THE GREAT DEFICIT TIME BOMB
Mon Feb 24 15:17:16 2003
208.152.73.113
THE GREAT DEFICIT TIME BOMB
The President has just submitted his budget with a $304 billion deficit for
2003, sending shock waves through the corridors of the Capitol, leaving
investors stunned, and setting off a new whirlwind of venomous, partisan
debate.
I'm non-partisan. Much as I have no business relationship with the
thousands of companies I rate, I have no commitment to either side of the
aisle. I look strictly at the numbers and tell it like it is:
The American federal budget is an unabashed perversion of fiscal prudence
... the product of decades of neglect and mismanagement ... a great time
bomb that is about to explode.
Which political party is largely responsible? The question itself is
specious. The time bomb was first created by Lyndon Johnson (Democrat) ...
enhanced by Richard Nixon (Republican) ... perpetuated by Jimmy Carter
(Democrat) ... enlarged by Ronald Reagan (Republican) ... and dropped in
our lap by Bill Clinton (Democrat).
Now, George W. Bush has just flipped the switch that starts the clock
ticking down to the ultimate explosion. Consider the shocking facts:
Deficit Shocker #1. The $304 billion does not include one dime for the
upcoming war in Iraq, which will cost anywhere from $50 billion to $200
billion.
Deficit Shocker #2. The deficit includes nothing to account for proposed
tax changes that are expected to cost $500 billion over the next 10 years.
Deficit Shocker #3. The Pension Benefit Guaranty Corporation (PBGC)
announced in late January that it went from a $7 billion surplus in 2001 to
a $3.6 billion deficit in 2002 a staggering loss of $10.6 billion in 12
months.
Now, the Director of the PBGC estimates that the pension funds it insures
are underfunded to the tune of about $300 billion! Even if the PBGC has to
pick up the tab for only one-tenth of that that amount, it would still cost
taxpayers about $30 billion.
Deficit Shocker #4. All of the above still excludes every single penny of
deficits of the government agencies the real deficit I've been warning
you about, now running at an average annual rate of $810 billion.
Deficit Shocker #5. If earnings decline ... or the economy sinks back into
recession (even a mild one) ... or if there is a financial disaster of any
kind ... the budget numbers will be blown out of the water. Reason: Tax
revenues flowing into the Treasury's coffers will fall almost immediately
... and cash outflows for unemployment benefits and other payments will surge.
Right now, though, the Bush budget is assuming no decline in earnings, no
recession, no financial disasters. Quite to the contrary, it assumes that
the economy will grow 2.9% this year.
Problem: The very latest data shows the economy's growth rate has plunged
from 4% to an annual rate of only 0.7% in the fourth quarter of last year.
And that was before the stock market began to fall again in January and
before the impact of the impending war on the economy.
Suppose things get no worse, and we wind up with 0.7% growth for all of
2003. That alone could add at least another $100 billion to the deficit.
The Impacts On Investors Are Both Inevitable And Potentially Devastating
Impact #1. Crowding out. Already, IPO and venture capital is drying up.
Total capital invested in entrepreneurial companies fell 26% in the third
quarter of last year to $4.5 billion. And for good reason: Net return on US
venture capital funds for the one-year period ending September 30, 2002,
was a negative 29.4%.
Thus, thousands of credit-addicted companies are facing cold-turkey
withdrawal due to the virtual shut-down of key markets. Banks are pulling
in their horns. Corporate bond markets are tight.
Now, with the US government grabbing up bigger and bigger chunks of the
available funds to finance its own out-of-control deficit, most private
corporations won't have a chance. They'll be shut out and often shut down
for lack of capital.
Impact #2. Bond prices will fall. The US government has one and only one
way to finance the deficit: By issuing more and more bills, notes, and
bonds. The price of Treasury bills is barely affected because the bills are
so short term, but long-term bonds can get hurt.
Reason: Huge new supplies dumped on the market depress the price.
Impact #3. Earnings will get clobbered. Ballooning deficits pull scarce
funds away from private companies. They force big cutbacks in equipment
spending. They drive real interest costs higher. They prompt companies to
reduce inventories. They gum up the works of the entire economy.
