Grandich Letter Special Alert: Shock, denial, frustration, anger??

What you are about to read is the single most important commentary I’ve written since I first began publishing The Grandich Letter in 1984. Every American should read it, and those who do will likely wish they hadn’t. What I’m about to speak of is the hardest thing I ever had to do in my life. What I speak about is not only IMHO going to profoundly impact hundreds of millions of Americans but will also directly hit me and my family. Never have I wished anything I did could be as wrong as this, but I know in my heart it is right.

Last October, I wrote a newsletter entitled “Man Your Battle Stations.” www.grandich.com/docs/financial.post_10-15-07.pdf. Soon after I wrote it, Canada’s BNN -- Business News Network -- had me live on the phone www.grandich.com/audio/BNN-10.22.07.TBN.wma. At that time, I was confident of my forecast but had not even begun to imagine how many people in the world would be severely impacted if I was right. Unlike a prediction about something turning out good where the masses profit, being right about really bad news is not a way to make friends and influence people.

Knowing that it won’t sit well with most, I’m going to tell what I think is the blunt truth. Trust me, it doesn’t do me any good, either, except maybe to give the masses a realistic and what I believe to be accurate and down-to-earth assessment of what is to come and the reality of what is currently taking place.

To do so, I have to go back in time and explain an event that lays the groundwork for where we are today as a nation.

Up until President Nixon’s term, America was truly a world power both militarily and economically. Though it was being challenged as teaching about God was being removed from schools, the moral fabric of America was firmly in place. Slowly, the Hippie culture of “do what you want and to and the heck with the consequences” began to take hold. But, it was a presidential move that would truly set off an economic time bomb that is now close to exploding: President Nixon decided to remove America from the Gold Standard http://en.wikipedia.org/wiki/Gold_standard. What Nixon did was remove our government from having to be strictly fiscally responsible. It allowed governments to effectively print money without having anything else to back the money other than its promise to make good on it. That promise or ability to make good has decreased as the United States would become so fiscally irresponsible by running up debts that now not only leave it at the mercy of its lenders, but have all but certainly caused critically important social services like Medicare and social security to be in danger of disappearing or greatly diluted in the coming years. Our former U.S. Comptroller, the man who was in charge of the government books, tried warning us for years (see www.grandich.com/video/60min.162mb.wvx) but has recently left office in part because on our refusal to take heed. The removal of the gold standard will IMHO be looked back on as the match for the economic time bomb that’s before us.

As plain as possible, what America has done as a government is to literally create money out of thin air, and we’ve done so over so many years that the interest owed is going to be difficult to repay, not to mention the principle. How important is this? If we did this as a business we would have been out of business a long time ago. If we did it as individuals we’d be in jail.

Americans have indebted themselves to the point where the average American has little or no real savings. Furthermore, the two key areas they have continued to borrow against to continue a lifestyle way beyond their means – the stock market and real estate market – are no longer viable means of borrowing against our future.

You must understand that the real net worth of America is negative. Yes, there are a small percentage of Americans who are indeed rich. But the large middle class that used to make up the bulk of Americans has shrunk with a few going up the ladder but most falling off or clinging to the bottom rung.

So, no matter what Wall Street, Washington or the media may try to tell you, you must sadly accept that as a nation we are heavily in debt, our cash flow has been seriously impacted and our ability to continue borrowing is fast reaching an end. It would be political suicide, but America’s debt should not be rated triple AAA anymore. Our creditors know that, and that’s why our currency has fallen so much. A country’s currency is one of the most viable indicators of what the world thinks of the country economically (unless, of course, you’re China where they literally have manipulated their currency into the world’s biggest money-making machine).

www.investmentnews.com/apps/pbcs.dll/article?AID=/20080619/REG/183669940/1094/INDaily01

www.vtcommons.org/journal/2008/03/kirkpatrick-sale-you-know-your-empire-collapsing-when

There has been a once-in-a-lifetime shift in wealth in the world. America, which once was truly an economic power and a creditor nation, has seen its wealth leave for several key countries that have seen incredible economic growth like China, India, and several countries in the Middle East. In Dubai, it’s estimated that 25 to 35% of all the world’s building cranes are at work. These very countries are now using their large reserves to buy up U.S. assets on the cheap.

