It's a good time to lay low, stay calm, and ask ourselves some sobering and
honest questions. Noriel Roubini, the noted economist and professor told
Bloomberg news this morning that a "silent run on banks has begun."
Today the stock markets are having a relief rally after the massive sell-off
on Monday. But because there is a breakdown of confidence and a spreading
financial contagion that seems destined to get worse before it is contained, the
markets will continue to be very vulnerable. Before you invest another dollar in
the stock market, even in energy stocks and precious metals stock, ask yourself
if you feel lucky. Ask yourself if you think that this financial "super-typhoon"
is over and things will not get worse before they get really better. As Dr.
Stephen Leeb wrote yesterday:
"The market and the economy must prove to be stable first. The odds of this
happening are pretty good, despite (or perhaps because of) last weeks
irrationality. After all, the government still seems close to passing the $700
billion rescue plan. Even to the likes of Bill Gates, that would be a lot of
money. Is it enough money to refill the world's liquidity tanks? We cannot be
absolutely certain. [You can almost be certain it isn't!]
"After all, the total value of outstanding derivatives is close to half a
quadrillion dollars (that's $500,000,000,000,000 -- five times the number of
stars in a typical galaxy, or the number of galaxies in the universe)! The $700
billion rescue plan only equals a little over 1% of this amount. Fortunately,
the mountain of derivatives does not appear on bank balance sheets.
"On the whole, however, we absolutely expect the rescue plan will work. The
government appears determined to prevent an economic collapse, and passing the
legislation to flood the economy with liquidity is the right move. The downturn
in the market is a little disconcerting, but not out of line with previous
crises. Still, our strategy, until the picture becomes a little more clear, is
to be cautious. In addition to gold, we will stick with stocks that have very
limited downside risk and the ability to emerge from the crisis with a large
market share and a stronger financial position when the economy regains its
footing."
How cautious should we be? Be cautious enough to only buy bargain, and I mean
cheap bargains. Jim Cramer was saying yesterday that the only precious metals
stock he'd be buying right now is Freeport-McMoran Copper & Gold (NYSE:FCX).
Leeb's publication, The Complete Investor, used the Warren Buffett investment as
the example of what cautionary investing is all about.
"Buffett's recent purchase of preferred shares in Goldman Sachs (NYSE:GS) is
great example of a bargain. Sure, there is a slight risk that Goldman could go
bankrupt, but that would imply a dire state of affairs indeed. In buying into
Goldman, Buffett is essentially betting on the survival of the entire financial
system, which is a pretty safe bet. If the system fails, it won't matter what
anyone is invested in. And if the system survives, Buffett will collect at least
10% a year, and possibly much more, for many, many years. That's a pretty good
wager. So we suggest you stick with Berkshire (NYSE:BRK-B), both for its
fundamentals and to participate in Buffett's bet that the economy will survive."
Yes Dr. Leeb, you probably are correct. The economy will survive, but in what
shape? If history and the laws of economics are any clue, the systemic cancer of
inflation has already spread deep within every organ of the "body politic" and
the financial habeus corpus..
If I were as wealthy as Mr. Buffett, I'd take my chances on some GS preferred
shares, but since I'm not, I think I'd rather own some SLV and some GLD.
