After so many e-mails from me about debts, threats, wars and revolutions, you probably think I’m an incurable worrywart.
But nearly everything happens for a reason: Most negative events in the present have the real potential to generate a positive outcome in the future.
So please join me this morning in my home office, and I will share my outlook in a brighter light.
I’m not going to sugarcoat the bad news.
Nor am I going to retreat from my warnings.
Rather, my mission in this e-mail is to give you a few examples of the dangers we face … take some giant leaps in time … and let you see for yourself how even the worst of scenarios can ultimately bring some of the best of changes.
Example #1
U.S. Budget Deficit
Running Amuck!
America’s budget deficit may have receded to the back page of the New York Times — or to the back of the minds of most investors. But that doesn’t mean it’s improved or gone away.
Quite to the contrary, just this past Friday, the non-partisan Congressional Budget Office reported that the administration’s new budget plan is going to jack up the deficit by trillions of dollars over the next 10 years. And it’s highly unlikely any other administration could do much better.
Here are just the main disasters lurking in the plan:
Budget disaster #1. Right or wrong, the administration is adamant about continuing its tax cuts.
Result: Add $1.7 trillion to the deficit over 10 years.
Budget disaster #2. The administration is also sticking with its plan to partially privatize Social Security.
Result: Add another $312 billion to the deficit.
Budget disaster #3. To offset about a third of those deficit increases, the administration proposes cuts in Medicare, Medicaid, education and other services. What are the chances of those getting an OK from Congress in an election year? Zilch.
Result: Take away a big chunk of the savings.
Budget disaster #4. In Iraq, the slippery slide into civil war has upended all plans for troop withdrawals. In Afghanistan, the steady comeback of the Taliban implies the U.S. may have to spend even more money. And yet, the budget plan assumes both conflicts will miraculously vanish at the end of this fiscal year. Indeed, not a single dime is budgeted for 2007 and beyond.
Result: Even assuming the wars get no worse, add about $100 billion for every year we stay the course.
Budget disaster #5. The budget plan assumes tens of millions of Americans are going to start paying more taxes simply because inflation will automatically push their income above the threshold that qualifies them for the alternate minimum tax. But both Republicans and Democrats say this is patently unfair. And they’ve vowed not to let it happen. So counting on those extra revenues is a pipe dream.
Result: Add another $1 trillion to the deficit.
All bad news that’s getting worse! But …
Join Me on a Time Capsule Through Time,
And You Will Learn to Count Your Blessings
Our first stop is the German Weimar Republic. The year: 1923. Unlike today, the dollar is strong. But the German currency has collapsed: One U.S. dollar will soon be worth about 3 trillion marks.
We stack them up along a wall, and they make a tower that’s 10 feet high. We ask a couple of children if they want some. They point to the stack and laugh.
We walk to a clothing store where shoppers are browsing. But their paper money is so worthless, most are carrying it around in discarded potato sacks or rusty wheelbarrows. One man parks his to the side, while eyeing an expensive-looking suit in the window.
Suddenly, to his great dismay, he realizes he’s been robbed: His stack of money is still there, sitting on the sidewalk. But his wheelbarrow, worth a lot more than the money it carried, is gone.
Financial chaos reigns. And it’s just a sneak preview to the true horrors to come in the ensuing two decades.
Central Brazil, 1953. We’re on a farm just a few miles outside of the town of Anápolis, where my father wants to build a second home.
I’m just seven, and I’m collecting coins of Brazil’s currency, the cruzeiro. I figure they must be valuable because each one represents a 1000 reis (meaning “kingsâ€), Brazil’s previous currency.
But the kings are dead and long gone. To my later dismay, my prized cruzeiro coins will soon be as well.
Indeed, over the next fifty years, the same fate awaits a series of new Brazilian currencies: The “new cruzeiro†(worth 1000 old cruzeiros) … the “cruzado†(worth 1000 new cruzeiros) … the “new cruzado†(worth 1000 old cruzados) … and the cruzeiro real (worth 1000 new cruzados).