Major Point – I’ve stated in recent years that “Americans have been robbing Peter to Pay Paul, but Peter is tapped out.” This in itself was bad and the housing bubble/scam only greatly exacerbated the problem. However, the oil crisis is the straw that has broken the camel’s back even though many in the nation are still only in the shock and denial phase (more on this later).

Unless you’ve been in a cave (and some of us may be before too long), the price of oil has literally brought the United States to the brink of its worse economic contraction since the Great Depression. And, depending on what happens with the price in the next few months, it could literally send many parts of the world into an economic free fall from which many of us in our lifetimes will never witness a full recovery. Here, too, we’re partly to blame since we not only used oil as if it was going to be in ample supply forever, but we failed to listen to a worthy theory that is now proving to be correct. For decades, the powers-that-be knew of or were at least shown the possibly of Peak Oil. (See http://en.wikipedia.org/wiki/Hubbert_peak_theory.) Every session of Congress for the last 30 years could have done something significant about energy, but as in most other matters, passed the buck. Don’t for one minute think it wasn’t widely known that we use 25% of all the oil produced in the world and developed only 3% ourselves. If that wasn’t enough incentive for the government to do something, what about the fact that countries like Iran, Venezuela and Russia are key suppliers of the world oil reserve? These countries have clearly expressed their dislike for America and would like to see us spend our last dollar on their precious oil. The rest of OPEC isn’t exactly all warm and fuzzy about America, either. Do you really think, despite all the rhetoric, that any of these countries are going to say, “Let’s do all we can to sell our oil for a lot lower price to help out poor Uncle Sam?”

The cost to consumer spending is so profound this time around because not only hasn’t America seen real wage growth for years while inflation has been much higher than government reports, but it comes at a time when it was already strapped by the housing bust and a slowing economy.

Major Point – Americans are mostly either in the shock or denial phase at this moment. Tens of millions of Americans are literally being stretched to the limit if not beyond just by the dramatic costs in fuel. Soon, they will enter the angry stage as some already have around the world protesting and demanding something be done. Sadly, despite all the political bantering you hear now, governments like the U.S. can do little. This will lead to the frustration phase when the realization is that there’s indeed little in the way of relief for as far as the eye can see. That will lead to the final phase which is either acceptance (not many will want or be able to live with this) or dismay and radical changes to lifestyle and a forever change to the economic landscape.

http://articles.moneycentral.msn.com/Investing/SuperModels/AxisOfAnxietyBoostsFuelPrices.aspx

As each week passes and energy prices remain very high, the economy can only slip further. As reality of this nightmare unfolds, people and businesses will only continue to cut back. This contraction will come as inflation raises its ugly head creating a scenario not seen in decades- stagflation.

I hope I end up wrong about this, but I’m extremely saddened that I won’t; the world is going to see already known food and water crises increase to epic proportions. These crises are like oil a couple of years ago. We saw it coming but kept hoping it wouldn’t hit us square in the face.

http://articles.moneycentral.msn.com/Investing/SuperModels/CouldWeReallyRunOutOfFood.aspx

As I stated upfront, my family and I will not escape, just like 90-95% of all other Americans. Sadly, life as we have known it is only going to be a memory if it isn’t already.

I know this won’t play well in Peoria (or anywhere for that matter), and as I type it I know full well the Grandichs will be victims, as well. People will stay in denial for the most part but this is of epic proportions. This has been mostly a secular newsletter, but I must tell you that I also believe this is Biblical. It is there where I personally suffer because upon concluding all this, I have none of the real faith that’s going to be needed to live through this. The miracle for many like me will not be how to try and avoid it but rather how to realize it’s been years of neglecting God or giving Him lip service at best and now only those who truly trust Him will find peace in their greatly trouble times ahead.

It will be years before the full effect of America’s collapse as an empire runs its course. As our assets become cheaper, several countries’ sovereign wealth funds will continue to buy into and acquire key American corporations and other assets. It won’t be in their best interests to see a total collapse here as what good will their new assets be if no American is left able to use them? There will also be certain Americans who will have enough wealth to participate in picking through the carnage. In years past they would be called vulture funds. The bottoming of this horrific fall should be evident when we learn of these funds going to work in earnest. The problem is that these countries and any fund participants know time is on their side now, as things will be cheaper to acquire as the weeks and months pass.

