Last week the title of this analysis was: "Be Afraid - Be VERY Afraid". Well, it "worked". Americans are becoming very afraid, but not quite in the way that those who want them to be afraid would like.
Americans have become afraid of their investment markets. Finally, more than two years after U.S. stock markets hit their peaks and after the Nasdaq index has ALREADY plummeted by 72.8%, U.S. investors are beginning to accept the unthinkable. They are beginning to think that this is an actual BEAR market, a phenomenon which was confidently thought by most of them to be impossible.
It's an old, old story. Bull markets operate on greed - bear markets operate on fear. Of the two, fear is by far the most powerful emotion. U.S. investors spent the last half of the 1990s in a state of euphoria watching their paper wealth go up and Up and UP. They then spent two years watching it go down and Down and DOWN. But up until very recently (an argument could be made that it is up until this past week), they held fear at bay by convincing themselves that it was just a matter of time before they got it all back again.
Now, with broader (S&P 500 and Nasdaq) indexes having broken BELOW their post 9/11 lows and with the Dow having lost 7.4% in a week, U.S. investors are starting to have grave doubts as to whether they WILL get all of it back. They are starting to contemplate the horrendous possibility that they might have to actually turn "paper" losses into REAL losses by selling before the market REALLY tanks.
On Tuesday, July 9, President Bush told the American people that his government was going to make sure that in future, they could "trust" the numbers coming out of corporate America. On that day, the Dow tanked 283 points. Later in the week, Treasury Secretary O'Neill referred to the "technical features" of U.S. markets, alluding to the article of faith held by Wall Street that U.S. stock indexes would NOT go below their post 9/11 lows. Here's what Mr O'Neill said:
"That's the basis for creating the foundation for another leap forward above the highs that we have ever achieved."
Ever since 9/11, the Bush Administration has been selling the line that they are going to "protect" the American people from any further terrorist attacks. They propose to do it by choking off all the personal freedoms that Americans once took for granted. Now, with all market, currency, and interest manipulations having been tried and having failed, the Bush Administration is trying to sell the line that they will protect the financial well being of the American people. Many Americans, although their number is falling, might have bought the first sales pitch about trading freedom for "security". Few if any have bought the latest one.
For most people, "freedom" is a nebulous concept. But the difference between a stock portfolio valued at $1,000,000 and one valued at $500,000 or less is starkly real. Mr Bush has said that he won't let the corporations lie any more. Mr O'Neill has said that no one should worry because they are about to get it all back. This stuff is right up there with Neville Chamberlain, Prime Minister of Great Britain, brandishing a piece of paper in late 1938 and bleating "Peace in our time".
Those who have never bothered to understand the fundamental mechanisms of credit-creation and deficit spending have most to fear. They don't understand why the markets went up, and they don't understand why they are now going down. While they were going up, understanding was not deemed necessary. Now they are going down, they have no means to come to grips with the situation. This, as it has always been, is the raw material of panic.
The major problem facing investors is said to be the fact that "all of a sudden", they can't trust the "numbers". When U.S. stock markets were going to heaven, nobody gave a flying !*#@ about the numbers. The only number that interested them was the price of the stock or the level of the index. U.S. funded debt went from $US 1 TRILLION to more than $US 6 TRILLION and they were told there was no "inflation". U.S. hi-tech corporations reported quarter after quarter of LOSSES and the bigger the loss, the greater the upward acceleration of the price of the stock. Investor poll after investor poll showed the confident expectation of 20% plus annual gains - FOREVER.
All of a sudden, it comes as a bolt from the blue. The investor has been decieved. But pulling the wool over someone's eyes isn't necessary when that person's eyes are screwed shut. The question "why" is seldom asked by most investors in a bull market.
Few people take the trouble to discover exactly WHY they are getting rich. But it's very hard NOT to try to discover why one is getting poor. The Bush Administration is trying to forestall the questions by the age old method - they have found a scapegoat.
Historically, public scapegoating of the magnitude of what is now occurring in the U.S. is an infallible indicator that the situation is threatening to go beyond the control of those doing the scapegoating. It shows clearly that the "powers that be" have decided that they can no longer hold back the tide, so they are setting up someone to blame for the inundation.
Gold has always been the lifeboat. Its performance this year is so superior to that of any other U.S. investment that the only surprising thing is that so few have noticed it even now. That state of affairs is going to end. The more the U.S. government tries to deflect attention from itself, the more attention it will attract. The more they "protest too much", the more incentive there is for increasing numbers of investors to at least try to figure out what is REALLY going on.
It won't take many. In financial matters, one can put one's "faith" in government or make the effort to understand the situation. Those who have made the effort already own Gold. That is true not just in the U.S., but all over the world. Now, we are approaching the final crumbling of the facade of U.S. financial invincibility. It will happen sooner or, if (when) the U.S. goes to war in Iraq, it will happen later. But it will happen.
Fear is taking over from greed. And no amount of "reassurance", no matter the source, can alleviate fear. Only knowledge and the tenacity to reason to conclusions can do that.
May we all have a very HAPPY NEW YEAR - stay tuned.