Thinking the Unthinkable
Planning to Survive a Severe Disaster
by Robert B. Gordon, Sc. D.
September 7, 2003
My very first web essay Dangers of Linear Thinking in a Cyclic World was published two years ago and every word in it is just as true today. There is very little evidence of cyclic thinking in our present government or academic institutions. Major corporations made colossal blunders in managing their pension fund assets in the recent stock mania. Today, political and financial leaders are busy repeating all the mistakes that their counterparts in Wall Street and Washington made during and after the 1929 Crash. And, unfortunately, this bear market is at a higher Elliott Wave level and predicted to be much longer and more severe than the 1929 aftermath.
Fortunately for the future of our beloved nation and its people, we do have a few brilliant minds who are keenly studying the application of historic political and economic cycles to our present situation. An example of the very best thinking and writing on a complex subject is the current provocative Nelson Hultberg essay on FSO titled Apocalypse This Way Comes. This great mind-challenging paper is 15 pages long and is a must read for any thinking American. I hope that many of you will print out the Hultberg essay and use it for serious thought and discussion.
Although it is true that every civilization and empire goes thru a birth to death cycle, it may be too early to predict the end of our nation. But it is certainly not too early to envision sweeping changes in our economy or in our government. According to Hultberg, we have for many decades been undergoing major changes from the government and economic policies laid down by our nation’s founders. Our citizens have been acting like a frog in a kettle of hot water on the stove, never able to decide to jump for freedom. Wake up fellow citizens. It may be later than you think.
THE BIG PICTURE
If the founders of this nation were to return for a visit, they might be awed by our skyscrapers, planes and cars, but they would be shocked beyond belief by our paper money with no gold or silver backing. They would be shocked by the shallowness of the debates going on daily in Washington, where only the single voice of Congressman Ron Paul opposes the lunacy of most legislators. They would be shocked by the size and complexity of our vast income tax system. They would also be appalled by our enormous national debt and the dismal status of our huge welfare programs. As Hultberg opines, there may still be a Nation here fifty years from now, but it will be radically different from the present.
I agree with Hultberg that we are cursed by two major parties that offer us no real difference. They both make stirring speeches and promises, but quietly serve their campaign contributors. Congress raises its own salaries and retires with enormous pensions. This situation might change in the campaign of 2008, assuming the likely election of a Democrat in 2004. I have long agreed with Robert Prechter’s prediction, that in this long bear market, any incumbent will meet Herbert Hoover’s fate. I expect this bear to cover at least three or more four-year terms. So, perhaps by 2008, our country will be ready for a complete house cleaning in both Washington and the 50 states.
THE COMING DEPRESSION
I was in high school and college from1929 to 1939. Graduating with a prestigious degree from MIT, I had just two job offers. The Great Depression was still in full force with no end in sight. No one knows how long it might have continued without the great economic build-up for World War II. It is hard to judge how the coming depression will compare, but one thing is very clear. This one will follow a Grand SuperCycle Crash, the end of Wave III of a 300-year long sequence that started in London in the early 1700’s. This wave III started in London in 1784, after a 64 year long bearish wave II. All the details of this historic wave are given in Robert Prechter’s prophetic book At the Crest of the Tidal Wave.
The 1929 crash was Wave I in a SuperCycle Wave whose Wave V ended at the recent 1999 top. This Wave I crash was very severe for the business of Wall Street, but the country as a whole was in much better economic shape than it is now. The U.S. government had little or no debt and was a creditor to the rest of the World. One fifth of the population was living on farms vs. 2% now. Only a small fraction of the working public was investing in Wall Street, so the public losses were trivial compared to our current bear market. There were many more two and three family households then than now, but I expect there will be many more 3 generation homes before the current bear ends.
The 70 and 80-year old residents in our retirement complex are still almost completely oblivious to what lies ahead. But in recent conversations, I have learned of some whose adult children are out of work. The number of families in these straits will surely multiply. I have two 2003 college grads in my family who still do not have a permanent job. In 1929, three generation American families were living much closer to each other, often in the same city so they could help each other. Today our 3 generation families are widely spread over the entire country or even abroad.
I believe it is fair to state that the difference in views of our 20, 50 and 80-year old family members are greater than it was 70 years ago. My reader e-mails are filled with tales of differing views on the economy and stock market. Later I will expand on this subject and suggest some possible way to bring the family together.
THE SHOCK EFFECTS OF THE NEXT BEAR LEG
After two and a half years of this bear market, the first down leg had produced a huge loss in the NASDAQ and considerably smaller losses in the S&P500 and DOW. But since last October we have had a large bear market rally propelled by Greenspan’s interest rate reductions and huge injections of money into the nation’s financial systems. Similar large rallies occurred after 1929 in this country and in Japan’s market after 1989.
