Catherine Crowley, owner of Cat PR Communications, interviews author and historical economist H. L Quist, revealing for the first time The Myth Buster's ‘secret' to his successful market forecasts. A Must Read for anyone interested in their future and their money.
Catherine Crowley: (CAT)
Mr. Quist, I've known you for over 10 years but never realized that you've had such a long history of revelations that have enabled you to forecast future events. In the current vernacular you would probably be called a "futurist." You are a true visionary. I think your readers would like to know more about how you were able to accurately predict certain events.
H. L Quist: (HLQ)
Certainly, but I would like to focus on financial and political events rather than the personal since my readers and listeners are so concerned about what is happening economically and politically and what will happen in the future.
Of course. But I think a little background and history is important. If you will, please relate your story of the 1987 stock market crash.
At that point in time I was 100% involved in the land development business in Scottsdale, Arizona. What makes my premonition of this cataclysmic event remarkable is that I wasn't ‘tuned into' the stock market having sold my insurance and securities business at the top of the market in 1978.
One night, while sleeping, I had a very clear picture in my mind of panic on the floor of the New York Stock Exchange. I liquidated my brokerage and IRA accounts the week of October 12, 1987. The Dow Jones Industrial Average (DOW) lost about 15% that week. The following Monday (referred to as "Black Monday") the DOW fell 22.6% which was the largest one-day decline in history. In total, the DOW declined over 40% in one week leaving investors in shock and disbelief. My wife became a believer.
What caused the crash and how does that event relate to today?
Most analysts point to the obvious — The Bull Market which began in 1982 had gained considerable momentum by 1987 with the DOW gaining 44% by August of that year alone. Computerized program trading was new and many observers expressed concern that both massive buying and selling could exacerbate market volatility. Merger mania and leveraged buy- outs (LBOs) financed by high-yield junk bonds created a culture of greed not unlike the recent subprime mess. Treasury Bill rates rose from 5.30% in January to 7.19% by October. Like all bubbles, the stage was set for a calamity. Amazingly, few saw it coming. Reviewing this event now, there's a critical component to it.
Few, if any economists, market analysts or historians will connect the Plaza Accord of 1985 with the Bull Market that led to Black Monday. The Group of 5 (G-5), the five largest global economies, met at the Plaza Hotel in New York City to discuss trade and currency imbalances what were creating economic stress within the group. A strong US dollar (USD) had appreciated 80% against the other major currencies which made US exports non-competitive and created huge trade surplus in Japan and Germany. As a result the US persuaded the G-5 to have the USD devalue against the other four currencies and in two years (1987) the USD had fallen almost 50% against the Yen and D-Mark. The result? A near parabolic rise in the US stock and real estate markets. The G-5 met again at the Louvre in France in 1987 and agreed to HALT the decline of the USD. The result? The Crash.
Why is this slice of history relevant today? The recent global financial crisis, trade imbalances, competitive currency devaluations and a host of other problems are the focus of the G-20 (no longer the G-5). What's coming? A new currency alignment. The USD should be devalued against all major currencies. Gold reached an all time high on October 6th in anticipation of that possible event.
The stock market crash also influenced your thinking on your real estate project didn't it?
Lincoln Resorts, Indian Bend Properties and Scottsdale Lakes Golf Club were formed in 1983 to assemble, re-zone, and develop 222 acres in the heart of Scottsdale, Arizona for a 500 room luxury resort hotel, 200 single family homes and a Robert Trent Jones Golf Course. I was a 20% joint venture partner in the ambitious project which was initiated shortly after Congress enacted the Garn-St. Germain Act in 1982. That Act was designed to revive a nearly-failed S&L industry devastated by the inflation-driven 16% interest rates of the late 70s. Our timing was perfect as land acquisition financing became available. Another short-term fix that would create a much larger problem later. Commercial development took off like a rocket propelled by tax incentives that proved to be too stimulative. After Congress attempted to slow commercial development with the Tax Reform Act of 1986 and the stock market debacle of a year later, it was apparent to two of the three partners and the joint venture's adviser that the development-ready project should be sold and not built. A buyer was introduced and a sale was closed on September 28, 1988 which proved to be the market high. My vision of what was about to occur was redundant in this instance.
