If you're like most investors, you've been
nearly brainwashed with conventional market "wisdom" that stocks are the best
way to grow your portfolio.
You would be crazy not to have your
money in the markets, right?
But when markets drop, as we've seen in this
credit crisis, it's amazing how quickly the story changes.
Steve Hochberg and Pete Kendall, editors of
Elliott Wave International's Financial Forecast, challenged the notion of
stocks' superiority years before this latest downturn.
Learn how cash has been king – and will
remain so – far longer than the latest news headlines may have you believe in
this free excerpt from Elliott Wave International's Credit Crisis Survival Kit.
Elliott Wave International has also made the
full Credit Crisis Survival Kit available free for a limited time. In addition
to this excerpt, it contains 14 other articles, reports, and videos that reveal
how to survive and prosper during the credit crisis.
Visit EWI to download the kit, free.
Cash's Invisible Reign Made Visible
[excerpted from Elliott Wave Financial Forecast, August 2008]
With respect to cash and its status as the
preeminent financial asset, however, we are starting to wonder if investors will
ever come around to our point of view, which, as we explained in the March
special section, is that there are times when "the phrase 'focus on the long
term' means "get out and wait.'" As we also pointed out, the last eight years
are clearly one of these times, as cash has outperformed all three major stock
averages over this period. A July 3 USA Today article shows how this outlook is
actually becoming more farsighted as the bear market intensifies:
3-month Treasuries Beat
S&P 500 for past 10 Years
The article says, "Investors who bought
stocks for the long run are finding out just how long the long run can be." But
the farther back in time cash's dominance stretches and the rockier the stock
market gets, the farther investors seem to move from ever taking anything off
the table. After stating that "there can be times, long times, when stocks won't
beat T-bills," a professor and popular buy-and-hold advocate is cited as
"optimistic that the next 10 years will be better than the past decade." In
March EWFF stated, "Cash will continue to outperform until stocks are no longer
fashionable." There is no sign that such a condition is even close to happening.
It's somewhat amazing that cash is not
capturing anyone's fancy because a tremendous society-wide thirst for cash is
spreading fast. "In a deflation," the Elliott Wave Financial Forecast has
stated, "Rule No. 1 is to unload everything that isn't nailed down. Rule No. 2
is to sell whatever everything remaining is nailed to." The banking system is
surely deflating, because, echoing Elliott Wave Financial Forecast's wording
again, "Desperate American Banks Are Selling Everything That Isn't Nailed Down."
SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years.
Merrill Lynch sold its founding stake in Bloomberg as well as various other
Meanwhile, "Americans are selling prized
possessions online and at flea markets at alarming rates." Pawnshops and auction
sites are booming. At Craigslist.org, the number of for-sale listings soared 70%
in eight months. This fits with our review of Craigslist's prospects when it was
getting started in 2005: "This is just the set-up phase. Once the global garage
sale really gets rolling, truly astounding volumes of dirt-cheap goods will be
available on-line and elsewhere." The global garage sale is on. The chart of the
U.S. savings rate shows that the bull market in cash has come to life.
A 30-year downtrend in savings rates ended at
minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This
jolt may be somewhat overstated due to the arrival of the government's stimulus
checks, but the burst should be the start of a critical new mindset among
consumers. When the government showered the economy with $600 checks, many did
something they never would have thought of through most of the bull market: They
put the money in the bank, which is exactly what the administration did not
want. In fact, federal, state and local governments are desperate for the tax
revenue that a little ripple-effect spending would have generated.
According to the National Conference of State
Legislatures, states must close a $40 billion shortfall in the current fiscal
year. "The problem today is that tax revenue is vanishing," says a story about
the sudden appearance of the worst fiscal crisis in New York since 1975. Even
cities like East Hampton, New York, where someone paid $103 million for an
oceanfront house last year, are out of money. "Nobody understands how it
happened," says one resident. The pages of this newsletter show otherwise. If we
are right, a deflationary decline is depleting and destroying cash flows in
novel new ways that no one alive has experienced before.
The previous analysis was excerpted from
Elliott Wave International's Credit Crisis Survival Kit. The kit, featuring 15
free resources to help you survive and prosper during the credit crisis, is
Visit EWI to download the kit, free.