It just drives me crazy. I see the pundits on TV or hear them on the radio and I can't believe what I hear. Let's face it. In general, most of these pundits -- experts, gurus and authorities-- on the economy and the financial markets are clueless. Now, don't get me wrong. That professional money manager talking about the stock market probably knows that market inside and out. The guru that tells you everything is great in the "X" industry or sector is probably very knowledgeable about that particular corner of the investment world. Yet, these commentators are consistently wrong when they try to figure out what the future will hold for investors and other parties interested in that area. Why? Primarily because they don't have enough information or expertise in understanding the interrelationship of markets, geopolitical considerations, the general economy, human behavior and good old fashioned logic. All of these things comprise the investing environment since no investment exists in a vacuum. I don't make for
Protect & Grow Your Wealth:
7 financial & economic predictions for 2004-2006
© Copyright March 2004
All rights reserved.
Since January 2000, forecasts that I have made in my public venues have so far been on target. Just in case you haven't been to my investing seminars or otherwise been privy to my research, here's the most important forecasts that were made in 1999-2002…
- The Bear Market of 2000
- The Recession of 2001
- The dollar will experience a major fall for 2002-2003
- Gold going up during 2001-2004
- Silver going up during 2002-2004
- The projected federal budget surpluses (in 2000) will become a huge deficit
- 2003 will be a record year for bankruptcies
- State & local government financial mismanagement will result in higher taxes
- Government payrolls will exceed manufacturing payrolls
- Tax audits will increase significantly due to government revenue shortfalls
- Foreclosures will start climbing in 2003
No, I don't think I had any special insight or some crystal ball regarding the above events. There are many that I feel do a far better job than I of figuring out the possibilities that may unfold in the world of high finance in the near-term. I actually thought that those events were easy to see coming. Before 2000, I made a forecast or two that blew up in my face. Why? Because I didn't do a complete analysis and it humbled me. In other words, I became my own best example of what happens when you become clueless in an area where you don't have the relevant expertise coupled with meaningful information. Failure indeed enhances your success.
Back to forecasting. What if, for example, an astute doctor examined you today and found out that you were a chain smoker, heavy drinker, 85 lbs. overweight, ate donuts and fried food and you were planning to run a marathon tomorrow. Would you be surprised about the doctor's "forecast" about the physiological disaster that awaited you? Yet another less-astute doctor might say to you "Hey… you should have no problem! You're wearing brand new sneakers, you seem well-rested, your outfit is stylish and the sun is shining. Go for it!" Both of these doctors may site facts that are 100% correct but…which doctor would you believe? (uh…the first doctor, we hope). Financial markets can be the same way. There are problems and symptoms. There are cause-and-effect situations going on every minute of every day. There is meaningful information and trivial or meaningless information. And yes, there are good and bad commentators. We need to hear the evidence and logic of bullish, bearish and neutral sources to make informed, common sense choices for our for our "financial" well-being.
This is part of the reason that I have written this piece since there are millions of people that are now financially at risk because they hear "talking heads" on TV blather on about economic points that were meaningless or secondary at best. In this report, I will provide 7 major forecasts that I believe are a virtual certainty in the coming years and I will take the risk to put myself to the test by putting these predictions in print (as of March 2004). In addition, this report will also provide some strategies and resources to help you protect and grow your wealth. The point is that in these uncertain economic times, you must be as informed as possible since your personal prosperity counts on it. Yes, listen to the media commentators but balance their views with information and commentary from others and then make up your own mind. Learn to be logical in your financial thinking and use your own intellect to discern what points of view are well-reasoned and well-researched and what is just a lot of hot air.
Please keep in mind that some of my forecasts are "still out" so to speak. In other words, they have not come to fruition because the time frame is still active. For example, in early 2003 I made the forecast that the Dow would go below 6000 in the next 24 months. Although I still stand by that forecast, I may be off somewhat on the timing since 2004 is an election year and the powers-that-be will do everything possible to keep the stock afloat until after Election day.
