March 21, 2007 – Everywhere global stock markets have rebounded whether in China, Australia, Europe, or the U.S. , short positions have decreased dramatically, and the bulls are back in full force. However, there are still two scenarios that every investor should be wary of, one that is very likely, and one that is near inevitable. The first event is that a more significant correction in those markets that have run up for the last six months with hardly a speed bump is necessary for them to experience additional significant growth. So the likelihood of a more significant correction, despite any short-term, or even intermediate strength, is still strong. Remember, for the immediate future, the best time to buy traditional stocks is when there is panic in the streets and not when everyone agrees that it is the time to buy. When stocks get pushed down in price for no good reason this is a time to buy. Secondly, there will come a time soon when true panic hits the streets, though during this instance, this will NOT be a time to buy because traditional stocks will be on sale with good reason. In fact, I will go so far as to say that what happens for the remainder of the year in traditional stock markets will be irrelevant to your ability to build wealth when compared to the significance that should be attributed to the positioning of your portfolio to benefit from the impending global economic crisis that will surface soon enough.
We saw foolish people believe that New Century Financial was a bargain when subprime markets in the U.S. faced great difficulties, and its share price dropped from $40 a share to $20 a share over just several months and jumped in. Similarly, there are people that will have their fortunes destroyed when this global economic crisis rises to the surface and they behave in a similar way.
Sometimes stocks are on sale because they deserve to be on sale. New Century Financial was one such stock and those investors that dove in headfirst at $20 a share and amplified their mistake by doubling down at $10 or $5 obviously are now left holding an empty bag as the company has gone bankrupt. There is a time that will come soon that will afflict some of the largest stock markets in the world, both emerging and developed, where trillions of dollars in wealth will be destroyed.
I know that a lot of people will think that any talk of a future global economic crisis is ludicrous but that is why so few people actually build wealth through investing. Only the handful of people that take the time to really understand the economics that brew well below the surface of the Bloomberg reports and CNBC and the Wall Street Journal will readily prepare their investment portfolios for this crisis. And this crisis that seems inevitable to me will be much bigger than the U.S. Great Depression of the 1930’s and much larger than the Asian Financial Crisis of 1997 because the conditions that are creating this crisis will have a much wider and more significant global impact than either of these two previous crises. Before those two crises hit, the overwhelming majority of investors believed that those people that believed a crisis was imminent were crazy. And during those times, salesmen and women in the financial industry were able to leverage the naivete of the thundering sheep herd to get them to do things that led to certain financial ruin.
If you believe that things cannot appear rosy on the surface even while an economic crisis is brewing, then one need only study history to prove this mindset to be fallacious. Do you know the U.S. stock markets had skyrocketed for about a decade straight and that unemployment was less than 1% immediately before the Great Depression hit. That’s correct. Less than 1%. You may have said that things could possibly not have been better in the U.S. economy back then. And this was right before most investors got smacked in the face by a 2,000 pound bear and lost their fortunes almost overnight. In a more contemporary case, during the 1997 Asian Financial Crisis that hit SE Asia, and in particular, South Korea and Thailand, again South East Asian economies were experiencing growth rates in the high single to low double digits as foreign investment flooded these markets. In fact, things were so rosy in Thailand back then that the overall economic giddiness sparked a real estate boom, the evidence of which can still be seen today, over a decade later. Just drive through Bangkok, and you will easily spot empty shells of half-constructed office buildings and luxury residential buildings sprinkled throughout the city as these projects, half-constructed, had to be abandoned when the crisis hit and funds to complete them dried up.
These two cases of a booming surface-level economy accompanied simultaneously by great stresses broiling below the surface produced the appearance of overnight financial collapses, when in reality, the conditions that caused both these crisis had been developing steam for years prior. All any investor saw, however, was the result, when the steam blew the head gasket. In both instances, the very savviest of investors actually built great wealth both during the Great Depression and in Southeast Asia during the 1997 Financial Crisis as they monitored the economic conditions below the surface and knew that the advent of such crises were far more likely than not. Thus, they not only prepared for it but they were able to profit from it. We see a situation brewing in today’s economy similar to these previous two, but only worse.
And though it is preventable, the actions needed to prevent it are so far fetched and unrealistic that we now see its occurrence as much more inevitable than preventable. Furthermore, the global economy is a significantly different creature than it was even as recently as 1997. The explosion of complex financial instruments, the growth of global trade and free trade agreements, and the boom in derivative markets (which now has grown to the hundreds of trillions of dollars in size) links many different financial assets and corporations in manners never seen before in history. For example, several decades ago, the crisis in subprime lending that is currently afflicting the states would affect just the subprime lenders. Now everyone from auto dealerships to investment houses are affected by a crisis in a seemingly unrelated industry.
Whether the onset of this new crisis starts this year, next year or five years out, the time to start preparing for it is now because once it starts, it will be too late to prepare. Your investment portfolio needs to be positioned to benefit from it well before it starts. So consider this part III of my advice to beware the perpetual bulls. The perpetual bulls have a much different agenda than yours. The only one you should be concerned about is how to not only protect your wealth but how to build great wealth during any situation that is likely to occur- whether that situation is strong regional growth or a global economic crisis.
[tags]peak investment crisis, new century financial, 1997 Asian Financial Crisis,great depression[/tags]
J.S. Kim is the Founder and Chief Educational Officer of maalamalama.com