The gold price
Surviving the Depression - Thursday 7th May 2009
Out of bad comes good. Meantime, hold 5-10% of your money in gold...
AUTHOR of the The Ultimate Depression Survival Guide and editor of the Safe Money letter, Dr.Martin Weiss has become a respected economist and analyst, quoted by everyone from The Wall Street Journal to USA Today and the Japan Economic Journal since founding his research consultancy in 1971.
Here he talks to Hard Assets Investor about his view of the US economic outlook and depression, the 5 steps to protecting yourself (including how much to put into Gold Investment), and how to spot the broader stock-market bottom when it arrives.
HAI: Your book, now No.1 on Amazon, is titled The Ultimate Depression Survival Guide. You're obviously worried about things that might happen...
Weiss: Well, first of all, whenever you see a government-inspired intervention, a government-inspired rally in the stock market or a recovery in the economy, to me that's an opportunity to get out.
HAI: Really?
Weiss: That's an opportunity to do what you wish you had done in 2008 before the stock market tanked. It's what you wished you had done with your real estate properties before the real estate market collapsed.
In this era, the beginning of the 21st century, we are in a decline – a fundamental decline that's going to continue, but it's not a straight-down move, just like any market. Therefore, when you have a countermove, that's your opportunity to sell; that's your opportunity to reduce your risk and build cash. Now we have that chance, because the government has done so much, and precisely because the government is doing so much, you may have a bit of an uptick, but I don't see it as a change in trend.
I think that a depression, a deep depression is essentially inevitable and unavoidable. Let me explain what I mean by a depression. A depression is a multi-year decline in the economy, bringing massive unemployment and delivering widespread financial losses to the majority of the population.
HAI: But by that definition, we're already in it...
Weiss: Exactly my point. We're already in a depression, but there's no sign that's it over yet. There's a lot of hope that it would end prematurely, but I don't think it will.
I think it's going to get much worse, but you walk around, buildings aren't destroyed, the lights are still on, the internet is still up, and we still have the fundamental strength of our country's infrastructure. So we're talking about a financial economic crisis, not the destruction of our society or our country. Based on that fact, there's still hope; this is not the end of the world.
A depression, even a severe depression like we had in the 1930s, was not the end of the world. So that is an opportunity for you as an individual to protect your assets now, build up a nice nest egg of cash, put it in a truly safe place, and then wait for the opportunity to buy what I call the big bottom. This is not it yet. The cup is still half full, and if you only have half of your portfolio left, it's still half full.
If I'm right that real estate prices and stock prices and other prices are going to continue going down, that means that your half-full portfolio will be worth a lot more in the future, provided you can preserve what you have today.
HAI: What will instigate this bottom or cause the recession to become so very severe?
Weiss: Higher interest rates – not inflation, but higher real interest rates. The government's deficit this year is going to exceed $2 trillion even with the best of economic assumptions. If I'm right about the scenario, you're going to see that deficit perpetuate itself and get larger.
There's only one conclusion: Interest rates must go up. The deficit is coming now, that's what driving the interest rates, and interest rates are driven by a combination of factors. One is sinking demand for Treasury securities, the other one is rising supply of Treasury securities, and a third one is a revival of inflation. You put it all into the soup, and short term, the Fed can keep short-term interest rates down, but it can't control long-term interest rates.
HAI: So what should investors do?
Weiss: Step one is get rid of all your stocks that are vulnerable to a decline, and that's probably almost all of them, with few exceptions. Take advantage of the fact that there is a rally in the market, and whenever you see a future rally, do the same.
Step No. 2: Get rid of real estate properties, investment properties, before it's too late. Step three: Take that cash and put it in a safe place. The safest place right now is short-term Treasury securities, even though there's no interest to earn, and maybe some Gold Bullion – a small allocation to gold.
HAI: What percentage?
Weiss: Up to five, maybe 10% of your portfolio. Then, Step 4, be aware that there are going to be some assets you can't sell, for whatever reason, assets that you're stuck with.
To protect yourself against declines, and those assets, hedge them using inverse ETFs. In my book, I list over 50 inverse ETFs that you can choose from as well as a very structured, well-planned-out, prudent hedging strategy for the investments that you cannot sell. The more the market goes down, the more those inverse ETFs are going to be worth.
