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Today's comment is by Jack Crooks, editor of World Currency Options and The Money Trader.
Dear A-Letter Reader,
Sometimes the most interesting remarks don't come from the pundits or the floating talking heads on CNBC. Instead, the really intriguing insights come from normal investors like you and me, who aren't afraid to tell it like it is.
I had such a reader write me recently. He wrote: "Ben Bernanke is like the death star. Destroyer of worlds."
In case you're wondering, the comment refers to the movie, Star Wars. In the film, the evil empire builds a moon-sized space station that can (and does) obliterate an entire planet with a single shot.
Of course, Bernanke's official job doesn't involve destroying planets, but some might argue that his official mandate has been destroying the U.S. economy lately.
In fact, last week Bernanke had to answer for his actions during two days of Congressional testimony.
Accompanied by Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox, Big Ben paid lip service to the panel of Congressmen bombarding him with questions. Bernanke gave the normal reassurances about the state of the economy and inflation. He also asked for additional Fed regulatory responsibilities. That made for a heated discussion.
The best quote came from Senator Jim Bunning. When it was his turn to address the Fed Chairman, he noted, "The Fed is the systemic risk."
Both my Star-Wars-loving reader and that Congressional testimony basically say the same thing: People are sick and tired of the Fed's decision to fight fire with a lot of hot air.
Almost any economist will tell you that every boom period is followed by a bust period. And typically, the larger the boom, the larger the bust.
But it seems like lately the Federal Reserve is disregarding the historical boom-bust cycle. Instead, Bernanke and his team are doing everything in (and beyond) their power to keep the good times rolling.
Sounds nice, but there comes a point when the economic system needs to cleanse itself. Hence the subsequent bust to every boom.
By making every effort to sustain the boom when it's already naturally run its course only delays the inevitable. The impending bust will be that much more painful, if you keep putting it off.
Many analysts, including myself, are beginning to believe the Fed needs to stop fighting the fire with bailouts and cheap money. Instead, they need to tighten up and let the market process work things out from here.
Right now, the Fed is no doubt in bailout mode. The Bear Stearns bailout is still fresh in investors' minds. (No doubt that bailout will go down in market infamy for quite some time.) Now we have the Fannie/Freddie fiasco. And who knows how many other firms the Fed has saved - so far - by opening up the vault doors to nearly everyone?
Read
This for Your Fannie Mae and Freddie Mac Survival Plan
By Tom Dyson
Fannie Mae and Freddie Mac are about to go bankrupt...
Leverage is the problem with these government-backed institutions. They bought $1.7 trillion in assets using only $70 billion of investors' money. So these assets only have to decline by $70 billion – 4.1% – to wipe out shareholders. Actually, if you include their mortgage guarantees, Freddie and Fannie are liable for $4.8 trillion worth of mortgages. So to wipe investors out, mortgage values only have to decline by 1.4%. And that's exactly what's happening right now...
Fannie and Freddie own mortgage assets. The value of these assets is a function of home prices and the solvency of homeowners. The S&P/Case-Shiller National Home Price Index is now down 14.1% year over year. Foreclosures are up 53% from June 2007.
No one knows exactly how much mortgage values have fallen. Every mortgage is different, and there's no benchmark. But one thing's for sure: They've fallen more than 4.1%. In other words, Fannie Mae and Freddie Mac are technically bankrupt.
Fannie and Freddie, directly or indirectly, own half the mortgages in America. Their bankruptcy will be one of the most important events in the history of American capitalism. Here's how I suggest you prepare yourself...
High dividend stocks are by nature defensive stocks. The dividend acts like an anchor and prevents the stock price from falling too far.
But the stocks in the portfolio of my newsletter – The 12% Letter – do more than pay big dividends. These stocks are the safest collection of high dividend payers you will find in this market. The key to this safety? They own valuable real assets and sell things for the lowest possible price.We've made investments in energy. Over the last two years, we made 15 investments in pipelines, natural gas, oil, oil services, electricity, coal, wind farms, and energy finance. We're showing a profit on 15 out of 15 of these stocks.
We also own fast food, convenience stores, and warehouse retailers. These are our "price leader" stocks like Wal-Mart and McDonalds. These stocks do well when consumers choose price over quality. They are excellent defensive stocks to own in the current crisis.
And we own timber, hydroelectric dams, and rural telecom assets. These stocks – when mixed together – will generate the safest 9% dividend we can find anywhere in the market. (The average dividend yield of the stocks in my portfolio is 9%.)
The government will bail out Fannie and Freddie and assume their debts. This is inflation. It will meet Fannie and Freddie's trillion-dollar debts by issuing more debt of its own. U.S. government debt will lose its value, and the dollar will keep falling.
The high-yield companies in my portfolio are the perfect stocks to protect your money from the U.S. government's inflation. These companies own productive assets. Factories are assets. So are trees. So are rural telephone networks.
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Denominated in U.S. dollars, the value of these real assets will rise. So your money is safe... much safer than if you left it in the bank or a money-market account.
But the real bonus comes when foreigners lose confidence in U.S. debt. The only way they'll be able to get any value for their dollars will be if they buy cheap American assets... like farmland, timberland, real estate... and American stocks loaded with real assets. There will be a panic into U.S. real asset and manufacturing stocks at some point in the next 12-18 months.
