James Dale Davidson: ‘Blood In the Streets’ Spells Opportunity

A quarter of a century ago, I published an investment book which became something of a cult classic, "Blood in the Streets."

My co-author was Lord William Rees-Mogg, a former chairman of Newsmax, just one stop in a distinguished career that included a long stint as editor of the Times of London.

The touchstone of "Blood in the Streets" was a comment by Baron Nathan Rothschild, the wealthiest man in the world in the 19th century, who said "The time to buy is when blood is running in the streets."

Lord Rothschild put his insight to work when he made a trading profit of 1 million pounds — a fantastic sum in 1815, anticipating the British victory over Napoleon.

"Blood in the Streets" was a thought exercise designed to alert investors to the dangers arising from "a twilight phase of economic history." Even in 1987, we could see that the Cold War era was drawing to a close and the Soviet Union was on its last legs.

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One of our chapters, "The Twilight of Communism," warned investors that the demise of Communism was likely to have deflationary consequences. At the time, this was considered so outrageous that Newsweek magazine ridiculed us for putting our names to, "an unthinking attack on reason."

In 1987, few people could imagine the changes that were soon in store. Yet less than five years later, by New Year's Day 1992, the Soviet Union had ceased to exist.

The point of this recollection is to establish, or remind you, that you are not necessarily driving blind when it comes to understanding how the world is destined to change.

Lord Rees-Mogg and I not only correctly envisioned the then-unthinkable death of the Soviet Union, we rightly told investors that it was likely to have deflationary consequences.

We wrote at that time: "History does repeat itself, though not always in the way we expect. The parallels between today's financial conditions and those leading to the Great Depression are ominously clear — though almost no one seems to have recognized them. And that may be the most ironic parallel of all. Now, as then, the prevalent economic worry is inflation. And inflation is a worry. But from where we sit an equal worry is deflation, a collapse that would place the most severe strains upon your livelihood and investments."

The point of invoking a comparison with the Great Depression and the collapse in the banking sector which it entailed is not to frighten you. On the contrary. I mean to remind you that Lord Rothschild became the wealthiest man in the world by buying when others were afraid to do so.

His secret of looking for bargains when most investors feel like bailing out is still a route to building extraordinary wealth. Don't forget that.

Although I was one of the first to warn that deflationary pressures associated with the end of the Cold War would put the banking system under strain, and could even lead to a "coming real estate collapse," I am now convinced that this is not a time for fear but an opportunity for you to make a greater fortune for yourself.

Millions of investors check the markets each day and feel the same emotions: Shock and sadness. The Dow, the S&P 500 and the Nasdaq have given back all their 2007 gains.

It seems like the market takes another turn for the worse with each glance at the ticker. (Of course, "ticker" is now just a figure of speech. There is no longer a "ticker." You are infinitely more likely to be downloading stock prices on your iPhone than staring at an old-fashioned telegraph ticker.)

Yet, however you get your stock prices, if you are like most investors, you may find it hard to remain optimistic when even top "pros" at Merrill Lynch, Citigroup, Bear Stearns and elsewhere have taken it on the chin.

That's why it is important to remember that, even now, when many investors are lost in despair, some investors are on their way to making lots of millions. You can be one of them. The key is to recognize that "History does repeat itself, though not always in the way we expect."

In the more than 20 years since "Blood in the Streets" was published, many other books and articles have been written drawing attention to the dangers of deflation. The economists at the Federal Reserve, including Fed Chairman Ben Bernanke are well aware of the risks that a cascading collapse could escalate into a general credit crunch that would do untold damage.

This is why interest rates have been cut sharply and repeatedly.

Chairman Bernanke just confirmed this, telling Congress that another interest rate cut is probably coming soon. "Downside risks to growth remain," he stressed in his prepared remarks. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

In other words, interest rates are going still lower.

History shows that stock markets seldom remain depressed when the real economy is sluggish yet credit conditions are loose. Not only are interest rates low and falling today, but the Fed and other central banks are aggressively flushing liquidity into the system.

Everyone with his wits about him has heard of the subprime debacle. If you own a house, you've probably had to come to grips with the fact that your property may be worth less than you thought it would be.

This is an unhappy turn of events if you are selling your house. But if you are buyer, the news is good.

The same logic applies to stock prices. It is easy to be swept up in the exuberance of bull markets. But the best time to buy is when prices are low. If they should fall further, this would only improve your opportunity to accumulate a fortune-making portfolio.

Yes, there are genuine problems on the horizon. The prospect of a Democrat taking the White House next year implies higher taxes. But remember, the U.S. stock market tends to rally no matter who is holding the presidency.

In fact, more than a century of precedent shows that the stock market tends to gain almost twice as much under Democratic presidents as Republicans.

It's true: Figures compiled by Ned Davis Research covering the period from March 4, 1901 through Oct. 23, 2006, show annual returns of 7.19 percent under a Democrat president, and 3.85 percent under a Republican.

I would not argue, however, that a Democrat victory would be preferable from the perspective of a stock investor today.

For one thing, the Democrats seem to be in thrall to the great progressive fad of the moment, the illusion that "greenhouse gases" are causing the world to turn into a hothouse.

The fact is, however, that 2007 was the coldest year of the century, and an abundance of evidence that global temperature trends are a function of solar sunspot activity, a phenomenon which is surely beyond the reach of exhaust from autos, trucks, and cows.

Still, even with the Democrats prepared to sacrifice trillions of dollars on the altar of environmental superstition, the prospects for cutting edge companies with viable technologies remain robust.

If you can identify rapidly growing companies, with real technologies, not tricked-up stock promotions, you can turn any current weakness in the stock market to your favor by buying now and waiting for the next bull market to cash in your winnings.

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