In this week’s Macro Theme update, we review “Reflation’s Rollover.” Last we...
Martin Weiss: Four Steps to Safety
11/07/2003 12:00 am EST
Caveat emptor is the watchword of Martin Weiss, whose Safe Money Report is an invaluable resource for those concerned with portfolio safety and asset protection. No matter how optimistic an investor may be, it is clearly in their interest to understand opposing views and potential risks. Here are excerpts from Martin's "standing room only" speech.
"I’ve told investors about the $475 billion as a bare-bones estimate that the government is making for 2004. I’ve told you about the $87 billion in additional funds requested. I’ve told you about the $217 billion additional dollars that the government is taking from the Social Security Trust Fund. And I have told you that additional expenses will likely drive the deficit above $1 trillion in 2004. You know these numbers already. What more can I do to persuade you? Let me read you another quote from another speaker, at another time, at another forum.
"And I quote: ‘If these numbers are making your head spin, don’t worry. Just remember that they are all big, and they are all bad. While we are starting off in a financial hole, we really don’t have any idea how big it is. Specifically, there are a number of very significant items that are not currently included as liabilities in the government’s financial statements. For example, several trillion in non-marketable government securites in so-called trust funds. In the case of the Social Security and MediCare, the federal government took in taxpayer money, spent it on other items, and replaced it with IOUs. Given the fact that these are IOUs, why aren't the amounts shown as liabilities of the US government? At the present time they are not. The figures also do not adequately figure Veteran’s health care benefits nor do they include future promised payments under the Medicaid and MediCare programs. These amounts total tens of trillions of dollars. They are likely to exceed over $100,000 for every man, woman, and child in America – and these amounts are growing every day. The burden of paying for these is not a very nice present for a child born today.'
"These are not the words of a newsletter writer, and they were not spoken at an investment seminar. They are from David M. Walker, Controller General and director of the US General Accounting Office (GAO) before the National Press Club in Washington DC last month. He also noted that this year the GAO was unable to express an opinion as to whether the US government’s financial statements were fairly stated – for a sixth consecutive year. In other words, as the Controller General, he was unable to audit or certify the books of the US government. He blamed this on serious financial mismanagement at the Department of Defense, the government’s inability to account for intra-governmental transactions, and the government’s inability to properly prepare consolidated financial statements. Ladies and gentlemen, this is worse than Enron-type accounting. The government’s books are a mess. Walker did add some optimistic comments. He said that with diligent efforts the government’s books could be back in shape by 2013.
"What about all the arguments that the deficit is natural in times of war and that it is manageable given the overall size of the economy? Well here is Mr. Walker’s response to that argument: ‘The current and projected deficits far exceed the costs associated with Iraq, the global war on terrorism and any incremental homeland security costs. Our projected budget deficits are not manageable.’ In less than 10 years, he says, "Due primarily to the retirement of the baby boomer generation, the US will be hit by a huge demographic tidal wave that is not expected to ever recede. This is unprecedented in the history of our nation." These are his words, not mine.
"So why aren’t more people on Wall Street talking about this? In Washington? In Congress? What is more striking than all these numbers is Mr.Walker’s belief that many member of Congress, many key policy makers, and many key leaders do agree that a deficit disaster is looming, but that they don’t want to talk about it in public. This is the view of the head of the only agency in Washington that knows these numbers inside and out and is in a non-political, non-partisan position. The GAO has no political axe to grind. And he is telling you point blank that many in Washington know that we are headed for a disaster, but that no one is really telling you what is going on. You should understand the gravity of this situation. And if you haven’t done so already, there is not further excuse to delay protective actions. You must protect yourself:
Strategy #1:Get most of your money to safety. I don’t care how long the stock market rallies or how soon the rally ends. Safety must still be your first priority. And the safest place is short-term US Treasury securities.
Strategy #2:Bet on rising gold prices. Here are some specific gold stocks that you can be considering – AngloGold (AU NYSE) is a company that is moving forward with its purchase of properties in Ghana. This is an excellent acquisition. I think it’s a buy. Newmont Mining (NEM NYSE) recently hit a six year high. The company is increasing reserves and slashing production costs. It’s another buy. Cambior (CBJ ASE) is also a buy. GoldCorp (GG NYSE) has unusually high gold deposits. And if you want diversificatin, I would recommend USAA World Precious Metals & Minerals Fund (USAGX).
Strategy #3:Bet on rising interest rates. How do you do that? There are several alternatives. The most conservative way to do this is to just keep your money in short term Treasuries. I know the yield is very low now, but as interest rates rise, your yield will rise along with it. I suspect that the government will try to keep rates low for a while, and you might not see a rise in interest rates very soon. But, the Federal Reserve does not control long-term interest rates, and these are rising. This leads me to a more aggressive way to bet on rising rates: buy Rydex Juno Fund (RYJAX). This fund is designed to go up in value with a rise in long-term interest rates (and concurrently, a decline in Treasury bond prices). For every 10% decline in the Treasury bond price, this fund is designed to rise 10%. If Treasury bonds go down 20% - which I think is a very reasonable scenario given the deficit disaster that’s looming – the net asset value of this fund would go up 20%.
Strategy #4:Bet on a falling dollar. A relatively conservative way to do this is to buy mutual funds that are designed to protect and profit from a falling dollar. For example, two of them are American Century International Bond Fund (AIBDX). The bonds are not long term so there is very little bond price risk. It’s primarily a play on a falling dollar, because most of the bond holdings are in foreign issues. Another fund that is similar in its strategy is the Prudent Global Income Fund (PSAFX). There are risks, but I am pretty sure that the dollar decline we have seen so far is just the beginning.
"To sum up, these are four strategies that you can follow. Get safe, bet on gold, bet on rising interest rates, and bet on a falling dollar. I think the profit potential in these strategies is as big as the deficit disaster is scary."
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