In sum, there's more pain to come in financial stocks. But if you buy stocks with big dividends and lots of cheap American assets, your money will be safe and you may even make a profit.
Good investing,
Tom
P.S. I recommended an interesting company in the most recent issue of The 12% Letter. This company yields 14%. It's been in business for 84 years, dominates every market it trades in, carries some of the world's strongest brand names... and it's only cut its dividend once since it went public in 1956. Click here for more on how these kinds of stocks can pay for your retirement.
Dear Subscriber,
The rally you saw last week was little more than a normal, bear-market bounce — predicated on the myth of government omnipotence ... spurred by the blind faith in fiat money ... and triggered by the official attacks on short-sellers.
For investors who jump into financial and other vulnerable stocks now, it's a trap door. But for those who feel like they're still stuck in all the stocks we've been telling you to get rid of, it's an escape hatch. Use it as your selling opportunity. And don't look back.
We spelled out the reasons in our Special Midyear Update. And behind me on my monitor is just one of them.
I hope you were able to attend. But whether you did or not, this gala, double-length edition of Money and Markets is the edited transcript, which I've taken the liberty to update with the latest inflation numbers ...
Special
Midyear Update
The Great American Nightmare:
What Washington Won't Tell You About
This Unfolding Financial Debacle
(Edited Transcript)
Martin Weiss: This is the first stage of the dangerous bear market we've been warning you about. And just as we've warned, the market is being driven down by the single most important sector: Financial companies, the heartbeat of our economy.
Nearly every major bank, brokerage and lender you can name is up to its eyeballs in leveraged investments whose value is going up in smoke. They're borrowing hundreds of billions from the Fed. They're raising billions more from investors, diluting their shares. They're selling massive amounts of assets — scrambling any way they can to raise cash to survive.
Merrill Lynch, America's largest brokerage firm, has lost more than two thirds of its stock value. Citigroup, once America's largest bank by market cap, has lost even more. Washington Mutual has given up nine tenths of its value. On average, even including the strongest of the banks, half of the wealth of bank shareholders has been wiped out.
This is the first stage of the deep recession we've been warning you about.Banks have no choice but to deny loans to all but the most highly qualified borrowers; and as a result, corporations and consumers have no choice but to cut back on their spending.
Consumer confidence is the worst since 1980. Mortgage default rates are the worst since the 1970s. Even the government's highly suspect official numbers show that the growth of the U.S. economy is grinding to a halt.
This is also bringing the runaway inflation we've been warning you about, with oil and energy leading the way. This time, unlike the 1970s when we had artificial energy shortages created by OPEC or by Iran, the planet is confronting chronic, long-term energy shortages.
But at each step of the way, what truly angers me is that our government leaders — the very people we elect to protect our interests — continually minimize, downplay and sugarcoat this crisis.
First, they told us it would be limited to the subprime mortgage market. Then, they told us it would be limited to housing. And of course, every time the Fed pumped in more money for a new bailout, they swore on a stack of Bibles that it would not re-ignite inflation.
The gap between what you see and what they say has never been greater. Today, we're going to show you how they're cooking the nation's books, distorting key economic data, and perpetuating the deception that things aren't nearly as bad as they really are. And we're going to show you why this great deception is, in itself, one of the greatest dangers of all.
As grim as the situation is, though, never forget: As a nation, we will get through this. We faced reality in the Great Depression and we created a stronger country as a result. We faced reality during World War II and we helped create a better world in its aftermath. And that's what we need to do again — face reality.
But right now, unfortunately, we live in two worlds. We live in a real world that average citizens experience each day — sinking home values, surging gas and food prices, the disappearance of easy credit. Plus, we live in a fantasy world that Washington bureaucrats have created — an American economy that they say is "still growing," inflation that they say is still "still moderate," a credit crisis that they repeatedly say has been "overcome."
How big is the gap between fiction and reality? Is it getting bigger? What are the real consequences for investors?
To help us answer those questions, John Williams, the founder of Shadow Government Statistics, was scheduled to join us. But John had a personal conflict and couldn't make it today. So he will join us on another occasion.
Separately, our own Larry Edelson has been issuing similar warnings about the government's rigged numbers for many years. And he knows John Williams' work very well. So we've invited Larry to provide his own analysis, based on Mr. Williams' data and writing. Thank you for joining, Larry.
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Larry Edelson: Thank you! Since the 1980s, Washington has changed and manipulated the way it measures almost every major economic stat — inflation, GDP, unemployment, even money supply — to fit its own political agenda.
John Williams (www.shadowstats.com) is a real number cruncher, and he has exposed this deception by continuing to measure those key numbersthe same way the government used to, using the same metrics the government used to swear by!
Martin: Can you give us some specific examples?
Larry: Sure. First, GDP growth. The government's figures show we had a mild and brief recession in 2002, and then a recovery in the years since. That's the black area on this chart.
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Now, here's the reality in red, based on Shadow Government Statistics: We had a much deeper recession in 2002, an attempt to recover, and more recently, a second recession starting in late 2006 or early 2007. In other words, the big picture for this entire decade is a double-dip recession. Meanwhile, the government claims we're not in a recession. It's ridiculous.
The unemployment situation is also much worse than the government admits: The government publishes a whole series of unemployment numbers — U1, U2, all the way up to U6. But the most widely used unemployment rate — the one the public hears about every month — is U3. Here's the line representing U3. It's now at 5.5%.
