While I do not want to be an alarmist, I am compelled to be a realist. As a person who watched so many people over the past 26 years lost so much of their hard earned money, I must prepare and warn you about things that I see and that the media will not report until it is newsworthy so they can say, “We will be right back after these messages from our sponsors.”
What’s wrong you say? Well, to begin with the problem that caused the stock market crashes of 2008-2009 and 2000-2002 is still not fixed; the toxic assets you and I know as “derivatives” (intangible assets that are tied by a hedge and leveraged to real assets). These assets are still lurking out there even though the government gave the impression that they took them off the banks’ balance sheet. BEWARE: They are making a slow return back into the game as we speak.
Looking back after years of digging and doing some research as to why the market crashed so severely only to bounce back in less than a year, my conclusion and finding is that it was mostly triggered due to the Bernie Madoff Ponzi scheme. If you look back over the history of the stock market crashes, there is usually a triggering event. These days it almost always leads to a hedge fund blowing up somewhere. For example, “Long-Term Capital” (LTC).
Many times we don’t even know about these until after it happens. A lot of people want to point to the housing market bubble. Yes, that was part of the problem but not the main cause. It started with the Madoff Ponzi scheme because his investors got word that they may not have the millions they thought they had and they started a run on the fund. When they could not get any money, they started a run on their funds at other institutions such as other real hedge funds, brokerage houses, and banks.
Speaking of the housing bubble, this is still not resolved because there are millions of Americans who have homes that are still underwater (mortgage on the house is more than the value of the house itself) and they are now coming to terms with the fact that there are no rapid bounce-backs or artificial fixes like the Dow Jones index. Many of these people are now simply walking away from their homes, which go back to the bank balance sheet.
The Dow Jones Index (or as many of you know it “The MARKET”) seems to have bounced back a bit, but please note this is not as it seems. Keep in mind that while there are tens of thousands of publicly traded stocks out there, the DJIA only lists 30 individual stocks. To look good last year, the Dow took out badly performing stocks such as GM, AIG and Citi Group and replaced them with stocks that looked good at the moment. Like a marathon runner who decides that halfway through the race that his leg hurts, so he has friend just finish the race for him.
So with this dreary outlook, is there a safe haven? No. There are safer strategies in how to invest, but by pure definition, there are no foolproof investments. At the moment a lot of people like gold, but is gold the answer? Well, the smart money and countries such as India (which almost never gets hit in these market crisis) quietly already bet on gold. While my friend in the gold business will disagree with me, I think the big money has been made here already, and any further movement on the upside will just be tiny bubbles. Gold also doesn’t pay dividends and it doesn’t split.
The landscape is still riddled with the very mines that have blown up your portfolio in the past. It may not happen in the next 15 minutes, but I guarantee it will happen again, and sooner than you think. My greatest concern is that if it would happen in the next 3-7 years, it will be very painful and there will not be any quick bounce-back where the government will step in and bail out the banks to give you that false sense of security. A bill such as the TARP (Troubled Asset Relief Program) would never make it through congress as it did in 2008. There will be no quick fix the next time.
I do believe you do need some limited government for checks and balances, but what Ronald Reagan said is true, “Government is not the solution to our problem, government is the problem.”
What is worrying Sherwin Brown:
1) Bubble-licious stocks
As I write this there are quite a few stocks such as Priceline, Netflix, Potash and my favorite, Apple (don’t forget their recent blunder: the I-pad) are so inflated that they are ripe for the popping.
2) Dow is back above 12 ,500
I have recently noticed how someone or some intuition is making sure the Dow stays above 10,000, which means someone or some institution is trying to quietly unload some stocks.
3) Insider information
… is still illegally used not just daily, but almost minute-by-minute. Yes, the SEC should be doing something to stop this, but as you all have come to know, the SEC is a government agency that only goes after small fish that they can beat into submission because the American tax dollar is at their fingertips (this is something I have personally experienced). Keep in mind, most of the SEC lawyers do not want to go after big institutions. They can make $50,000 per year attacking the Big Boys or jump ship to do similar work and make over $500,000 per year working for the Big Boys.
4) The Mutual Fund (MF)
MF companies are at it again with their slick commercials; “We put you first,” hyping up their two five-star funds while failing to mention that their other 98 funds have taken such heavy hits, the only stars they can see are the ones circling their heads. And my very favorite line: “This time, it is different.”
This is still the biggest time-bomb and it is ticking. Derivatives are what have caused almost all stock markets to crash. The government knows about them, but congress is so heavily lobbied and funded by the people who benefit from these so-called investments that congress will not do anything about them. If you think you are not affected by these, I’ve got some bad news for you: not only are they linked to your mutual funds in your retirement programs like your 401(K)s and IRAs, they can also affect the very cash or credit card you have in your purse and pocket.
All it takes these days is for another hedge fund to have leveraged too much on some over-bought asset (gold, corn or copper) to have things turn against them and down she goes. Have you ever wondered why a life-saving stock like Medtronic can get hit just as hard as a fluke like pet.com <http://pet.com/> ? Again, even though you may have the safest stock or investment in the world, it can be hedged to the hilt and you do not even know it till it’s too late.
When most hedge funds are in trouble, they have to sell any and everything. And here is the part that really stinks. While the government may know about this, they usually do not let the public know until this current danger has passed. Hint: You don’t buy home insurance as your house is burning. You buy it before it starts to catch fire.
6) The US Government is borrowing money at an alarming rate from China
I hear you say that is much better than printing it. But how do you know China is not just cranking up their secret printing press? I have a hard time believing that any smart country would lend us so much real money when they can see the underlying reasons for the current mess we are in.
Strategy to protect you in a good or bad market:
So what are we doing to try to protect you, in a good or bad time?
1) Keeping some cash in your portfolio,
2) Buying/keeping dividends paying stocks that benefit in a good or bad economy,
3) Any unusual gain in any stocks we own, I sell off enough to take your original investment out of the market while I keep the gain invested. (This is a strategy most people have been taught backward, they have been taught to take out their gain while leaving hard earn principal to the risk of the market.)
4) Make sure you own a few stocks in the companies that write the rules, such Goldman Sachs (these are the Washington insiders), Master Card, and the New York Stock Exchange. I call these my “Wall-E stocks” from the movie Wall-E. This is because when there is no one around but a robot and the cockroaches, there is a very good chance that these companies will still be doing business.
Is the market going to crash in the next 15 minutes? No. Is going to crash again? Yes. When will crash? I do not know. What I do know is this: unless we fix the underlying problems, it can be in the next 15 minutes.
Sherwin P. Brown
Have a wonderful and healthy Day