The Rise of the Mega-Rich

The Rise of the Mega-Rich

The first decade of the 21st century is over. Many people find themselves off to a bad start. The new century began with the Y2K scare -- the threat of computers shutting down around the world. Then 9/11 came, followed by two long and expensive wars. The Nasdaq bubble and crash were followed by the real estate bubble then subprime crash, which led to the unprecedented printing of trillions of dollars in an attempt to prevent a global depression. The result is a lingering financial crisis that has expanded the gap between the haves and have-nots.

Most decades have their characters. In the 1960s, we had the hippies. By the 1970s the peace movement evolved into John Travolta and disco. In the 1980s, capitalists took center stage. Techies dominated the 1990s and suddenly geeks were cool.

The question is, what character will emerge to represent the first decade of the 21st century? Will it be the religious terrorists flying into tall buildings or the financial terrorists stealing our wealth from inside tall buildings? Will the first decade be known for Ponzi scheme notables such as Bernie Madoff and Allen Stanford… or Social Security and mutual funds? Could it be known for odd couples such as Barack and Hillary or John and Sarah? Or will the first decade be known as the era of celebrity philandering with confessions from the likes of Tiger Woods, Elliot Spitzer, and John Edwards? (All three should get together to co-author a book entitled “Family First”.)

The Century's Exciting Start

All in all, the first decade was an exciting start to the 21st century. What will the second decade bring? What new character will emerge if hippies, disco-ducks, techies, and philanderers are yesterday’s news?

I believe there will be two newsworthy groups to emerge between 2010 and 2020. One big group will be the Dumpies, so named because life leaves them down in the dumps. Many in this group are old hippies who flourished during the ‘60s and forgot to grow up. Not all Dumpies were hippies. Many Dumpies became Dumpies simply because, like dinosaurs, they failed to notice the weather changing. They simply followed in their parents’ footsteps, faithfully believing that all they had to do was go to school, get a job, buy a house, save money, retire on a company pension, collect Social Security, and live happily ever after at the country club. The formula worked for their parents -- the WWII generation – so why shouldn’t it work for them?

The problem is, the rules of money changed. In 1971 President Nixon took the world off the gold standard and in 1974 the predecessor to the 401(k) plan emerged. Suddenly savers were losers as inflation took off, debtors were winners, and people turned to gambling with real estate and in the stock market as the guarantee of a retirement check for life disappeared.

In the coming decade, I believe we will be hearing more and more stories of Dumpies -- well educated, hard-working, successful, prosperous people who will find themselves out of time, out of money, and dependent upon government or family support in their golden years.

The New, the Young, the Prosperous

The second group you will hear more about is the new, young, global mega-rich. They are internationally minded plutocrats who are the beneficiaries of globalization and the technical revolution. They are being pushed along by the fall of communism, the spread of economic globalization, and the impact of the internet as technology makes information and communication free or almost free. Most are 40 or younger today.

This rise of the new global mega-rich is happening as established institutions are falling. The fall runs the gamut from the music business and traditional media to the Detroit automakers who find themselves obsolete, outmaneuvered, and out-priced by entrepreneurs in Silicon Valley, Mumbai, Shanghai, and even Siberia.

We live in an era of unprecedented opportunity for the smartest, most persistent, and creative among us. Whole new businesses will emerge around breakthrough products as revolutionary technologies accelerate capitalism’s creative destruction of slower industries.

In this second decade, you will see the middle class of the West being hollowed out, creating the Dumpies of the world…modern dinosaurs of the evolutionary process. Both globalization and technology will have a punishing impact on those without intellect, luck, or chutzpah to profit from the changes. Machines, technology, and cheap labor in low-wage countries have pushed down wages in the West, aggravating the financial crisis for the obsolete and ill-informed.

Unprecedented Openness

We live in an age of unprecedented openness. As stated earlier, technology has made information and communication free or almost free. There is more opportunity than ever before…yet that opportunity is largely theoretical: In America social mobility will reverse as many in the middle class become Dumpies.

Between 1997 and 2001 the gap was as follows:

1. The top 1% earned 24% of earnings growth.
2. The top 10% earned 49% of earnings growth.
3. The bottom 50% earned 13% of growth.

Until 2008 none of this seemed to matter. The wonderful inventions, such as iphones, ipods, Twitter, Google, and Facebook kept us entertained like kids at Disneyland.

At the same time, the expanding bubble of debt created a surreal environment of monetary nirvana. You could buy what you wanted, max out your credit cards, and pay off the cards with a home equity loan, as Santa’s sleigh ride continued. Who cared if the bottom 50% were being left behind? Who cared if the top 10% earned 49% of earning’s growth? Who cared if 10% of the population got richer while 90% were left behind? We had toys, we were hip, we had designer bling from China that made us look rich, and we could buy the house of our dreams for no money down. What could be better?

As this financial crisis lingers on, the gap between the new plutocracy and the new Dumpies is becoming a pressing political issue. During the 1960s, the hippies dropped acid and dropped out. Today, as Dumpies, the largest demographic group (a.k.a. baby boomers, approximately 75 million strong…of which I am one) may wake up and drop back in. If they do, who knows where the political process, driven by their hippie values, will go? This is why the second decade of the 21st century will be more important than the first.

Financial education is an important objective for this next decade. We cannot allow the gap to grow bigger. We must have financial education in our schools. Money will not close the gap -- only financial education will. If we do nothing, who knows what creature will emerge as the mascot of the new decade?

To see the future, look to the past. Throughout history, political despots have emerged during times of economic crisis. Some famous characters are Mao, Stalin, Napoleon, and Milosevic.