By early 1989 it was apparent to anyone with any degree of perspective and experience that the over leveraged and over-built commercial market globally and in the US and the institutions that financed the boom were in deep doo-doo. Congress enacted the Financial Institution Reform, Recovery & Enforcement Act (FIRREA) on August 9, 1989. Institutional financing for any real estate project in the US was to become unavailable but remarkably few seemed to recognize what Congresses' intent was and the impact on the industry. Fortunately for me and my partners, the buyer secured financing that paid off the project's underlying land loan. Within month's the buyer's lender was shuttered and the Resolution Trust Corp created by FIRREA seized the property. The resort site which we had sold for $13/Sq. Ft. in 1988 was sold at auction three years later for $3.75/Sq. Ft. This period marked the largest write-off of real property values since the Great Depression and redistribution of wealth prior to the present day.
There is a sidebar to this story which is enhanced by my ability to see what others can't. When the buyer paid off the underlying land loan which was about $10,000,000, the senior partner and I met with the S&L President (project lender) and requested a small infrastructure development loan for Indian Bend Properties. The president greatly appreciative of the payment (few loans were repaid) apologetically declined the request. In the lobby, my partner remarked:
"I can't understand why they declined."
I replied: "It's over!"
"What's over" my partner asked.
"They're closing their doors!"
"How did you get that information from that discussion? He inquired.
"Oh you know, I can see what others can't see," I replied.
I don't think my partner ever knew where my source originated and I never told him.
It was indeed over. 747 financial institutions were closed. The plan by the Fed and Congress to save the S&L industry in 1982, destroyed it just 7 years later. The reader is probably able to realize that a pattern is developing here. Rear view vision is 20/20.
A great story. Going forward, you were able to combine considerable knowledge with your vision, weren't you?
Yes. Suffering a devastating financial loss, particularly when our initial strategy, the ultimate execution and the timing of the sale of the property was nearly flawless, can be humbling. But I was determined to gain from the loss and thus began a search to discover:
1. What is the cause of boom and bust cycles?
2. Are they predictable?
3. How does an investor protect oneself from these dramatic shifts in the economy?
I knew I could help others which was a defining moment for me. Two prominent best sellers in the early 1990s were:
The Great Reckoning: Protecting Yourself From the Coming Depression, by James Dale Davidson and Sir William Rees-Mogg, and
Bankruptcy 1995: The Coming Collapse of America and How to Stop It, by Harry E. Figgie, Jr. and Gerald J. Swanson.
As the titles clearly elucidate, the future the authors saw was bleak. The recession of 1992 would morph into a depression. Fortunately the thesis of the authors were 100% wrong. I envisioned a much different scenario.
What I learned from these sources plus considerable additional research was that all boom and bust cycles (with the exception of the crash of 1973-1974) had three common denominators:
1. Federal Reserve Monetary Policy,
2. Congressional legislation, and
3. The Madness of Crowds.
Armed with a wealth of data I began teaching a CE Class in real estate in 1994 and published a newsletter. Despite the above cited experts and the ominous portents of an eminent economic collapse. I boldly proclaimed in the first class:
"Get Ready For The Coming Boom in Real Estate."
One Realtor/attendee in the back of the class shouted out angrily, "How can you make such a stupid statement." Almost all of us here haven't closed a sale in years!" (He could have said, you lied!")
I calmly advised the class that I had done my homework and then delivered six reasons why a boom was coming. First and foremost, FIRREA had expired and the banks, now flush with cash, were able to make real estate loans. None of the attendees were even aware of the law. Ironically, this forecast marked the beginning of the longest (12 years) and most profitable bull market in real estate in the nation's history. "Select" investors who purchased RTC properties in the early 90s realized outsized gains in a short period of time. Most were political payoffs. Another story I fully understood and related.