Then, Step No. 5: If you want to take some additional risk, you can use those same inverse ETFs to go for pure profits. And step No. 6 – and this is the bigger opportunity – which is for most people, so you don't have to be a speculator, simply wait for the big bottom.
HAI: How can investors spot the bottom? It looked like the bottom back in December...and again in March.
Weiss: In my book, I devote three chapters to the signs and the typical circumstances that surround the big bottom, and that's the best way to know. You can't pick a number. If you were to go by 1929, 1932, it would be 1,500 on the Dow. We don't know; and even if it goes only half that far, you're still looking at another 40% decline. So you don't want to base it on a single number, but there are a lot of conditions or signs to look for.
You need to see failure and you need to see extreme pessimism, not only on Wall Street but on Main Street, in people you talk to, your real estate broker. When everyone else is telling you what I'm telling today, that will probably be very close to a big bottom.
HAI: Like brokers jumping out of windows here on Wall and Broad...?
Weiss: I hope not! But that level of pessimism, that's one of the signs, that's your opportunity to start step-by-step to get back into investing for the long term and for the long-term future of the economy, because it won't be the end of the world. There will still be a strong potential for a very healthy recovery. The first thing you want to invest in at that time is going to be the safer, more prudent investments, like long-term corporate bonds.
The second thing you may want to invest in is nice dividend-paying stocks, the surviving dividend-paying stocks. You'll know by then which ones will survive and which ones won't, because most of the damage will have been done. So you can do the triage then; trying to do it today is premature. Then finally, get more aggressive and start investing in blue chips and major companies, which you should be able to pick up for a small fraction of what they're selling today.
HAI: Will there be opportunity globally?
Weiss: Yes. The last chapter in my book is about global opportunities, but let me say one thing before we run out of time. I wrote this book primarily to help you and everyone protect their wealth and grow it in these difficult times, but I also wrote it for another reason, and that is to try to help the country.
For example, every penny that I earn in royalties is being donated to a national charity; it's the campaign to end child homelessness, which I think is going to be an even bigger problem as we move into this depression. Also, I provide a prescription not only for you as an individual but for us as a nation to come out of this, and I'm very optimistic that this is not the end of the world.
No matter how bad things may appear, there is still a light at the end of the tunnel, and out of bad comes good.
AUTHOR of the The Ultimate Depression Survival Guide and editor of the Safe Money letter, Dr.Martin Weiss has become a respected economist and analyst, quoted by everyone from The Wall Street Journal to USA Today and the Japan Economic Journal since founding his research consultancy in 1971.
Here he talks to Hard Assets Investor about his view of the US economic outlook and depression, the 5 steps to protecting yourself (including how much to put into Gold Investment), and how to spot the broader stock-market bottom when it arrives.
HAI: Your book, now No.1 on Amazon, is titled The Ultimate Depression Survival Guide. You're obviously worried about things that might happen...
Weiss: Well, first of all, whenever you see a government-inspired intervention, a government-inspired rally in the stock market or a recovery in the economy, to me that's an opportunity to get out.
HAI: Really?
Weiss: That's an opportunity to do what you wish you had done in 2008 before the stock market tanked. It's what you wished you had done with your real estate properties before the real estate market collapsed.
In this era, the beginning of the 21st century, we are in a decline – a fundamental decline that's going to continue, but it's not a straight-down move, just like any market. Therefore, when you have a countermove, that's your opportunity to sell; that's your opportunity to reduce your risk and build cash. Now we have that chance, because the government has done so much, and precisely because the government is doing so much, you may have a bit of an uptick, but I don't see it as a change in trend.
I think that a depression, a deep depression is essentially inevitable and unavoidable. Let me explain what I mean by a depression. A depression is a multi-year decline in the economy, bringing massive unemployment and delivering widespread financial losses to the majority of the population.
HAI: But by that definition, we're already in it...
Weiss: Exactly my point. We're already in a depression, but there's no sign that's it over yet. There's a lot of hope that it would end prematurely, but I don't think it will.
I think it's going to get much worse, but you walk around, buildings aren't destroyed, the lights are still on, the internet is still up, and we still have the fundamental strength of our country's infrastructure. So we're talking about a financial economic crisis, not the destruction of our society or our country. Based on that fact, there's still hope; this is not the end of the world.