Finally, in the early 21st century, Brazil’s newest currency, the real (worth 2,750 of the previous cruzeiro reals), will be stable and even strong.
But at the age of seven and in 1953, I will have to wait half a century before that happens. And by that time, the cruzeiro coins I’m collecting will be worth precisely one-2,750,000,000,000,000th of their value in 1953. That’s two thousand, seven hundred and fifty trillion times less.
In the interim, poverty reigns. And even children of sharecroppers that I photograph in the 1980s have less then the children of American sharecroppers during our Great Depression. Reason: The few cruzeiros or cruzados they earn inevitably plunge rapidly in value.
New York City, 1980. The U.S. is on the brink of a hyperinflation that some pundits say could be as bad as Brazil’s or even Weimar Germany’s.
But instead, something very positive happens: The nation is forced back from the brink by a mechanism that did not exist either in Brazil after the second world war or in Germany after the first.
It’s called the “New York bond market†— the largest and most liquid market for debts the world has ever seen.
Here’s why it’s such a positive change: Through this market, the ultimate power to decide the fate of the nation’s money has been transferred — from the handful of leaders who might destroy it … to the millions of investors who must defend it.
In 1980, these investors rise up against the money spenders and budget busters in Washington. They refuse to buy any more of the U.S. government’s Treasury’s notes and bonds. And with that single act of rebellion, they send a clear message to the White House, the Federal Reserve and to Congress:
“Quit the nonsense! Stop the inflation! Otherwise, we won’t loan you another penny. You’ll have to shut down the government. Your own government paychecks will bounce.â€
That’s one message that government officials — whether elected or not — finally get. And sure enough, even in a presidential election year … even at the risk of a sharp recession … President Carter (a Democrat) imposes draconian measures to squelch the inflation and pull the country back from the brink.
In the 2000s, you can expect the same.
We will see more budget busting and more big spending.
We will see some of the worst inflation in our nation’s history.
But it will not be like Germany in 1923 or Brazil in 1953. And it certainly won’t be the end of the world. Quite to the contrary, it will be the needed catharsis to force our leaders onto the right path.
Example #2
Trade Deficit Disaster
While the U.S. government is hemorrhaging red ink internally, the entire country is drowning in even more red ink internationally.
Right now, the U.S. trade deficit is the largest of any country, any place, any time.
It clocked in at well over $700 billion last year.
It’s headed for $800 billion in 2006.
And it’s putting the nation at the greatest financial risk since Benjamin Franklin borrowed from the French to finance the American revolution.
Result: Expect the dollar to plunge while gold, silver and other commodities surge.
Just in the past couple of weeks, gold has jumped by about $26. And on Thursday alone, silver catapulted from $9.71 to $10.12 per ounce … busted through its recent peaks … and surged to its highest level in over 22 years.
And again, it is the wisdom of the marketplace — not the folly of politicians — that will ultimately prevail.
In previous centuries, yes, there may have been a gold standard. But the international free market for foreign currencies was small or nonexistent. Today, it’s the largest market on the planet, trading around the clock, with trillions transacted among millions of individuals and institutions.
No single government controls this vast marketplace, and any short-sighted government attempts to manipulate it have inevitably backfired.
To some governments, that may appear to be a drawback. But for you and me, it’s ultimately a great benefit. Foreign selling of the U.S. dollar will also send a clear message to Washington, parallel to the message sent by rebellious bond investors:
“Quit the nonsense! Stop the inflation! Or we’ll dump your dollars … and your own personal money will be worthless.â€
Unlike banana republics of old, Uncle Sam has no rich uncle.
And unlike the situation faced by kingdoms and empires of bygone eras, there’s no hiding from the truth. In the foreign exchange markets, the value of the dollar is tracked by the second, and the information is transmitted to millions of computers everywhere.
That’s why I’m optimistic for the long term: Our leaders may be complacent, irresponsible or downright dumb most of the time, and probably will continue to be for quite a while. But when their own butt and their own paycheck is on the line, I trust they’ll ultimately do the right thing.
Example #3
Bird Flu Going Wild
More than any other peril facing humanity, a bird flu pandemic easily provides the most fodder to those who have no other mission than to spread fear.