You saw another stock market crash coming at the end of 1999. I didn't know what to think about your forecast as I helped you craft your book. I soon became a believer.
The stock market crash of 2000 was a no-brainer. I didn't have to reach into my subconscious mind. Everyone now says they saw it coming. How many said it in writing. In early 1999 I conceived a fictional story but with easily identifiable real-life characters and real time markets, that would forecast both political and stock market events. The book was "Secrets: A Novel of Golf and Politics," which was published in January 2000. My hero, Robbie, ‘mystically and mysteriously finds a secret to success as a pro golfer and wins the US Open while at the same time acquires the power to be able to accurately forecast the future. As the author's alter-ego, Robbie predicts a colossal collapse in the stock market. If the reader is interested in golf, a murder mystery, romance, finance and political intrigue, "Secrets" is a great read. (Available on the sidebar on this blog.) The only forecast that didn't come to pass? The controversial and ambitious president of the US (the Villain) doesn't become the Executive Secretary of the United Nations — despite an all out real life campaign to get the job!
You related to me the story of 9-11 and your vision of a New Years eve bombing. It's amazing for what did and did not happen.
I had had many painful visions of terror attacks leading up to 9-11 but I flat out missed that event. I was playing in a golf tournament in the mountains and as most golfers know, serious players think of little else. A year or so later I had a clear unambiguous vision that there would be a terrorist attack in Times Square during the New Years eve celebration. I was transfixed on the TV as the time ticked down and told those watching the celebration that I was fearful of an event. Obviously it didn't happen but remarkably an attack was planned. Sometime later it was revealed that the FBI, CIA and other agencies had intercepted terrorists crossing into the US from Canada with the intent of carrying out the New Years Eve massacre. I have had ongoing exhausting, sleepless nights envisioning such attacks. They're not going to stop. 9-11 started a 100 year religious war.
You foresaw the big crash coming very early in 2005, didn't you?
Often a casual or crafted remark or "trial balloon" will reveal a policy strategy that will go un- noticed is a clue to a major market shift. Such was the case when Ben Bernanke, then a Federal Reserve Board member, gave a November 2, 2002 speech to the national Economics Club in Washington, D.C. where he said "there will never be a depression in the US because the government has at its disposal a new technology called the printing press." The future chairman of the Fed also suggested that the government could "drop $100 bills from helicopters," which garnered him the nickname "Helicopter Ben." Those flippant comments were a clear signal to me that the Fed's strategy would be to flood the market with cheap money. I recommended to all clients at the time to get fully invested when fear from 9-11 was prevalent throughout America. I was now connecting my knowledge with my vision. The period late 2002 to early 2007 probably represented the greatest inflation of assets (real property, equities and commodities), in US history. In July 2005 I wrote a Special Report (available upon request) entitled "The Future Isn't What It Used To Be." It forecast The Great Reckoning to begin in 2006/2007. The report also warned:
"US banks, brokerage firms, and hedge funds have created an enormous and incalculable inverse pyramid of leveraged bets known as derivatives that threatens to bring down all of the global financial markets." (Page 26)
I clearly saw the future but most listeners and readers were in denial. The derivatives were the trigger for the collapse. Exactly two years later this "gun" was fired but incredibly very few realized they had been shot.
Your "Special Report" was really, a compilation of your knowledge and what you envisioned. You indicated that you followed your own advice but you did make a mistake. What was it?
Both books, GREED and PROFIT are a compilation of events leading up to the cause and effect of this severe recession but there's one personal aspect that's not included and for purposes of full disclosure I'll relate it here. I basically liquidated all equities prior to ‘the end of Wall St. as we knew it." I did however, retain almost all gold stocks, gold options and futures. I made the same error as the now famous Peter Schiff made. When the massive flight to safety came a year ago, September 2009, precious metals were also liquidated. The only safe-haven was US Treasuries. Now of course, a year later, gold has reached a new all-time high and assumed its role as a preferred asset class and hedge against the devaluation of the USD. For the record I still own those stocks. It proves that you can have a vision of 20/20 and still not see the entire playing field.