Plus, the government also publishes the unemployment rate called U6, which is the government's broadest measure. That's now at 9.7%.
Martin: Most people aren't aware that the government itself admits we have 9.7% unemployment in the U.S. But on top of that, you're saying it's even worse?
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Larry: Yes, during the Clinton Administration, the government decided to stop counting long-term discouraged workers — people who had given up looking for a job for more than a year.
Result: The number of discouraged workers in their stats dropped from the 5 million range to less than 500,000.
Martin: So 4.5 million discouraged workers magically disappeared from the government's unemployment count?
Larry: Into thin air! Like they didn't exist! So you have to add those discouraged workers back into the ranks of the unemployed, just like they did before the Clinton years.
Martin: So what's the broadest measure of unemployment today, based on the way the government used to calculate it?
Larry: It's this red area — 13.7% unemployment. That's much closer to the true unemployment rate in the U.S.
Martin: That's hard for most people to believe.
Larry: Is it really? I think it's very consistent with the fact that so many Americans are suffering an income crunch. And it also jibes with the fact that so many Americans have had to borrow so heavily to make ends meet.
Martin: That makes sense. If people are wondering, "Why was the Fed so frightened in the early part of this decade? Why did they pump up the housing bubble? Why did Americans take out so many home equity loans?" — then this picture you're painting of the true GDP and the true unemployment helps us answer those questions.
Larry: Yes, it does. And now, here we are, with America's banks facing the consequences. And here we are, with a Fed that's going nuts trying to rescue those banks. In fact, the Fed's own data is good evidence of this.
Martin: Please show us that evidence.
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Larry: It's called nonborrowed bank reserves. This is a measure of precisely how much the Fed has been bailing out the banks with its special lending operations. About a year ago, the banks had about $40 billion in net nonborrowed reserves. That's total bank reserves less borrowed reserves.
But look at this: Now their net borrowed reserves are $130 billion below zero. That's a $170 billion swing into the negative — and it reflects the amount the Fed has been lending them with all of its new special lending facilities that everyone's been hearing about.
Martin: With this kind of money pumping, the money supply must be growing by leaps and bounds.
Larry: Martin, remember when the Federal Reserve stopped publishing one of the broadest measures of money supply, and I wrote that they must be doing it to hide something?
Martin: You were talking about the M3 money supply.
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Larry: Yes, M3. Fortunately, John Williams continues to estimate M3; and sure enough, in May, the annual M3 growth was galloping along at the pace of 16%. In March, it was even higher — over 17%. Heck, the last time we saw these kinds of numbers was in the 1970s — before inflation soared far into double digits!
The key is how the official Consumer Price Index — the CPI — is also being used to brainwash the public, unfortunately.
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Here's the CPI: 5% inflation. I guess if you don't eat, don't drive or don't buy anything, or if you're in high office and all that is taken care of for you, then maybe you're experiencing low inflation. But for nearly all other Americans, the government's CPI figures are horribly understated.
Martin: Explain how that's done.
Larry: Starting in the 1980s, the government made two major, fundamental changes to the way they calculate the CPI.
First, they began making adjustments for the quality of the products. For example, if a textbook has color pictures in it, they say it has a higher value and, therefore, they recognize only a portion of the price increase.
Martin: But as a practical matter, if a college professor requires a certain textbook, the student still has to buy it and pay whatever it costs, right?
Larry: Of course! The second major thing they did was to plot some key items on a log scale. The net result is that they reduce the weight of items that go up in price, but increase the weight of items that go down in price. It's absurd, but they did it for a reason: To hold down the inflation adjustment for Social Security payments. Their real agenda was to underpay retirees by covering up the true inflation.
Martin: Let's assume the government never changed the CPI. And let's calculate the CPI the way they did before these changes were made.
Larry: Then you'd get the red area in this chart: According to Shadow Government Statistics, consumer price inflation in America is now galloping along at the rate of 12.6% per year.
Martin: 12.6% consumer price inflation in the United States today!
Larry: Yes. And I think that jibes with most people's experience. That's why foreign investors are getting fed up with our dollar. That's how the world is buried in a tsunami of counterfeit dollars — and every one of them is falling in value, gutting the buying power of your dollars at the rate of 12.6% per year! At that rate with compounding, your cost of living doubles in less than six years!
Martin: Which is maddening for people on fixed incomes.
Larry: Absolutely maddening. You have millions of people who scrimped, saved and invested to build a nest egg — to ensure a dream retirement. Now, many could wind up barely surviving, financially dependent on their families. Plus, you have millions of people who are losing their #1 source of retirement savings — the equity in their homes. Worst of all, you have millions of people who trust the government's numbers and are sleepwalking towards disaster. That's what we're so worried about.
Martin: In your opinion, what's the worst-case scenario?
Larry: The worst-case scenario is a hyperinflationary depression. But whether it goes that far or not, I think we're going to see one of the greatest inflationary spirals in decades. That sums up my views. But now I think our subscribers would like to get your analysis.
Martin: To me, Williams' story is not just about revealing the government's distorted data or about past events. It's also a real and present danger now. History proves that the truth can never be hidden forever. The truth always comes out. People suddenly see — in a flash of lightning — that the emperor has no clothes. That's when you get panic in the financial markets, when people dump their stocks and bonds. And right now, after years of bliss, I think that rude awakening could be very close.
