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Starting Now: America’s Second Great Depression
Martin D. Weiss, Ph.D.
Money
and Markets
Tuesday, Dec 02, 2008
On this first weekday after Thanksgiving, it’s
time to take a moment, look at the changes swirling all around
us and think about the tasks we must achieve together in the weeks
ahead.
After more than six decades of growth, America is sinking into
its Second Great Depression of modern times. The place is every
home, business, and community.
The time is now.
America’s Second Great Depression is not a typical 20th
century recession that happens to strike a bit harder or linger
somewhat longer. Nor is it merely a fictional scenario conjured
up by economists with a murky crystal ball.
(ARTICLE CONTINUES BELOW)
America’s Second Great Depression is the probable consequence
of a great housing bust, a massive mortgage meltdown and the biggest
financial crisis in history.
It promises to bring the worst wave of bankruptcies, job losses
and wealth destruction any citizen under 90 has ever experienced.
It challenges the smartest minds in Washington, defies the deepest
pockets on Wall Street and threatens to rip through our life with
the force of a Cat-5 hurricane. And yet, among all those making
the decisions that could forever change our future, no one has
personal experience with a similar episode.
I don’t either. I was born in 1946, just as we were leaving
the final vestiges of America’s First Great Depression behind.
I’ve studied that historic period with books, charts and
numbers, but that’s not the same thing. I’ve lived
in Brazil and Japan during tough times, but that, too, was different.
What brings me closer to a visceral understanding of this crisis
is the half century I shared with my father, J. Irving Weiss,
one of the few economists who not only advised investors during
the First Great Depression, but actually predicted it.
Dad was so proud of that unusual feat, he began telling me stories
about it when I was just five years old. Vicariously, I lived
through the Roaring Twenties, the Crash of ‘29, the massive
bank failures of the 1930s, and the many years of human suffering
that ensued. Through Dad’s teachings, I felt as though I
was there with him when investors lost fortunes, when we hit rock
bottom in 1933, when we eventually recovered and brand new fortunes
were made. Dad was not only a loving father, but also my mentor,
partner and best friend.
I wish he could be here today to write to you directly and help
you get through these tough times personally. But as soon as I
was old enough, I helped him write his investment reports; and
in 1971, soon after I founded Weiss Research, he helped me write
mine. Although he’s gone, I can feel his vibrant energy
and calming spirit beside me; and from time to time, I will let
him speak to you posthumously here in Money and Markets.
Think of this message you get from me each Monday as co-authored
by the two of us. He will tell you about his experiences and analysis
during America’s First Great Depression; I will tell you
what it means for America’s Second Great Depression and
what you can do about it. A lot has changed since then. What hasn’t
changed is my family’s passionate desire to help you through
it.
This entire effort is the culmination of eighty-four years of
research, beginning when Dad first went to Wall Street in 1924
to learn everything he could about money.
Five years later, when the great crash struck, he did not own
any stocks. His parents were recent immigrants from Eastern Europe
with barely enough to keep food on the table. He had to save everything
he earned, bring it home and give it to his mother. He knew how
real estate had collapsed in Florida, and he saw how America’s
farms were in disarray. He didn’t want to gamble his hard-earned
savings on another bubble.
After the crash, the stock market rallied for almost six months,
and nearly everyone on Wall Street thought the crisis was over.
But Dad persuaded his clients and friends to sell everything,
get the heck out of the market, and pile up as much cash as they
could. He was so convinced the market would fall again, he even
borrowed $500 from his mother to sell short — to take a
crack at profiting from the market’s decline.
Sure enough, the Crash of ‘29 was just the opening act
of the great bear market. All told, from its peak in 1929, the
Dow Jones Industrials Average fell 89%. Compared to the Dow’s
peak in 2007, that would be tantamount to a plunge of more than
12,600 points — to a low of approximately 1500. Dad explains
it this way:
“In the 1930s, at each step down the slippery slope of
the market’s decline, Washington would periodically announce
some new initiative to turn things around. President Hoover
would give a new pep talk promising ‘prosperity around
the corner.’ And often, the Dow staged dramatic rallies
— up 30% on the first round, 48% on the second, 23% on
the third, and more. Each time, I sought to use the rallies
as selling opportunities. I persuaded more of my clients to
get rid of their stocks and pile up cash. I even told them to
take their money out of shaky banks.