Impact #4. Stocks will be hammered to a pulp. If the government offers
higher rates on its bonds and the economy is sinking, who in their right
mind will invest in the stock market?
Already, the Wall Street Journal reports that long-term investors are not
returning to stocks, even during major rallies. Already, investors are
freaking out in the face of the massive federal deficits.
And unlike other shocks such as 9/11, or even the war in Iraq the great
deficit time bomb is not going away. It's going to get worse with every
passing day, week, or month.
On the surface, Mr. Bush doesn't seem to be very worried. He never mentions
the danger of recession. He rarely breathes a word of doubt. But his
actions speak louder than his words, raising a series of urgent questions
for investors:
Why Has Mr. Bush Proposed the Most Radical Tax Cuts in Decades? What Is He
So Afraid of?
If the US economy is improving, as Mr. Bush insists, then why has he
proposed one of the most radical tax cuts in US history including the
elimination of taxes on dividends?
And if the Democrats are so critical of fiscal imprudence, why are they
anxious to hand out cash giveaways in the form of rebate checks to 135
million Americans?
The answer: Political insiders in both parties are terrified of everything
we've been telling you about in Safe Money over the past few months.
Sure, they may be smiling in public. But privately they're biting their
nails to stubs. They're scared about giant corporate bankruptcies,
deflation, and still another disastrous year in the stock market.
That's the real reason Mr. Bush proposed a $674-billion tax cut. It was his
desperate gamble to pump up the US stock market. That's why the Democrats
want to do even more, even sooner.
That's also why you must take a cold, hard look at the same terrors that
are driving them to make all these radical proposals ...
Terror #1: Collapsing earnings. AOL's $98.7 billion loss for 2002 was the
worst yearly loss by a company ever in the US!
Losses at the world's largest insurance company, AIG, sent the entire
insurance sector reeling. Its own shares fell 10% in a day as it
announced that it added $1.8 billion to reserves for claims against
casualty and directors' liability policies.
Applied Materials announced that its first-quarter orders are going to be
35% below its fourth-quarter numbers.
An internal spreadsheet from Worldcom reveals that sales have plunged by
81% in the fourth quarter.
Terror #2. Plummeting retail sales. The sharp decline in the economy's
growth rate I told you about earlier from 4% to just 0.7% does not
reflect the plunge in holiday sales in December, the worst in over 30 years.
Federated says its January sales will be down 4%-5%, and it is closing 11
stores, lopping off 1,500 jobs, and warning of falling profits. J.C. Penney
is cutting 2,000 jobs and taking about $40 million in charges.
Everywhere you look, sales and net revenues are falling. Costco's sales
have fallen 25% ... Nordstrom's is down 19.7% ... and Home Depot is down
11.1%.
This is the decline in consumer spending that I've been warning you about
the one sector that everyone was counting on to hold up the economy. Now
it's crumbling.
Prognosis: A nationwide collapse in retail sales and retail prices, driving
retail stocks into the gutter. If you still own any, get out NOW!
Terror #3: Unemployment! If the economy were truly improving as the
politicians would have you believe, then why are so many more people being
laid off?
In December, we had the largest one-month surge in unemployed in nearly a
year. Now, for the first quarter of 2003, estimates are that unemployment
will rise in the to as high as 6.3%.
Terror #4: Nation's factories winding down, even shutting down. In Detroit,
after living on borrowed future sales for months (with its zero-percent
financing campaigns), the big auto and parts makers are finally suffering
the consequences. Late last year, although their sales rose slightly due to
the giveaway financing, profits were already plunging. So, they had no
choice. They slashed production by 4.3%, with more cutbacks dead ahead.
Now, in January, the actual sales declines are starting to hit. They
dropped 2% overall compared to last year, with Chrysler's sales down a
whopping 12%.
Other manufacturers are also feeling the pinch: Just in the past 13 weeks,
the value of many manufacturers' stocks have plummeted, with Black & Decker
Tools down 21%, OshKosh B'Gosh down 19%, and Stanley Works down 18.3%.