The bullish views of both investors and analysts have reached the same high level of the 1999-2000 top. Expert bearish writers are now calling the present market Greenspan’s "second bubble". Subscribers to the Elliott Wave reports have received blow by blow reports of the long rally, which is still following the normal pattern except for its somewhat surprising length. This rally, now ending, is counted as corrective wave 2 down, which means it will be followed by impulse wave 3 down--usually the longest and strongest wave in a five-wave pattern either up or down.
An interesting development in this monstrous market top is that small cap stocks made a recent new all time high, extending the overall market top period from 5 to 6 years--a very large top formation, which portends a very long and deep bear market ahead. Mutual funds and investors now joining this new trend may be saddened when small caps become leaders to the downside. Our readers who are new to bear markets must be reminded that this biggest-bear-of-all-time will not end until almost all stocks are at unbelievable low prices. At the 1932 bottom, a group of surviving industrial stocks sold at 0.3 of their book value; while the ratios of many stocks are now 3.0 or higher. Without a doubt, many stocks now listed will simply disappear.
Whether Wave 3 down will lead to an investor panic is unknown in advance, but the months of September and October have seen some very bad market days. Due to its predicted multi-year length, this bear may not be spectacular, but instead just keep going down and eventually discourage all potential buyers. That is when at least an initial bottom will be formed, provided Wall Street has also stopped calling for a new bull market.
THE CREDIT AND HOUSING BUBBLES
I have written recently about the 3 bubbles, but maybe with a renewed stock bubble we should count four. I am certainly not an expert on debt and real estate, but I have read every expert opinion I could find. Their collective opinion is the U. S. is in uncharted waters with respect to its enormous amount of personal, corporate and government debt. And much of the debt has been securitized into income shares sold to the public which has no knowledge of what they bought.
I have read many horror stories about the crimes being committed by home builders, appraisers and mortgage firms in selling homes to new buyers with no down payment. With interest rates now rising, there will be many foreclosures. With most mortgages now being tied in with highly leveraged derivatives, by Freddie Mac and Fanny Mae, experts are forecasting huge problems ahead. So it is now almost certain that this depression will be accompanied by severe problems never before encountered - a veritable enormous financial collapse.
EXPERT MARKET VIEWS
I spend more time reading other views than writing. None of my favorite experts have changed their bearish views in the past year. And because of the resurgence of bullish analysts and individual investors, most of them are more bearish than earlier. This stems from the current overwhelming public bullishness, the continuing credit and housing bubbles and complete disgust with Alan Greenspan’s words and actions.
I normally look daily at the following web sites that publish a variety of papers by experts on the national and world economies and stock markets. It is important to realize that this bear market and depression is now occurring throughout the developed world. The U.S. is leading, but the entire globe is following. There are important items published almost daily on these sites, listed below not in order of value, since they are all worth visiting:
www.financialsense.com, www.prudentbear.com, www.fiendbear.com, www.safehaven.com, www.dailyreckoning.com, www.freebuck.com, www.gold-eagle.com
Some of the writers I read are, in no special order, Bill Bonner, Ian Campbell, Richard Benson, Richard Duncan, Adam Hamilton, Jim Puplava, Jim Rogers, Richard Russell, Kurt Richebächer, Doug Noland, Ron Paul, Doug Gillespie, Nelson Hultberg, Gary North and quite a few others.
While writing this paper, I received this e-mail concerning our only independent Congressman.
Dear Dr. Gordon:
Our hero in the Congress, Ron Paul, electrified the Congress on Friday with
an amazing speech in which he:1. Slammed our current fiat money monetary system as unfair to labor and
seniors;
2. Condemned central banks for manipulating the price of gold downward;
3. Chastised Federal Reserve Chairman Greenspan for hubris in thinking that
he and his band of cohorts could somehow outguess the free market;
4. Damned legal tender laws as immoral;
5. Warned about the threat fiat money poses to our freedom and our way of
life;
6. Decried the injustice to seniors who lose interest on their hard earned
savings as a direct result of the Federal Reserve's manipulating interest
rates for the benefit of special interests; and, much more...Best Regards,
Larry Parks
Executive Director, Foundation for the Advancement of Monetary Education
http://www.FAME.org[Webnote: FSO published a link to this speech at FSU/Posts: Click here]
PITY THE IGNORANT MASSES
The problems my readers report--about differences of opinion on our economy--within their own families pale compared to the tens of millions of American families living happily or unhappily, with no knowledge of the subjects discussed above. If their only news source is the daily paper and TV programs like CNBC, they can live happily with their new house, new car or new child until the truth finally hits them hard.
