Financial Doom – Current Best Sellers

MSN Money

Go ahead and read those apocalyptic books on the economy if you like a good scare. But be sure you recognize fiction when you see it.

By Jim Jubak

If fairy tales express our deepest fears, then investors must be on the verge of a psychotic breakdown.

The current crop of financial gloom-and-doom books carry titles such as “America’s Financial Apocalypse,” “Financial Armageddon” and the comparatively prosaic “The Coming Economic Collapse.”

Any way you go, it means the end of the world (the end of the financial world, anyway). And that’s scary. Really, really scary.

But we need to remember that while fairy tales may reflect real fears, they aren’t reliable guides to how the world works. That’s true whether the main character is named Snow White or Ben Bernanke.

Sigmund Freud, Carl Jung and Bruno Bettelheim all theorized that we read fairy tales about evil stepmothers, parental abandonment in dark woods and child-eating witches to help us express and then cope with our darkest fears.

The psychological value of these tales, in this theory, lies in the formulaic, repeated return to archetypical fears in what the reader knows — even a reader as young as my 6-year-old daughter — is a fiction. It also helps that, unlike real-life horrors, these tales usually have happy endings.

This current crop of financial-disaster books should be read the same way — as financial fairy tales that represent our darkest financial fears and then allow us to cope with those fears by offering up happy endings in the form of investment strategies that can fend off disaster.

So what are investors’ deepest fears right now?

A collapse of the U.S. dollar. A steady decline in the dollar of the sort I’ve been writing about seemingly forever is one thing. Investors, and others paid in dollars, aren’t thrilled at the prospect, but they know they can cope by buying gold or overseas equities, for example.

A collapse is something else entirely. In “The Collapse of the Dollar,” James Turk and John Rubino compare the catastrophe about to overtake the dollar to the fall of Rome, the hyperinflation that ushered in Hitler’s Germany and the confiscation of bank deposits in 1990s Argentina.

A collapse in the dollar would let loose war, one of the Four Horsemen of the Apocalypse, according to Michael Panzner’s “Financial Armageddon.” In the absence of the global order enforced by the United States and represented by the dollar, countries would wage pitched battles for natural resources.

A new Great Depression. In the next decades, 73 million baby boomers will retire into poverty because they haven’t saved much of anything and have run up a mountain of debt, and because financial market bubbles will have wiped out whatever they did save, argues Stathis in “America’s Financial Apocalypse” (the author uses just one name).

In “The Next Great Bubble Boom,” author Harry Dent Jr. forecasts a third great boom that will take the Dow Jones Industrial Average ($INDU) as high as 40,000 in 2010 before a housing and commodity crash ushers in a 12-year bear market so deep it produces deflation in the prices of everything through 2023. That period doesn’t sound very appealing: The period after the boom will resemble, according to Dent, the years from A.D. 400 to 900, known in Western history as the Dark Ages.

The end of the oil economy. “Americans will experience a permanent energy shortfall far worse than the one in the 1970s,” Stephen Leeb and Glen Strathy maintain in “The Coming Economic Collapse.”

As the world runs out of oil, according to “America’s Financial Apocalypse,” the U.S. will enter a massive economic meltdown resulting in the next Great Depression.

The collapse of the debt pyramid created by Wall Street, fostered by the Federal Reserve and encouraged by the government in Washington. The problem, almost all these books agree, lies in the creation of money out of thin air. This money is backed not by gold but by a promise to pay, which we know the government is powerless to keep.

The books differ in how they define the problem. Turk and Rubino point to the end of the gold standard, while Panzner focuses on the creation of trillions of dollars in derivatives based on things such as mortgages and credit card debt. But they all agree that this structure isn’t sustainable.

Many of the arguments for apocalypse in these books make are more extreme versions of the worries that I voice regularly in these columns. The U.S. is addicted to debt. The dollar is in a long-term decline. Parts of the financial markets do resemble pyramid schemes. The world is running out of oil.

But — and this may surprise many of those readers who have e-mailed me lately about my doom-and-gloom columns — I don’t think prospects in the long term are nearly as gloomy as these authors do.

I believe that the world will somehow muddle through with a lower standard of living in the United States, with much higher taxes to pay for the liabilities we refuse to fund today and with a painful disruption of our lives because we refuse to plan for an orderly transition away from oil. But still, it will be nothing resembling the apocalypse these authors envision.

Why not? Three reasons.

What isn’t factored in

First, these books underestimate the power of feedback to change current trends. The very fears expressed in books like these motivate people to find solutions. So do rising market prices.

With oil over $100 a barrel, for example, entrepreneurs get really, really motivated to find solutions because the reward is immense. Would the transition be easier if we had invested more money sooner or if we actually had a national energy plan? Quite probably. But I’m certain that things won’t look as bleak on the energy front in five years as they do today.

I think there are similar feedback loops operating against a collapse of the dollar. (Think about what the aging of the European and Japanese populations will do to the euro and the yen when demographics really start to bite in 2013 or so.) Sometimes one of these doom trends actually works as a feedback loop to put the brakes on another one. For example, a growing U.S. debt burden leads to higher U.S. interest rates that help to support the U.S. dollar. Does that lower U.S. growth and living standards? Sure. But it also prevents a collapse in the U.S. currency.

Second, the catastrophes in these books are quaintly U.S.-centric. Globalization changes the way that any financial disaster in any one of the world’s dominant economies — including that of the biggest, the U.S. — would play out. When Rome fell (a favorite comparison in this kind of book) it was an unmitigated disaster for everyone who lived in Western Europe because the imperial economy was the only game in town.

