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Are You Prepared?  Because ,We Ain't $een Nothin' Yet!

Robert B. Gordon, Sc. D.

Ominous storm clouds have been gathering for some time. There have been a few gusts of wind and a few drops of rain have fallen. An enormous storm is about to strike an unsuspecting world. Only a tiny fraction of people in this nation and the rest of the developed world are prepared physically and financially for what is about to strike their lives.

Our great nation, along with others, have warning systems in place to provide the populace with early warnings for many natural disasters such as hurricanes, earthquakes and tornados. A very great tragedy, a true disaster, is about to hit the entire globe, but there were no warnings to prepare for it in advance. And, even more tragic, a widespread general alarm has not yet happened a full 3 years after the first signs of grave trouble appeared.

The true understanding of what is now happening and what is to come is held by a tiny fraction of our population. From the top down, neither President Bush, his advisors nor members of our Congress, with the possible exception of Representative Ron Paul of Texas, have a correct and full knowledge of the economic devastation about to strike. There are no signs of recognition of our "once in a century" storm by our corporate leaders in Wall Street or around the nation. The ivory towers of academia have not recognized the scope and magnitude of what they now perceive as a "modest recession." Prof. Jeremy Siegel of the Wharton School of Finance, a renowned author and student of the stock market, has recently declared on CNBC that the bear market is over - a brilliant case of the blind leading the blind!

The highly paid executives and the thousands of employees of the large corporations that have declared bankruptcy recently must surely recognize that something quite unusual is occurring. The heads of other companies struggling to keep their business alive and the millions of investors who have lost trillions of dollars from their retirement plans know that there are serious problems with our economy. But no one, from the President and Alan Greenspan on down to our nation’s daily newspapers, are telling the scary truth about the crisis situation threatening America and the rest of the world.

The crux of the great tragedy now unfolding is that the basic knowledge underlying cycles in the stock market and economy were discovered in the 1930s by Ralph Elliott and published in his monumental book the "Elliott Wave Principle." Seventy years later, there has been no serious recognition and acceptance of his revolutionary discoveries. Today, only a tiny group of mostly do-it-yourself investors and traders are using and profiting from Elliott's teachings. For a better understanding of Elliott’s great work, read my essays titled "Elliott Waves for the Masses" and "Brilliant Minds." For a full account of the serious problems in Wall Street, read my essay "Wall Street’s Greatest Crime."

THE WASHINGTON CIRCUS

Anyone with a modicum of knowledge about our country’s true state of economic affairs would not know whether to laugh or cry at the semi-annual Congressional committee hearings with Alan Greenspan. They provide a tragic view of the lack of any serious understanding of our current problems. Congressmen read questions written by their staffs in a futile attempt to display their knowledge of the economy, but never add anything of value. Although completely oblivious of the tragedy unfolding in America, they seem to relish their few minutes before the camera. They are completely unaware of the approaching storm.

Some of my readers have the opinion that the "powers that be" in Washington do know the truth about our unfolding tragedy, but do not want to scare the public into a panic. If any of our leaders really understood the truth, why would they be pushing measures that add "fuel to the fire?"  Why did our economic gurus pursue policies that promoted credit and housing bubbles to rival and expand that in the stock market? It is either gross incompetence or ignorance or both!

AT THE CREST OF THE TIDAL WAVE

Following Ralph Elliott’s pioneering work in the 1930s, his loyal band of followers proceeded to trace the history of stock market waves back to the early 1700s in the London stock market. This was a monumental achievement and enabled Robert Prechter in 1995 to write his brilliant "At the Crest of the Tidal Wave" book and predict the great crash of the Grand SuperCycle Wave III, which finally came to pass in 2000. His detractors make a big thing about his being several years early from the recognized price peak in early 2000. However, we now have a clear picture showing that, due to the immense size of the mania, the entire topping process required a full five years from 1997 to 2002 to complete the peaks for different market indicators and indices. So today, a tiny group of Elliotticians truly understands the enormity of the market correction now underway. To their disgrace, our thousands of university professors in this country and around the world are still in complete ignorance of Elliott’s work. So far, only two Ph.D. level professors, Hernan Cortes Douglas and John Casti, have written papers on Elliott.  Please see the references in my previous essays to their fine works.

BLIND THOUGHTLESS OPTIMISM IS VERY DANGEROUS

Although our news media are very remiss in educating the public on the great economic tragedy now unfolding, they do unwittingly disclose some frightening facts. See my recent critical essay titled "The Unholy Alliance Continues."  Today’s Arizona Republic newspaper had a front page story with the bold heading "Bankrupt Firms Drain Pension Insurance." It discloses that the 8 billion dollar surplus in the Pension Benefit Guaranty fund has been wiped out with the current corporate bankruptcies, which are just a small start in what will become a major national tragedy. So retirees, now suffering from extremely low interest rates on their savings, face a more serious reduction in their incomes.

