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*The Daily Reckoning PRESENTS:

Dr. Martin Weiss explains why Argentina's default is but a sneak preview of debt crises around the globe and why Enron-like time bombs still await U.S. investors in 2002.

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January 23, 2002

NO TIME TO BE SWAYED
by Martin Weiss

By the time Enron went belly-up late last year, its stock price had cratered from $90 to 26 cents a share. Over $66 billion in capital - and almost every single penny invested by 58,920 investors - was wiped out.

It was the largest bankruptcy in US history.

When Argentina announced in the last days of 2001 that it was officially defaulting on its $155 billion in debts, it devastated the assets of hundreds of banks and tens of thousands of investors around the world.

It was the largest debt default in the history of the world.

Now, despite all this, Wall Street is telling you that "a recovery is around the corner" - that it's once again time to spend with passion...or buy with lust.

They're lying through their teeth.

I just returned from South America, where I had a ringside seat to the collapse of Argentina. Larry's just back from Asia. Our staff has been scrutinizing the balance sheets of thousands of other corporations at high risk of failure.

I can tell you flatly: This is going to be a global disaster. The flood of bankruptcies and defaults has barely begun.

And the stock market rally is just another hot-air balloon - hype from Wall Street and spin from Washington.

For example, they're telling you Enron's collapse is unique. Baloney! Bethlehem Steel, Phar-Mor, Polaroid, and 352 other publicly traded companies also went belly up last year. This year, companies at high risk include Ford, JDS Uniphase, Kmart, Xerox, plus 1,381 others.

They're telling you "the profit picture isn't all that bad." Oh, really? Then why did JDS Uniphase announce the largest loss in U.S. history last year? Why did AOL just announce write-offs that will smash the JDS record?

They're trying to get you to believe that Argentina's collapse is "isolated." I'd prefer to believe in Santa Claus and the tooth fairy. The reality: FleetFinancial, J.P. Morgan Chase, Bank of America, and a batch of European banks are taking big hits from Argentina's default.

At the same time, Avon, Colgate-Palmolive, Gillette, and hundreds of other companies with business in Argentina are taking big hits from Argentina's devaluation.

But that's just the beginning. Brazil's debt is over twice as large as Argentina's. Colombia's is $38 billion with unemployment close to 17%. Venezuela suffers from the same kind of overvalued currency, the same kind of recession, and the same potential for an explosive public uprising.

Japan, Indonesia, Thailand, Hong Kong, Singapore, and the Philippines are sinking fast. Europe's a mess. All suffer from ailments that are similar to Argentina's.

In fact, the collapse of Argentina is far worse than anyone dreamed possible. Even in the "worst-case scenario," those with big stakes in Argentina were expecting either a default or devaluation. Now they're being slammed with both at the same time.

This puts the bigwigs at the IMF between a rock and a hard place.

If they continue to hold back aid for Argentina, they will be blamed for looting, rioting, and even a violent public uprising, potentially causing thousands of deaths.

But if they dish out more money, a half dozen other indebted nations will be tempted to default and devalue, just as Argentina did.

How did it happen? Peel off the multiple layers of financial mumbo-jumbo, and you will see the two key forces that drove Argentina into its hellish nightmare: Debt! And deflation!

Then look back at my writings, and you will see that these are the very same explosive ingredients I've been warning you about - not just for countries like Argentina, but also for Asia, Europe, and the U.S.

Debt is dangerous. Deflation is worse - it destroys the ability of borrowers to pay back the debts. Throw the two into the same pot, and the resulting explosion can blow up the "strongest" economies, sabotage the most "astute" central bankers, and destroy the wealth of the "smartest" investors.

This is exactly what happened in Argentina.

This is also very similar to what will happen throughout the globe for the simple, irrefutable reason that many other key countries are prone to the very same twin ailments that destroyed Argentina: Debt and deflation!

Japan is the classic, paramount example, with one, huge difference: Investors can try to ignore Argentina. They cannot ignore Japan.

Japan was the technological leader of the late 20th century. It is the world's second largest economy, the engine of growth for all of Asia, and the largest investor in America. When Japan collapses, there is no force on Earth that can hold up America or Europe.

And Japan is collapsing - right now - even as I write you these words. Why? Because of...debt and deflation!

