(This is Part 8 in a series. Go back to Part 7.)
Do you remember the five stages of bereavement? Let's recall that the first one is denial. It seems to me that that's where the world is now, dancing to the siren song of debt while the iceberg of credit deleveraging lies dead ahead.
To summarize, the U.S. and the world are embarked on an historic experiment—to see if a world economy can be run on unrelenting creation of more and more debt.
Can humanity borrow itself rich?
History suggests that the answer is "no." Sound economic growth comes from savings and productive investment, not from rampant borrowing and spending. History also suggests that when a debt bubble goes beyond the point of sustainability it can and will suddenly deflate.
Another interesting point about bubbles, whether of credit or assets, is that they always ultimately go below the point at which they began. That is, they replicate and beyond on the downside the extremes they reached on the upside.
Anybody who tries to predict the future is a fool—we all know that—but...oh well! What follows, then, is just my hallucinations while gazing into the tea leaves. It is not intended as investment advice since a) I'm off my rocker, and b) I don't know your personal situation. You would be wise to consult a trusted financial advisor who does.
It seems to me that all assets that have been driven up by credit creation will suffer historic declines. Indeed, that is the very meaning of a debt deflation. This would certainly include the stock, bond and housing markets.
If such an environment does develop, it may not be wise to attempt to pick "good" stocks/bonds/houses and so on, since it may become like trying to swim upstream against a tsunami. There's a saying among market professionals: "When the paddy wagon comes for the bad girls it takes away the good girls too."
Second, the declines in these areas could go much further than anyone now imagines, so that prematurely trying to "pick the bottom" may become a very dangerous exercise. It's worth remembering that stocks, bonds and housing all took 25 years to return to where they were in 1929.
Since the phenomenon could be an order of magnitude larger this time, it may not be a great idea to "wait it out" while holding on. I don't think any securities sector or part of the country (or the world) will be exempt.
Basically, it may be a very good time to "cash out." We've been in a bull market for everything but cash for two generations or more; it's possible that now we've entered, or are about to enter, a bull market for cash relative to stocks, bonds and housing.
One possible place to hold cash these days is to find a bank in your area that holds much higher reserves than most banks and is rated among the tops in the country for safety. Such banks can be located in Martin Weiss' book The Ultimate Safe Money Guide or in online searches.
Another possibility is to hold funds in U.S. T-bills, which are short-term instruments and thus not subject to interest-rate risk as are longer-term notes and bonds. And there are money-market funds that specialize in holding just short-term T-bills; such funds can be located online.
Are the possibilities mentioned above safe? Who knows? In my opinion, in a financial sense nothing is truly safe these days. We can only speak of relatively more safe or relatively less safe, and these seem relatively safe at the moment. Any of this could, of course, change over time.
Gold should also be mentioned. It is highly likely that we will enter a period of time characterized by a depressed economy along with rising prices of many important items. This happened in the 1970's, when it was called stagflation. I believe we'll be rerunning a version of 70's stagflation, only more intense.
In such an environment, where both inflationary and depressionary elements are present, gold and perhaps silver are perhaps the only things that may have at least some chance of rising in all possible environments.
Once the stock market seriously resumes its main trend of decline, which could be tomorrow or next year, I believe the whole psychology will change. Aggressive sellers will probably appear at that point in all asset classes, including stocks, bonds and real estate. In my opinion, that will begin a different era.
(This is the end of Part 8. Go to Part 9.)
—jim sloman, 4.1.04 for Sep 3
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