The Little Book of Bull Moves, Updated and Expanded E-Book

Peter D. Schiff

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Little Books. Big Profits
• Sprache: Englisch

Seitenzahl: 307

Veröffentlichungsjahr: 2010

Beschreibung

In The Little Book of Bull Moves, popular author and economic advisor, Peter Schiff, takes a new look at America's bull markets of the 1920's, 1960's, and 1990's, and the bear markets that followed. Analyzing similarities and differences from both an economic and political perspective, Schiff discusses investment strategies that worked then and explains how those same conservative approaches to investing can be applied in today's market.

• Provides detailed advice on the techniques and strategies that can help investors maintain and even build wealth now and in the turbulent times that lie just ahead
• Filled with insightful commentary, inventive metaphors, and prescriptive advice
• Other titles by Schiff: Crash Proof: How to Profit From the Coming Economic Collapse, and The Little Book of Bull Moves in Bear Markets

Written by a seasoned Wall Street prognosticator, The Little Book of Bull Moves shows readers how to make money under adverse market conditions by using conservative, nontraditional investment strategies.

Leseprobe

Table of Contents

Praise

Little Book Big Profits Series

Title Page

Copyright Page

Dedication

Disclosure

Foreword

Prologue to the 2010 Edition

A Note on the Format and Title

Author’s Note

What Do We Mean by Bull and Bear Markets?

Some Historical Perspective

Introduction

Chapter One - Let’s Do the Time Warp Again

The Healthy 1950s

The Coming Economic Collapse

Doctor Doom

The Real Estate Bubble Bursts

A Hair of the Dog: Paulson and Bernanke to the Rescue

The Outlook

Chapter Two - Saving Your Assets

A Little Background

Understanding Inflation

Price versus Systemic Inflation

Exported Inflation

The Bretton Woods Agreements of 1944

The Dollar’s Reserve Currency Status

The Significance of Decoupling

Chapter Three - Beware of False Prophets

Usual Suspect 1: Uncle Sam

Usual Suspect 2: Wall Street

Usual Suspect 3: Industry Groups

Chapter Four - Of Babies and Bathwater

The Current United States Stock Market

Historical Parallels

Chapter Five - Hot Stuff

By Way of Background

Forces of Nature

So What Commodities Are We Talking About and What Are the Ways to Play Them?

Ways to Own Futures Contracts

Investing

Chapter Six - The Ring in the Bull’s Nose

Digging for Gold

A Silver Lining

The Six Ways to Play Gold and Silver

Chapter Seven - Weathering the Storm

Steering Clear of the Garden of Worms

Fact or Fiction?

Investing in Foreign Economies

The Better Option

Beware of Pink Sheets

How, Then, Do You Go About Selecting a Broker Who Will Execute Your Foreign ...

Chapter Eight - Favorite Nations

Desirable Industrial Sectors

Some Favorite Nations

Chapter Nine - If You Want to Roll the Dice

An Impressive Track Record

How Do I Ride This Emerging Bull?

Chapter Ten - To Infinity and Beyond

Service without a Smile

Rebuilding the United States

Major Decisions

Chapter Eleven - A Decade of Frugality

The Cause . . .

. . . And the Effect

Start Saving Now—But Not in Dollars

Get Rid of Debt—Especially Variable-Rate Debt

Stockpile Goods

Get Good at Fixing Things

Chapter Twelve - Pack Your Bags

How Can You Decide If You Will Need a Haven?

Where Should You Go?

Other Factors to Consider

If You Stay Home

Chapter Thirteen - The Light at the End of the Tunnel

The Box the Federal Reserve Is In

Why We Should Take a Solutions Approach to the Crisis and Look at Some Things Differently

Thoughts on the Upcoming Presidential Election and How It Might Affect Our Economy

Tunnels and Lights

Why Lower Living Standards Will Hurt More This Time

The Positive Side of Demand Destruction

Praise for The Little Book of Bull Moves in Bear Markets

“I don’t always agree with Peter, but I always listen to what he has to say. Anyone who has a track record as good as his in predicting future pricing of commodities and equity markets cannot be ignored. We always look for ways to stay ahead of the market. This little book, written by someone whose prognostications have proven prescient, should be a part of formulating your strategy for the future.”