In the midst of even the worst adversity, opportunity is created for somebody. There are still certain industries and areas that should be quite profitable, especially if the oil price doesn’t continue to rise parabolically, but finds a home in the $75 to $150 area.

There will now be a serious effort to develop alternative energy sources. Solar energy and nuclear power must and will become prominent energy sources. The masses of people who ignore this environmental issue are all but certain now to demand nuclear energy despite any environmental concerns. Agricultural and water-related opportunities will become paramount investment targets. And, believe it or not, infrastructure needs in areas of the world that continue to see growth will also be of interest to investors.

Critical Point – American investors will be hard pressed to act as the losses suffered in the markets will be great. Wall Street will continue to tell them this is just another “dip” and the market always comes back. This, of course, will be many of the same people who didn’t foresee the housing, energy and food crises, so keep that I mind if you choose to follow them.

To those who have the courage to see that Wall Street is little more than one behemoth sales organization, I will once again state that traditional financial planning is a flawed process. I don’t care if it’s a brokerage, insurance or bank representative and their plan comes in a highly-sophisticated, computer-generated program with all sorts of charts, graph and analysis. The plan itself is doomed from the onset. Why?

No one, including me, can accurately predict the direction or degree of change in these key economic factors over any real length of time. Therefore, despite all the assurances the marketing material and the representative give you, your plan can’t meet its goals because events will unfold that will alter the course of your plan. Buried in that small print disclaimer is effectively a warning of this, but I doubt 1% of the tens of millions of investors who have had a plan done read it—and even if they did, they didn’t understand it.

Wall Street is all about gathering assets under management and trying to make those assets appreciate. Isn’t it amazing that the vast majority of so-called money managers underperform the market yet the public-at-large, including very successful professionals and business owners, continue to give them their money?

Cash flow is what everyone should be concentrating on. Most individuals and businesses don’t do as good a job as they can when it comes to their cash flow. You can increase your worth by hundreds of thousands of dollars (if not more) over your lifetime if you can understand two key facts:

• LOCs-Lost Opportunity Costs – The best way to explain LOCs is to ask you if you lost $20 what did you lose? Most people answer $20. However, the truth is that you lost $20 PLUS the opportunity what the $20 could make if you had it back. That is a lost opportunity cost. Everybody has them and the more you earn the more LOCs you will have.

• Velocity of Money – The key is to have your money always working for you. Banks are the most effective employers of this (providing they don’t do foolish investments like many end up doing). Here’s how it works: a bank opens it door and graciously accepts you as a depositor. They pay you one turn on your money (which today is anywhere from 2-4%) whether in a money market or CD. They then take your money and lend it out to several different types of borrowers from equity loans to credit card users. They earn anywhere from 6 to 15% by simply using your money. They effectively get to use one dollar to make several.

There’s a process that teaches one to do this and manage your cash flow better without you having to use out of pocket expenses and take the degree of risk so many are now seeing in their traditional financial plans. If you reside in America, email me for details peter@grandich.com.

While the inevitable correction in oil (but from what price level?) is going to allow the stock market to enjoy a bear market rally (but from what level?), prices should continue to erode. The DJIA has somewhat masked tremendous losses in many areas of the market. It’s not uncommon to find investors with 50% or more losses. Again, the shock and denial phase has kept somewhat of a lid on the outcry, but soon the anger and frustration phase will be evident. I feel extremely bad for the tens of millions of people whose life’s blood has been poured into their homes and investment vehicles and are now being badly damaged or destroyed. They can only hope for a miracle, but I’m afraid most all of us are going to be part of this growing nightmare. There is no magic pill that can return things to the way they were just a few years ago. I’m extremely frustrated because like these people, I’ve learned all of my own strength is useless. We’re going to need to have real faith in God if we’re to survive in what looks more and more like the start of “End Times” or at least the end of a lifestyle as we once knew. I felt last October that the market could lose at least half of its value. In several areas it already has. As unimaginable as it seems, we could be in just the first half of the worst stock market decline in all of history.

