Economy Crumbling

I invest prudently to help ensure the future financial well-being of my wife and two daughters. And Martin, who visited us recently, shares the same philosophy.

But when future history books are written on the twenty-first century, they will probably show that this time — right now — was the most dangerous for investors in decades.

Just look at what’s happened in the last ten days.

We’ve seen the U.S. government throwing money at the credit crisis with wild abandon — cranking up the total cost and potential liability of fighting this disaster to more than $2.5 trillion.

We’ve seen endless “happy talk” from President George Bush, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, declaring that their latest schemes really will “end the credit crisis once and for all.”

But all their efforts are already backfiring: The fear of huge bond supplies to finance this folly is driving up interest rates on Treasury bonds. And as I showed you on Friday, that’s sending mortgage rates through the roof, threatening to sabotage the entire bailout plan.

Meanwhile, nearly the entire economy is crumbling.

I wish I didn’t have to sound so bearish. No one wants to see workers thrown out on the street, millions of Americans suffer through deep recession, or stocks fall out of bed. But the fundamentals at the heart of this crisis are not improving. To the contrary; they’re signaling one of the worst Octobers on record.

Just take a look at last week’s pile-up of dismal news announcements (along with my view on each) …

First, the National Association of Home Builders announced that October has been the cruelest month ever for the housing industry. The group’s index, which measures home sales and buyer traffic, has just fallen to the worst levels in its 23-year history.

My view: A lasting recovery in construction activity, sales, and home prices remains many, many months away.

Second, the U.S. Department of Labor reported that 3.7 million Americans are now receiving unemployment benefits — the most in more than five years.

My view: The broad economy is behaving like the Titanic, and these job losses could be just the tip of the iceberg.

Third, U.S. industrial production cratered 2.8% in September — more than three times the decline that was expected and the single-worst reading in any month going back to 1974.

My view: This is the first hard data confirming what we’ve suspected all along — that this recession could be at least as bad as the 1974-75 recession, which was the deepest since the Great Depression.

Fourth, housing starts plunged a staggering 6.3% in September. Worse, applications for construction permits — a solid indication of how housing starts will fare this month — crashed 8.3%. Single-family home construction is now running at levels we haven’t seen in 26 years!

My view: The housing market is still on the ropes. Commercial real estate is getting killed. Lenders are shutting down their operations. The only good news is that home prices are falling so far so fast, there is now some hope that homes will be affordable again in the not-too-distant future.

Fifth, consumer confidence just suffered its steepest monthly drop in history. The Reuters/University of Michigan Surveys of Consumers said its confidence index plummeted from 70.3 all the way down to 57.5 in one fell swoop.

My view: This is frightening. But it should come as no surprise to our readers: It goes hand in hand with the “blackest of Black Octobers” that I warned you about last month.

Ignore the Washington and Wall Street Spin.
These Powerful Economic Forces Are Screaming,
“THE WORST IS STILL AHEAD!”

As long as the forces that drive the economy and the stock market continue to fall so steeply and deeply, almost any stock you own or buy now is a potential time-bomb that can sink your portfolio.

There are exceptions, of course. And if you or your money manager know how to hedge against downside risk, that’s another alternative.

But I will repeat what I said at the outset: This is a dangerous time for investors. So my recommendations are as follows:

Ignore the spin coming from on high. It’s just noise. It won’t make a bit of difference.
Don’t be fooled by rallies in the stock market. They’re little more than mirages based on fantasy. The bigger they are the better the selling opportunity.
If you want to protect your family as much as I want to protect mine, you’ll get your money to safety. The more the better.

Until next time,

Mike

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