bust.
That's why Argentina went under and why we've had the
worst bankruptcy crisis and the longest bear market since
the 1930s.
The worldwide deflation is far too powerful to stop. The
authorities in Japan tried to stop it, but they failed. They
dropped interest rates down to zero. They spent trillions of
dollars on massive public works programs over the years.
They even bought common stocks with government
money. But nothing worked. The deflation continued, and
their bear market is now in its twelfth year, with still no
bottom in sight.
The United States seems to be embarking on a similar
path. Mr. Bush and Mr. Greenspan are trying to stop the
deflation, hoping to nip it in the bud. But they don't have a
chance against deflation. They don't control what happens
outside of the United States, where tens of thousands of
factories and billions of workers are ready to churn out
boatloads of high-quality goods to dump into US markets
at deep-discount prices. Nor do they control the new
spending habits of millions of American consumers, most
of whom now demand bargains, even giveaways. They
certainly don't control the fire sales of assets by bankrupt
companies.
DEFLATION IS HERE, WHETHER THEY LIKE IT OR NOT
Even a spike in oil prices cannot alter America's collision
course with deflation. If anything, high oil prices pull
spending power away from other purchases, depressing
demand and spurring the deflation further.
This deflation -- plus the bankruptcies that knock gaping
holes in the portfolios of investors and in the balance
sheets of big banks -- is what's driving the stock market
inexorably lower, year after year.
Yes, the newest and latest round of Wall Street hype is
getting some individual investors to buy stocks, just like it
has today, driving the Dow up by triple-digits in the first few
trading hours of the new year. But all over the world,
nearly everyone else is selling or getting ready to sell.
Big banks like J.P. Morgan Chase and Citigroup are using
every rally to take some money out of the market to
compensate for the huge losses they've taken in
companies that have gone under.
German investors, who were a major support for the US
market throughout the 1990s, are now unloading. This
year, the German Dax Index has fallen more than any
other major market in the world -- more than the Dow and
more than the Nikkei. And Germany's Neuer Markt --
Europe's main rival to the Nasdaq -- has lost 96% of its
value and is shutting its doors for good. So before year-
end, German institutions must find something to sell to
help offset their losses, and the only sector that's still got
value is American blue chips. All over the world, deflation
is forcing investors to sell their stocks.
That's another reason the rallies fail, why the rally since
October is doomed to fail. It's also why I think the
investments we have recommended in Safe Money will
shine.
I leave you with just one more Big Picture thought ...
(CHART NOT AVAILABLE IN TEXT FORMAT)
This is the Dow since 1980. Look at how high it went by
the end of the 1990s. Look also at how much room it still
has to fall. Even a 50% decline in the Dow from its peak
would be very modest in this context. And yet much
smaller declines have generated incredibly good results for
the bear market investments I have recommended in Safe
Money.
Aside from the few precious moments with my family over
the holiday weekends, I have been devoting nearly every
moment of my waking hours to make sure we take full
advantage of the next leg down. It could be a whopper.
Warm regards and a very Happy New Year!
Martin
P.S. Two more critical facts you must be aware of:
Fact #1. The positive number that drove the stock market
higher today -- the ISM Manufacturing survey -- reflects
factory activity back in November, when factory managers
were apparently gearing up for big holiday sales. But the
horrible sales and consumer confidence numbers that
came out just a few days ago reflect what JUST happened
now in December! As soon as the market wakes up to this
ironic twist, it will come tumbling right back down again.
Fact #2. One year ago, in the first three days of January
2002, the Dow gained 410 points. By the end of January,
however, the Dow was down 815 points for the month.
This year, don't be surprised if January turns out to be
even worse!
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