A depression, even a severe depression like we had in the 1930s, was not the end of the world. So that is an opportunity for you as an individual to protect your assets now, build up a nice nest egg of cash, put it in a truly safe place, and then wait for the opportunity to buy what I call the big bottom. This is not it yet. The cup is still half full, and if you only have half of your portfolio left, it's still half full.
If I'm right that real estate prices and stock prices and other prices are going to continue going down, that means that your half-full portfolio will be worth a lot more in the future, provided you can preserve what you have today.
HAI: What will instigate this bottom or cause the recession to become so very severe?
Weiss: Higher interest rates – not inflation, but higher real interest rates. The government's deficit this year is going to exceed $2 trillion even with the best of economic assumptions. If I'm right about the scenario, you're going to see that deficit perpetuate itself and get larger.
There's only one conclusion: Interest rates must go up. The deficit is coming now, that's what driving the interest rates, and interest rates are driven by a combination of factors. One is sinking demand for Treasury securities, the other one is rising supply of Treasury securities, and a third one is a revival of inflation. You put it all into the soup, and short term, the Fed can keep short-term interest rates down, but it can't control long-term interest rates.
HAI: So what should investors do?
Weiss: Step one is get rid of all your stocks that are vulnerable to a decline, and that's probably almost all of them, with few exceptions. Take advantage of the fact that there is a rally in the market, and whenever you see a future rally, do the same.
Step No. 2: Get rid of real estate properties, investment properties, before it's too late. Step three: Take that cash and put it in a safe place. The safest place right now is short-term Treasury securities, even though there's no interest to earn, and maybe some Gold Bullion – a small allocation to gold.
HAI: What percentage?
Weiss: Up to five, maybe 10% of your portfolio. Then, Step 4, be aware that there are going to be some assets you can't sell, for whatever reason, assets that you're stuck with.
To protect yourself against declines, and those assets, hedge them using inverse ETFs. In my book, I list over 50 inverse ETFs that you can choose from as well as a very structured, well-planned-out, prudent hedging strategy for the investments that you cannot sell. The more the market goes down, the more those inverse ETFs are going to be worth.
Then, Step No. 5: If you want to take some additional risk, you can use those same inverse ETFs to go for pure profits. And step No. 6 – and this is the bigger opportunity – which is for most people, so you don't have to be a speculator, simply wait for the big bottom.
HAI: How can investors spot the bottom? It looked like the bottom back in December...and again in March.
Weiss: In my book, I devote three chapters to the signs and the typical circumstances that surround the big bottom, and that's the best way to know. You can't pick a number. If you were to go by 1929, 1932, it would be 1,500 on the Dow. We don't know; and even if it goes only half that far, you're still looking at another 40% decline. So you don't want to base it on a single number, but there are a lot of conditions or signs to look for.
You need to see failure and you need to see extreme pessimism, not only on Wall Street but on Main Street, in people you talk to, your real estate broker. When everyone else is telling you what I'm telling today, that will probably be very close to a big bottom.
HAI: Like brokers jumping out of windows here on Wall and Broad...?
Weiss: I hope not! But that level of pessimism, that's one of the signs, that's your opportunity to start step-by-step to get back into investing for the long term and for the long-term future of the economy, because it won't be the end of the world. There will still be a strong potential for a very healthy recovery. The first thing you want to invest in at that time is going to be the safer, more prudent investments, like long-term corporate bonds.
The second thing you may want to invest in is nice dividend-paying stocks, the surviving dividend-paying stocks. You'll know by then which ones will survive and which ones won't, because most of the damage will have been done. So you can do the triage then; trying to do it today is premature. Then finally, get more aggressive and start investing in blue chips and major companies, which you should be able to pick up for a small fraction of what they're selling today.
HAI: Will there be opportunity globally?
Weiss: Yes. The last chapter in my book is about global opportunities, but let me say one thing before we run out of time. I wrote this book primarily to help you and everyone protect their wealth and grow it in these difficult times, but I also wrote it for another reason, and that is to try to help the country.
For example, every penny that I earn in royalties is being donated to a national charity; it's the campaign to end child homelessness, which I think is going to be an even bigger problem as we move into this depression. Also, I provide a prescription not only for you as an individual but for us as a nation to come out of this, and I'm very optimistic that this is not the end of the world.
No matter how bad things may appear, there is still a light at the end of the tunnel, and out of bad comes good.
Weiss Research, 07 May '09
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