How to Survive and Prosper During the Financial Markets Crisis
Stock-Markets / Financial Crash Jan 26, 2008 - 02:17 AM GMT
Larry Edelson writes: Six months ago I warned you that all hell was about to break loose in the U.S. economy. Tumbling real estate values ... tens of billions of dollars in mortgage debt at risk ... the virtually non-stop decline in the dollar ... an ongoing bull market in gold — all pointed to tough times ahead for our country.
Despite the Federal Reserve slashing interest rates by three-quarters of a point this week, the time of reckoning has arrived.
And things are getting worse by the moment!
Never in my 30 years in the markets have I seen such powerful and destructive forces hit Wall Street at the same time.
Will the U.S. economy survive the disaster? If so, how?
How will investors fare? Will they be poorer or richer in the end?
How will you survive?
I'll answer these pressing questions in a few moments. But first, let's take a hard look at what's really happening in the markets right now.
How Bad Is the U.S. Economy?
It's so bad that more than $750 billion has been printed and dumped onto the U.S. economy by central banks around the world.
It's so bad that President Bush, Treasury Secretary Henry Paulson, and virtually all of the 2008 Presidential candidates — Democrats and Republicans alike — are calling for as much as $150 billion in immediate tax cuts.
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| Treasury Secretary Paulson and President Bush are calling for immediate tax cuts. |
Some 78 publicly traded companies filed for bankruptcy in 2007.
Four major financial institutions have begged to secure capital infusions from the likes of Abu Dhabi, Singapore, China, Kuwait, and more — to stave off insolvency.
And all this is just the beginning of the squandering of America!
The U.S. economy is suffering from a deep underlying disease — debt-addiction. It's been a financial disaster waiting in the wings for decades. America is the world's "Empire of Debt," and that debt is crumbling like there's no tomorrow.
Colossal IOUs in this country that Martin, Mike, and I have been warning you about are starting to go bad. But the subprime crisis is just the opening act, the superficial wounds.
Underneath the real estate debacle are several more layers of debt that are like dominos ready to topple at any minute.
The federal government itself is in hock to the tune of $9 TRILLION, and that's just the national debt.
That doesn't take into account social security, Medicare, government pensions coming due, or any other domestic obligations the government is responsible for. Add them all up and it's a whopping $55 trillion in debts Washington is on the hook for.
Then there's corporate America — with the highest debt levels ever seen in the history of our country.
In 1975, corporate debt represented a mere 12.9% of GDP ...
By 1985, it grew to 26.3% ...
By 1995, 35.9% ...
By 2000, 45.8% ...
And today it stands at an incredible 53.1%, making U.S. corporations the most indebted they have ever been.
Think it stops there? Hardly!
U.S. citizens are also broke, for all intents and purposes.
Debt is at its highest levels ever, equal to 23% of the average American's household net worth.
No wonder! Here in the U.S. we spend money like there's no tomorrow. We borrow money like there's no tomorrow. And we save hardly anything for a rainy day. Our national savings rate is a disgrace at only 0.5% of national income.
Will the U.S. Survive the Unraveling of All These Debts?
Yes, it will. How?
Unlike many other countries, our economy is very transparent, liquid, and innovative. That makes the U.S. more resilient than just about any other country on the planet.
Our markets, though they may not seem that way right now, are the most efficient in the world at dispersing risk ... and at creating solutions to crises.
That's ironic when you think about all the pundits on Wall Street who didn't see the subprime crisis coming.
But it's true. Between our legal system, our regulatory authorities, and the talent this country has in the financial sector, I believe the subprime and debt problems will eventually be at least partially alleviated.
How so? Three ways ...
#1. Concerted Federal Reserve action to lower interest rates, reducing the interest cost on debt.
#2. By the Fed and the Treasury acting in concert to flood the economy with new money, hiking inflation to much higher levels, and creating other asset bubbles that will help diminish the relative size and burden of debts.
#3. By foreign investors swooping in to take advantage of the weak U.S. dollar and picking up assets on the cheap with their stronger currencies.
Last year, foreign investors poured a record $414 billion into American companies, factories and other properties through private deals and purchases of publicly traded stock, according to Thomson Financial, a research firm.