—David Asman, Fox Business and Fox News anchor and host, and former op-ed editor of the Wall Street Journal

“One of Wall Street’s great straight shooters, Peter Schiff is a reliable source of unvarnished economic reality who has the common sense to yell ‘fire’ when everyone else quibbles over the definition of ‘smoke.’ ”

—Paul Tharp, Financial Writer, the New York Post

Little Book Big Profits Series

In the Little Book Big Profits series, the brightest icons in the financial world write on topics that range from tried-and-true investment strategies to tomorrow’s new trends. Each book offers a unique perspective on investing, allowing the reader to pick and choose from the very best in investment advice today.

Books in the Little Book Big Profits series include:

The Little Book That Beats the Market by Joel Greenblatt The Little Book of Value Investing by Christopher Browne The Little Book of Common Sense Investing by John C. Bogle The Little Book That Makes You Rich by Louis Navellier The Little Book That Builds Wealth by Pat Dorsey The Little Book That Saves Your Assets by David M. Darst The Little Book of Bull Moves in Bear Markets by Peter D. Schiff The Little Book of Main Street Money by Jonathan Clements The Little Book of Safe Money by Jason Zweig The Little Book of Behavioral Investing by James Montier The Little Book of Big Dividends by Charles B. Carlson The Little Book of Investing Do’s and Don’ts by Ben Stein and Phil DeMuth The Little Book of Bull Moves, Updated and Expanded byPeter D. Schiff

Copyright © 2010 by Peter D. Schiff and Lynn Sonberg Book Associates. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

ISBN 978-0-470-64399-0 (cloth); 978-0-470-90224-0 (ebk); 978-0-470-90223-3 (ebk)

To my brother Andrew Schiff, whose help has been instrumental in getting my message out, more recently as a valuable member of the Euro Pacific team, and to our parents, Irwin and Ellen Schiff, who, though divorced early on in our lives, nevertheless managed to maintain a sense of family that ultimately allowed this business relationship to flourish. I also want to especially thank my father, for his knowledge and passion, and for the personal sacrifice that he has made for his country. I hope that his grandchildren, including my son Spencer, my niece Eliza, and my nephew Ethan, will one day benefit from his courage.

I also want to thank John Downes for his invaluable help in crafting the text of this book.

Disclosure

DATA FROM VARIOUS sources was used in the preparation of this book. The information is believed to be reliable, accurate, and appropriate, but it is not guaranteed in any way. The forecasts and strategies contained herein are statements of opinion, and therefore may prove to be inaccurate. They are in fact the author’s own opinions, and payment was not received in any form that influenced his opinions. Peter Schiff and the employees of Euro Pacific Capital implement many of the strategies described. This book contains the names of some companies used as examples of the strategies described, as well as a mutual fund that can be sold only by prospectus; but none can be deemed recommendations to the book’s readers. These strategies will be inappropriate for some investors, and we urge you to speak with a financial professional and carefully review any pertinent disclosures before implementing any investment strategy.

In addition to being the president, Peter Schiff is also a registered representative and owner of Euro Pacific Capital, Inc. Euro Pacific is a National Association of Securities Dealers (NASD)-registered broker-dealer and a member of the Securities Investor Protection Corporation (SIPC). This book has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation to buy or sell, any security or instrument, or to participate in any particular trading strategy. Investment strategies described in this book may ultimately lose value even if the opinions and forecasts presented prove to be accurate. All investments involve varying amounts of risk, and their values will fluctuate. Investments may increase or decrease in value, and investors may lose money.

Foreword

ONCE IN A GREAT while, the world undergoes big changes. The great discovery voyages at the end of the fifteenth century led to a huge enlargement of the world’s economic sphere. Venice—master of the previously important Mediterranean trade routes, and the world’s richest and most powerful city—was thrown into a corner of the world, as Voltaire later observed.

The breakdown of the socialist/communist ideology at the end of the twentieth century and the end of policies of self-reliance and isolation on the Indian subcontinent were other big changes. Suddenly, three billion ambitious and motivated people joined the world’s free market economy and the capitalistic system. These new citizens of the global economy are striving mightily to raise themselves to the level of affluence they see in their Western counterparts. Simply put, the free world has been joined by more than three billion people who have a similar frame of mind as the American pioneers of the nineteenth century.

