“A forecast is never so useful as when it warns man of a crisis.” ~ Bertrand de Jouvenal
“We have outlived the short-run and are suffering from the long-run consequences of [Keynesian] policies.” ~ Ludwig von Mises
Look out below.
Wall Street and global stock markets fell sharply this week, and there appears no end in sight to the selling. Yesterday, Standard & Poors downgraded General Motors, which sent the stock down 30%, and now there’s even talk that GM, which used to be the world’s largest company, will collapse next year. And now muni bonds are losing value fast. What’s next?
I’ve been warning my subscribers and Human Events readers of this impending crisis and stock market crash for some time. Last week, I warned, “Artificial intervention by the Fed and Congress has propped up the stock market and kept it from literally crashing. One wonders how long they can keep this going without the entire system unraveling. It’s always worked in the past. Since World War II, the government has intervened time and time again, injecting liquidity and running deficits, and it’s worked. But this time it might be different, and you need to be prepared.”
The best strategy? Again, I repeat what I wrote last week: “Our system is based on confidence. If people lose faith in their government and their bank, they may start rushing for the exits, selling their stocks, and converting checking accounts into cash. They may also buy gold and silver coins, the ultimate hedge against crisis and bad government. (Note: The U.S. Mint has run out of American eagle gold and silver coins.)
“The result could be a crash, deflation, and yes, even a Great Depression. The government will do everything in its power to keep it from happening, but there are no guarantees. Investors would be wise to play it conservatively: have a well-diversified portfolio in quality stocks, hold a strong position in cash and precious metals, and avoid any unnecessary expenses until the crisis blows over.”
What about after the crash? I see a slow recovery after the markets calm down. Three major trends will guide us through the end of 2008 and into 2009:
First, there is the credit crunch and the desperate attempts by central banks and the Treasury to restore the financial system back to normalcy. Once this happens, it will recreate a strong short-term buying opportunity. The Fed is especially active in cutting short-term interest rates again and injecting new liquidity into the system. M2 is now growing at a 12% rate.
To stave off a crash, there is talk of an emergency G-8 meeting this weekend where top government officials and central bankers will meet to iron out another rescue plan that involves guaranteeing interbank loans. The Fed and the Treasury have already injected more than $1 trillion into the banking system, guaranteed money market funds, provided liquidity for commercial paper, and loaned record amounts to banks from its emergency lending facility. Perhaps weekend action will stabilize the markets for a while, but there is no sure-fire solutions at this stage.
Second, the global recession could last for a year or longer. The expansion of the money supply could stimulate a recovery, but it will also be inflationary and artificial.
Third: U.S. politics. One reason Wall Street has fallen so sharply in the past month is the increasing evidence that the Democratic Party candidate Barack Obama will be the next president. Intrade, the political futures market, now has Obama’s chances of winning at 74% compared to 26% for McCain. Obama is almost universally admired outside the U.S., but domestically, he favors a sharp increase in taxes on investors and entrepreneurs, more government intervention in health care and business, and more union power. He is the most pro-union candidate in recent memory who favors the “card check” bill that would end the secret ballot for workers, a bedrock of American democracy. (See my column on Monday.)
My advice: Hope for the best (a recovery soon), but be prepared for the worst.