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A New Phase In The Great Money Panic
-- September 12, 2001
I have followed geopolitical events since I was a young teenager. I know the current state of affairs on wars and revolutions in nearly every country on Earth. But as I began to fall asleep, I realized that my knowledge gave me little more than a historical timeline -- but few clues regarding the tragedies yet to come.
Fortunately, very early yesterday, a few hours before the attack, my wife and I were at the sea, swimming. I had sprinted, freestyle, for a half mile. So my tired muscles let me sleep deeply, and this morning, I awoke with a fresh mind, feelings in check, vision clear, ready to dissect the events rationally, and share my analysis with you. Here's what I can tell you with a reasonable level of confidence:
First, this is NOT the end of the world or the end of our country. There is massive back-up and redundancy in our infrastructure. Almost every record that was destroyed is duplicated in offices elsewhere. And if you consider the sheer enormity of the American economy, you will see that yesterday's attack was like a mild stroke to our vast infrastructure.
In the minutes following the attack, although some phone lines were jammed temporarily with extra traffic, I was able to log onto the Internet, promptly reach friends around the world, and send you a short email.
BUT ... the attack IS a great blow to an already-vulnerable economy. As I have been telling you for many months, the world economy was ALREADY teetering on the brink even BEFORE yesterday's attack.
Even as the hijacked airlines flew mercilessly toward their targets, a flood of red ink had wiped out over six years of TOTAL accumulated profits of ALL companies listed on the Nasdaq Exchange (see last issue of Safe Money).
Even as the upper floors of the World Trade Center burst into flames, America's largest money center banks had the greatest exposure ever to derivatives -- high-risk bets that are notoriously vulnerable to unexpected events (according to the latest reports by the US General Accounting Office).
Even as the 110-story twin towers imploded into a great cloud of dust and debris, the world's stock markets had already been tumbling for 18 months or more. The Nasdaq had lost about two-thirds of its peak value, with over $5 trillion in wealth destroyed. The German Neuer Markt, the equivalent to our Nasdaq, had lost roughly NINE-TENTHS of its value. The German DAX, the counterpart of our Dow Jones Industrials, was down about 47%; the Nikkei, down close to 75%.
So no historian of the future will ever be able to assert that terrorists caused the Great Money Panic of 2001-2002. They are strictly a catalyst of the great economic decline that was already in the making.
In my writings, I have described that future decline in great detail. Except for a few minor changes and footnotes -- too unimportant to mention right now -- my scenarios for the future are unaffected by the great tragedy of Tuesday, September 11, 2001. As I have predicted, we will still see:
Until today, the primary thread of strength that was holding up the US economy was the apparently resilient confidence of the American consumer. But last Friday, when the news spread of rapidly rising unemployment, that confidence was shaken. Today, that confidence is mostly gone.
- The worst stock market decline since 1929-32, perhaps worse
- An economic depression of unknown duration
- A severe threat to our banking system
Americans will cancel their buying plans, cancel their investment plans. Many rushed yesterday to their banks to pull money out. That particular panic will be temporary. But it is a sneak preview of what's to come after a severe economic decline.
Unlike Pearl Harbor, when Americans were galvanized into action against a clearly visible enemy, this time, the enemy is largely unseen and unknown. This is not December 1941. It will not turn the economy around. Quite the contrary, it is instantly wiping away the already-thin veneer of hope and trust that drove American consumers to spend themselves further into debt, to live it up despite their declining financial ability to do so.
Ironically, the greater and longer lasting impact is not the damage to property or even to life. It is the blow to America's psyche. Markets will reopen. New structures will emerge in lower Manhattan. But America will never forget. America will remember September 11, 2001 as not only the day that will live in infamy, but also as a sordid landmark between 20th century boom and 21st century bust.
What will happen next? No one can say for sure. But here's the most likely sequence of events, as best Larry and I can piece them together ...
Event #1. Reopening. The New York Stock Exchange, the American Stock Exchange, and even the Nasdaq will reopen, perhaps this week, perhaps early next week.
Event #2. Opening crash. Due to the sheer physical damage to companies headquartered at the World Trade Center, plus the worldwide shock to investor confidence, the Dow Jones Industrials will likely open dramatically lower.
Any guess as to the exact level is speculative. But based on the declines we have already seen overseas in the immediate aftermath of the attacks -- the German DAX sank 9%, the CAC sank 7.4%, and the FTSE sank 5.7% -- we figure the Dow could open around 8700 - 8800, or about 800 to 900 points lower than its last closing level.
Expect similar declines in the S&P.; The Nasdaq's decline may be greater. We will adjust these estimates -- downward or upward -- as new information on markets overseas becomes available, and we will update you accordingly.
Event #3. A dramatic rally. The sheer fact that markets ARE open and infrastructure IS still intact will help overcome some of the initial shock, restore confidence, and trigger a dramatic rally.
It's too soon to say how far the rally will go. But it is reasonable to assume that, except for the companies hit the hardest at the World Trade Center, the rally could bring the market back up as far as Monday's closing level. In other words, it could help close most or all of the gap between the first opening prices after the attack, to the last closing prices before the attack. If it does, it will be your opportunity to:
For specific signals, stay tuned for our updates. We will be in touch with you frequently during that period.