At the same time, as Peter Schiff so vividly shows in this book, economic policy makers in the United States have totally lost their way. No wonder that in recent years a new economic and financial anxiety has taken hold among those public citizens who try to understand the world around them. This confusion is largely a function of the increasingly incomprehensible explanations offered by the most powerful figures in government, academia, and commerce. Anyone who has recently listened to the 2008 speeches of Ben Bernanke, the chairman of the Federal Reserve Board, is familiar with the feeling. The large words flow, but the concepts never coalesce into anything that is meaningful even to those, like myself, who have studied economics.

As a result, many regular folks may be tempted to look at economics much as they look at quantum physics: concepts that lie beyond the reach of casual understanding. When the policies of the Federal Reserve seem to be counterintuitive, who can blame them? As an example, currently the Fed is obsessed with solving economic and financial problems with artificially low interest rates at a time when, because of the entry into the global economy of the three billion people I referred to earlier, inflationary pressures, especially on raw materials, are very high.

In fact, it would appear that academia has found a gold mine in transforming basic economics and the art of investment based on common sense into a science of finance, filling entire libraries with pages and pages of indecipherable equations. Government leaders have seized upon these theories as a means to deploy a smoke screen between their own actions and the impact those moves make on the economy.

However, we are fortunate to have someone like Peter Schiff, who shows us, with common sense and in a highly readable and focused account of economic and financial trends over the past few years, not only how to avoid costly investment mistakes, but how to capitalize on opportunities that will preserve and enhance our wealth.

Whereas many experts view the greed and irresponsibility of subprime lenders as the underlying cause of the current credit market turmoil, Peter vividly shows how the Fed, through irresponsible monetary policies, not only caused the credit crisis, but also destroyed the value of the dollar and fueled the staggering price increases in food and energy.

Why is this book so good? Because Peter Schiff has common sense and does not mince his words. With admirable clarity, sarcasm, and hard-hitting criticism of the Fed and other policy makers, he explains the causes and consequences of the current financial crisis and how you can find ways to preserve your capital. Schiff clearly understands that a big change in the world’s economic and political equilibrium is under way and that such a change requires unconventional thinking and new investment strategies.

My advice is this: Listen to another incomprehensible speech by the chairman of Federal Reserve Board, and then read this book written by a businessman with common sense! You will then know why the U.S. economy is in so much trouble, what caused the financial crisis, and how you can prepare for the future. You will also lose all respect for the financial leaders in Washington and Wall Street who claimed wisdom but delivered only folly. Peter Schiff has written a true masterpiece.

—MARC FABER Editor of theGloom Boom & Doom Report

Prologue to the 2010 Edition

WHEN I WAS WRITING The Little Book of Bull Moves in Bear Markets in late 2007 and early 2008, the gloomy forecasts I had made in my first book, Crash Proof: How to Profit from the Coming Economic Collapse, had only just begun to play out. The real estate bubble had been pricked as predicted, but instead of exploding it was leaking air slowly. The recession was clearly underway, although not yet officially recognized as such.

In a free market system, recessions, however painful, serve the salutary purpose of wringing out the excesses of the preceding boom and restoring fundamental economic balance. Unfortunately, the outgoing Bush administration and, less surprisingly, the incoming Obama administration had no stomach for free market remedies involving recession. Instead, the government and the Federal Reserve have used every gimmick possible in an effort to reverse the downward trend of real estate prices, to prevent more foreclosures, and to prevent toxic assets from restraining bank lending. While they have so far failed in their efforts to blow the bubble back up, they have succeeded in preventing it from fully deflating. Government economic stimulus is thus adding inflation to inflation. As a result, our economy is now perched on a precipice even higher than before, making the advice in The Little Book of Bull Moves all the more relevant and vital to your financial survival.

My investment strategy has always focused on understanding longer-term trends, where my track record has been extraordinary, and has discouraged efforts at short-term market timing. That the book I’m updating is an example of short-term market timing carried to perfection is as ironic, therefore, as it was accidental. That’s because of what happened between the time I finished writing the first edition in the spring of 2008 and the time it was published that October.