And this is not just a regional phenomenon. The nation's factories, mines
and utilities are running nearly 25% idle. That's almost $1 trillion in
productive capacity just sitting there, with many shifts or sectors
slowed, stalled, even shut down.
Prognosis: Spreading shutdowns of auto and parts assembly lines. Massive
lay-offs of factory workers. Major strife with unions.
Terror #5: Still more accounting fraud on Wall Street!
A final audit of accounting restatements for the second half of 2002
reveals massive fraud and corruption far beyond what Washington
politicians expected. Accounting restatements of publicly held companies
skyrocketed to 330, up 22% from 2001. And 183 of them, more than half,
involved audited year-end financial statements, up from 147 in the previous
year.
In late January, the SEC sued accounting giant KPMG over allegations that
it knowingly allowed Xerox to report false financial results. And recent
news stories reveal that the NASD is planning to file charges against a
star technology investment banker at Credit Suisse First Boston.
Prognosis: Expect a lot more of these throughout 2003.
Terror #6: More billion-dollar bankruptcies!
We've just seen some of the largest corporations in history go bankrupt
not just Enron and WorldCom, but also Bethlehem Steel, Polaroid, Pharmor,
Kmart, United Airlines, Conseco, and many more.
Hundreds of billions of investors' life savings vanished before their eyes.
Now, both Democrats and Republicans live in terror that corporate
bankruptcies may erupt again and bust the Richter scale.
In January, Wherehouse Entertainment, which sells new and used music and
DVDs in 23 states, filed for Chapter 11 protection and announced that it is
closing 120 of its 370 stores.
It wasn't alone. The year 2003 began with a number of big-name filings,
including insurance giant Conseco ... FAO Schwartz ... and Peregrine Systems.
Prognosis: Another record year for both personal and corporate bankruptcies.
What To Do
First and foremost, get to safety immediately.
Second, use our Conservative Portfolio to aim for higher yields without
sacrificing the safety of most of your assets.
Third, if you have risk capital you can afford to lose, allocate the
portion you're comfortable with to speculative strategies.
Above all, don't sacrifice your home, your business, or any other assets on
the altar of complacency in a falling world economy.
Mon Feb 24 15:17:16 2003
208.152.73.113
THE GREAT DEFICIT TIME BOMB
The President has just submitted his budget with a $304 billion deficit for
2003, sending shock waves through the corridors of the Capitol, leaving
investors stunned, and setting off a new whirlwind of venomous, partisan
debate.
I'm non-partisan. Much as I have no business relationship with the
thousands of companies I rate, I have no commitment to either side of the
aisle. I look strictly at the numbers and tell it like it is:
The American federal budget is an unabashed perversion of fiscal prudence
... the product of decades of neglect and mismanagement ... a great time
bomb that is about to explode.
Which political party is largely responsible? The question itself is
specious. The time bomb was first created by Lyndon Johnson (Democrat) ...
enhanced by Richard Nixon (Republican) ... perpetuated by Jimmy Carter
(Democrat) ... enlarged by Ronald Reagan (Republican) ... and dropped in
our lap by Bill Clinton (Democrat).
Now, George W. Bush has just flipped the switch that starts the clock
ticking down to the ultimate explosion. Consider the shocking facts:
Deficit Shocker #1. The $304 billion does not include one dime for the
upcoming war in Iraq, which will cost anywhere from $50 billion to $200
billion.
Deficit Shocker #2. The deficit includes nothing to account for proposed
tax changes that are expected to cost $500 billion over the next 10 years.
Deficit Shocker #3. The Pension Benefit Guaranty Corporation (PBGC)
announced in late January that it went from a $7 billion surplus in 2001 to
a $3.6 billion deficit in 2002 a staggering loss of $10.6 billion in 12
months.
Now, the Director of the PBGC estimates that the pension funds it insures
are underfunded to the tune of about $300 billion! Even if the PBGC has to
pick up the tab for only one-tenth of that that amount, it would still cost
taxpayers about $30 billion.
Deficit Shocker #4. All of the above still excludes every single penny of
deficits of the government agencies the real deficit I've been warning
you about, now running at an average annual rate of $810 billion.