Larry: What makes you say that?
Martin: Because of a few things we're watching very closely.
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First, the consumer confidence numbers. Remember: These numbers are not subject to Washington's distortions. And right now, according to the Conference Board, consumer confidence has plunged all the way from 105.3 to 50.4, its lowest level in 16 years. Plus, their index that measures future expectations has nosedived to 41, the lowest level in four decades. That plunge in consumer confidence tells me the public is coming closer to a rude awakening.
Second, we have the polls in the presidential election campaign. Those polls imply a massive distrust and disbelief in Washington about the economy — another confirming signal to me that America is close to a rude awakening.
Third, the folks in Washington can only cook some of their books some of the time. They can't cook all the books all the time. So even the government's numbers are now starting to reveal tough times: You have unemployment surging by a half point, the worst in decades. You have inflation now more than double what it was a year ago. And the official numbers prove that the banking crisis is now much worse than last year, when they were saying "it couldn't possibly get any worse."
Larry: The big question is: How much worse could it get?
Martin: I've been talking to some folks in Washington and on Wall Street. In private, they're telling a very different story from what you hear them saying in public. They're saying one reason bank stocks have gotten clobbered so badly is because the pros now see another meltdown on the horizon, beyond Fannie Mae and Freddie Mac. But next time, because of inflation fears, they're worried the Fed will not come to the rescue in the same way as it has done so far. And it could be ugly.
Larry: I disagree. I think the Fed will do whatever it takes. And that translates into even more money pumping and even more inflation.
Martin: Either way, the unspoken concern on Wall Street is that the next shoe to fall could be a Wall Street firm that's far larger. Perhaps a Merrill Lynch or a Citigroup or a Washington Mutual. If that's the case, you'd have a company that's too big to fail ... but that's also too big to save. So the Fed's response is bound to be more complex than what you've seen so far.
Larry: I don't think there's anything complex about it. The bigger the failure, the more money the Fed's going to pour in. It's hard for me to believe it's going to let a Citibank or a Bank of America or a GM fail. I guess anything's possible. But I think the Fed will do everything in its power to keep the system afloat, no matter how much money is required, no matter how much inflation it generates, no matter how low the dollar goes.
Martin: Larry, it's a mute point. Because in either scenario, the U.S. dollar suffers. It suffers when U.S. banks and lenders fail. And it suffers when the Fed pumps in hundreds of billions in unbacked dollars to rescue those banks and lenders.
Ultimately, the dollar reflects everything we've been talking about today. The dollar falls when the U.S. stock and bond markets fall. The dollar falls when the U.S. sinks into a recession. The dollar is slammed by inflation, which obviously erodes its purchasing power.
Plus, today, we've talked about still another danger for the dollar: What happens when international investors suddenly discover that our inflation, our unemployment — our entire economy — are far worse than the U.S. government has been letting on. They're likely to dump the U.S. dollar in a panic.
What never ceases to amaze me is how all of these dangers are coming together at the same time, how they're already here for everyone to see with their own eyes ... and yet most investors are still frozen into inaction.
Our goal is three-fold: First, to help you find safety in an unsafe world. Second, to help you implement defensive strategies. And third, to recognize that, often, the best defense is to go on the offense — finding ways to profit directly from the crisis.
Larry: Years ago, profiting from a crisis was difficult and required a lot of sophistication.
Martin: But today, you just need some awareness and common sense. Because today, there are revolutionary new investments that the average investor can use. To tell us more about them and to help walk us through the steps, I've asked Mike Larson, the Associate Editor of our Safe Money Report, to join us.
Everyone knows Mike from Money and Markets and from his frequent appearances on TV. But let me introduce you to him anyway.
When Mike first warned investors about the housing and mortgage crisis a few years ago, laying out exactly how it would unfold and why, he was not exactly a popular figure on Wall Street. And when he presented his white paper to the Federal Reserve and the FDIC — also on the housing and mortgage crisis — it didn't make them very happy either. They vehemently denied even the remotest possibility of his forecasts coming true.
But now, Mike is in great demand. He's continually getting calls to appear on CNBC and Fox or to be interviewed by the Wall Street Journal and the Washington Post. And thanks in good measure to his research, we now have hundreds of thousands of investors getting our reports.
Mike, you've heard what we said about the huge discrepancy between reality and fantasy. But in the housing market, where you're known as a national expert, I get the impression people are finally beginning to face reality. So I sense that, perhaps in the housing sector at least, the discrepancy between fiction and fantasy is not quite as bad.
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Mike Larson: Not as bad? In reality, it could actually be worse. Just look at Fannie Mae and Freddie Mac, for example.
Martin: You're talking about the collapse in their shares since the beginning of the year, the collapse in confidence on Wall Street, and the government's massive rescue to avert an even further collapse.
Mike: Yes, and I'm talking about the reasons behind that collapse. Look. These are the giants of the mortgage industry — just two companies responsible for about 50% of all the mortgages in America. Until just recently, most people were counting on them to be the great survivors of the housing bust — and the great saviors of the housing market.
Washington and Wall Street said Fannie and Freddie were immune to the subprime problems. Washington and Wall Street said they had plenty of capital. Congress even passed special legislation increasing the size of the mortgages they could finance — to let them pump still more money into the housing market.