No, I don't believe that the current administration is involved in any egregious skullduggery (well, no more than any previous administration, anyway). However, every incumbent administration (regardless of party affiliation) in the past fifty years has done everything in their power to keep the good times humming along until after voters have made up their minds. Once Election Day passes, they figure that they have four years to do something to resolve whatever economic problems have come to light. Or, as is often the case, "solutions" implemented really put a temporary fix and give the incumbent administration a chance to postpone the day of economic reckoning to whoever is the successor. Much of the current administration's economic challenges are really a manifestation of policies that were enacted as far back as 1995 (and beyond). Politicians (both Republican and Democrats) are great at politicking but are generally terrible at economics. Whether they know it or not, they have done far, far more economic pain and suffering than they have ever alleviated. This is a very important piece of reality for investors.
Therefore, if you want to make yourself a more proficient and profitable investor, the following observation is indeed one of the greatest principles of successful investing:
Count on government stupidity.
It has created more massive economic & social problems
than any other man-made entity in the history of the world.
Understand this, you gain. Misunderstand this, you lose.
Government is a powerful, coercive force that is steered by politicians and bureaucrats that are generally not informed about the immense systemic effects that government wields on a society and its economy. Being on the wrong side if it, you will be harmed. Being on the right side, you will prosper. Government power comes into being in the form of taxes, regulations, war, currency mismanagement and so on. An economy that is overburdened by government eventually results in collapse. The Roman empire and the Soviet Union are good examples of this. Excessive government size, scope and intervention has been the root cause of the Great Depression. Excessive government is in fact the real problem in poverty-stricken and strife-torn countries across the globe and throughout history. Every recession and every depression is the result of excessive government intervention. Excessive government is the direct result of political ideologies such as socialism, communism, fascism, welfare-statism and other top-heavy forms of government.
Why does this matter to you as the individual investor? Because when you understand government and its inherent shortcomings and failings, you understand the major force that can drive markets and industries up or down and make intelligent and profitable decisions. 20+ years of experience and observation helped me figure out what became the primary (and most relevant ) question in my research (and forecasts); "How do government policies, actions (and inactions) effect a particular stock, industry, market or society?" Become proficient in this thought process and apply rational investing strategies and there's no reason why you shouldn't be in the top 1% of investors. Let me prove it to you with a true situation that is occurring as I write this.
Very recently I started helping a small group of middle-income investors speculate in the silver market. This was a diverse group of individuals- teachers, small business owners and retirees. They were of course made fully aware of the potential risks of speculating with commodities options. All of them opened commodities brokerage accounts and started to invest with as little as $2,000. The first to start speculating did so in May 2003. I've known most of them for years and they trusted my guidance. All the accounts were with one major brokerage firm for easy monitoring. Their money was put into silver call options because it was the most aggressive way to be bullish in the current silver market. The extensive research indicated that the bullish factors for silver were (are) outstanding. How did they do?
Every single account was up at least 300%. The best accounts were up over 500%! And all this happened in less than 10 months! Documentation verifies this. Market gurus boast about meeting or beating the market (10%? 15%? Maybe 25% in a year?) yet this resolute and diverse group saw their investments triple and quadruple literally in less than a year! On a percentage basis, they are beating not only most investors but most market pundits, too. Now…how does understanding the negative machinations of government have anything to do with the silver market in particular and investing/ economics in general?
Because of the government's gross failure to keep the silver market free from manipulation and interference, it laid the groundwork for upside pressure for silver. How? This question is best addressed by others such as renown silver analysts Ted Butler (his excellent essays are archived at http://www.butlerresearch.com/) and David Morgan of http://www.silver-investor.com/. The bottom line for silver is that the government unwittingly created an environment that essentially sanctioned some large market participants in the act of artificially suppressing the price of silver. Price manipulation is tantamount to fraud and it must be addressed. The primary and proper responsibility of government (some would argue the only responsibility) is to prevent or punish involuntary transactions such as murder, rape, theft and fraud.
