AIG just made a BIG comeback: it announced its first profitable quarter after seven quarters of losses on Friday. (Let's all light a CIGar and celebrate, since taxpayers helped bail it out to the tune of $180 billion.)
So why shouldn't the rest of us DIG into our pockets to show that we give a FIG about the stock market's own comeback? Who would refuse a GIG to dance a JIG on the grave of the bear market?
Fortunately, it doesn't take a MIG to shoot down this idea. Bob Prechter did it in his best-selling book, Conquer the Crash, when he explained that it's best not to act like a PIG at a trough that will soon be empty -- particularly since the U.S. economy is heading for a deflationary depression. It's better to RIG up some kind of safety net in advance, rather than to WIG out about market ZIG-zags.
Here are three reasons Conquer the Crash gives not to speculate in the stock market now, even though it has been rising since the July low.
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Should You Speculate in Stocks?
Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you spent to read this book.
1. Stocks May Go to Near Zero
In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation. Countless investors, including the managers of insurance companies, pension funds and mutual funds, express great confidence that their “diverse holdings” will keep major portfolio risk at bay. Aside from piles of questionable debt, what are those diverse holdings? Stocks, stocks and more stocks. Despite current optimism that the bull market is back, there will be many more casualties to come when stock prices turn back down again.
2. Stock Mutual Funds Will Fall, Too
Not only will many stocks fall 90 to 100 percent, but so will a substantial number of stock mutual funds, which cannot exit large equity positions without depressing prices and which have the added burden to you of one percent (or more) annual management fees. The good news is that we will finally find out who the few truly good fund managers are and which ones were heroes by virtue of being around for a bull market.
3. The Fed Won't Be Able To Save the Stock Market
Don’t presume that the Fed will rescue the stock market, either. In theory, the Fed could declare a support price for certain stocks, but which ones? And how much money would it commit to buying them? If the Fed were actually to buy equities or stock-index futures, the temporary result might be a brief rally, but the ultimate result would be a collapse in the value of the Fed’s own assets when the market turned back down, making the Fed look foolish and compromising its primary goals, as cited in Chapter 13. It wouldn’t want to keep repeating that experience. The bankers’ pools of 1929 gave up on this strategy, and so will the Fed if it tries it.