But now, Fannie and Freddie are in deep trouble themselves. Despite the government's rescue, investors are worried about their exposure to complex derivatives. Investors are afraid of the losses they might suffer if the mortgage insurers they rely on go belly-up. And investors are downright petrified that they won't be able to raise the billions of dollars of capital they need.
It all just goes to illustrate what you said earlier: When the truth is bottled up for so long — and then suddenly released in a flash — the consequence is panic.
Martin: Right now, with the latest rescue proposals, you can hear some people again saying that "the crisis is behind us."
Mike: That's exactly what they said last year when central banks pumped in money. And that's exactly what they said in March when the Fed rescued Bear Stearns. They were wrong then — and it's pretty obvious that they're wrong again.
Mike: But what about the housing market itself. Do you agree with folks who say that we're facing reality there?
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Mike: In some markets, and with some property types, yes. Banks are slashing the price of foreclosed homes with reckless abandon. Sellers are giving up and just taking whatever price they can get. So there's a bit of recognition — capitulation — and some buying activity. But most of that "bottom-fishing" is predicated on the idea that mortgage giants like Fannie and Freddie would still play a major role in the housing market bailout. Now the whole idea of a rescue by Fannie and Freddie is down the tubes.
Bottom line: Home prices are plunging. But they still have a long way to go.
Martin: So what could ultimately put the housing bust behind us?
Mike: The only thing that could fix it is a wash-out.
Martin: Please describe what that would entail.
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Mike: First, mass foreclosures in 2009. Connect the dots: The Treasury Secretary predicted 2.5 million foreclosures for this year. On the same day, the Fed Secretary said the problems will persist deep into next year. So if you put those two statements together and throw in a deep recession, you've got the likelihood of massive foreclosures again next year.
Second, much lower real estate prices! You can't have that many properties being dumped onto auction block and expect prices to "stabilize" as many people are still hoping.
Third, big cutbacks in building activity! Hard to believe, but builders still don't get it. They've cut back, but not nearly enough.
Fourth, lots and lots of time. All this could take years to digest, and most people are still greatly underestimating the magnitude of the problem.
Martin: What are they going to do about Fannie Mae and Freddie Mac?
Mike: Ultimately, they may have to nationalize those companies — take them over entirely. That means the shareholders get wiped out. But it also means taxpayers get shafted. And if you think the Fed money pumping so far is a lot, wait till you see the money pumping that will be needed when Fannie or Freddie collapse and the mortgage market crumbles!
Martin: What new evidence do we have that the mortgage market is crumbling?
Mike: I'll give you a major example: IndyMac — one of the biggest mortgage lenders in the nation — has just failed, as everyone knows. Plus, even before it failed, it shut down nearly all of its mortgage operations.
Martin: Was IndyMac really that big of a player?
Mike: That big? Are you kidding me? Remember when the subprime lender New Century Financial went under in early 2007?
Martin: Yes, of course. We wrote about that in our Safe Money Report well before it happened.
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Mike: My point is that in its last full year of operations, New Century made about $60 billion in mortgage loans. Then later last year, another big lender, American Home Mortgage, failed. In its last full year, it wrote about $59 billion in mortgages.
Martin: And IndyMac?
Mike: IndyMac is the biggest of the three. It originated $77 billion worth of mortgages last year. Now, the FDIC has taken over. But they've got their hands full handling depositors. They're not going to lift a finger to revive the mortgage business.
Martin: That's just one company.
Mike: No. IndyMac is far from alone. Almost every day, another regional bank, another mortgage insurer or another broker takes a bath.
For example, Marshall & Ilsley is a midsized bank based in Wisconsin. It said it will have to set aside $900 million in the second quarter to cover losses on housing and construction loans. That was 35 times its loan loss provision of a year earlier. Result: The stock has plunged more than half this year alone!
Then there's Triad Guaranty. It is — or should I say, was — a major mortgage insurer, a company that pays lenders off when borrowers can't make good on their loans. Well, Triad has been losing money hand over fist — including $150 million in the first quarter alone — because losses are off the charts. And now, the company has been forced to stop writing new policies. Its shares traded hands for $58 last January. They go for about 72 cents now.
Or how about Merrill Lynch? Merrill lost $2.2 billion in the third quarter of last year ... $9.8 billion in the fourth quarter ... $1.9 billion in the first quarter of this year ... and another $4.65 billion in the second quarter, far more than expected.
They've already been begging to borrow billions of dollars from sovereign wealth funds and other investors. But even that wasn't enough. The company is now reportedly looking to dump more assets in a fire sale. They're desperately looking for capital, and as I said — as both Bernanke and Paulson admitted — this thing is far from over.
Martin: Mike, I know you're just warming up. But let's use the remaining time to talk about steps investors should be taking right now.
Mike: Sure. But let me say this: Up until late '07 and early '08, most of the problems were confined to real estate. The rest of the economy was holding up. Now the river is overflowing its banks. The whole economy is losing jobs — more than 430,000 in the first six months of this year alone. The service sector is starting to roll over, following construction and manufacturing over the cliff. My point is that investors need to take major action on several fronts — not just housing.
Martin: And, naturally, the first step is to simply get out of danger.