Japan's DEBTS are staggering - $7.5 trillion or 2.4 times their GDP, making Japan the most indebted industrial country relative to its size in the world, ever. Of that total, $4.3 trillion is owed by the government, 1.3 times GDP, also the worst in the world. Most dangerous of all: $1.5 trillion of the debts are held by Japan's broken banking system, burning a hole in their vaults like a nuclear meltdown.

Japan's DEFLATION couldn't come at a worse time - consumer prices down virtually nonstop for the last 24 months...bankruptcies surging to 1,800 per month, the worst in 17 years...unemployment the highest in 55 years...the economy crushed.

No, Japan is not Argentina. You won't see looters ransacking supermarkets or rioters burning furniture in Parliament. But Japan is going under just the same, in its own way, with a far more devastating impact worldwide than the collapse of a hundred Argentinas.

The first to fall in Japan's wake will be the Southeast Asian economies - Hong Kong, which like Argentina, has pegged the value of its currency to the U.S. dollar... Thailand, where bad loans have soared to a record 30% of loans outstanding...Indonesia, South Korea, and the Philippines.

Europe is in the same boat. For every dollar of GDP, the 12 nations of the European Union have piled up $1.82 in public and private debt! Corporate profits are sinking. Industrial production has fallen 4.1% in a year. Unemployment in the Eurozone is 8.4%, headed for double digits.

Nearly every nation is on the verge of a debt-and- deflation blowup, threatening to drive its economy into the gutter and its stock prices into the toilet. As a result:

* U.S. banks and investors will be slapped down or even wiped out.

* U.S.-based multinationals will get killed, their exports gutted, their foreign subsidiaries in shambles.

* Worst of all, foreign investors, who now own a whopping $10 trillion in U.S. assets, will have no choice but to begin dumping their holdings at any price.

Don't underestimate this. Earnings are the most powerful force driving the stock market. And right now, the stock market has recovered...but earnings have not!

In the second quarter of 2000, pre-tax corporate profits of non-financial firms reached a peak of $577.6 billion. Fifteen months later, in the third quarter of 2001, they had plunged 26% to $414.8 billion - the sharpest decline since the Great Depression. And despite tall promises, there is NO concrete sign of improvement.

Profits always sink in a recession. That's normal. But what we're going through today is far beyond the normal boundaries of any recession in my lifetime.

Indeed, the TOTAL results for ALL of the 4,000-plus companies on the Nasdaq was red ink last year. And that red ink was so huge, it wiped out every dime of profits the Nasdaq-listed companies made in the six years prior.

Sure, you may see some hints of improvement here and there as companies bounce back from the initial shock of September 11. But, fundamentally, the earnings picture isn't getting better for one simple reason: Deflation.

Because of deflation, companies have lost their ability to maintain their product pricing. So for a rapidly increasing number of companies, profit margins are toast.

One of the most common comments I hear from Wall Street is about the "big September bottom" - the idea that the levels of mid-September last year are the lowest we've see in many years.

If you look at the market valuations of previous market lows compared to last September's, you'll see just how cockeyed that concept really is.

In the previous 17 bear markets (going as far back as 1929!), the shares were selling at an average of 13.8 times earnings. That's relatively cheap. And that gives you an idea of what it takes to make a real bottom.

That was NOT, however, what we saw in September of last year - not even close. Instead of 13.8 times earnings, the market was selling at 21 times earnings! Conclusion: It was not the bottom.

The real bottom is yet to come, and it's going to be FAR deeper.

Martin Weiss,
for The Daily Reckoning

p.s. This is no time to be swayed by still more of the same Wall Street hype. But it's also not the time to hide in a corner. You have a unique, once-in-a-century opportunity to harness the power of a great bear market to your distinct advantage.

For advice on playing it safe in 2002 (and even making a small fortune), click here:

The Safe Money Report

Martin D. Weiss, Ph.D., the nation's leading advocate for financial safety, has helped millions of Americans with his ratings of stocks, mutual funds, insurance companies, banks, brokerage firms and HMOs. Martin has testified repeatedly before Congress, advocating full disclosure of risk to investors.

The Wall Street Journal says Weiss runs a "feisty firm," and Esquire noted that his is "the only company...that provides financial grades free of any possible conflict of interest." Forbes calls Dr. Weiss "Mr. Independence."