“On the surface, it might have appeared that just sitting
out the crisis got you nowhere. Actually, though, it was a great
strategy for building wealth. Prices were falling — on
homes, on automobiles, on almost everything. So the more prices
fell, the more your money was worth. Just by saving money, stashing
the cash, keeping your job and going about your daily life,
you were building wealth. You didn’t have to know about
investing. All you needed to figure out was how to protect yourself
from the bad times. Then, when we hit rock bottom — that
was the time to start buying real estate, stocks or bonds.
“The end of the entire decline came with two events:
The inauguration of our new president, Franklin D. Roosevelt,
and the national banking holiday he declared on his third day
in office. But after three years of panics and crashes, most
people greeted those events with dread. They thought it would
be the beginning of another, even steeper slide. Some people
even said it was the final chapter of capitalism itself. As
it turned out, that was precisely the right time to pick up
some of the greatest bargains of the century and make a lot
of money.”
Helping people make money was Dad’s profession, but his
passion in life went far beyond money; he was a man of deep empathy
and feeling for his fellow man. When others suffered, he suffered
along side them. He gave them jobs, bought them meals and offered
an abundance of free advice
Most of all, he did not want to see America go through another
depression ever again. His vision for accomplishing that goal,
however, was different from that of most economists in the post-Depression
era. Their strategy was to yank the economy out of nearly every
slump and slumber, forever seeking to keep the economy growing,
always bailing out major institutions that failed. His philosophy
was moderation in both directions. “The only way to avoid
the pain of a great bust,” he wrote, “is to refrain
from the excesses of a great boom.”
I agree, and in the coming weeks, I’ll explain why. Plus,
I’ll show you how you can use a similarly moderate approach
to secure your own future.
A better future was also something Dad sought to secure for the
country as a whole, in his own personal way. In 1955, for example,
a Florida junk dealer sought to take over one of America’s
largest cash-rich companies to force it to borrow money and grow
more quickly. In response, Dad mobilized like-minded executives
from all over the country and, in one of the greatest corporate
battles of that era, successfully blocked the takeover. Similarly,
in 1959, when the U.S. federal deficit seemed to be growing out
of control, he formed the Sound Dollar Committee, organized a
grassroots movement of an estimated 11 million citizens, and helped
President Eisenhower give America its last truly balanced budget.
Today, I am Chairman of the Sound Dollar Committee; and separately,
I am the cofounder of the Financial Publishers Association, representing
over 14 million investors. My primary goal, like Dad’s,
is to do my small part to help head off the avoidable consequences
of another depression.
Right now, our country’s finances have deteriorated too
far to balance the federal budget anytime soon. But it’s
not too late to avoid some major financial blunders that could
seriously weaken our country for the rest of the century. Even
in the worst-case scenario, it is certainly not too late for you
to protect your savings, boost your income and grow your wealth.
How long could the depression last? How much further can home
prices fall? How far down will the stock market go? Will it be
as bad as the 1930s? At this juncture, you can count on your fingers
the number of serious analysts who believe that’s even a
remote possibility. And yet, stranger things have already happened,
including the largest bank and insurance company collapses of
all time. Before he passed away, Dad expressed it this way:
“Most Americans — especially the youngsters who
manage billions of dollars on Wall Street — have no concept
of the power and speed of a great stock market crash. They’ve
never lived through one. So it’s hard for them to visualize
it. In 1929, people were jumping out of windows and one-time
wealthy people were selling apples on street corners. The shock
waves reached into almost every office and every home in the
country and in the world. Next time, it could be just as bad,
or even worse.”
Trouble is, there are no historical precedents for what’s
happening in this era. Any forecasts I make today, no matter how
well researched, are not nearly as valuable as the awareness you
will have of current events as they unfold in real time. So rather
than pick a number for the bottom in the Dow or guess the low
price of an average home, my primary purpose is to help give you
the understanding you need to make some major decisions right
now and then adjust them as the crisis unfolds.
Your immediate task, which may seem hard, is actually very simple
— get your money to safety.
Your second task, which may seem easy, could actually be more
difficult — wait patiently.
But it’s the last step that will be the most rewarding
— when real estate, stocks and bonds are near a true bottom,
reinvest in America and greatly improve your life for years to
come.
Over the next few weeks, I will show you how. I will give you
the warning signs to watch out for while things are still falling;
I will describe the kinds of conditions that are likely to prevail
when we’re near a bottom; and I will provide step-by-step
instructions on precisely what to do.