Mike: Of course. If you haven't done so already based on our earlier warnings, get the heck out of vulnerable stocks and bonds. Get out of bank stocks. Get out of housing stocks. Get out of tech stocks. Get out of industrial stocks. Whether you have a profit or a loss, use bear-market rallies to sell.
Second, build a nice cash hoard — in Treasury bills or equivalent.
Larry: In dollars?
Mike: Partially yes. If you're a resident in the U.S., if you have most of your accounts here in the U.S., you still need dollars. But we don't recommend you put all your cash in dollars. A good portion of it should also be in the world's strongest currencies.
Plus, sometimes the best defense is to go on the offense. And right now, if you have some funds available to go on the offense, you're going to have three major, unprecedented profit opportunities.
Martin: This is critical, Mike. So can you elaborate on those three opportunities?
Mike: The first major opportunity is staring investors right in the face but most don't know what to do about it: The falling dollar and the surging foreign currencies.
The dollar could always enjoy sharp rallies in the foreign exchange market, even prolonged rallies. But ultimately, every single one of the dangers we've talked about today is fundamentally bearish for the dollar long term and fundamentally bullish for the world's strongest currencies.
The government's rigged numbers are bad for the dollar. The recession is bad for the dollar. The inflation is bad for the dollar. The housing bust is bad for the dollar. So that opens up major future opportunities in foreign currencies.
Martin: Years ago, investing in foreign currencies was difficult.
Mike: But not now. You can buy foreign currency CDs from the U.S. bank, Everbank. You can buy foreign currency ETFs listed on the New York Stock Exchange. And looking ahead, some of the best opportunities could be in what we call crisis currencies.
Martin: Like the Swiss franc and the Japanese yen.
Mike: Correct. When there's crisis, investors naturally rush to the Swiss franc and the Japanese yen. You can buy them with CDs or with ETFs. Plus, if you want leverage, you can also buy options on these currencies — just like you'd buy an option on a stock.
Martin: How much could you make? In the Swiss franc, for example?
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Mike: In the past, every time we've had a major crisis hit — the crash of '87, the debt crisis of 1998 and again with this credit crisis — we've seen the Swiss franc surge by 20%, 25%, 30%. So if you own an ETF or a CD, that's what you could see in a relatively short period of time.
And in these currencies, a 5% move is considered big. So those 20%, 25% and 30% moves were four, five, six times bigger than big. With the leverage you can get in currencies, the profit opportunities are enormous.
Martin: Please tell our readers about the second opportunity.
Mike: The second major opportunity is all around us, also visible with the naked eye. But many folks are afraid it's too late to jump on board.
Martin: You're talking about energy and food.
Mike: Yes, natural resources.
Larry: This is my specialty. So let me jump in here. Everything you've talked about today is going to force the government to unleash wave after wave of money pumping to offset the huge risks that the Fed is now well aware of. Meanwhile, like we said earlier, three million new consumers in Asia and around the world are driving up the demand for resources like never before. So the opportunities there are enormous.
Martin: Mike, what kind of profits do you think are possible?
Mike: Suffice it to say, the potential is very large. But it's not just profits. You can also make excellent yields. In our Safe Money Report, for example, we recommend Kinder Morgan Energy Partners LP. This pipeline company has been prospering from rising energy prices, and it recently raised its quarterly payout to 96 cents per unit — an indicated dividend yield of about 6.9%. Plus, there are several others, yielding even more, that we're looking to recommend soon.
The third major opportunity is to target profits from a decline in the stock market, especially in highly vulnerable sectors. The more those sectors fall, the more money you can make directly from the fall.
Larry: Years ago, to accomplish that, you had to use futures, or options, or even sell stocks short, right?
Mike: Yes. But that's no longer the case. Today, you can buy ETFs that are especially designed to go up when the market goes down. They're called inverse ETFs.
If you've still got investments in your portfolio that are vulnerable to this crisis, then we feel you must use these special ETFs for protection. And if you don't have any vulnerable investments, then you can use these same ETFs to go for substantial capital gains.
They're identical to the ETFs you know, except for one aspect: In a crisis like this, especially a prolonged crisis like the Fed has finally admitted to, instead of sitting out of the game — or worse, getting injured — you can make money and build your wealth. And you can do so with remarkable speed.
Martin: Please explain to our readers how it works.
Mike: There are two types of inverse ETFs. There are single-leverage inverse ETFs. And there are double-leverage inverse ETFs.
On the single-leverage ETFs, for every 10% decline in an index, your ETF is designed to go up 10%. And on the double-leverage ETFs, for every 10% decline, your ETF is designed to go up 20%.
And now, there are dozens of double-inverse ETFs available. For example, if construction companies ... or lenders ... or retailers ... or tech companies fall by, say, 30%, and you own the double-inverse ETF on that sector, your ETF should rise 60%!
That can make a huge difference for investors. Instead of losing money, you'd be making money. Instead of spending the next decade or two trying to recoup from stock market losses — which is what most investors could wind up doing — your portfolio can continue to grow. Most people don't realize how much of a difference that can make.
Martin: You have some very startling numbers on that you were showing me earlier. Can you share them with us now?
Mike: Sure. Let's say you're starting with $100,000 right now. And let's say you've got a diversified portfolio aiming to grow at an average rate of 7% per year. But over the next two years, because of the crisis, you get slammed with, say, a cumulative loss of 60%.