Deficit Shocker #5. If earnings decline ... or the economy sinks back into
recession (even a mild one) ... or if there is a financial disaster of any
kind ... the budget numbers will be blown out of the water. Reason: Tax
revenues flowing into the Treasury's coffers will fall almost immediately
... and cash outflows for unemployment benefits and other payments will surge.
Right now, though, the Bush budget is assuming no decline in earnings, no
recession, no financial disasters. Quite to the contrary, it assumes that
the economy will grow 2.9% this year.
Problem: The very latest data shows the economy's growth rate has plunged
from 4% to an annual rate of only 0.7% in the fourth quarter of last year.
And that was before the stock market began to fall again in January and
before the impact of the impending war on the economy.
Suppose things get no worse, and we wind up with 0.7% growth for all of
2003. That alone could add at least another $100 billion to the deficit.
The Impacts On Investors Are Both Inevitable And Potentially Devastating
Impact #1. Crowding out. Already, IPO and venture capital is drying up.
Total capital invested in entrepreneurial companies fell 26% in the third
quarter of last year to $4.5 billion. And for good reason: Net return on US
venture capital funds for the one-year period ending September 30, 2002,
was a negative 29.4%.
Thus, thousands of credit-addicted companies are facing cold-turkey
withdrawal due to the virtual shut-down of key markets. Banks are pulling
in their horns. Corporate bond markets are tight.
Now, with the US government grabbing up bigger and bigger chunks of the
available funds to finance its own out-of-control deficit, most private
corporations won't have a chance. They'll be shut out and often shut down
for lack of capital.
Impact #2. Bond prices will fall. The US government has one and only one
way to finance the deficit: By issuing more and more bills, notes, and
bonds. The price of Treasury bills is barely affected because the bills are
so short term, but long-term bonds can get hurt.
Reason: Huge new supplies dumped on the market depress the price.
Impact #3. Earnings will get clobbered. Ballooning deficits pull scarce
funds away from private companies. They force big cutbacks in equipment
spending. They drive real interest costs higher. They prompt companies to
reduce inventories. They gum up the works of the entire economy.
Impact #4. Stocks will be hammered to a pulp. If the government offers
higher rates on its bonds and the economy is sinking, who in their right
mind will invest in the stock market?
Already, the Wall Street Journal reports that long-term investors are not
returning to stocks, even during major rallies. Already, investors are
freaking out in the face of the massive federal deficits.
And unlike other shocks such as 9/11, or even the war in Iraq the great
deficit time bomb is not going away. It's going to get worse with every
passing day, week, or month.
On the surface, Mr. Bush doesn't seem to be very worried. He never mentions
the danger of recession. He rarely breathes a word of doubt. But his
actions speak louder than his words, raising a series of urgent questions
for investors:
Why Has Mr. Bush Proposed the Most Radical Tax Cuts in Decades? What Is He
So Afraid of?
If the US economy is improving, as Mr. Bush insists, then why has he
proposed one of the most radical tax cuts in US history including the
elimination of taxes on dividends?
And if the Democrats are so critical of fiscal imprudence, why are they
anxious to hand out cash giveaways in the form of rebate checks to 135
million Americans?
The answer: Political insiders in both parties are terrified of everything
we've been telling you about in Safe Money over the past few months.
Sure, they may be smiling in public. But privately they're biting their
nails to stubs. They're scared about giant corporate bankruptcies,
deflation, and still another disastrous year in the stock market.
That's the real reason Mr. Bush proposed a $674-billion tax cut. It was his
desperate gamble to pump up the US stock market. That's why the Democrats
want to do even more, even sooner.
That's also why you must take a cold, hard look at the same terrors that
are driving them to make all these radical proposals ...
Terror #1: Collapsing earnings. AOL's $98.7 billion loss for 2002 was the
worst yearly loss by a company ever in the US!
Losses at the world's largest insurance company, AIG, sent the entire
insurance sector reeling. Its own shares fell 10% in a day as it
announced that it added $1.8 billion to reserves for claims against
casualty and directors' liability policies.
Applied Materials announced that its first-quarter orders are going to be
35% below its fourth-quarter numbers.