In the case of silver, its price suppression occurred over many years. This "mismanagement" warped the market for silver. The artificially low price stimulated market demand and consumption for silver. As the low silver price made silver mining uneconomical, a silver shortage started coming into being. As of 2003, silver demand far exceeds the available supply of silver. In addition, the past few years has seen an unprecedented explosion in the money supply. More dollars printed by the government means one thing: inflation. As you can see, you don't have to be a proficient silver analyst to envision a price rise in this scenario. The most important thing to be aware of is how markets react to government action (or inaction as Butler points out).
Once it became apparent that conditions would make silver's price rise, the astute investor can take action. As the record clearly shows, silver-related investments were among the best performers over the past year. Whether it was physical silver, precious metals mutual funds, silver mining stocks or more speculative vehicles such as futures and options, silver investors have so far been rewarded handsomely with returns on their money that easily surpassed the performance of run-of-the-mill common stocks in 2003.
Accurate forecasting based on logic, empirical evidence and diligent research will always be beneficial for investors seeking consistent success. I hope that the above gives you some food for thought. At this point, I'll provide what I believe will be some profitable forecasts.
FIRST, A PERSONAL WARNING…
Just remember that you take the following as my personal opinion only and NOT as investment recommendations. PLEASE do your homework and due diligence and consult with a financial advisor that you trust. I make no guarantees in my reports. Remember that investing and speculating carry risk and you could suffer losses if you are not informed and exercise caution. With that disclaimer in place, here goes:
1. The Dow will go below 6,000.
With this forecast, I reiterate my bearish warning from last year. If stocks are fairly priced given the current fundamentals, economic conditions and plausible price-to-earnings (PE) ratios, most stocks would have to fall to more realistic levels. When stocks, for example, should typically have a PE ratio within the range of 10-20, what happens now that stocks' PE ratios are in nose-bleed territory of 50, 100 and beyond. In addition, many companies are still hard-pressed to produce a net profit at all. I've had people tell me "How could you be bearish on stocks since you wrote books such as "Stock Investing for Dummies" and "The Unofficial Guide to Picking Stocks"? My research tells me that stock bargains in this market are few and far between. Be very selective. If you're not sure, don't invest. If you are already in the market, at the very least use techniques such as stop-loss orders to minimize your down-side risk.
2. The dollar will drop at least another 25%
I made the same prediction in early 2002. Considering the budget deficit, national debt levels and the trade deficit and juxtaposing that will the dollar being printed (or digitally produced) at the greatest rate in US history, seeing the dollar drop then was easy. Why will it drop again? The conditions two years later are worse now. The final nail in the coffin is the public admission by the federal government and the federal reserve that a weak dollar would be welcome in 2004.
3. Gold will hit $1,000 an ounce.
I don't count on this happening next week, next month or even next year. However, the bullish factors for gold are excellent. As the investing public sees rising inflation, geopolitical concerns, federal budget worries among other factors, gold will excel. Since gold had already surpassed $850 at the height of its last bull market, seeing hit four figures is realistic in the coming years.
4. Silver will hit $50 an ounce
I said this last year when silver was under $5. It is now around $7.50. It still has far to go. However, the bullish factors for silver are better than excellent. For those that don't mind the risk, I believe that silver is the best speculation on my radar screen. My students and clients have already made tremendous profits but I think that the bull market in silver (and precious metals in general) has barely begun.
5. The real estate/ mortgage bubble will pop
The vulnerability in the real estate market is the softest that I have ever seen it in my career. There is simply too much debt outstanding. In addition, there are literally billions of dollars in adjustable-rate mortgages which would all by itself become a powerful bearish factor in the event of rising interest which will ultimately occur as inflation really heats. Because this is a credit related problem, you may be interested in reading the excellent commentaries on this huge debt problem by credit analyst Doug Noland (read them at http://www.prudentbear.com/)
6. We will have a severe recession
Just look at the overall picture in regards to debt and taxes. Our GDP is about $11 trillion and our cumulative debt is about $34 trillion. In addition, in spite of the recent tax cuts (tax cuts are definitely a plus) the overall tax burden in the US is growing. Federal income tax cuts are offset because of rising state & local taxes. Real estate taxes, for example, have gone up over 37% in the past three years. There are more factors pointing to a new recession which would probably start within 3-12 months. Again, this is an election year so everything possible will be done to delay or defer the inevitable. That includes the fact that the government does regularly change statistical formulas which can warp or vitiate the results. There is an outside chance of a depression depending on which direction government takes in 2005. Wait and see.