Martin: Which is a fair assumption.
Mike: Very fair. In fact, we're already seeing that kind of loss in most financial stocks. And we could easily see that kind of loss in most other stocks as well, even in some bonds.
In that scenario, and even assuming you get your 7% growth per year every year except the next two, you still won't recoup your original $100,000 until about 16 years from today.
Martin: So instead of doing that ...
Mike: Instead of doing that, let's say you sell your stocks, and for the next two years, you put 90% of your money away in cash, yielding just 4%. And let's say you pull off the other 10% of your money to buy double-inverse ETFs. Then, starting with your third year, you go back to your regular investment program and you get the same 7% per year growth as in the previous example.
Martin: OK. That's a fair assumption.
Mike: In that case, 16 years from now, instead of about $100,000 in your account, you'd have over $290,000 in your account.
Martin: $290,000 instead of $100,000, and that's just using 10% of your money for the inverse ETFs.
Mike: Exactly.
Larry: And if you used the entire $100,000 for the inverse ETFs?
Mike: Not a good idea.
Martin: I wouldn't do that if I were you. Remember, if you're wrong about the market, you can also lose money in these ETFs.
Larry: I didn't say all my money. I said the entire $100,000. I have other funds in other investments like natural resources, which are doing just fine.
Martin: Mike, humor Larry here. How much would you wind up with if you did that just for now, to take advantage of the decline, and then went right back to average growth per year of 7%?
Mike: Larry asked me that question before. So I'm ready with the answer. The answer is over $550,000.
Martin: No matter what, though, we stick to our recommendation of doing all this in moderation. Even if you do nothing but just escape this crisis, you're going to be far better off than the investor who gets caught in this crisis.
In fact, that's the absolute, minimum, bottom-line goal of our Safe Money Report. To help you keep what you've got even in the worst-case scenario — to help you avoid the dangers even if this crisis turns out be deeper, more widespread and longer lasting than anyone in Washington or on Wall Street is willing to admit. We want you to defend yourself against every possible downside risk — not just inflation and recession, but also financial failures, even the failure of your bank or your broker and insurance company.
Larry: Mike, Martin, I've been reading and contributing to your Safe Money Report now for over 15 years. And I want to express a sentiment that I feel very strongly about and that I've heard many, many subscribers express with equal passion.
I'm talking about the peace of mind you provide. In my view, that alone is worth its weight in gold. Even if you never make me a dime, I'm a loyal subscriber for life — because I know you're there to help protect me from losses. And if there ever was a time I need you for that, it's right now. And at the very minimum, I'm going to need you for at least the next two years.
Mike: And needless to say, our Safe Money Report goes far beyond just asset protection. As you said, sometimes the best defense is to go on the offense, to aim for some major profits from this situation — in strong currencies, in natural resources, in inverse ETFs. This is a major, unprecedented crisis. And it offers major, unprecedented profit opportunities.
Editor's note: To help you get a jump-start on the three profit opportunities, we've just written three free reports:
 | Currency
Riches for 2008-2009
| Resource
Riches for 2008-2009
| Inverse ETF
Riches for 2008-2009 | |
These free reports are worth $237. But they're absolutely free with your one-year membership to our Safe Money Report.
Plus, the membership guarantee gives you a full 12-month free trial: After one year, if you are unhappy with the service for whatever reason, you are entitled to a 100%, money-back refund; and all the free reports are yours to keep.
To join ($99 — a $90 savings from the list price), click here.
Or for more information, call 1-888-868-0988 in the U.S. and Canada, 1-561-627-3300 overseas.
Heads up: A major new recommendation is coming shortly. To get it, we recommend you join Safe Money early this week.
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson 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 Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
 |
IT'S
A MORTGAGE MESS, NOT A REAL ESTATE MESS. A DEFENSE OF REAL ESTATE
AGENTS Lenn Harley, Homefinders.com, MD & VA Real Estate |
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How
to enjoy your Western New York Backyard (LOCALISM FEATURED) Western New York Home Sales | Colleen Kulikowski (Hunt Real Estate ERA) |
 |
Well
I never, ever thought it would turn out like this! April Hayden-Munson Realtor, Southeastern Wisconsin (RE/MAX Realty 100) |
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Midori
Miller and Jeannette Neerpat-The Next Evolution Finally Meet! Midori Miller-Daytona Beach Florida Real Estate Trainer (CENTURY 21 Sundance Realty) |
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Don’t
let the South Lake Tahoe Real Estate Market Get Ahead of You (MARKET
REPORT FEATURED) Gary Bolen (CRS) Lake Tahoe Real Estate Information (Dickson Realty - South Lake Tahoe) |
 |
A
walk around London, England... (LOCALISM FEATURED) Poppy Dinsey ~ Zoomf, London, UK (Zoomf) |
 |
Funny
things I heard today that weren't so funny!! Bryant Tutas-Tutas Towne Realty, Inc |
 |
When we wrote many moons ago that the two giants of the mortgage industry — Fannie Mae and Freddie Mac — could be in big danger, officials in Washington and Wall Street said we were crazy.
But today, some of those same individuals, since departed from their official posts, are saying even worse.
According to a Bloomberg News story that just bust into the headlines ...
Former St. Louis Federal Reserve President William Poole just said the two major U.S. mortgage finance companies are "insolvent" and may need a U.S. government bailout!