In 1933, four years after the 1929 crash, two figures arose from the Depression. One was Adolf Hitler. The other was Franklin Delano Roosevelt. Many people believe Barack Obama is modeling himself after FDR. Which leads to the question: Who will play Hitler?

Doing the Dead Cat Bounce

Dow 5,000 in 2010?

In my last column I predicted a “dead cat bounce” in the stock market and a possible Dow plunge to 5,000 this year. Obviously, many readers mocked my prediction.

But the dead cat bounce is very important, especially in today’s market.

Simply put, ‘a dead cat bounce’ looks like Diagram 1 below:

The market crashes, rebounds, and runs out of steam, then crashes again…unfortunately, and possibly, to a lower low.
When professional investors observe a ‘dead cat’ forming, many will begin to sell. If their selling leads to a panic, the stock market goes even lower.

Putting today’s numbers to the ‘dead cat’ diagram gives this topic more meaning.

In 2002, the Dow hit a low of 7,286.

In 2007, the Dow hit a high of 14,164

In 2009 the Dow fell and stopped at 6,547.

Dow 6,547 is where the market stopped falling and the dead cat bounce began. At 6,547 the market was oversold and buyers came rushing back in, looking for bargains. The Dow headed back up, and a bear market rally began.

On February 5, 2010 the Dow closed at 10,012.

What Does This Mean?

So the question is, “What do these numbers mean to me?” The answer to that question depends upon you. If you are a bullish person, you will be optimistic, reassured by these numbers, and looking forward to the Dow breaking 14,000 soon.
If you are bearish, you will be waiting for the dead cat to finally die and for a double dip recession to begin.

One of the theorists (and writers) I follow is Richard Russell, a wise sage who is in tune with markets and the madness of crowds. He has been in the business for about 50 years, so he has the wisdom and perspective of time. Lately, he has been writing about the ‘50% Rule’ of Dow Theory. I thought I would pass it on to you because it may assist you in seeing the future of the economy, even if --like me -- you do not trade in stocks.

The following is my interpretation of the ‘50% Rule’ using real numbers.

In 2002 the low of the Dow was 7,286.

In 2007 the Dow hit a high of 14,164.

The ‘50% Rule ‘number is 10,725…the halfway point between 7,286 and 14,164.

In 2007, when the market headed down and broke 10,725, professional traders who follow the Dow Theory ‘50% Rule’ knew what was going to happen next. On March 9, 2009, the crash stopped at Dow 6,547.

On that day, what I believe is a ‘dead cat bounce’ began as the market moved up.

On January 19, 2010, the Dow stalled at 10,725 and headed down again. This is spooky. The 50% rule came true.

The next interesting point is 7,286, the low of 2002, when the rally began. According to Russell, if the Dow holds at 7,286 and begins a rally, this might be a good time to buy. But if it fails to hold at 7,286 and slides past 6,547, then look out for dead cats dropping from the sky. Russell predicts that Dow 1,000, the number at which the Dow began its rally in the 1970s, may not be out of the question. If that happens, there will be millions of baby boomers joining the dead cats falling from the sky as their 401(k)s and IRAs implode.

Other Markets

This ‘50% Rule’ may apply to other markets such as gold, the hot commodity of this era.

In 1971 gold was $35 an ounce. I began buying gold in 1972 when I was a pilot in Vietnam, watching the Vietnamese panic when they knew the U.S. was not going to win the war.

Gold hit a peak of $850 an ounce in January of 1980.

Gold dropped to a low of $252 in July of 1999. Obviously, I bought a lot of gold in 1999. Gold was at an all-time low because Central Banks, such as the Fed and the Bank of England, were dumping gold in an attempt to protect the value of their counterfeit currencies.

According to the ‘50% Rule’ of Dow Theory, when the price of gold was passing $600 an ounce(halfway between $850 and $252), a rally in gold was on. When gold passed $600, mainstream financial experts began warning of a crash in the price of gold… stating that gold was in a bubble.

Today gold fluctuates between $1,000 and $1,200 an ounce.

Is Gold in a Bubble?

When you factor in inflation and devaluation of the U.S. dollar, $850 gold in 1980 is $2,500 an ounce in today’s dollars. In other words, gold might be at 50% at $1,200, which is the highest of highs. Could there be a run to $2,500?

Your personal answer to that question will depend upon how confident you are in Fed Chairman Ben Bernanke, President Obama, and Wall Street. If you have faith in our leaders of commerce, don’t buy gold. If you do not have faith in them, maybe you should buy gold or silver.

If the dead cat bounce dies and the Dow drops to 5,000 in 2010, as I predict, then the price of gold and silver may die with the dead cat of the Dow, as investors cling to cash. The next question you need to answer is, “If the Dow dies and the price of gold and silver drop, what should you invest in at the bottom…stocks, gold and silver, or cash?”

I know what I will do. I will buy more gold and silver. Why? The answer is because I trust gold and silver more than Central bankers, the Oval Office, and Wall Street. Gold and silver have been real money for thousands of years.

The Lost Decade

The people I am most concerned about are the average investors who have bought their financial planner’s advice of “Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”

Many investors are calling the past 10 years The Lost Decade. That means those who invested for the long term in stocks, bonds, mutual funds, and cash are long-term losers. Japan has been in a Lost Two Decades.

A ‘lost decade’ means:

1. Zero job creation.
2. Zero economic gains for the typical family. Home values are down and many families owe more on their home than the home is worth.
3. Zero gains in the stock market.

Over the next few months, it is important to watch both the Dow and gold. As I write, the Dow is around 10,000 and gold is at $1,000. If the Dow breaks 7,286, the 2002 low, and continues down below 6,547, the 2009 low, watch out below. If 6,547 is broken and gold passes $2,500 an ounce, you'll have even more to worry about.