- Liquidate any remaining shares you may own
- Add to your investments designed to profit from a market decline
Event #4. Severe recession, then depression. The economic decline began months before the attack. Now it will accelerate. This would have happened regardless of yesterday's events. However, now, it may simply happen sooner. That means an immediate recession, followed by a prolonged depression.
Event #5. Asset deflation. Corporate bonds, real estate, and almost any asset imaginable will be hit hard. Stock prices will tumble again. They will make brand-new lows, below the post-attack opening lows. And they will fall rapidly toward the very same targets I have set forth in my recent releases:
Event #6. Hardest hit sectors will include: Property and casualty insurers, brokerage firms, and other financial institutions. As I've said in recent issues, the bust in technology will also spread to luxury goods, retail, services, core manufacturing, and virtually every sector of the economy.
- 5000 on the Dow
- 800 for the Nasdaq Composite
Event #7. The Federal Reserve and the stock exchanges will rally to support the markets, helping to inspire further rallies. But just as seven interest rate cuts have failed to spur an economic recovery, any future attempt by the Fed to change the course of history will also be ineffective.
Event #8. Gold. Suffice it to say that even before these shocking events, Larry was anticipating a run to $340. But it won't happen overnight, and there are bound to be wild swings in the price of gold -- both up and down.
Event #9. US Treasuries and other government securities will remain firm. There will be a very temporary disruption in the government security markets. Trading of US government and other fixed-income securities halted after planes crashed into both towers of New York's World Trade Center. Some of the market-making inter-dealer brokers of fixed income, derivatives, and other related instruments -- including Cantor Fitzgerald, Eurobrokers, Garban LLC, and others -- were located in these buildings.
But the market for government securities is not centralized in any one location and physically exists in firms all over New York, and all over the country. These markets will reopen promptly. And it's likely there will be a flight to safety by investors, boosting Treasury prices.
What To Do
First, stay tuned to my communications. The scenario I have just described to you is based strictly on what we know now. But that's not nearly enough. You need to get my view on what we know tomorrow and the days after.
Second, if you have been following my advice, you are in excellent shape. You are among a privileged minority that has ALREADY taken all the same protective steps that millions of Americans will be desperate to take in the days ahead.
* You have most of your money in US Treasury securities, which will be safe and secure. Hold.
* You have hedges in mining shares that are already doing great. Hold.
* If you have some funds allocated to shorts and other speculative positions that we have recommended, you will be the envy of all those around you. Those investments are designed to profit from any decline, regardless of whether the causes were predicted or entirely unexpected. We advised you to take one round of windfall profits already. Now, stand by for instructions to take another round of potentially even greater windfall profits.
* If you have options, you are in great shape. Options are ideal for dramatic changes -- whether up or down.
Will the temporary market shutdown threaten the underlying mechanisms for trading options? No. Even if markets remain closed for longer than expected, the earliest that any equity options will expire is on Friday, September 21, 2001. That is over a week from now. US stock markets will almost definitely be open by then.
And even in the unlikely event that someday, due to some other reason, markets remain closed for an extended period, it's likely that all option expirations would be postponed, giving you a chance to unload them. Reason: No one will know what the value is of the underlying security. And if there's no way to price the underlying security, there's no way to price the option.
Further, the Options Clearing Corporation (OCC) would likely step in and guarantee all transactions. This is an independent company that covers all options transactions through its member brokerage firms. Therefore, whether your options are in the money or out of the money, you should be able to trade them immediately upon the markets' reopening. The same will apply to mutual funds that invest in options.
What if you have your funds with a brokerage firm that was hit directly by the attack? Your money is not in jeopardy. Morgan Stanley was the World Trade Center's biggest tenant, occupying 25 floors with 3,500 employees. Other major tenants included Marsh & McLennan Cos. (brokers), Bank of America, Deutsche Bank, Oppenheimer Funds, and Credite Suisse First Boston. But even these companies never physically had your money at the World Trade Center. At most, they kept track of it there. All had back-up records offsite. That's standard operating procedures. Examples:
-- Morgan Stanley released a statement saying that all account records are secure and that they would be open for trading tomorrow.
-- The computer network for the Nasdaq is located in Connecticut, not even in Manhattan. So it was not impacted. The Nasdaq also has a completely redundant computer network in Maryland that mirrors all trading.
-- The SEC, the CFTC, and other regulatory agencies, which had offices in the World Trade Center, have their main offices in Washington. Plus, all of the exchanges have self-regulatory agencies that help enforce their rules and regulations.
These institutions will hold up the system. But they will not hold up the markets and the economy. I repeat: This is not the end of the world. But it already was -- and will continue to be -- the end of a fifty-year boom. We were already speeding toward a prolonged and deep bear market, a severe recession and depression, and the Great Money Panic. Now, we will get there sooner.
Batten down the hatches and hold on to your hat. With or without the threat of terrorism, this is going to be one of the worst declines of all time.
Best wishes and God bless,
Martin with Larry