The Fleecing of Innocent American Investors by Wall Street, and what to do about it (before it's too late!)

By Craig R. Smith, CEO SATC

Jun 10, 2003

"The small investor is back, for the first time in 12 months!"

-CEO, Charles Schwab, CNBC 6-9-03

YES, the new bull market in stocks is on, according to the majority of economic "experts" featured in the mass media -- and Wall Street couldn't be happier. In fact, I think I discern a new excitement, no, exuberance that has returned to Wall Street.

MY FIRST QUESTION IS: What are these respected "experts" smoking? It seems to have impaired their judgment (and most Americans)!

MY ADVICE is to ignore most of what these so-called "experts" say, for good reasons, which I will outline below.

I feel like a man who sees a disaster coming, but few want to hear it. Thankfully, I'm not the only man (or woman) who sees a disaster coming.

Voices of caution and reason like Richard Russell, Stephen Roach, Bill Bonner, The Aden Sisters...just to name a few, do not view the recent run up in stocks as a new bull market, but rather, a bear market rally -- that appears to be topping out.

Where is the economic recovery to fuel such a bull market? That is my question. Have they considered these grim economic fundamentals? Such as:

-Record bankruptcies,
-Record federal budget deficits,
-A massive U.S. trade deficit,
-A rapidly declining greenback,
-High unemployment (the REAL level is at more than 10 percent),
-Debt levels in the U.S., which are now more than 300 percent of GDP,
-A housing bubble ready to pop,
-Ridiculous over-valuation of stocks, which are DOUBLE the historical norm on the S&P and Dow,
-Paltry dividends in the 2 percent range,
-The worst budget crunch for local and state governments in 50 years,
-A feeble manufacturing sector, a dead airline industry and a dying automobile industry,
-Massive underfunding of corporate pension plans,
-Kinky tech stocks like EBay, Yahoo and Amazon having P/E ratios that would have been a warning sign when the Nasdaq was at 5,000,
-Continued overcapacity, no pricing power for corporations and stalled business spending.

Fact is, the only bull market in sight today is the new bull market in gold, but I will get to that in a moment. Back to the economy.

Alan Greenspan is the most powerful voice in the economic world today, no question. What does he make of all this new bullishness? Here's what he told Congress just two weeks ago ...

"The acceleration has not yet begun ...indications are suggestive of a fairly marked turnaround. We are stabilizing and there is some indication of return, but it's not at this stage by any means clear."

Sounds like muddy water to me. Certainly not enough to build another round of "irrational exuberance" upon, right? WRONG!

Then why are the sheepish investors today running straight for the slaughterhouse?

-Perhaps it is the prospect of making up some of the trillions of money lost in the stock market over the last 40 months. The longest on record, I might add.

-Perhaps it is the recognition that staying in cash is also a losing proposition, with interest rates at 40-year lows.

-Perhaps the innate desire to believe that the best is yet to come.

Frankly, I don't know why so many millions of small investors are flocking back to the same Wall Street dreamweavers that that created the bubble market of the 1990s. Pure Wall Street spin, I guess.

I want to go on record saying that this bull market rap from Wall Street is bogus, even if the market is up 20% from the bottom, as some claim is the defining stat for a new bull market.

Here is what the smartest contrarian economists say about what is really going on Wall Street ... and what you should do before it is too late!

* "Right now, though, Wall Street stock promoters and their followers have the upper hand. The more they see news about debts or deflation, the more they try to persuade you that the Federal Reserve will come to the rescue. And the more they see news of an uptick in the economy following the Iraq war, the more they talk about "a real recovery under way. Watch out! It's just another great trap!"


* "The question -- should I mess around with this bear market in stocks -- or should I take a large position in gold and gold shares and bank on the bull market in gold being the right way to go? I decided that the potential big money was with the gold bull market rather than trying to 'beat the bear.' And that's where I am now."


* "Gold's bull market is alive and well. More important, gold formed a major bottom in February, 2001. And despite its ups and downs, the major trend has been up for more than two years now. As long as this continues, and we believe it will, then gold is headed higher."

-MARY ANNE & PAM ADEN, (see below)

* "As I see it, there are five myths to the recovery call of 2003, each of which draws the postwar healing scenario into serious question:
1) First and foremost, is the myth of another US-led recovery in a lopsided global economy.
2) The notion of a capex-led recovery in the United States is a second myth of the global healing scenario.
3) A third myth of recovery is that America has fixed its saving problem, thereby removing one of the key impediments to sustained economic revival. Nothing could be further from the truth.
4) A fourth myth of recovery is to pretend that the deflationary scare is over.
5) A fifth myth of recovery is the notion that postwar healing in the US is about to spark an economic revival elsewhere in the world. Unfortunately, the world is still headed the other way."

-STEPHEN ROACH, Morgan Stanley, Dreamcatchers, 4/23/03

* "We are at the early stages of another bull market for gold."

-JEAN-MARIE EVEILLARD, First Eagle Gold Fund

* "I look for gold to pass the $400 mark very soon. And then? Toward $500."

-HARRY SCHULTZ, "The only bull market is the gold market", CBS

* "Internet stocks are rocketing percentage wise and speculation is again starting to replace reason - shades of 2000! Earnings reports, in my opinion, have been bogus as companies consistently seem to miraculously beat estimates by 1 penny. Meanwhile, the Federal Reserve is running the printing presses and, in truth, it will be inflation not deflation that will be our undoing. In 1913 dollars, the US Dollar has lost 90% of its value."

-MARK LEIBOVIT, technical analyst,

* "Economists keep saying the sun will come out tomorrow ... and tomorrow ... and tomorrow. Most experts think the economy's rebound to full strength is just a month or two away. But some bearish economists are warning that we've heard these forecasts more than once before, that the forecasts have been wrong every time, and that there's little to indicate they're right this time."


And these are just a few quotes we've archived at in the last three weekly editions of Real Money Perspective. Shall I go on? (Archives)

It seems most people have the attention span of about two minutes nowadays and they forget very quickly the pain that most investors suffered over the last few years. They have also ignored some key market shifts toward gold that will over time prove to be critical. Like:

-In Jan 2003 gold prices surged to a six-year high, breaking through several key technical barriers.

-Over the last 2 years, while the S&P fell 26.9%, the price of gold had risen 31%. The Amex Gold bug Index rose 78.4%

-Of the top performing 20 mutual funds for 2002, 19 were invested in gold and gold shares. Mutuals made money on gold.

-Gold prices traditionally rise when the U.S. dollar falls. The dollar has fallen 19.6 % in the last two years and deficits on current and government account are growing.

-Demand for gold exceeds supply by roughly 1,300 tons a year, which should continue to drive prices higher

-Gold is not going out of style. It WILL pass the test of time. Always has always will.

The key to understanding and overcoming the Wall Street hype is to learn from history. We have been down this road before in 1999. I warned my readers then that the stock market bubble was searching for a pin. Today, I say that the pins are searching for the next stock market bubble, which is forming before our very eyes.

It is time for "tough financial love" - which means saying get out now, or at the very least establish an exit strategy for when the headlines read "Dow Struggles to Stay Above 8,000."

Don't sit around and allow Wall Street to turn you into a sheep-wrecked investor, instead, think for yourself! Do your homework! Diversify!

My eternal message to you is so simple, it may have been overlooked, it is simply that true asset diversification MUST include tangibles like gold and U.S. rare coins. Period. Or else you can expect losses that result from not hedging your portfolio from the treachery of Wall Street.

Please don't ignore the gathering voices of reason which all agree that the only bull market worth watching is the new bull market in gold. And stay tuned ... this message is about to echo across America. -CRS

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