Ironically, gold could be mirroring the history of the DJIA. The DJIA had for decades traded under 1,000. When it finally broke out above that mark, it ran up to 14,000. Gold has been under $1,000 for almost its entire free trading history but now appears it can break above it and run like the DJIA by seeing a multiple return before it’s all said and done.

This is a seasonally weak period for gold as jewelry fabricators usually wait until around September to step back into the market in a big way. And yes, the weakening world economy is likely to dampen jewelry demand, but I think gold is returning to its historic place as a storer of value and real money. As things worsen, I see it becoming the necessary evil even to the paper lovers of Wall Street. We still may have one more decline on the heels of an oil price correction, but it would only be an opportunity to buy as I now believe we’re going to see a parabolic rise once we get to stay above $1,050 or so for more than a few days or weeks. It’s very possible to now see $2000 or more in the next 12 to 24 months. But, the world as we knew it will sadly be dramatically changed.

To those who once had such high hopes only to be dashed in the recent sharp correction, try to regain your confidence—nuclear power just has to be a primary source of energy going forward. It’s pretty clear now that fossil fuel is a “dinosaur.” We won’t likely see a sharp run-up, but prices can make a new high in the next 12-24 months and the uranium players who more than survive the recent swoon are likely to get another good at-bat.

With the world’s eye squarely on this market and numerous powerful parties, countries and speculators all deeply involved, it’s a total guess to try and figure what oil is going to do day-to-day, week-to-week. The one thing for certain now that the cat is out of the bag is we will never see cheap oil again. Anything under $100 for any substantial time will be a gift, but don’t hold your breath. I do think it has killed the big car and consumer truck industry for good and that’s why we could see one or more of the Big Three automakers go into bankruptcy or merge with a foreign maker.

I said when the U.S. Dollar Index was above 100 that the only party who didn’t know the U.S. Dollar is dead was the U.S. Dollar. I think it’s now taken the hint. One would think the Fed has to start raising rates to fight inflation, but I think our Fed Chairman is under incredible pressure and is finding it very hard to keep fixing the increasing leaks in the sinking ship. The dollar is overdue for a rally, but like the U.S. stock market, it won’t be a new bull market but merely a dead cat bounce.

I have no more room on my head for scratch marks from trying to figure out why the junior resource market hasn’t shared greatly in the wealth gained in the metals markets themselves. The old logic that the companies who primarily find the next mines should benefit from the rise in the metals they’re looking for doesn’t seem to apply anymore. Excuses can include: general pressure in equities; Bullion ETFs have sapped much of the monies that used to find their way into this market during run ups in metals prices; and lack of major finds or big gains overall has kept hot money from flowing in. I feel like someone at a roulette table who keeps betting black despite numerous reds in a row saying to himself that black has to hit.

I do think we’re going to see more consolidation in the junior sector as companies try to recapitalize or merge. I also think we’re going to see the majors reach down now to those juniors who are clearly onto a significant deposit as majors are running out of opportunities to merge with similar size players. I lost count of how many times I have cried wolf, but I still believe this sector can have a big run up as the big pools of money still available and in commodities can find a home here if some sort of major discovery or some large gains in share prices can send up a flare.

Peter Grandich is the founder and managing member of Grandich Publications, LLC. (www.Grandich.com), which publishes The Grandich Letter. First published in 1984, The Grandich Letter provides commentary on the mining and metals markets, discusses the Canadian economy and investments from an American point of view, and provides commentary on the world's markets and economies. Grandich Publications also provides a variety of services to publicly-held corporations on a compensation basis. He is also the founder and managing member of Trinity Financial, Sports & Entertainment Management Co., LLC, a firm with a Christian perspective, which serves the public-at-large and has a unique Pro Sports Division that assists athletes and entertainers. Grandich is quoted regularly in the financial media and speaks at major investment conference worldwide.

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The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, when used in the preceding discussion, the words "plan," "confident that," "believe," "scheduled," "expect," or "intend to," and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the Act. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward-looking statements. Such risks and uncertainties include, but are not limited to, future events and the financial performance of the Company which are inherently uncertain and actual events and/or results may differ materially.

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Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.


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