With just 12 weeks between now and the presidential election, sifting through the political spin to figure out what’s really going on in the economy is going to be tougher by the day.
Politicians will point fingers for bad numbers and take credit for good ones.
Their economic experts will invent new theories, omit facts, and ignore the obvious.
Even so-called “objective” analysts will often have a hidden agenda.
Last night, for example, one political commentator posing as “independent and unbiased” was actually pushing a pro-Kerry agenda. Another was obviously pro-Bush. Their acrobatics to twist the facts about the economy were so swift it made my head spin.
In the heat of the debate, neither the Democrats nor the Republicans seem to see what’s really going on.
Neither has recognized that they are fellow passengers on a single vessel, driven by undercurrents that are now beyond their control …
Undercurrent #1
The greatest consumer
squeeze in half a century!
Consider the plight of most American families right now:
* They have already spent their tax-cut money …
* They can’t borrow any more on their homes …
* Their prospects for new jobs are grim; and for higher paying jobs, even grimmer …
* They’re dishing out up to $50 per week just to fill up a single tank of gas; and …
* They’re swimming in debt.
So they’re beginning to cut back, throttling down the single largest engine driving the economic recovery.
Important: This consumer squeeze didn’t begin under Bush. Nor is it going to be resolved simply by a change of the guard. The squeeze is the natural consequence of a multi-decade borrowing-and-spending binge that has finally reached a dead end.
Undercurrent #2
The greatest investor
disappointment in decades!
Ever since the stock market hit rock bottom in late 2002, investors have harbored fervent hopes for a full recovery back to the market’s all-time highs or beyond. But now, nearly one year and ten months later, it looks like those hopes are being dashed.
The Dow Jones Industrials dove decisively below 10,000 on Thursday, busted to brand new lows for the year on Friday, and kept on falling right up until the closing bell.
The S&P 500 and the Nasdaq Composite fell even more sharply, and both are now trading at around the same level as they did in early 1998!
In other words, if you had bought the average S&P or Nasdaq stock in the first months of 1998, and you had held on faithfully to your shares for more than six long years, all you’d have to show for your patience right now is a big fat zero.
But you’d be among the lucky ones: Investors who bought the average S&P stock in early 2000 are now down to about 66 cents on the dollar; and those who bought the average Nasdaq stocks are down to a meager 33 cents on the dollar, despite the long market rise of 2003.
Historians of the future will debate endlessly whether the first half of the decade brought us two bear markets separated by a one-year bull … or one single bear market interrupted by a one-year rally.
But that’s of little significance right now. In this political season, the key point to recognize is that the market’s malaise did not originate in the current administration. Nor will it be easily overcome by the next. It is the natural outcome of speculative excesses that have been piling up for many years and have yet to be unraveled.
Undercurrent #3
No more trump cards!
The last time the market and the economy were beginning to sink like this, President Bush still had two trump cards — tax cuts and rate cuts. He played them both. And he rescued the economy from the jaws of disaster.
But now the recovery cycle is ending, and there’s little or nothing the government can do about it:
* No matter how weak the economy may be the Fed is committed to raising short-term interest rates — not lowering them. Tomorrow, they’re going to hike the Fed Funds rate to 1.5% … and by early next year, they’ll probably jack it up to 2% or more.
* No matter which party controls Congress, the bulging federal budget deficit makes more tax cuts politically impossible.
* And regardless of who wins the White House, there are no more trump cards.
If Bush wins, he will likely pursue a similar economic agenda, with little or nothing that is substantially new enough to encourage investors. And if Kerry wins, he will likely restore some portion of the dividend taxes or capital gains taxes, spooking stock investors even more.
Undercurrent #4
Inflation
Just because the economy is weakening doesn’t necessarily mean inflation is receding. Quite to the contrary, the single most powerful driver of price inflation — oil and energy — is still surging.
And if you think the political spin on other economic numbers is bad, wait till you see the spin on inflation.
* Economists pooh-pooh energy price hikes simply by relegating it to a category of items which are not part of the “core” inflation.
* Both political candidates are virtually silent on the subject.
* And even Federal Reserve Chairman Greenspan has been busily trying to convince the world that inflation is not a concern.
The reality: Consumer price inflation this year is still running at an annual rate of between 4 and 5 percent, or up to FOUR times higher than the current level of short-term interest rates. This has multiple implications …
First, it means that inflation is bound to continue. That’s almost invariably what happens when interest rates are far lower than inflation.
Second, interest rates are bound to rise further despite the weakening economy. Indeed, it’s not until interest rates catch up with inflation — and even exceed it — that you’re likely to see inflation tamed and interest rates recede significantly.
Third, the dollar is bound to resume its decline. Foreign investors are already looking for the nearest exit door.
Fourth, investments that are driven higher by inflation — gold, energy and natural resources — should continue to rise.
But no matter what the final outcome, clearly, the battle against price instability — either deflation or inflation — did not begin under Bush. Nor will it end in the next four years. It is the culmination of decades of money and credit excesses that are just now coming to a head.
What To Do
If you fell for the Wall Street hype last time around, you can’t blame yourself.
You didn’t know about the earnings lies, distorted ratings, and stock manipulations.
You couldn’t predict the demise of the dot-bombs, the Enrons, and the WorldComs.
So you had no way of anticipating the sheer depth and duration of the decline.
But if you fall into a similar trap again today, you’ll have no one else to point fingers at. Not the president. Not Congress. Not even Wall Street brokers.
My recommendations:
First, forget about the buy-and-hold approach. It hasn’t worked for over six years. And for the past four years, it has been an outright disaster.
Second, if you are completely risk adverse, don’t snub the get-out-and-stay-out approach to the stock market. Many people will still try to convince you that you “always” must have some of your money in common stocks. Baloney! If your single goal is capital preservation, it’s perfectly valid to find a safe haven and sit it out.
Third, if you feel you need to keep a certain allocation in the market, at least be sure to stick with stocks that have a Weiss rating of “B” or better. (In Wall Street’s parlance, a Weiss B or A rating means “buy,” a C rating means “hold,” and a D or E rating means “sell.”)
There are several ways that you can get my Weiss Ratings for free:
* You can look up our stock ratings at many public libraries.
* Or if you have your brokerage account with one of the major Wall Street firms that uses the Weiss ratings, they will give you free access to the Weiss reports on the stocks that Weiss Ratings has been assigned to cover for them.
Whether Weiss cover their stocks or not, the good news is this: Starting right now and for the next five years, you’re entitled to get a third-party, independent opinion on every stock your broker recommends.
We’re proud that we’re one of the independent research providers that some of the large Wall Street brokerage firms have chosen. But whether the stock research they give you comes from us or from another independent firm, do take advantage of it.
The following are the major firms currently providing free, high-quality stock research to their millions of customers.
Bear Stearns
Credit Suisse First Boston
Fidelity Brokers
Goldman Sachs
J.P. Morgan Securities
Lehman Brothers
Merrill Lynch
Morgan Stanley
Piper Jaffray
Salomon Smith Barney Inc.
UBS Warburg
How exactly does it work? For more information, see my recent article at http://www.weissratings.com/revolution.asp
Fourth, the time is NOW to take a closer look at other asset classes — silver- and gold-related investments and Treasury bills, or money market funds that buy exclusively Treasury bills.
Another alternative: Rotating wisely among various mutual funds, including contrarian funds — those that are designed to make money when the stock market goes down.
Fifth and most important: Stay safe. There are going to be some rocky times ahead. Be sure not to underestimate their severity.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
