Deflation and the Destruction of America's Wealth

Martin Weiss writes: The deflation we've been warning you about is here, and it's striking hard. Last week, the Fed released a report that sent chills down the spine of economists all over the world, revealing a sweeping destruction of wealth in America.

Just in the third quarter alone, U.S. households lost $647 billion in real estate; $922 billion in stocks; $523 billion in mutual funds; $653 billion in life insurance and pension fund reserves; plus $128 billion in private business interests.

Total destruction of household wealth in the third quarter: $2.8 trillion, the worst in recorded history. That's four times more than the government's entire $700 billion bailout package (TARP).

Total destruction of household wealth in the last year: $7.2 trillion or over TEN times more than the $700 billion TARP package.

Meanwhile, the Treasury reports that only $330 billion of the TARP funds have been committed so far. Worse, most of the funds that have reached the banks are sitting idle in their coffers. If as much as $30 billion has trickled down to households, I'd consider it a minor miracle.

See the contrast? The destruction of wealth is large and swift; the government rescues, relatively small and slow.

Yes, the White House may decide to shift some of the TARP money to cover General Motors and Chrysler's cash needs for the next few weeks; they don't want the auto giants going down on their watch.

But even if they can somehow save GM and Chrysler for now, they cannot save the countless smaller and medium-sized companies that are going bankrupt. They cannot save the thousands of municipalities and states that are running out of money. They certainly cannot make whole the millions of households that have gotten smacked with the $7.2 trillion in losses.

More evidence of deflation:

U.S. consumer prices falling at an annual rate of 12%! U.S. producer prices falling at an annual rate of 26.4%! Commodity prices slammed by as much as 70% from their peak!

My friend, these are not numbers that denote less inflation. They are hard evidence of deflation!

Your Next Steps

The critical question of our time: Will this deflation be less severe, equally severe or more severe than the 1929-1932 deflation?

If I were you, and you've got your portfolio or your 401k in stocks or stock mutual funds, I wouldn't stick around for the answer.

Yet that's what most Wall Street experts are telling you to do. Two full years after the first obvious signs of a housing industry collapse, most people who give advice about investing are still in denial.

Wall Street cheerleaders refuse to admit that an obviously massive deflation can lead to an equally massive collapse in the nation's economy.

They've repeatedly sworn on a stack of Bibles that the deflation in housing would “soon end,” the crisis would be “contained” and everything would be “just fine.” They've tried to persuade nearly every investor to stay the course, keep their money in the stock market, or even buy more.

But as 2008 comes to a close, no one can possibly deny that the U.S. economy is in deep trouble. Anyone can see the evidence — the sharpest declines in the economy since the 1970s, the worst debt crisis in a lifetime, the largest financial failures and bailouts in history.

Everyone can also agree on the likely causes — the economic blunders of Washington, the financial greed of Wall Street, the big debts and bets by almost everyone. And no one could dispute the probable consequences — surging unemployment and potentially years of hardship for millions of Americans.

Yet despite this widespread agreement, nearly every authority still tries to persuade you to keep your money in the stock market.

Financial experts on NBC Nightly News tell millions of viewers that, as long as they've got plenty of years to live and recoup losses, they should continue investing most of their 401k or IRA in stocks.

Suze Orman on Oprah advises millions more to continue socking away their retirement money in stocks regardless of any market decline.

In Time Magazine , the New York Times , the Wall Street Journal and virtually every newspaper in the country, similar advice is liberally dispensed.

Their unwavering message: Don't sell. Stick with it. Buy more.

It's not a symptom of conspiracy and, in most cases, it's not a sign of intellectual dishonesty. The majority of pundits sincerely believe in what they are advising you, and many follow the same strategy with their own money. But that does not make it good advice.

Consider Dad's tale of the average investor's woes in America's First Great Depression, and you'll understand what I mean:

“I was a young broker in 1930, and the advice my senior colleagues gave out used to make me cry inside. ‘Just hang on to your stocks for the long term and ride out the storm,' they said.

“The results were devastating for their clients.

“If you bought the average stock in 1929 and held on until 1932, you wound up with about 10 cents on the dollar. And that's if you bought the good stocks — the ones that survived. If you bought the bad stocks — in bankrupt companies — you'd be left with nothing, a big fat zero.

