Martin D. Weiss: In the second half of 20th Century, you could count on the rising U.S. economy to lift nearly all boats. Sure, we had recessions.
In fact, in the years between 1945 and 2000, economists count a total of eight significant contractions along with eight bear markets — some minor, some not-so-minor.
But looking back, it’s obvious that those setbacks were merely temporary ripples in a veritable “golden age” for investors that lasted over a half century.
In fact, if you had simply invested $10,000 in the average Dow stock in 1945 and held it until year-end 1999, you could have seen it grow to $756,146, multiplying your money by more than 75 times! But …
21st Century Investing Is Another Matter Entirely!
If we’ve learned anything in the twelve years since New Year’s Day, 2000, it’s that buy-and-hold investors are practically begging to get their heads handed to them.
In fact, for most investors, the 2000s have been a financial nightmare:
They lost $9.5 trillion when the dot.com bubble burst in 2000 … technology stocks went down in flames … and most other stocks sunk along with them.
They lost another $15 trillion when the real estate bubble burst in 2007, slashing 56% off the average S&P 500 stock … driving companies like Bear Sterns and Lehman Brothers to extinction … and erasing a staggering $14.8 trillion of real estate values.
Total losses since 2000 alone: Nearly $40 trillion. Almost $267,000 for every American worker.
Time after time, we’ve seen key stocks double, triple, and quadruple as each bubble grew … only to be give back ALL of those gains — and more — in the subsequent wipe-out.
And we saw many stocks — even venerable old companies that had been with us for a hundred of years or more — simply dry up and blow away.
Investors lost their shirts in supergiants like Lehman Brothers, Washington Mutual, WorldCom, General Motors, CIT Group, Enron, Conseco, Chrysler, and Pacific Gas and Electric.
Plus, investors lost nearly everything in Refco, IndyMac Bancorp, Global Crossing, General Growth Properties, Calpine Corporation, New Century Financial, UAL Corporation, Delta Airlines, Circuit City, and Polaroid.
All of these companies went bankrupt. And all their stocks fell to zero. Yet …
The Tech and Housing Bubbles That Created These Giant Failures Were SMALL in Comparison to the Greatest Bubble of All, Being Created RIGHT NOW!
I’m talking about the massive growth of the federal government that we’ve seen over the past few years.
Not only is the government bubble the biggest of all time, but it is rapidly expanding in four separate ways:
First, we have an unprecedented Government Debt Bubble: Washington has spent a record $16.3 trillion since 2007 … has added $6.5 trillion to the national debt … and is CONTINUING to run up trillion-dollar-plus deficits every year.
Second, we are witnessing the Greatest Monetary Bubble in U.S. history: Just since 2008, the Federal Reserve has dumped more than $1.8 trillion newly-created U.S. dollars directly into the economy.
Plus, the Fed is creating even MORE money by holding interest rates low in order to increase loan demand. Never forget: When banks lend money, they effectively create new U.S. dollars out of thin air.
Third, we have a Government Employment Bubble. The Heritage Foundation reports that since December 2007, even while the private sector workforce has shrunk by 6.6%, shedding more than 7.5 million jobs … the federal government workforce has grown by 11.7%, adding 230,000 jobs.
Fourth, and most dangerous, there’s the Entitlement Bubble: Just consider the facts:
One in every five Americans now relies on federal assistance.
Nearly 46 million Americans need food stamps to keep body and soul together — 34% more than just two years ago.
The average recipient of federal aid collects $32,748 in benefits — about $300 more than the average tax-paying family gets in disposable income.
The biggest of all: The government’s obligations for Social Security, Medicare and Medicaid are now $65 trillion, nearly five times the value of all the goods and services produced by the entire country.
But Soon, Three Major Events Will Burst This Massive Bubble …
First, the U.S. government is going to lose its primary creditors — overseas investors.
In fact, there’s abundant evidence that this deadly process has already begun.
That’s why Lawrence Goodman, a former Treasury official and president of the Center for Financial Stability, pointed out last week that major U.S. creditors like Japan and China, that once scooped up U.S. debt, are shunning it. Such foreign purchases of U.S. debt amounted to 6 percent of GDP and has since fallen by over eighty percent to a paltry 0.9 percent.
Second, that’s why the Federal Reserve has had no choice but to temporarily fill the gap.
Last year the Fed used printed money to purchase a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.
This raises the question: What happens when the Fed’s actions drive fuel, food and other prices through the roof? Treasury interest rates surge — the first sign that the government bubble is bursting.
Third, ultimately entitlements must be cut — just like they’re being cut in Europe. In Spain, Greece, Portugal and Italy, those cuts are taking massive amounts of money out of the economy and plunging them into deep recessions.
Imagine what will happen when the world’s largest government with the world’s largest entitlement obligations begins making similar kinds of cuts!
Make no mistake: This great government bubble — probably the greatest mankind has ever seen — is destined to burst.
Like all the bubbles before it — Tulip Mania in the 1600s … the South Sea Bubble of the 1700s … the Tech Bubble in the 1990s … the Housing Bubble of the mid-2000s, this Great Government Bubble WILL BURST. And when it does, blood will run hip deep down Wall Street.
How to Grow Rich in Bubble Land
This is truly one of the most terrifying, frustrating — and, for those who know how to make money in times like these, one of the most exciting — times for investors ever.
The fact that we have identified this new “bubble/bust” pattern gives you a very significant advantage over other investors.
Knowing what’s likely to come — knowing that this new bubble in the government is destined to burst — gives you the power to both protect and grow your wealth throughout 2012 and beyond.
Here are three simple rules of thumb we recommend:
1. Do NOT be lulled into a false sense of security by anything Washington or Wall Street may tell you.
Remember: These are many of the same people who, in the 1990s, swore that the technology bubble would never burst.
Their mantra: The Internet had created a “New Economy” that made recessions obsolete. They were wrong. The Internet did not repeal the laws of supply and demand. Quite the contrary. It merely help exaggerated the swings from boom to bust.
Also remember that these are many of the same people who scoffed in the mid-2000s when we warned that the real estate bubble would inevitably burst.
Their mantra: “There has never been a nationwide real estate bust. Therefore, there will never be a nationwide real estate bust.” Again, they were wrong for the simple reason that there’s ALWAYS a first time.
Now they’re doing it again, and their newest mantra is the most ridiculous of all. They’re saying: “The Fed is guaranteeing low interest rates. Therefore it will be impossible for interest rates to rise.”
In the real world, however, the Fed never has controlled — and never will control — interest rates for more than limited periods of time. Meanwhile, regardless of the Fed’s attempts to combat it …
• Inflation naturally drives rates higher as investors demand more yield to cover the depreciation of their money. And …
• Global investors can drive rates skyward simply by dumping their holdings of sovereign debts, much as they did in Europe last year … and are doing again in Spain right now.
2. Wealth-building is not possible without wealth- preservation.
This is especially true right now.
Europe is in shambles. The Middle East seems on the verge of a major new war. The real estate crisis that triggered our last recession in the U.S. is not over. Home foreclosures are still rising. Home prices are still falling.
So make sure you have a strategy that will protect you in the worst-case scenario, while offering you substantial profit opportunities in the meantime.
Examples: Select companies in the strongest foreign countries, plus stable companies that produce gold, energy and other natural resources.
3. Never settle for less than the best.
Surround yourself with the best investment guidance available to you. They should help you (a) own the investments that are most likely to generate substantial safe returns while the bubble continues and (b) see the danger coming so you can get your money to safety before this bubble bursts.
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Good luck and God bless!
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. 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 MaMare 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 Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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