Our nation as a whole is living from one day to the next under the tragic presumption that we are recovering from a mild recession. Although federal, state, and local tax revenues have declined sharply; this is assumed to be a temporary problem that can be solved by borrowing funds to make up for the deficit. Our newly elected Arizona governor is publicly bragging about her plan to borrow rather than to slash expenses. She will live to rue that decision.

From our vantage point, we see individual investors, corporations and local and state governments making very bad decisions due to their total misunderstanding of the problems our nation currently faces. Only the Federal government can print money in a deficit situation. With revenues shrinking and soon to get worse, more borrowing at the state and local level will bring huge problems. Interest payments on tax-free bonds will be in great jeopardy, causing further pain for investors counting on that income stream. Many large corporations and governments are nearing the limits of their borrowing power. Consumers are up to their eyeballs in debt.  We expect personal and corporate bankruptcies to increase and would not be surprised to see some very dire fiscal emergencies for our states and cities, all traceable directly to an optimistic view of the economy.

Our leaders have made a huge mistake in not letting the stock market bubble go through a normal correction process that history teaches is essential. By encouraging consumers to go on a huge debt binge, including such excesses as zero-down-payment house purchases, they have fostered huge new bubbles in debt and housing  that greatly extend and magnify all the problems of the stock bubble.

WILL THERE BE BLOOD IN THE STREETS?

I experienced the ten years of the Great Depression in my teens and early 20’s. I have vivid memories of that period. Our nation survived because it had many strengths in its favor. It had 20% of the population living on farms and capable of growing their own food vs. 2% today. It was a creditor nation with other nations owing us money, instead of our huge $40 billion deficit of the past month. There was no Social Security, but private and public charities prevented people from starving. There were long bread and soup lines, but no riots that I can recall.  There were people selling apples on the street in order to survive. I cannot conceive of such a peaceful resolution recurring during the coming depression, which I expect to be long and severe.

There will surely be many marches and demonstrations when the public finally learns the truth about the economy and the colossal failures of the government establishment to take appropriate measures, years previously, that might have somewhat mitigated the conditions. I imagine there will be public burnings in effigy of Alan Greenspan and a few other key figures.

The Great Depression ended only as a direct result of the tremendous surge in economic activity caused by World War II. Our entire nation, its people and governments at all levels, are so badly in debt at this time that it is hard to imagine any beneficial effects on the economy coming from another war. We have 31 trillion dollars of government, corporate and consumer debt which is over three times our annual gross national product and which experts claim can never be wiped out except through a ruinous level of inflation.

BITE THE BULLET

This phrase reportedly stems from its Civil War usage where soldiers were given a bullet to bite while undergoing surgery without anesthesia. I am using it now as a wake up call to all  readers to throw away their rose-colored glasses and face the truth. We are about to slide into a vicious new down leg in the bear market. It will give a final wake up call to all investors who are not in a deep self-imposed inability to act - the deer in the headlight syndrome.

From this point in the bear market and for the foreseeable future, essentially all equity stocks and bonds of low grade or long maturity should be avoided like a plague. If owned, they should be sold now. As we have presented in numerous essays, the only asset classes that are expected to do well for the bear market duration are short-term notes or bonds of highest grade, guaranteed by the U.S. and Foreign Governments, precious metals and short funds. Tax-free bonds of all types, insured or not, should be carefully reviewed for possible sale in the weakening financial condition of states and cities which is expected to get much worse.

Some experts predict we will enter a deflationary environment similar to Japan’s in which prices of many essential and luxury items will fall in price. I remember my family surviving reasonably well in the Great Depression with my Dad’s salary cut in half, but with the cost of living down by a third. It was a hard time, but we made it through. Somehow, I’ll never know, my family paid my $300 yearly tuition through college. And although I drove my late 1927 Model T Ford to college every day, I cannot ever remember buying gasoline for the tank under the driver’s seat. The gas mileage of that car must have been infinite!

FINAL WORDS

Read as many of my 70 essays for information on the recommended bear market asset classes as possible.  My complete archive is available at www.freebuck.com. Click on Commentary and then on my name to reach the archive. My essays cover precious metal stocks and funds, foreign government bond funds, and short funds of the fully managed and reverse index types. They include many examples on how these asset classes can be used in combination for portfolios ranging from very conservative to more aggressive.

We had a very good reader response to our essay on "Questions to Ask your Financial Advisor."  We will continue to provide the information on how to contact the 3 advisors. We are happy to do this, since we are unable to provide specific advice to our readers. We welcome your general questions and comments.

© 2003 Robert B. Gordon, Sc. D.
Robert B. Gordon, Sc. D.
Sun City West, Arizona
January 26, 2003
rgordon145@aol.com

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