That's an increase of 90% over 2006 and double the average for the last decade!
During just the first two weeks of this year, foreign businesses and giant Sovereign Wealth Funds invested another $22.6 billion in American companies. If they keep that pace up all year, they will invest another $588 billion in the U.S.
As a result, this flood of money will wash Wall Street clean; large chunks of debt losses will be converted into equity, helping to capitalize and recapitalize many American institutions.
All this, in the end, is positive for the U.S. economy. But it will also change it forever as inflation goes through the roof.
How Will YOU Survive?
In the end, we all know that Washington insiders only care about their own vested interest: The continued survival of the federal government.
Our policymakers sugarcoat their rhetoric so you'll buy into their policies and vote this way or that, but in reality, the tricks they have up their sleeves mostly suit them.
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| As Washington rolls the printing presses, your dollars are reduced to pocket change. |
One of the most spectacular examples of this is the falling dollar. It helps the government and corporate America reduce the mountain of debt by inflating assets.
But for you, it means your dollars purchases less and the cost of just about every good or service you buy goes up. Your real income goes down.
Nearly every action the policy wonks will take during this crisis will cost you money. Period. So the key to weathering this financial crisis is understanding that ...
The government is NOT looking out for your financial interests.
That's up to you!
Let's talk about how you can protect your wealth and prosper through the very tough period ahead.
I Suggest Taking Action Immediately ...
Understand that Washington has no choice but to devalue the dollars in your pocket.
Realize that the bear market in the dollar is bad for virtually all paper assets. It could send bond prices much lower and longer-term interest rates higher. It could slam the broad stock markets into a very sharp bear market — the beginning of which we are already seeing.
Recognize the fact that we are on the verge of an unprecedented tidal wave of inflation at the consumer level. In effect, the government is robbing you of your wealth to pay off this country's huge empire of debt. They are robbing Peter to pay Paul.
So ...
First, keep the bulk of your money SAFE. My rule of thumb is that 75% of your liquid net worth should be in cash equivalents such as Treasury-only money market funds. They are the safest money market funds on the planet.
The yield is nothing to write home about, but the peace of mind is huge.
Second, steer clear of the broad stock market. I've been telling you for months the Dow is headed down to as low as 11,000, possibly even lower. Blue chips and tech stocks are NOT going to perform well until the washout in the dollar comes.
If you still own any of those kinds of stocks now, consider getting rid of them!
Third, with the proceeds of those sales, and any remaining portion of your other funds, stick with investments which make sense in this environment: TANGIBLE ASSETS. Not paper-based assets. Invest in companies that focus on natural resources.
Natural resources investments should continue to soar, even if the U.S. economy crashes and burns. There's just too much demand for commodities emanating from the rest of the world as it modernizes. And there's too little supply to go around.
That in itself is making this bull market in natural resources all the more powerful than anything we've ever seen. Throw in the weak U.S. dollar, and it's like throwing kerosene on a fire. Gold, oil, food, gas, base metals, you name it — all are poised to rocket higher.
Fourth, continue to look toward Asia and Latin America for the best opportunities. Their economies are all doing well and are full of potential. They have a lot of catching up to do with the U.S.
Fifth, also consider investing in foreign currencies like the Australian and New Zealand dollars. They offer two bangs for your buck: The chance the currency will appreciate, and the yield you can get from foreign currency denominated Certificates of Deposit, or CDs. The New Zealand dollar, for example, currently pays as much as 6.75% on a 12-month CD.
The best source I know of for this kind of investment is Everbank's World Currency CDs. You can find out more info at www.everbank.com .
And by all means, subscribe to my Real Wealth Report if you have not already done so. It will give you everything you need — including in-depth analysis and recommendations — to survive and prosper from the current crisis hitting the U.S.
You don't want to miss the January 2008 forecast issue — hot off the press — because it gives you my core recommendations for starting off the year on the right foot.
Best wishes,
Larry
P.S. Real Wealth Report was ranked as one of the top financial newsletters for 2007, beating out 96% of all the other financial newsletters audited by the Hulbert Financial Digest !
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