When Rome fell, people in this economy lost their only currency. A collapse in the U.S. dollar would leave the world with euros, yen, yuan and more. When Rome fell, people lost their livelihoods even though the economies of Constantinople, Alexandria, Xi’an and Ctesiphon were doing quite well, thank you.

Today, jobs are outsourced to India and Poland — and could be outsourced to New Jersey and California. Economies such as China’s and India’s can chug on ahead even when the U.S. economy slows down.

We tend to focus on the costs of the global economy in U.S. jobs or the loss of market share by U.S. companies. We don’t take much note of the way that the global economy is likely to act as a safety net in the case of the kind of disasters these books describe. In a global economy, apocalypse just isn’t what it used to be.

Third, a good part of the extremes to which these books want to take these trends — the difference between my short-term pessimism about the economy and stock market over the next 12 months and these books’ long-term gloom over decades — comes from the way these books are grounded in American guilt that stretches back to the colonists who scratched farms out of the dark forests.

The language in these books, even the references to Armageddon, apocalypses, the end of days and the final battle between God and Satan, ties our economic doom to our moral failure. We deserve the punishment of these dooms because we’ve strayed from the path. We’re not thrifty. We’re gluttonous consumers. We can’t control our lust for consumption.

Yet these books don’t follow that logic to the end. If this is the battle at the end of time, if we really are looking at certain doom, then these books shouldn’t end with chapters on how you can avoid doom by buying gold or investing in certificates of deposit until the chaos is over, or by buying the stocks of this company or that.

But they all do, and those are the happy endings that all fairy tales must have. Turk and Rubin’s book on the collapse of the dollar adds “and How to Profit From It” to the title. Panzner’s book on financial Armageddon adds a cover line promising that inside you’ll learn how to “Protect Your Future from Economic Collapse.” Leeb and Strathy promise to tell you “How You Can Thrive When Oil Costs $200 a Barrel.”

If doom is truly upon us, there’s nothing we can do, and we might as well just keep on with our lives. If the doom can be avoided, as these books suggest, by something as simple as buying gold or real estate or inflation-indexed Treasury notes, then it’s not much of a doom, and we will see forces come into play to change the direction of the economy before it runs off a cliff.

Sometimes, though, we just enjoy being scared out of our wits. Stephen King and Michael Crichton have made nice careers out of putting nightmares between book covers, and tales of financial horror wouldn’t be published in such numbers if there weren’t a market for them. So if you’re among the many who indulge a taste for apocalypse, just try to remember, as my daughter says after hearing one of her scary stories, “It’s just fiction, Dad.”

Developments on past columns

Why we’re stuck with insane prices“: On May 5, the Philippines held a rice auction, and no qualified bidders showed up. The country, Asia’s biggest rice importer, was looking to buy 675,000 tons of rice for its national stockpile. Only one company bid, however, and even that offer, from Vietnam Southern Food, failed to meet the auction’s minimum terms.

The auction failure may simply reflect how tight global rice supplies are — and how hesitant rice exporters are to guarantee delivery or prices. But I think there’s a good chance it’s related to efforts by Thailand, Cambodia, Laos and Vietnam — among the world’s largest rice exporters — to form an OPEC-style rice cartel. In the last week of April, Thailand, the world’s biggest rice exporter, said it wanted to form such a cartel to give rice exporters more control over international rice prices.

How the Fed lost the inflation fight“: Also on May 5, Goldcorp (GG, news, msgs) announced first-quarter earnings of 23 cents a share, 2 cents a share above Wall Street expectations. Revenue climbed 32% from the first quarter of 2007 but, at $627 million, still came in below analyst projections by $46 million.

Cash costs in the company’s gold operations — that’s costs net of sales of copper and silver — for the quarter climbed to $240 per ounce from $181 an ounce in the same quarter of 2007. That still leaves Goldcorp with one of the lowest cost structures in the gold industry.

The company also announced that its big Penasquito mine in Mexico remains on schedule for the first gold pour from ore in 2008. The company recently upgraded proven and probable reserves for the mine to 13 million ounces of gold and 864 million ounces of silver.

As of today, May 6, I’m raising my target price for Goldcorp to $46 a share by December 2008 from my prior target of $41 by October 2008. (Full disclosure: I own shares of Goldcorp in my personal account.)

Can tech stocks spark a 2007 rally?“: It wasn’t a good quarter. On April 25, SiRF Technology Holdings (SIRF, news, msgs) reported first-quarter revenue of $62 million, down 8% from the first quarter of 2007. A loss of 14 cents a share was twice as bad as Wall Street had expected. The lousy numbers weren’t just a reflection of slowing sales and falling prices in the GPS market after the holiday selling season, although weak demand in that market certainly didn’t help.

The bigger problems are evidence that SiRF Technology is losing market share to competitors with cheaper products and that the company needs a top-to-bottom restructuring so that it can compete on cost. Unit volume climbed 34% year to year, but unit volume in the market grew by 78%, showing pretty clearly that the company is losing market share.

Management has launched what seems to be a top-to-bottom review of its strategic options, which range from cutting costs to potential mergers and acquisitions. I continue to believe that we’ve taken the bulk of our damage in these shares. The stock dropped 14% on the bad news but then regained most of the lost ground.

I think it’s worth holding on for either a second-half turnaround in sales with a pickup in end markets or a potential takeout by a competitor or in a private-equity buyout.

As of May 6, I’m keeping SiRF Technology in Jubak’s Picks at my prior target price of $12 a share by January 2009. (Full disclosure: I own shares of SiRF Technology in my personal portfolio.)

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