In other words, he believes they're virtually bankrupt!
No wonder their shares are being torn to smithereens, with Fannie Mae down another 12.4% today alone, on top of the pounding it took yesterday and Monday!
And no wonder Fannie and Freddie bonds are being trashed, with yield spreads going haywire!
Meanwhile, America's real estate volcanoes — the ones that caused this tumult in the first place — continue to erupt:
* U.S. foreclosure filings just surged 53% in June!
* Treasury Secretary Paulson predicted this week that 2.5 million foreclosures this year alone; while Fed Chairman Bernanke predicted the crisis will continue deep into next year. That means next year could bring millions more in foreclosures!
* General Motors and Ford could be among the next major companies to confront widespread talk of financial insolvency. Already, their shares are turning to dust! Already, their bonds are rated "junk."
We don't want you to get caught. We want you to have an unbiased, crystal clear vision of the actual state of the economy — with unambiguous recommendations on what to do next. That's why ...
We're
organizing an absolutely "Must Attend" event
to prepare you for the second half of 2008 ...
To
help you sidestep the clear and present dangers
that could otherwise destroy your wealth ...
And
to help you join the handful of investors
who will thrive as this crisis unfolds!
The
date: This coming Wednesday, July 16, 2008
The time: 12 Noon Eastern Time (5 P.M. GMT)
The place: Online
To attend: Click
here for your free registration.
The topics: We will give you the unhedged, unspun, accurate answers to five, crucial questions
1. How bad is it — really? What do Bush, Bernanke and Paulson know about the true state of the economy and inflation that they only confess to each other behind closed doors?
2. What new shocks are looming just over the horizon? And how will they impact your income, savings, investments and financial security in the months ahead?
3. How much more perilous will things get before the U.S. economy and stock market finally bottom and begin to recover? What's the best case we can hope for? What's the worst-case scenario we should be preparing for now?
4. What steps should you take to protect yourself right now — today? To shield your income? Your investments? Your retirement and your buying power in this treacherous environment?
5. How can you actually grow your wealth even while others are losing theirs? At a time when so many things — stocks, bonds, even your money — are losing their value, what investments offer you the greatest profit potential with the least risk? (After all — somebody's profiting from all this; why not you?)
Get the right answers, and you stand an excellent chance of protecting and growing your wealth throughout the rest of 2008 and beyond. Get these answers wrong, and much of what you've earned, saved and invested could be in jeopardy.
Register
now for our complimentary
mid-year strategy update
and get the answers you need
to protect your wealth and profit!
This event — titled "The Great American Nightmare: What Washington Won't Tell You About This Unfolding Financial Debacle" — is designed to help you weather this economic storm.
For a full hour, we will explore this crisis ... reveal the truth no politician or bureaucrat is telling you now ... and give you urgent recommendations to protect your wealth and profit for the rest of 2008 and beyond.
With the help of data provided by John Williams' Shadow Government Statistics, we destroy Washington's smoke-and-mirrors reports and give you the unbiased answer to why this situation is so much more dangerous than Washington says it is:
| Why this
is already a deep recession — even though Washington says the economy
is still growing.| Why so
many people are out of a job despite the fact that Washington claims
unemployment is still low. | How
Washington claims money supply growth is low despite the hundreds of
billions of new dollars it's creating to bail out banks and brokers. | How
Washington is lying about consumer price inflation, reportedly only 4.2%
a year, even while so many things you buy are going up far more rapidly
every month. | And much
more! | | |
We'll reveal the startling trends these rarely seen data are showing right now ... and we'll show you the new shocks they indicate are now in store for stock and bond investors.
And then, we will show you what to do about all of this:Music Facts and Downloads
| How to
identify stocks that could be time bombs in your stock portfolio ...| How to
protect your portfolio from the inevitable fall-out of an "ultimate
capitulation" on Wall Street ... | The
investments that are least vulnerable now and that are most
likely to skyrocket in the next phase of this great credit crisis ... | And much,
much more! | |
I repeat: This event is absolutely free. Just click this link to register so I can make sure you receive instructions for attending and a reminder the day of the event.
Please let us know you're coming right away. Now, as never before, your financial security depends on getting trustworthy answers. We'll have them for you in this event, along with the specific steps you must take now to insulate your wealth and profit in the months ahead.
Click here to register.
Best wishes,
Martin and Mike
P.S. Be sure to set aside the full hour to attend the entire event. In the last few minutes, we'll show you a great service designed to help protect you from this crisis and open up the opportunity for immediate profits in a bear market.
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About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson 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 Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
 |
Boy, did Federal Reserve Chairman Ben Bernanke blow it this week!
Investors were looking for a strong Fed statement because they believed it would support the dollar and snuff out the recent surge in commodities prices.
But instead of reassuring Wall Street and giving investors an excuse to drive stocks through the roof, Bernanke blinked. Investors expressed their disapproval by responding with a strong statement of their own.
The Dow's 358 point collapse yesterday can be directly traced back to ...
The Fed is TALKING tough about inflation, but making it clear it isn't going to DO anything about it.
Officials talked quite a bit about elevated inflation in their post-meeting statement. They said:
"The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
But they didn't go the extra step of shifting to a "tightening bias." In short, the Fed didn't imply that a rate hike was imminent.