“Then, even if all of your companies survived, it wasn't until 1954 — 25 years later — that you could finally recoup your original investment, provided you could stick it out that long.

“Unfortunately, most people couldn't. They lost their jobs. They risked losing their house. So they were forced to cash in their stocks with huge losses. For them, the idea of ‘holding on for the long term' was a joke, an insult, or both. They didn't have that choice. Later, when the market eventually recovered, they never got the chance to recoup their losses.”

Even if you don't believe that the late 2000s was comparable to the early 1930s, there is ample reason to exit the stock market. Just consider these facts and connect the dots:

Fact #1. Between 1965 and 1980, America suffered through a long dead zone punctuated by periodic debt troubles, credit crunches, financial failures, housing market declines, recessions and bear markets. For a decade and a half, most investors lost money in the stock market.

Fact #2. The financial crisis that has struck America in 2008 is evidently far worse than anything we experienced during that 1965-1980 dead zone. The debt problems are far bigger. The bankruptcies make earlier episodes look small by comparison. And the nationwide bust in housing is much deeper than anything experienced in history. So it's reasonable to assume that the experience of investors could be at least as bad as, and possibly worse than, that experienced in the 1960s and 1970s.

Fact #3. A decline in the second largest economy of the modern world, Japan, began in 1990; has lasted for 18 long years; has taken the Nikkei Average down 82%; and, as of this writing, is still not over. Now consider this: The crisis that struck Japan in the early 1990s was ALSO less severe than the global crisis striking us right now.

What About This Time?

No one knows how far stocks will fall, how long they will stay down, or how soon they will recover.

No one knows how many banks, insurance companies, brokerage firms, or manufacturing corporations will go bankrupt.

No one can say if the government bailouts will make things better, just keep things from getting worse, or cause even more serious troubles.

All we do know with relative certainty is this: As long we have a financial crisis, recession or depression, the risk of loss is greater than the opportunity for profit — especially in the stock market!

If you're a gambler, if you don't mind betting against the odds, and if you have plenty of extra cash to play with, that may be a risk-reward you can overcome with trading acumen and good luck. But if you want to build a nest egg for your retirement or your kids' education, if you want to sleep nights during topsy-turvy stock market gyrations, if your net worth has been diminished by real estate losses, if you're worried about losing some or all of your income in a recession or depression, then staying invested in the stock market during a financial crisis is absolutely, positively nuts!

We are obviously living in risky times. So why would you want to double the whammy by putting your money in obviously risky investments? Yes, I know. Your broker, your financial planner — even some of your best friends — are cajoling you to stay in the market.

My view: If they fooled you once, shame on them. If they fool you again, shame on you!

Certainly, you are well aware of the catastrophic events that have already happened. You must realize that these events are likely to lead to further economic declines. And if the economy falls, it should be clear that nearly all of us, yourself included, will be affected in some way.

You also must know by now that the same old assurances from Washington and Wall Street — that “all is fine,” that they will soon “lick the problem,” that the latest, biggest bailout is “finally working” — have been proven wrong over and over again. You must be able to conclude, without my help or anyone else's, that if ever there was a time when stock market investing is too risky, this is it.

If your goal is to save money for the future purchase of a home, retire in dignity, give you children and grandchildren educational opportunities or have enough money to cover your long-term care, and you still own stocks or stock market mutual funds, then get your money out of danger before it's too late! Start selling!

Naturally, precisely when and how much you should sell will depend on actual market conditions. But as a rule of thumb …

If the stock market is rallying and up significantly, sell everything. Just call your broker and say: “Sell all my stocks at the market.”

If the stock market is falling and already down sharply, tell your broker to sell half as soon as possible. Then sell the balance on any rally.

If the market is in a panicked frenzy, overrun by an uncontrollable crowd of sellers and virtually devoid of all buyers, wait. Don't sell immediately. As soon as the panic subsides, then sell half. And as soon as there's a decent rally, then sell the balance.

If you own stocks you are unable or unwilling to sell, as an alternative, consider buying hedges, such as inverse ETFs, that can help offset your losses. And …

If you work with a money manager, ask him about investment programs designed specifically for bear markets, along with their performance track record during both up and down markets. If it's solid, you can use a bear market program as a vehicle for either protection or profit.

No matter what approach you use, this is no time for complacency. Act boldly but prudently. Then get your money to safety.

Good luck and God bless!

Martin

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