When I was writing, the long-term bull market trends in foreign currencies, gold, oil, and other commodities were going strong, and I recommended that readers get out of dollar-denominated investments and invest accordingly. But once the manuscript was wrapped and off to the printer, all those long-term trends suddenly reversed, hitting bottoms just as the book was coming out in October. So anybody who followed my advice and bought in October is sitting on huge profits now that long-term trends have resumed. The question that comes to mind now is: Should investors take profits and expect a similar reversal to happen again?

My answer to that question is “no.” Although I was surprised by the strength of the dollar’s countertrend rally and its effects on gold, other commodities, and foreign stocks, I think a repeat of 2008 is highly unlikely and that a second economic collapse even more devastating than the first is coming. That will be the collapse of the dollar, and I’d want to be sure I was out of it when that collapse occurs.

What happened in October 2008 after the bankruptcy of Lehman Brothers was a global credit freeze and massive deleveraging—in effect a global margin call—and a flight to perceived quality (emphasis on perceived ). Institutional investors holding gold, such as mutual funds and the big hedge funds, sold it to meet margin calls or redemptions because it was the most liquid asset they had. Foreign stocks sold off because economies abroad were presumed to be more vulnerable than they were to what was happening to their best customer.

With regard to foreign stocks, given the rapidity and strength of the rebound following the 2008 collapse, current holders, far less leveraged than those who were caught off guard in 2008, are far less likely to sell at fire sale prices. I also expect that many buyers who missed the rally will eagerly buy during any meaningful pullbacks, making them self-limiting.

The reason the flight to “quality” dollar rally that occurred as the world deleveraged is not likely to repeat is simply that there is no quality associated with the dollar, as many who rushed to buy it will soon find out. Remember how Wile E. Coyote would run off the edge of a cliff yet not fall into the canyon below until he actually looked down. Once dollar holders take a closer look at the dollars they own, they will realize they are in the same precarious position as the coyote. Of course, like the coyote, by then it will be too late, and the value of their holdings will disappear in a puff of smoke—beep, beep.

Unfortunately, the economic collapse that I was publicly predicting in the early 2000s, which I wrote about in Crash Proof, expanded on in the Little Book, updated in Crash Proof 2.0, and demystified whimsically in How an Economy Grows and Why It Crashes, has yet to fully play out.

The architect of the policies that created the real estate bubble, former Federal Reserve Chairman Alan Greenspan, is now saying that the hedge fund managers who bet against subprime merely got lucky, and that only four or five of the world’s most brilliant economic forecasters, whom he knows personally, correctly forecast the bursting of the housing bubble and ensuing crisis.

Well, I forecast it, chapter and verse, and have books to prove it. And let me assure you there is absolutely no way in the world Greenspan could have failed to foresee the consequences of drastically lowering rates when he should have been raising them. That action brought us teaser rates, and his advocacy of adjustable rate mortgages (ARMs) made the bait and switch complete. Four or five economic forecasters? I personally got literally hundreds of e-mails from people who shared my view that the crisis was coming. It did not take a rocket scientist, as Greenspan suggests, to see that a security backed by mortgage loans having no down payment, made to people with no income and no jobs and no assets (NINJA loans), and financed with teaser rates on ARMs on houses that had tripled in price would end in disaster.

As early as February 2004, in a weekly commentary titled “There He Goes Again,” I wrote:

In recent months the statements of Fed Chairman Alan Greenspan have become increasingly confusing and self-contradictory. So much so, that an impartial observer must conclude that his motives are less than honest. This week, the Chairman was true to form as he continued misleading the public with respect to the enormous risks facing the U.S. economy. Rather than expressing an obvious concern over the increasing use of adjustable rate mortgages (ARMs) he instead praised them, encouraged greater use, and expressed regret that too many homeowners were wasting money on fixed-rate mortgages. In the same speech he declared that the high levels of consumer debt did not concern him because the cost of servicing that debt was so low. Given that reality, one would assume he would hope most borrowers would [want fixed-rate mortgages to] lock in those low rates. . . . Rather than reflecting the sophistication of American homeowners, as Greenspan suggests, the reality is that most homeowners are choosing ARMs because it is either the only way they can afford to buy a home, or . . . the only way they can afford to make ends meet. The average ARM is 50% larger than the average fixed-rate, suggesting that the larger the mortgage, the more likely it is that the borrower needs the lower payments to qualify. Also, financially distressed homeowners typically refinance fixed-rate mortgages into ARMs to save money. In so doing, they trade the benefits of lower current payments for the risks of higher future payments. Given that interest rates and domestic savings are at historic lows, the budget and current account deficits are surging, commodity prices are soaring, and the dollar is collapsing, this is perhaps the worst time in history to make such a tradeoff. . . . [Greenspan] says whatever he thinks he has to say to sustain the bubble economy, regardless of his personal beliefs. Everything he says is designed to postpone the day of reckoning as long as possible, no matter how much worse that day will become as a result.

Greenspan’s betrayal of free market economics for the sake of political expediency caused the Great Recession in 2007, and the policies now being used in the name of stimulation, if continued, can only result in disaster on a grander scale. His friend and mentor, Ayn Rand, must be turning in her grave.

Because policies that produced the inevitable bubble are still being pursued, the losses our economy and most investors will suffer will be that much larger as a result. For all the hype that the great recession has ended and that U.S. stocks are in a new bull market, I am convinced that neither is the case. Any short-term boost to U.S. gross domestic product (GDP) that may result from additional debt-financed consumption or government spending will not last. Such supposed growth merely borrows from the future and guarantees a larger downturn once the bills come due.

In addition, as long as government and Fed policy prevent market forces from rebalancing our economy, it will not recover, and a string of worsening recessions will ultimately be seen as a single depression. In other words, because the government will not allow the pain of a real recession, we will never experience the gain of a genuine recovery.

I therefore caution investors to remain vigilant. I expect any upward moves in U.S. stocks, real estate, bonds, or the dollar to remain bull moves in bear markets, and any downturns in foreign currencies, gold, oil, commodities, or many foreign stock markets to be bear moves in bull markets. In my Author’s Note, I fully explain the semantics of bull and bear market trends and temporary countertrends.

Of course a U.S. dollar collapse will be likely to cause nominal U.S. stock prices to rise sharply. However, investors must not be fooled by the illusion. Prices are relative. If the dollar collapses, the U.S economy will implode as well. While such an event will be very bearish for stocks, most stocks will lose less value than the dollars in which they are priced. Their real value will be what they are worth in terms of other currencies or gold.

A Note on the Format and Title

I chose a format for this updated edition that keeps the original text intact and intersperses appropriate new information and commentary clearly identified with the heading “2010 Update.” I did it this way to demonstrate that my economic thinking as set forth in the original book and in my earlier book, Crash Proof, has been borne out by subsequent events. I hope this will give readers confidence in the longer-term predictions that are the basis for my investment recommendations.

This book was originally published with the title The Little Book of Bull Moves in Bear Markets in October 2008. We decided to omit the reference to bear markets in the title of the current edition simply because most people, quite incorrectly, believe the bear market has ended and might therefore conclude that my book is out of date. Trust me, it is not.

I believe that U.S. stocks are in a long-term secular bear market that began in 2000 and will likely continue well into the decade that is beginning in 2010. To understand my reasoning, however, you have to read the book. You have to understand that stocks can be rising in dollar terms but losing value in real terms because the purchasing power of the dollar is falling at a faster rate. The dollar’s loss of value is mainly due to inflation that is not officially reported, and as a result many people, pundits included, focus on nominal values and believe we are in a bull market. They are mistaken. Hence the practical decision to shorten the title of my book so that people can continue to profit from the excellent and still current investment advice that it contains.

Author’s Note

What Do We Mean by Bull and Bear Markets?

The Little Book of Bull Moves in Bear Markets is a book for stock investors; its focus is on preserving and enhancing invested wealth at a time when a collapsing American economy threatens to destroy it. The current economic backdrop requires a fresh approach to investing, and before getting too deeply into the discussion, I want to say a word about what I mean by the terms bull and bear markets.