But this time, the warnings are not coming from a radical fringe. Nor are they based merely on speculation and wild guesses.
Well known world leaders, including President Bush and UN Secretary Kofi Annan, are among those leading the campaign to warn the public.
Widely respected institutions, including the Centers for Disease Control, the U.S. Government Accountability Office, and the White House itself have issued studies on what to expect.
They estimate as many as 150 million deaths within a 12- to 18-month time frame — about fifty times more than those who died of AIDS last year.
They foresee a global shutdown of commerce, travel and the economic system as we know it. They predict a scenario that is far more pessimistic than anything I have ever spoken or written about in my entire lifetime.
Larry puts it this way:
Let’s pray they’re wrong. And let’s hope these dire prophecies galvanize world leaders into doing what it takes to prevent the worst of the prophecies from coming true.
That’s exactly what I see happening: World leaders have no choice but to spend, spend, spend, to keep the sky from falling. And just for starters, a $10 billion avian flu defense fund is already being created.
They will establish solid systems for stockpiling vaccine, something that experts say should have been done years ago.
They will upgrade the nation’s — and hopefully the world’s — health facilities, something that everyone knows should have been done decades ago.
Video-conferencing companies will double and triple their production of systems that help millions of Americans work from home to avoid contagion. Their profits will go ballistic. Their shares will surge.
Executive jet manufacturers, service providers and leasing companies will step in to replace some of the thousands of commercial flights that are canceled due to travel fears in a pandemic. Their shares will surge.
The pandemic will still be ugly. But the world will survive.
We will also survive the runaway budget deficits, the record-smashing trade deficits, and the resulting surge in inflation. We will survive for two fundamental reasons:
First, because of free markets. Prices may go through the roof. Or prices may collapse. But the market mechanism itself is the strongest it’s been in history, sorting buys and sells with dispatch and efficiency.
Second, because of you. You have a vested interest in protecting your wealth and making it grow. So you will naturally rebel against anyone or anything that threatens those goals.
But unlike your counterparts of past eras, you don’t have to bang your fist on the desk of some faceless bureaucrat to make yourself heard. You don’t even have to wait for the next election. All you have to do is pick up the phone or click on your mouse, issuing one three- or four-letter instruction: BUY or SELL.
That order, combined with those of millions of others, will send the most powerful message of all to our leaders. And, right now …
With All Their Mistaken Steps and
All Their Misguided Blunders, Here Are
Some of the Orders You Should Consider
Sell long-term bonds. They’re already falling. Just Friday, the price of U.S. Treasuries broke down sharply. So don’t wait.
Sell the companies vulnerable to the consequences of wild deficits, inflation and rising interest rates. You’ve seen what’s happened to General Motors and Ford. Now, brace yourself for a similar fate befalling large home builders like Toll Brothers or subprime lenders like Century Financial.
Buy gold, silver, and the companies that produce them. The surge you saw in precious metals last week could be just the beginning of the next big leg in their bull market. For example, look at streetTRACKS Gold Trust (GLD) and US Global Investors World Precious Minerals Fund (UNWPX).
Buy the energy and other natural resource companies recommended by Larry Edelson in his Real Wealth Report. After their February dip, they’re already beginning to turn higher. So you don’t have much time to wait around. Ditto for his favorite alternative energy companies.
Buy companies that are first in line to receive a big share of the $10 billion spending bonanza for the bird flu. For detailed instructions on what to buy, download Larry’s report, “Follow The Money — 5 Companies That Will Get the Lion’s Share of the $10 Billion Avian Flu Defense Budget.â€
He just released it Friday night. And it’s ready for download right now.
The report will be sold for $145. But for just $99, the full report is yours free simply by starting or renewing your subscription to Larry’s Real Wealth Report for one year. Call 800-604-3649.
And always remember: If you fear some of the real dangers I have been warning you about, that’s not necessarily a bad thing — provided you respond with reason and moderation.
Keep a big chunk of your money safe. Invest the rest prudently. And when you go for the huge profits that are possible, do so strictly with money you can afford to risk.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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