An internal spreadsheet from Worldcom reveals that sales have plunged by
81% in the fourth quarter.
Terror #2. Plummeting retail sales. The sharp decline in the economy's
growth rate I told you about earlier from 4% to just 0.7% does not
reflect the plunge in holiday sales in December, the worst in over 30 years.
Federated says its January sales will be down 4%-5%, and it is closing 11
stores, lopping off 1,500 jobs, and warning of falling profits. J.C. Penney
is cutting 2,000 jobs and taking about $40 million in charges.
Everywhere you look, sales and net revenues are falling. Costco's sales
have fallen 25% ... Nordstrom's is down 19.7% ... and Home Depot is down
11.1%.
This is the decline in consumer spending that I've been warning you about
the one sector that everyone was counting on to hold up the economy. Now
it's crumbling.
Prognosis: A nationwide collapse in retail sales and retail prices, driving
retail stocks into the gutter. If you still own any, get out NOW!
Terror #3: Unemployment! If the economy were truly improving as the
politicians would have you believe, then why are so many more people being
laid off?
In December, we had the largest one-month surge in unemployed in nearly a
year. Now, for the first quarter of 2003, estimates are that unemployment
will rise in the to as high as 6.3%.
Terror #4: Nation's factories winding down, even shutting down. In Detroit,
after living on borrowed future sales for months (with its zero-percent
financing campaigns), the big auto and parts makers are finally suffering
the consequences. Late last year, although their sales rose slightly due to
the giveaway financing, profits were already plunging. So, they had no
choice. They slashed production by 4.3%, with more cutbacks dead ahead.
Now, in January, the actual sales declines are starting to hit. They
dropped 2% overall compared to last year, with Chrysler's sales down a
whopping 12%.
Other manufacturers are also feeling the pinch: Just in the past 13 weeks,
the value of many manufacturers' stocks have plummeted, with Black & Decker
Tools down 21%, OshKosh B'Gosh down 19%, and Stanley Works down 18.3%.
And this is not just a regional phenomenon. The nation's factories, mines
and utilities are running nearly 25% idle. That's almost $1 trillion in
productive capacity just sitting there, with many shifts or sectors
slowed, stalled, even shut down.
Prognosis: Spreading shutdowns of auto and parts assembly lines. Massive
lay-offs of factory workers. Major strife with unions.
Terror #5: Still more accounting fraud on Wall Street!
A final audit of accounting restatements for the second half of 2002
reveals massive fraud and corruption far beyond what Washington
politicians expected. Accounting restatements of publicly held companies
skyrocketed to 330, up 22% from 2001. And 183 of them, more than half,
involved audited year-end financial statements, up from 147 in the previous
year.
In late January, the SEC sued accounting giant KPMG over allegations that
it knowingly allowed Xerox to report false financial results. And recent
news stories reveal that the NASD is planning to file charges against a
star technology investment banker at Credit Suisse First Boston.
Prognosis: Expect a lot more of these throughout 2003.
Terror #6: More billion-dollar bankruptcies!
We've just seen some of the largest corporations in history go bankrupt
not just Enron and WorldCom, but also Bethlehem Steel, Polaroid, Pharmor,
Kmart, United Airlines, Conseco, and many more.
Hundreds of billions of investors' life savings vanished before their eyes.
Now, both Democrats and Republicans live in terror that corporate
bankruptcies may erupt again and bust the Richter scale.
In January, Wherehouse Entertainment, which sells new and used music and
DVDs in 23 states, filed for Chapter 11 protection and announced that it is
closing 120 of its 370 stores.
It wasn't alone. The year 2003 began with a number of big-name filings,
including insurance giant Conseco ... FAO Schwartz ... and Peregrine Systems.
Prognosis: Another record year for both personal and corporate bankruptcies.
What To Do
First and foremost, get to safety immediately.
Second, use our Conservative Portfolio to aim for higher yields without
sacrificing the safety of most of your assets.
Third, if you have risk capital you can afford to lose, allocate the
portion you're comfortable with to speculative strategies.
Above all, don't sacrifice your home, your business, or any other assets on
the altar of complacency in a falling world economy.