Except in hindsight, nobody knows when bull, bear, or sideways markets begin and end, and there is no universal agreement on the magnitude or duration of the market moves that define them. But precise definitions are not terribly important as long as you know bull means up, bear means down, and sideways means flat, and you have the relative knowledge to distinguish market trends from reverse market movements and fluctuations that are merely short-term in nature.

Unless otherwise specified, bull, bear, and sideways refer in this book to the stock market, but the terms are commonly applied to markets in other asset classes and in stock market sectors, such as commodities; subsectors, such as gold; or stock classifications, such as small capitalization and large capitalization. Price movements are tracked by indexes and averages that measure changes using various weighting methodologies.

It is important, particularly when making period-to-period comparisons, to be consistent in the use of indexes. A broad market comparison using the price-weighted, high-capitalization Dow Jones Industrial Average of 30 stocks versus the capitalization-weighted Dow Jones Wilshire Index of 5000 equities would produce significant discrepancies, for example, even though the former is the world’s most popular indicator of the market and the latter is the only index that includes all stocks traded in the market.

Broadly speaking, we have secular bullor bear trends, which are long-term and can last five to 20 years or more; primary bull or bear trends, which last from a few months to five years; and secondary trends, which are reverse movements of at least 10 percent, are measured in days or weeks, and are called corrections when they reverse a bull trend and bear market rallies when they reverse a bear trend.

Short-term fluctuations having no consistency in terms of direction come under the rubric of volatility. For example, a temporary drop in price, called a dip, has no forecasting value whatsoever, although it might be an opportunity to add to a position.

For price changes to be meaningful, nominal values must be converted to real numbers, meaning there has to be an adjustment for inflation. As discussed at length elsewhere in the book, when inflation lifts asset prices, this effect is not included in the consumer or producer price indexes used by government to measure it, so we have to estimate a realistic rate of actual inflation. Currently I estimate real inflation at between 8 and 10 percent despite the CPI reflecting only a mere fraction of that number, around 4 percent.

The importance of all these distinctions is that investors, unlike short-term traders, use strategies that attempt to synchronize holding periods with bull trends and stand to lose money if they seriously misjudge when the trends begin and end. A long-term investor playing a secular bull market, for example, must have enough confidence in the secular trend to recognize primary and secondary reversals for what they are and hang in there for the longer term. More germane to the current situation, long-term investors must understand the nature of the secular bear market now well under way, and resist the temptation to buy into the various upside reversals that occur along the way.

Because there is no way to identify the beginning or end of a trend except by a rearview mirror, making what are essentially market timing judgments requires courage and conviction in addition to understanding the underlying economic conditions and learning what we can from historical experience.

Wall Street is eager to save us such trouble, but is an unlikely source of reliable guidance. Like Merrill Lynch, Wall Street generally is “bullish on America.” It wants its public to think we’re either in a bull market or near the end of bear market, a happy choice between upward momentum and bargain prices, which is to say a market perennially favorable for buyers of what the Wall Street firms are selling. It’s easy to sit here and dismiss their market wisdom as self-serving propaganda, but they are a relentless and persuasive source of plausible optimism, and it takes a lot of fortitude to resist being influenced by them.

The strategies I recommend in the pages that follow are based on my conviction that the U.S. dollar will continue to lose purchasing power as expansionist monetary policy, in a futile effort to revive our consumer-based economy, creates additional inflation. With the dollar on a clear path toward collapse, cash and bonds are held at one’s peril; and the stock market, nominally in a bear market as of July 2, 2008, but off a whopping 42 percent from its January 14, 2000, high when adjusted for 8 percent annual inflation, has by my analysis been in a secular bear market since that date that that will last well into the next decade. Running concurrently, and spurred by the tremendous demand expected from industrial revolutions in China and India, has been a worldwide secular bull market in agricultural, natural resource, and precious metals commodities. My strategies aim to tap into that big-time by owning producing companies or stocks of conservative, dividend-paying utility or commercial real estate companies that benefit by being vital to the economies of resource-rich countries.

So throughout the book, when I talk about bull and bear markets in gold, oil, and various other commodities, I’ll often use the terms loosely, referring to commodity prices as well as the share prices of companies producing those commodities. Unless otherwise specified, though, I’ll be referring to markets secular in duration.

