Yesterday the US stock market plunged by about 3%, jittered by the panic the night before in China, where the Shanghai Index plunged nearly 10%. Like a thief in the night, fortunes for some people evaporated quickly. I think we’ll recover from this sell-off, but there are many factors in place that could eventually lead to a much bigger cause of panic, resulting in massive stock market tumult and a plunging dollar. To the unwise, it will come as a thief in the night.
Already some of the winds of recession are in their air. Subprime lenders, companies that provide mortgages to people with poor credit ratings, plummeted suddenly in recent weeks. I foolishly thought I had called the bottom of one “well managed” company that I had made money on before, Novastar Financial (NFI), but it went from being viewed as a solid dividend machine with huge profit potential to a trainwreck in one day, and has dropped over 50% from what I thought was a bottom. Hilarious! Great learning experience – only had a little. But the growing wave of mortgage defaults that are destroying it and other subprime lenders may well represent the tip of an iceberg that is going to affect many other parts of the market. Financial writer Chuck Butler has this to say:
Have you seen all the negative news stories regarding the subprime mortgage loan problems? Aye-Caramba… This is getting U-G-L-Y! These subprime loans aren’t getting hit with the ugly stick… Oh-no, it’s more like the whole ugly forest! Again, here I am talking about my friend John Mauldin… But John did a great job explaining it all in his Feb 17 letter… I’ll give you some excerpts…
First of all… Generally, subprime mortgages are for borrowers with credit scores under 620. Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s. Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30 or 60 or 90 days or more, will suffer from a plummeting credit score. If it falls below 620, that consumer is in subprime territory. Subprime loans have higher rates than equivalent prime loans.
OK… Now that I’ve explained a subprime mortgage, here are the excerpts from John’s 2/17 letter… “A decade ago sub-prime mortgages were a mere $35 billion. Today they are one-fourth of all mortgages, about $665 billion. Somewhere in the neighborhood of $1 trillion in adjustable-rate mortgages is eligible to be reset in the next two years, sharply increasing payments and lowering the discretionary spending ability of those homeowners.”
I know, I know, you’re wondering what this has to do with the threat of a recession… Well, grasshopper, it’s quite simple really… Mortgage Equity Withdrawals (MEW’s) have been fueling this economy… John tells us that “MEW’s accounted for over 2% of last year’s GDP growth [JL: I think that puts it at about 2/3 of 2006 growth].”
Uh-oh… That looks scary… If MEW’s accounted for a majority of Consumer Spending and that ability of those consumers to withdraw is going to be sharply lowered, guess what that does to an economy?
I’m not trying to be Gloom & Doom here… I just want to bring this to your attention, in hopes that you make the moves in your investment portfolio to protect you from a potential recession, which cannot be good for the dollar, eh?
We may have a great 2007 in the stock market – it’s possible. But we could also see some sudden changes that wipe out fortunes. Are you prepared? Are you getting out of debt, living frugally, and working hard to save? Are you building up a healthy food storage? And are you putting some of your savings in forms that will retain their value or even increase in value if the economy and the dollar tanks? Hey, it’s no secret that I’m a big precious metals buff. I think this is a great time to be invested in the metals themselves (using an exchange traded fund for a 401k, or owning physical metal itself, protected in a safe place), in select mining stocks, in energy, and in other areas that can do well even if the dollar drops sharply.
Metals and mining stocks (gold, silver, uranium, etc.) dropped sharply yesterday, lowered by the whole market. But I think the smart money will see this as a buying opportunity and move in, while others flee. With our massive inflationary engines running at full speed, printing up billions of fiat dollars that are being dumped into Iraq, China, and elsewhere, the eventual fate of the dollar is certain.
Did you realize that the minimum wage in the early 1970s was actually over $9 in 2007 dollars?? Our money today is worth much less than it was a few decades ago – you’ve been slowly robbed by a whole gang of elected thieves in the night. While you think Congress has been looking out for the little guy by raising the minimum wage, they have been grossly lowering the real minimum wage and everybody’s wage in effect by devaluing the dollar through reckless inflationary spending. And the dollar right now, as weak as it has become, is far stronger than it should be, solely because of the great blessing of China and other nations buying tons of US treasuries and the petrodollar of the Middle East. Once they get spooked about the dollar and sell off their treasuries, or use their money to buy other stuff (California, for instance), then the flood of dollars on the market could cause a massive drop. It could come suddenly. And when it does, gold and silver will see massive increases in price. I really think you should add some to your portfolio, and get your kids collecting some cheap 90% silver coins now – while they are incredibly cheap. There’s another story there, the story of massive market manipulation that has suppressed prices of precious metals – an amazing gifts, if understood properly. But the gig will be up one day when market realities are more firmly in place.
But far more important than financial preparation is spiritual preparation. Get your lives in order. Learn to follow the guidance of the Lord in your daily life, and prepare to able to help your family, your ward, and your neighbors when the crises of the future strike as a thief in the night.