When the real truth about unemployment, bankruptcies and interest rates is combined with huge headlines about a big "new" bear market, most Americans will be stunned and not know what to do or when to do it. We have no way to reach these unfortunates, so we will concentrate the remainder of this essay on trying to list some actions that may be helpful to our readers and their families.
STRENGTHEN YOUR FAMILY TIES
Based on my experience in the 1930s, close family ties will be a great source of strength to the young and old adults and will help keep their "ship" afloat. Let me give you some details of my own life in the Great Depression. We had a 3 generation home: 3 children, 2 parents and my mother’s parents. We had 3 bedrooms, 2 baths and I had an unheated sleeping porch bed with a blanket- wrapped, heated brick to keep me alive each winter night.
My grandfather, in his sixties, had a job as a night watchman in a street car barn. He ate his dinner during our breakfast. My father had a good steady job as a tool designer in an electrical appliance factory. His salary was progressively dropped to half the original, but we managed to survive with the help of a 25% drop in living costs due that scary word "deflation." Somehow my family paid my $300 a year college tuition from 1931 to 1935, but of course there were no jobs at graduation. My initial goal had been to be an architect, but there was very little building of any kind during the entire depression period. So I went to MIT on a scholarship and changed my career goals twice in the next 4 years.
In the 1930s, unemployment rose to 25%, but It is impossible to guess the level this time since the depression will cover the entire world. Based on my current knowledge of nursing shortages in our care center, I would advise any high school graduate of either sex to pursue a nursing goal as the safest career choice today. I fear that all of the professions requiring college education will be severely overcrowded, even lawyers.
How do you get the whole family pulling together during the coming bad times? It has to start with a common goal to survive whatever comes your way. All of the adults need to read the recommended web sites or be given copies of their important essays. It would help if a spread-out family all were on the internet for e-mail communications. If the older generation can read, send them printed copies of recent writings by Richard Russell, dean of all U.S. market writers, who is very bearish, or the masterful writings by Jim Puplava at www.financialsense.com.
The main purpose of this essay is to provide a stern warning of what is now underway. The experts you will read do not collectively see any possibility of this black cloud going away. Our nation and the rest of the free world have traveled far too long down the wrong road. There is literally nothing to be done now, but to grin and bear it. Our nation and the 50 states are broke. They are borrowing heavily because they think the recession will be over next year. It will be much worse.
SOME STEPS YOU CAN TAKE NOW
If your reading convinces you and your family that bad times are really just ahead, the very best thing you can start doing is to reduce your living expenses. It can help in many ways. Unemployment is bound to increase. Instead of deflation, we may get higher living costs from inflation either sooner or later.
I cannot tell you or anyone what to do about your current housing. Interest rates are now heading up and property taxes will rise as state and local governments strive to balance their bloated budgets. Each family has to decide what kind of housing will be best for them.
The most important task any family can do in the next few months is to get their entire family on the same team. This may involve a big job of education, but it is an absolute must for the family to make it thru the problems that lie ahead.
Once your family is together and intending to survive, it may involve changes in your life style, even in your work or location. Do not wait for the storm to hit before you decide what needs to be done. Then it may be too late. Please remember the events ahead are unprecedented in world history and no one, regardless of his or her expertise, can give an exact time schedule or description of future events.
When your family are all on the same page in understanding bad times are ahead, concentrate efforts on getting your investments in the safest possible place. My essays continue to offer ideas on ways to do this. Get rid of stocks, mutual funds and advisors that have been diminishing your assets. Start accumulating some precious metal coins to be held indefinitely in your physical possession. Remember that most of the experts do not expect any near-term solutions to our national and world problems. The sheer complexity and magnitude of the problems ahead defies any kind of quick solutions. Do not expect a miracle.
If possible in your family situation, designate someone to gather and disseminate expert news from the internet. Then designate the right person to hold the family circle together. Life will be tough enough for a cohesive family, so stick together and help one another.
FINAL WORDS
Regardless of the present state of information and cohesiveness of your family, do not allow yourself to become too pessimistic. Obtain and circulate expert views so that everyone is on the same page. Tough times are coming, but it will not be the end of the world or this nation. There will probably be some major surprises.
Extend your family circle to include close friends and neighbors.
In our depression experience in the 1930s, our close circle involved 3 families since my mother had two sisters and their families in the same city. On holidays we would rotate being host for the holiday celebrations. Our life continued, though on a reduced economic scale, and we all survived. Become mentally and physically prepared for the problems ahead and your family, regardless of its size or composition, can emerge from a difficult period even stronger than it is right now.
© 2003 Robert B. Gordon, Sc. D.
Robert B. Gordon, Sc. D.
Sun City West, Arizona
September 7, 2003