I guess that brings us to the most important issue of all. What does The Myth Buster see in the future?
Without question this is the most difficult and painful forecast that I've ever made. One, difficult because there is a convergence of so many social, political and economic factors that impact the picture, and Two, because what needs to be done to improve the US economy may not be an option at all. Reluctant as I am to disclose this, I'm motivated by those who need and want to know. Let me tackle Number 2 first, okay?
I hope that you can break it down so I and the average reader will understand.
I'll try. The US needs to have the USD devalued against the world's major currencies. Like the Plaza Accord in 1985 which resulted in an inflation of assets, i.e., real property, equities and commodities, in order to bail out the banks and halt the massive residential and commercial mortgage foreclosures.
Loan modifications, though helpful and new programs such as Barney Frank just proposed to use TARP money to pay down loans, won't do the job. The reason this solution may not be an option is that the Chinese, Japanese and other governments own trillions of US Treasury debt and US assets and they don't want to see their assets diminish in value. More importantly, they don't want their export goods to become more expensive to Americans and reduce their trade surplus. Conversely, our exports would become cheaper and more competitive. Another plus for US manufacturing and creation of more jobs. This asset inflation scenario is the basis for my book ‘How To Profit From The Coming Inflationary Boom."
Now, here's the ‘ball buster" (excuse the play on names). Central banks, hedge funds, speculators and even small investors are Short the USD — ‘betting" it will decrease in value. All of these folks, assuming that the US Fed will continue to keep US interest rates low for a long period of time have all moved to the same side of the ship. What usually happens when this occurs? The ship capsizes! The prospect of this contrarian move occurring is both ominous and present. A global monetary crisis could collapse the world's fragile financial system that was on a similar brink a year ago. In retrospect it was Alan Greenspan and the other Masters of the Universe that brought us to this point. The new cadre of characters at the Fed, and the Treasury and the Administration won't be able to impose another bailout on the US taxpayer. I pray that this vision never materializes.
Now, the social and political.
Barrack Obama, Nancy Pelosi, and Michael Moore are the voice and portent of the future New America. Their goal along with their army of Progressives, Marxists, Communists, and Socialists is to undermine and destroy the capitalist system. Faced with the dilemma outlined above its an easy sell to attribute the problems we face today to the evils of the capitalists and their greed. A coup d'etat has taken place in America and those who are in control are Not motivated by finding a free market solution to the problem. In fact, this crisis "should not go to waste" and they believe that it should serve to bury the present system. The bailout plans already enacted and those proposed along with trillions of deficits as far as the eye can see are designed not to save but to bankrupt Capitalism. These revolutionaries designed it that way. Now, the silent majority has caught on to the scheme. America's middle class is now in a struggle to attempt to prevent the re-distribution of the remaining amount of its net worth. The elitists have their position, their money, and their power. They're above the fray.
What made America the envy of the world and to many the cause of resentment, was not only our free enterprise system but our incomparable Rule of Law. America was the place that its citizens and non-citizens could do business confident that our nation's code of ethics and Rule of Law would protect them and their property. Were now witnessing the breakdown of this integral facet of our enterprise which will allow corruption to flourish. America is now ruled by a diverse collection of Heavy-Handed Radicals — a "Thugocracy."
I apologize for this diatribe but the future picture is not warm and fuzzy. The plot of Moore's movie of America can change and end positively with a fight. There is hope. Its up to the silent majority of Democrats, Republicans and Independents who want to restore our nation's roots. We have our differences but a United America and a free enterprise system should take precedent. Help change my vision.
Wow! What a revelation. I for one certainly hope you wake up one morning with a revised vision for America.
So do I. I would prefer visions of sugar plums.
-- H. L. Quist