“A forecast is never so useful as when it warns man of a crisis.”
– Bertrand de Jouvenal
“Today, the governments of the world are just creating ever increasing deficits. They are spending like there is no tomorrow… The world’s economy is being run as a giant Ponzi scheme… The ‘mother’ of all financial collapses is upon us NOW.”
– 2012 promotional copy for Harry Browne’s You Can Profit from a Monetary Crisis (updated)
Like the hurricane that ripped through Florida, a black bear ran through Wall Street at a fast and furious pace last week, erasing any yearly gains for the indexes. There was talk of another Halloween scare in October, but fortunately the markets stabilized on Friday and Monday.
The sell-off on Wall Street – and the rally in gold – reminded me of all the predictions made over the years by the permabears. For example…
Financial guru Harry Browne died in 2006, but the publisher reissued his 1974 best-seller You Can Profit from a Monetary Crisis in 2012, warning that we were about to suffer from the mother of all bear markets.
Actually, just the opposite happened, and we have enjoyed the mother of all bull markets.
In 1989, Browne wrote The Economic Time Bomb: How You Can Profit from the Emerging Crises, in which he predicted that the growing federal deficit would cause a stock market crash… or worse.
This too never happened. In fact, the book came out on the eve of the 1990s super bull market.
Another example is Ravi Batra‘s The Great Depression of 1990. It was No. 1 on the New York Times best-seller list. But the depression never materialized, and Batra was discredited as a legitimate forecaster.
The “Library of Mistakes”
I saw many more examples of miscalculation last month in Edinburgh, Scotland. I was there to give the first Adam Smith lecture at the Panmure House, the final home Adam Smith lived in when he was Scotland’s commissioner of customs. (You can read my paper here.)
While there, I came across the Library of Mistakes, a large room that houses books by economists and financial gurus who have blundered in predicting the future. They indeed have copies of doom-and-gloom books by Browne, Howard Ruff, Doug Casey and Batra, among others.
Modern-day Cassandras and hard-money advocates have warned us time and time again of impending monetary disaster as a result of out-of-control spending, the growing unfunded liability crisis in Social Security and Medicare, and a monstrous national debt.
These problems are real, but they were not enough to end the bull market of the past 10 years.
But that’s not to say their gloomy forecasts will never come true. It’s just a question of timing…
Signs of Danger Ahead
One of the lessons I’ve learned in my long career in the financial markets is that Armageddon can be postponed time and time again, and when a genuine monetary crisis does occur, the federal government is often able to bail out the system, at least temporarily.
It did so in 1982 when Social Security ran out of money; in 1987 when the stock market crashed; in 2000 when the Y2K glitch happened; and in 2008 when the real estate market collapsed.
And now we are starting to see the early signs of a new fiscal crisis. Government spending under the Republicans is out of control. It rose 4.4% in 2018 to $4.4 trillion, spilling more red ink.
While spending went up, tax revenues were relatively stable and corporate income taxes fell 31% due to Trump’s tax reform.
The federal deficit is approaching $1 trillion. Almost all economists, including Keynesians, agree that during full employment we should be running surpluses not deficits.
The current cover story of The Economist is apt: “The next recession: How bad will it be?” Pretty bad, given the fiscal irresponsibility of the Trump administration and the Republicans in power. It’s a travesty.
Not only is spending out of control, but rising interest rates will compound the problem.
Guess what is now the fastest-growing expense in the federal budget? Not military spending, not Social Security, not Medicare – it’s interest on the national debt.
It increased 19% this year to $415 billion. It is expected to reach $1 trillion in 2024. It could happen quicker given the rising in rates and the unfunded entitlements liability problem finally rearing its head.
It’s time to sound the alarm. It’s time for the Republicans and Democrats to come together to solve this growing fiscal crisis. The Liberal and Conservative parties in Canada solved a similar problem in the mid-1990s. Why can’t we do it today?
Browne created the Permanent Portfolio Fund (Nasdaq: PRPFX) as a way for you to protect yourself when the crisis hits. He recommends you invest 25% in growth stocks, 25% in government bonds, 25% in cash and 25% in precious metals.
Unfortunately, the fund has returned an average 6.5% annualized return compared with 10.6% for the S&P 500 Index, and has lost 10% since 2011. You would have been better off in a safe money market fund.
Given the coming climate, better to take your chances in a well-managed mutual fund or index exchange-traded fund like SPDR S&P 500 ETF Trust (NYSE: SPY) and hold it for the long term.