Surviving the crisis on Wall Street and Main Street is not rocket
science. You don’t have to forecast the future. You don’t
even need investing experience. All you need is the courage to
get out of its way and the patience to stay out of its way for
the duration.
The simple secret is to throw out your prejudices, start with
a clean slate and then follow your own common sense. Right now,
that means taking a cold, hard look at the events swirling around
you and recognizing that your money could be in grave danger.
It means accepting the reality that the value of your home, your
401k, and even some of your supposedly “safe” investments
CAN fall a lot further. And most important, it requires the realization
that you have the power to stop the bloodletting.
There’s no law, rule or ethic that requires you to sit
quietly and accept financial punishment passively. You have every
right — and every mechanism — to get your money to
safety without remorse.
I have warned about this crisis repeatedly. I have nagged, cajoled
and shouted this message from the rooftops. But it gives me no
pleasure to see my dire warnings come true. I have dreaded this
day as often as I have predicted it. I prayed it would not come
to pass. But now that it’s here, I have a new prayer:
That you are, or soon will be, out of danger and ready for
the worst …
That the worst will strike swiftly and end swiftly …
That, once we hit bottom, no matter how ugly the future may
appear, you, me and many others will have the fortitude to reinvest,
help get our country back on its feet, and move on to better
times.
Just promise me one thing: No matter how dark this tunnel may
seem, never forget it is not the end of the world. Our country
has been through worse before, and we survived. We will survive
this crisis too.
You hold your future in your hands. At this landmark turning
point in our history, it’s the choices you make today that
will determine your fate — and the destiny of everyone that
depends on you — for decades to come. Your decisions now
could make the difference between a successful career or a lifetime
of struggle … retiring in dignity or becoming a ward of
the state … enjoying wealth and health or risking poverty-stricken
illness.
Whatever your choices may be, do not procrastinate. And whenever
you take action, don’t do so in haste. Your response to
the current crisis — or any new crisis that may ensue —
should be both prompt and planned; both bold and prudent. I write
to you each week to help you make that possible.
Here are your tasks in a nutshell:
Your first and most urgent priority is to survive the depression,
while building the biggest pile of CASH you can. Whether it’s
a molehill of pennies that you pinch from daily sacrifices or
a mountain of dollars you squeeze out of asset sales, the more
cash you can accumulate now, the better.
Your second priority is to make sure your cash is in the safest
place possible. That may not be the nearest bank or the biggest
insurance company. Short-term Treasury securities, despite their
low yield, must be the primary vehicle.
Third, for the duration of this crisis, plus any new ones that
may strike, your best friend and companion will be patience.
Don’t yield to the temptation of so-called “bargains”
and “big discounts” from peak prices. Many of those
peak prices were a fiction from a bygone era that may never be
seen again in my lifetime or yours.
Don’t jump in too soon. You can afford to wait. Indeed,
just by waiting patiently, you can build wealth tremendously.
Fourth, I recognize that not everyone is able to follow all my
instructions to the letter.
You may have real estate you cannot sell or a pension fund beyond
you cannot control.
You may have bonds that have no market or a business that continues
to provide income.
All could be assets that you must keep; and yet, at the same
time, all are assets that could be vulnerable to big losses in
a continuing decline.
To untie that knotty dilemma, you may need a hedge — a
protective shield that can help offset your losses. Alternatively,
if you are a risk-taker, those same hedges can be turned into
pure profit opportunities during a market decline. I hope you
have already read and acted on the guide to hedging I sent you
a while ago. If not, the latest rally in the market gives you
a great time to start. (Click here to download the pdf file.)
Last, the big pay-off will come when we hit rock bottom and it’s
time to buy the greatest bargains of the century. So recognizing
the bottom can unlock the opportunity to boost your income, allowing
you to buy some of the best assets in the world for a pittance
and stake out the high ground for yourself, your children and
generations to come. I will do my utmost to alert you when the
time comes.
Just remember that nothing is predetermined. Right now, the tsunami
of crisis seems unstoppable. But in the foreseeable future, there
will also come a singular moment in time when the worst of the
storm has passed and the tides of history have ebbed, opening
a window for you, me and our leaders to choose our own destiny.
Before then, let’s have a serious discussion about what
the best — and worst — choices may be.
Good luck and God bless!
Martin
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