Some Historical Perspective

The worst bear market in history began with the Crash of 1929, which kicked off the Great Depression and ended when World War II began in the early 1940s, but wartime rally was actually the primary trend within a secular bear market that lasted until 1949.

It is instructive to focus on the market’s movements in the 1930s as tracked by the Dow Jones Industrial Average. After peaking at 380 in 1929 following an eight-year bull market, the Dow plunged by 90 percent to 42 late in 1932. But then it rallied to 187 in 1937, dropped to around 100 a year later, had a couple of minor rallies, and then bottomed at 95 in 1942. Extending the secular bear market, another bear market rally took it to 206 by 1946, after which it pulled back to 167 and went sideways until 1949, when it phased into a secular bull market lasting from 1950 to 1965.

That two major rallies occurred during the worst bear market on record illustrates the importance of and difficulty of recognizing trends for what, with the benefit of hindsight, they turn out to be.

Another secular bear market extended from 1966, when the Vietnam War was getting hot, to 1982, after the Reagan-Volcker assault on double-digit inflation. Those who think the cure was worse than the disease might take another look at the disease. In nominal terms, the Dow lost around 22 percent during the 16-year period. But the CPI, a somewhat more reliable indicator of inflation then than now, rose during the same period from 95.4 to 308.6, a gain of 223.5 percent or 7.3 percent annualized, which seems staggering and is, but is less than the real inflation rate prevailing today.

Four bear market rallies (which at the time fit the definitions of bull markets) occurred during the period, in 1967- 1968, 1970-1973, 1974-1976, and, on a smaller scale, in 1980. In inflation-adjusted terms, however, the highs were lower than previous bull market peaks and the subsequent lows, including the infamous 1973-1974 bear market, were lower in real terms than previous bottoms.

Including a secular bear market from 1906 to 1921, there were three secular bear markets in the 100 years prior to the present one, and to be invested through any of them, especially when inflation is factored in, was very costly. To put this in perspective, and to show the dangers of overpaying for stocks at bull market peaks, the Dow was worth 20 ounces of gold in both 1929 and 1966, but bottomed at near one ounce of gold in 1932 and 1980. The recent bear market began with the Dow priced near 43 ounces of gold, and is worth less than 12 ounces today, on its way to retest the 1932 and 1980 lows. In other words, the Dow, despite a nominal rise from 380 in 1929 to about 11,000 today, has actually lost almost half its real value when measured from its peak price of 80 years ago. So much for the idea that buying stocks at any price always works provided your time horizon is long enough.

Conversely, we were in a secular bull market between 1982 and 2000, in which stocks followed a ratchet pattern steeply upward. That period included the infamous Black Monday of October 19, 1987, when the Dow plunged 508 points or 22.6 percent, beginning a three-month correction reflecting worry about inflated stock prices, federal budget and trade deficits, and foreign market activity. The point drop set a record that was broken on Bloody Monday in 1997, when economic and currency upheaval in Southeast Asia triggered a 554-point drop. On a percentage basis, however, the 1987 drop was greater.

In 1990, after years of land speculation and other overinvestment had resulted in a bubble economy and subsequent liquidity crisis, the Tokyo stock market fell 36 percent, wiping out the yen equivalent of $2.07 trillion in value and marking the beginning of a severe recession and secular bear market lasting until 2000, when signs of recovery began to appear. Japan tried a number of stimulative measures, including lower interest rates, public works projects, structural reform policies, and other ideas, all of which contributed to huge government deficits, but its economy was very slow to respond, possibly because of a high savings rate, one respect in which Japan’s experience and America’s are dissimilar. Those Japanese investors who ignored the secular trend remained invested and suffered over a decade of losses. However, those who read the economic tea leaves sold their shares and used the proceeds to invest in bull markets elsewhere. That is precisely the course of action this book will encourage you to follow in our bear market.

As noted earlier, the U.S. stock market is eight years into a secular bear market, taking inflation into account, the economic background of which is covered in the following pages. The book focuses on strategies of mine that will help readers avoid getting hurt by the collapsing dollar and enable them to participate in bull markets elsewhere. The goal is to help you preserve and enhance wealth that can be reinvested in America after fundamental economic reform takes place.