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After last week’s bombardment of news reports, anyone who still thinks the U.S. economy is not sinking rapidly into recession is either trying to push a biased agenda or living on another planet.
The dire reality:
This recession is undeniable, with a greater abundance of evidence at this early stage than any other economic downturn of modern times — plunging home sales and prices, falling consumer confidence and spending, surging unemployment and more.
This recession is unavoidable, with nothing the Federal Reserve, the Treasury, the White House or Congress can do quickly enough or forcefully enough to stop it.
Indeed, with inflation already surging and the dollar already plunging, it’s now likely that their grab-bag of housing market bailouts, stimulus packages and interest-rate cuts are likely to accomplish little more than push the dollar over the brink, drive commodity prices through the roof, propel inflation beyond control and, ultimately, deepen the crisis.
This recession is incomparable, unlike anything you’ve seen in the past or are likely to see in the future.
For the first time since the early 1980s, we are witnessing the virtual shutdown of some of the nation’s most important credit markets — for many kinds of mortgages, certain types of corporate bonds and, in the past few days, even municipal bonds.
For the first time since the Great Depression, the value of residential real estate is plunging nationwide.
For the first time in U.S. history, countless middle-class Americans — even many with good credit — are defaulting on their mortgages, abandoning their homes, sending a whole new set of shockwaves through the banking system.
And for the first time ever, trillions of dollars in derivatives — debts and bets that did not even exist in recessions or panics of yesteryear — are now blowing up.
Fortunately, however, thanks to a series of new revolutionary instruments now available to average investors …
This recession is also eminently escapable! Unlike during any prior crisis, you now have multiple opportunities to protect your family from the declining value of your real estate … create a solid defense against the falling dollar … hedge your portfolio against a falling stock market … and even turn each of these situations into life-changing profit opportunities.
Most stock investors, however, are frozen in limbo. They’re continually waiting for the government to swoop down with the next big rescue. They don’t yet recognize the severity of the storm. They don’t yet understand how quickly it can destroy their portfolios.
If you — or someone you care for — is among them, join me now in a brief guided tour of last week’s events. And at each stop along the way, let me share with you my thoughts regarding what I see coming next and what you can do right now to escape the dangers.
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First, take a long, hard look at the home price decline.
The recession has barely begun — and the decline in residential real estate values is already the worst since modern records were kept.
The S&P/Schiller Home Price Index, which not long ago was soaring by more than 30%, just plunged 9.1% in December.
Worse, the median price of new homes sold has tanked 15.1% from January of last year, the biggest drop in any month since at least 1964, when they first began tracking this measure.
Is this decline as deep as what our parents or grandparents experienced in the Great Depression? Probably not. But …
In the Depression, the cost of living was going down, helping to ease the burden for many homeowners. Today, it’s going up.
In the Depression, a much smaller percentage of families borrowed money to buy a home. Today, it’s the purchase of a home without debt that’s the rarity.
If you walked into a bank in the 1930s, it’s absolutely certain that the mere mention of mortgages with no down payments, no documented income or no principal payments would have been universally greeted with ridicule. Today, these wacky new loans have been created by over 10,000 banks, thrifts and mortgage lenders in 3,000 counties and 25,000 towns across the U.S.
From everything we know, it’s quite certain that adjustable-rate mortgages (ARMs) did not exist. Today, so many ARMs are resetting at higher rates, they are threatening to help trigger up to two million foreclosures.
Back then, very few home owners were upside-down — with more debt than home value — and it was unheard of for Americans to abandon their homes for that reason alone. Today, this situation is so widespread, a half dozen government agencies and thousands of lending institutions are desperately scrambling to find ways to reverse the trend.
What’s next:
The political forces for an unprecedented, national bailout are now mounting by the day. So expect massive government efforts to forestall an equally massive wave of foreclosures. But while the likely success of these efforts is doubtful, the unintended consequences are obvious …
- Bigger losses for lenders when they delay seizing homes and wind up selling them at lower prices.
- A bigger burden on taxpayers as the government spends money it does not have.
- A bust in commercial real estate sales and prices. This is beginning right now, following a pattern very similar to the bust in housing. It’s still a few steps behind. But it’s likely to catch up quickly.
- Severe damage to the U.S. dollar and a superboom in commodities. (More on these in a moment.)
Your escape:
- If you’re selling your home, price it aggressively.
- If you’re pondering what to do with commercial properties, stop guessing and start acting: Sell!
- If you’re looking for a new place to live, don’t buy. Rent.
- If you’re seeking bargains, don’t rush. Wait. It’s far too soon. And for the truly great bargains that will come later, be ready to pay cash or a very substantial down payment.
- If you own real estate but can’t sell, hedge with an inverse ETF like ProShares UltraShort Real Estate (SRS).
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Second, look how this situation is starting to impact consumers.
With home prices plunging and the cost of living soaring, consumer confidence is getting hit hard.
Just in the last few months, it has fallen from some of the highest levels on record to the lowest level in five years.
The best evidence: The Conference Board just reported that its confidence index fell to 75 in February. That’s far below the 83 reading that analysts had forecast. And it’s down to the lowest level since February 2003, a time when Americans were intensely fearful of a new war that was about to begin.
What’s next:
- Consumer spending, already slowing to a standstill, will shrink rapidly. With just a few exceptional items that they must buy no matter what, Americans will snap their wallets shut, slashing their purchase of high-priced luxuries and bargain-basement discounts, big-ticket items and everyday tidbits.
- Corporate profits will plunge. In already-blighted industries, don’t be surprised to see floods of red ink and a string of bankruptcies.
- Layoffs and unemployment will surge.
Your escape:
- Get the heck out of vulnerable stocks as fast as you possibly can.
- If you’re unwilling or unable to sell, at least hedge with inverse ETFs. (For more specific instructions, see my free report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.)
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Third, prices are surging.
The U.S. Labor Department has just announced that wholesale prices …
• jumped by 1% last month, more than double what analysts expected, and …
• surged by a whopping 7.4% in the last 12 months, the largest yearly gain since late 1981.
Moreover, these numbers do not yet include the new explosion in energy prices — crude’s surge past $100 per barrel, natural gas’ big double-digit gains, and gasoline’s run toward the $4-per-gallon level.
Nor do they include the most recent parabolic surge in food prices.
And most important, they do not include the most recent downward spiral in the dollar, which inevitably drives up the prices Americans pay for massive quantities of imported goods.
What’s next:
- A continuing free-fall in the value of the U.S. dollar, despite surprise rallies.
- A continuing, parabolic rise in commodity prices, despite sharp intermediate corrections.
- A sudden and shocking jump in the government’s Consumer Price Index, despite a deeply-ingrained institutional bias that chronically understates its severity.
Your escape:
- Revolutionary new investments that give average investors immediate and easy access to the world’s strongest foreign currencies: Currency ETFs and World Currency Options.
- Commodity-ETFs — exchange-traded funds that invest in pure commodities such as gold, silver, oil and copper.
Bottom line: The great housing bust is creating a new superboom. So hold on to your hat. This journey is just beginning.
Good luck and God bless!
Martin
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. 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 in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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