7. We will surpass 2 million bankruptcies & foreclosures
What do you think? As the economy continues to slow and get more murky, what happens as millions try to carry large debt loads? As more companies cut expenses to simply survive, that means reducing jobs since human labor is typically the most burdensome cost in the company's income statement. As the employment market slows or even contracts, that means more people that can not afford to make payments on larger and larger debt burdens.
Yes, I can be wrong. However, I think that I might be off on the timing but not in the essence of the forecasts. Maybe the Dow will actually hit 6,000 in 2007. Maybe the real estate bubble will keep on inflating throughout the decade. Maybe I might be off a few months or a quarter either way. We'll find out soon enough.
Actually, I would be happy to be wrong with some of these forecasts. These are not "wishes". They are just expectations I have based on all the information available to me. In the earlier example, I'm sure that the doctor didn't wish anything bad for his patient. It's just that it is important to alert people to potential problems to avoid or minimize pain.
Successful investing is more than just understanding economics. It also means politics and history. No market works in a vacuum. Whether it is precious metals, stocks, bonds, bank investments or real estate, it becomes a good (or bad) investment based not only on its intrinsic values and supply & demand fundamentals but also on the total economic and geo-political environment.
To enhance your personal research, I have included a few of my favorite resources so that you can have a fuller understanding of what's going on now. Once you get the fundamentals of the effects of government policy and how people and organizations react, you will start to understand to best way to invest to preserve or grow your hard-earned money.
RESOURCES
1. Prosperity Alert (free) financial newsletter
Feel free to subscribe to my free financial & home business ezine, Prosperity Alert to get updated information and commentary related to this report in the coming months. Email me at mailto:Mladjenovic@juno.com
2. Politics & economics
Regularly visit and review the following websites for news & views: The Mises Institute ( http://www.mises.org/ )
Foundation for Economic Education ( http://www.fee.org/ )
American Institute for Economic Research ( http://www.aier.org/ )
3. Money & Investing
For great information on investing and the financial markets:
Financial Sense Online ( http://www.financialsense.com/ )
Safe Money Report ( http://www.safemoneyreport.com/ )
McAlvany Intelligence Advisor ( http://www.mcalvany.com/ )
4. Taxes
Reducing your taxes is important but remember to tell your representatives that taxes hurt the economy. When you tally up all the taxes you pay, this expense is greater than food, clothing & shelter…combined!
National Taxpayers Union ( http://www.ntu.org/ )
Americans for Tax Reform ( http://www.atr.org/ )
Citizens for an Alternate Tax System ( http://www.cats.org/ )
Tax Foundation ( http://www.taxfoundation.org/ )
5. Precious Metals
Gold essays & research can be found at http://www.gold-eagle.com/ ,
http://www.lemetropolecafe.com/ and http://www.321gold.com/.
Silver essays & research can be found at http://www.silver-investor.com/ and http://www.butlerresearch.com/
You can track the major metals markets at http://www.nymex.com/, http://www.kitco.com/ and http://www.thebulliondesk.com/.
The coming months & years will probably be momentous times for our economy. If you are serious about protecting and growing your wealth, go beyond the conventional and superficial commentary presented in the mass media. Remember that investors lost over $7 trillion during 2000-2002 listening to an endless parade of bullish pundits on the major financial shows while the reality was more accurately presented by pros that were more bearish and rarely seen on Radio & TV programs. The economy has in many ways more pitfalls now than in 1999-2000 and people must be more informed and take an independent (often contrarian) approach to protecting and growing your wealth.
I wish you all the best in your wealth-building pursuits.
Regards,
Paul Mladjenovic
201-714-4953
www.Mladjenovic.com