The stock market is on a cliff. When it falls, it will not only erase the riches on Wall Street but your hard-earned savings. It is called deflation, and it will impact all of us.
I have a pretty good idea about stock market crashes because I have experienced four of them. The first was in 1987. The second was in 1989. The third was in 2001, and the last was in 2008. The monster crash for stocks is still to come.
The fundamentals both for the banking system and the economy and our dysfunctional Federal government will not allow current record stock prices to persist.
As major stock indexes reach all-time highs, there is the disjoint between the value of equity prices and the economic realities that will eventually have to support prices.
We live in a time Oscar Wilde described more than a century ago: “Nowadays people know the price of everything and the value of nothing.”
Everyone seems to know the price of the Dow Jones industrial average. Friends and family ask me how much higher the stock market will go. Few ask if it will go lower, while many offer their own stock tip.
It’s no different from 1929 when legendary investment guru Bernard Baruch said: “When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich, it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.”
When I suggest that the market is heading lower, people wave me off.
What most people seem to understand is that Big Board stocks keep setting records. Both the Dow and the broader-based Standard & Poor’s 500 Index are at all-time highs.
The S&P has gained 10 percent in three months. The Dow is up more than 11 percent. Yet the U.S. unemployment rate is close to 8 percent. America lost 8.9 million jobs in four years and has gained back only half of them.
The economic recovery exists only on paper because of massive cash injections by the Federal Reserve.
Only trillions of dollars’ worth of freshly printed money has prevented the United States from falling into an economic abyss.
But printing new money does not equate to creating new wealth. All the Fed has done is provided a cancer patient with copious amounts of morphine. It is a feel-no-pain regiment for the markets. But the cancer is still there.
Two things dictate investment behavior: greed and fear. For the past year, greed has consumed any fears.
I Wished I Had Sold Used Cars
In the spring of 1996, I was in an office on the eighth floor of the Washington Mutual Building in Spokane, Wash.
I was working for one of the largest brokerage companies in the country.
Each day on my desk there were Securities and Exchange Commission compliance books and stacks of practice exams to help me pass a registered investment adviser exam. Once I passed it, I could dispense investment advice to all.
To get the job, I passed the aptitude test by saying that 2 plus 2 equaled 4. I believe that the brokers who were fast-tracked said 2 plus 2 equaled 16.
Over the next six months, I studied securities laws that dated back to the 1930s. I also spent time in the lunchroom learning from seasoned brokers about ways to get around these laws.
Below sums up my experience as a stockbroker in training:
Question: How many stock brokers does it take to screw in a light bulb?
Correct answer: Two. One to take out the bulb and drop it, another to try to sell it before it crashes (fully knowing that it’s already burned out).
The advanced test for certified investment advisers was this:
Question: How many investment brokers does it take to screw in a light bulb?
Correct answer: Good God! It burned out! Sell every share of GE!
I remember the 6 a.m. Monday meetings in the conference room.
It was there that we received a call from the company’s grand poobah, Ralph Acampora. His name was synonymous with the dot-com bubble.
Acampora’s biography states: “He was an industry leader in technical analysis and a regular on popular weekly TV shows such as Wall Street Week with Louis Rukeyser. His opinions about the market were reported by major national newspapers.”
I had been writing about investments for well more than a decade, so I knew about bullish Acampora and his never-ending expectations for higher stock prices.
The world said Acampora was a genius, which made it all the harder for me to understand his Monday morning call to arms. I suspected Acampora was not really trying to sell value to Prudential customers. But every Monday the sales team was given its orders.
One time, I interrupted the post conference meeting by suggesting resource stock. A group of 15 brokers looked at me like I was a heretic.
After several Mondays of listening to Acampora clairvoyance in picking stock market winners, I went to my manager.
I asked him why Acampora was telling us to pitch such stocks. The manager explained to me that Prudential had an inventory of stocks and that they had to be sold every week.
It hit me. My job was never to give quality investment advice. I was being trained to generate revenue for Prudential. I was a used car salesman. Even worse, I wasn’t even providing anything as useful as a used car.
I passed my exams for Prudential and the SEC. Once I did that, I was registered to attend a two-week sales boot camp in California. If I survived that, then I could push any stock, bond or mutual fund I wanted.
I decided to quit. That was the only time in my 55 years that quitting felt right.
In 2013, nothing has changed. Wall Street is richer than ever, and big analysts have more lives than wrinkled movie stars. They can make the same mistakes over and get richer for it.
Bestselling author Nassim Taleb addresses this absurdity: “People who were driving a school bus blindfolded (and crashed it) should never be given a new school bus.”
Action to take: Sell all Big Board stocks immediately. Move money into physical gold, silver, Treasury bills (despite their low returns) and hold physical cash in a safe dry place. Speculators believe the only game in town is blue chip stocks. Take it from an old ex-stockbroker.
Yours in good times and bad,
Editor, Myers Energy & Gold Report