The Morning After: An Extreme New World
Right now, if you feel like you’ve awakened in a strange new world, you’re not alone.
The investment environment has changed over the past few years — and the change has been radical.
Today, we are in the midst of a massive global revolution — the East, reaping the benefits of its industry and thrift; the West, paying the price for its sloth and extravagance.
Former “Third World” countries are resource-rich, virtually debt-free and have vast cash reserves. And the so-called “advanced” nations — in Europe and the United States — are nearly bankrupt, drowning in debt; most available cash, borrowed or printed.
As happens every half-millennium or so, the economic sun is setting in the West and is rising in the East.
The New Reality
Moral lessons aside, the reality is that a revolution of this magnitude — the historic changing of the planet’s leadership — can be expected to impact the value of every conceivable store of wealth. And it’s only natural that these changes be as extreme as the events that drive them.
We’ve seen similar extremes in stocks as well:
Thirty-four months ago — in October of 2007 — the Dow was over 14,093. Just a year and a half later — by March of last year — it had plunged to 6,627, a 53% decline.
Then, in March of last year, the Dow changed course, ultimately rising to 11,019, posting a 66% gain in 13 months … only to change course AGAIN in April of this year, sinking to the 9,700 zone in just the last three months.
Moreover, judging from the rapidly deteriorating economic news, this is likely to be just the beginning of a far deeper decline — one that could take the Dow down all the way back to last year’s lows.
If that forecast proves to be correct, the Dow will have swung a total of more than 15,000 points since October of 2007.
And as you might expect, similar scenarios have been playing out in every other major investment market on the planet:
- The U.S. dollar crashed to all-time lows in 2008. Then, the European debt crisis took center stage. And for the past seven months or so, investors have been buying dollars and dragging the euro through the dirt. In the next phase, if those same investors realize that America’s sovereign debt crisis dwarfs that in Europe — and that the U.S. Fed has been counterfeiting dollars like there’s no tomorrow — it could be the dollar’s turn at the whipping post.
- The U.S. bond market is a huge bubble. Market interest rates — not just those dictated by the Fed but also those set in the bond market by real investors — have cratered as bond prices soared. But with our deficits bulging and our economy sinking, global investors may soon decide to flee from dollar-denominated bonds, much as they fled from European bonds this spring. If so, our bond bubble could also burst.
Why the Old Rules No Longer Apply
In this kind of environment, the old rules of investing are out the door.
Most buy-and-hold investors are subjected to the roller coaster rides of their lives; and, in the end, go nowhere (if they’re among the lucky ones who can avoid big losses.)
Look. After all the sleepless nights — and fanfare — of the past three years, the Dow is STILL down 32% from its October, 2007 highs.
After nearly three years of nail-biting volatility, most buy-and-hold investors have managed to wind up with far less money than they started with.
Worse: There’s no end in sight. Nothing on the horizon that even suggests a return to normalcy at any point in the foreseeable future.
Given these new facts of life, most inexperienced investors are frozen — unable to budge. And they often lose a lot of money.
Martin D. Weiss, Ph.D.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.