Nine Eleven and Eleven Twenty-Two
If you're almost 60 like me, sometimes your memory is sharp, sometimes not.
But among all the historical moments of our lifetime, none are more permanently embedded in your mind than 9/11 and 11/22 -- the day America was attacked and the day John F. Kennedy was shot.
You can instantly recall, in vivid detail, where you were, what you were doing, maybe even what you were thinking.
What you may not vividly remember, however, is how strikingly different the investment environment was at the time of these two unforgettable events. Start with 9-11 ...
Where Were You?
At work? At home? In the U.S.? Abroad?
Elisabeth and I were staying with friends in Calpe, Spain.
While she was taking snapshots, I was busily typing away at my laptop, writing you an email message -- just as I'm doing right now.
It was 2:55pm in Spain, 8:55am Eastern Time. I was about to hit the send button so we could join them for an afternoon stroll along the Mediterranean.
Then the phone rang.
Another friend. Calling from Viacenza, Italy.
"It's World War III," he declared.
"If you don't believe it, turn on your TV."
We did. And like millions of others, we watched -- incredulously -- as, just moments later, United Airlines flight 175, flying from Boston to Los Angeles with 65 people on board, crashed into the south tower of the World Trade Center, damaging multiple floors and bursting into flames.
U.S stock exchanges shut down.
The world's financial markets, already plunging in the wake of the tech wreck, sunk into a black hole of uncertainty.
One week later, on the first day of trading after the attacks, the Dow plunged by over 7%.
One year later, it was still down by over 10%.
Airline stocks, already swooning due to weak business travel, nosedived.
Consumers, fearful of venturing far from home, stopped shopping.
Overall, the attacks triggered the single most rapid implosion of the U.S. economy I've witnessed in my lifetime.
You were there. So you know the rest of the story. But ...
about November 22, 1963?
How Old Were You Then?
I was 17, living in a small town in the interior of São Paulo, Brazil.
At the time, we happened to be the host family for two Peace Core volunteers -- a young married couple, which just weeks earlier, had received a personal send-off from President Kennedy before departing on their tour of duty.
Early that morning, they had left for the field, and I didn't expect them back until later in the evening. But suddenly, while sitting outside, I saw them running towards me, delivering the news in a steady staccato of panic-stricken shouts and sobs.
We rushed inside, and I switched on the radio. On the local stations, there was nothing but samba and the "new fad" -- bossa nova. So I turned to a shortwave band. And we spent the next two days glued to the Voice of America.
We didn't see the first images of the funeral until days later.
Jackie Kennedy's sorrow embodied our regrets for things passed; John Jr.'s salute, our hopes for things to come.
For Dad, it was a personal blow. Before the war, he had advised Joe Kennedy, JFK's father, in Palm Beach. He had met the three older Kennedy children when they were teenagers. Even though he was an Eisenhower Republican, I could tell that he was shaken by the loss.
Maybe that's why he expected Wall Street to suffer a setback as well. But, strangely, stock traders barely batted an eyelash. On the news of the assassination, the Dow declined, but by less than 3%. Just six months later, it was up more than 12%. And within a year, it had gained almost 22%.
The economy didn't suffer a hiccup. It had upward momentum under JFK and even stronger momentum under LBJ.
Later the Vietnam war would take its toll. But there was no prolonged stock market decline, certainly no tech wreck, which leads me to ...
The Key Question No
One Is Asking Today
Was the steepness of our economy's post-9-11 decline strictly related to the severity of the attacks? Or was it because of something more fundamental and long-lasting -- more deeply embedded in core of the American economy?
Compare the aftermath of the terrorist attacks with the consequences of the JFK assassination, and you'll be a few steps closer to the answer:
First, as you've seen, the financial impact of November 22, 1963 lasted little more than 24 hours. The nation wept. And then it moved on.
In contrast, after the 9-11 attacks, not only did the economy plunge, but it continued to sink even after the initial shock was gone.
Second, in the early 1960s, Americans enjoyed a strong cushion of financial safety, with plenty of savings and very little debt.
Today, in the 9-11 era, precisely the opposite is true.
For the first time since the Great Depression, Americans are not only spending every penny they earn -- they're going beyond that, dipping into their savings and spending still more.
This is easily the most obviously catastrophic -- and most consistently ignored -- economic phenomenon of our era.
Are we prepared for the next terrorists attacks?
In terms of Homeland Security, the answer is debatable. But in terms of financial security, it's not. We're not ready. We simply don't have the cushion of cash. Indeed, according to Federal Reserve data, the typical American family today ...
* Has a balance of only $3,800 in cash in the bank...
* Has no retirement account whatsoever ...
* Owes $90,000 on their mortgage, and
* Owes $2,200 in credit card debt.
Overall, we are now less prepared for economic hardship than at any time in our lifetime. (For more, don't miss Nilus Mattive's report.)
Third, and most revealing of all ...
Despite All the Hype and All the
Stimulus, the U.S. Economy Is
Starting to Slump Once Again
Four of America's largest industries -- housing, autos, airlines and technology -- are, at best, slumping, and at worst, sinking.
In the housing industry, construction spending plunged in July by the largest margin in nearly five years. The number of homes sitting on the market is the largest of all time. And for the first time, home values themselves are beginning to fall. (See Mike Larson's latest report for details.)
In the auto industry, Detroit's two largest -- GM and Ford -- have announced massive production cuts in a desperate attempt to ward off bankruptcy.
In the airline industry, both Delta and Northwest Airlines already filed for bankruptcy this year.
In the technology sector, domestic competition has been cutthroat; foreign competition, even worse.
There are bright spots -- such as commodity-based industries and defense. But without housing, autos, airlines and technology, it's unlikely they'll be able to carry the day.
Wall Street Assumes That a Weaker
Economy Means Less Inflation
And Lower Interest Rates.
Don't Bet on It!
Instead, consider the facts:
Fact #1. The economy grew by a meager 2.5 percent in the second quarter, down sharply from 5.6 percent in the first.
Fact #2. Last month, layoffs surged 76 percent compared with the previous month. Intel just said it will be laying off 10% of its entire workforce over the next few months. Other big companies -- including Sun MicroSystems, AOL, Oracle, Kodak, EMC Corp, Nokia, and Disney -- have also announced major layoffs.
Fact #3. At the same time, prices continue to rise. Health care costs are soaring. College tuition is hitting new records. Utilities in many states have gone from ridiculous to absurd. And now even basic food items are surging. Overall, the Consumer Price Index was up 4.1 percent over the 12 months ending in July -- the worst in 15 years.
This is a classic case of stagflation -- a slumping economy plus rising inflation striking in the same time and place.
It means the Fed may have to raise interest rates when it meets again next Wednesday, September 20.
It means bond prices, which have enjoyed a nice rally, could plunge again.
And it means that the housing market, which has already turned south, could suffer another major blow.
Brace yourself. The unspoken lesson of 9-11 is that no matter how ready we may be for the next terrorist attack, our preparedness for the next financial shock is the worst in 60 years.
My recommendations ...
1. Make sure your keep-safe funds are truly safe. I recommend a Treasury-only money funds.
2. Hold your inflation hedges such as gold and energy-related investments. The dips you've seen in recent days are very temporary.
3. Use ETFs to go for solid, double-digit returns, year in and year out. My Saturday report sums, Global Powderkeg, sums it up nicely.
But don't wait. It's time.
Good luck and God bless,