Monday, April 28, 2014

Wiedemer, Aftershock

The world may end in fire and brimstone; I may get mauled by a deer in my backyard. Quite frankly, I never give these possibilities a second thought. I can do nothing to avert apocalypses and I’m not going to stop going outside. There are, however, some negative events that are worth planning for in some way or another, either because they are likely (with consequences ranging from minor to major) or because, although unlikely, I would take a huge hit if they happened. For instance, it is highly likely that I will be stung by one or more wasps this summer; since I don’t have a life-threatening allergy to wasps, it is sufficient to keep a topical ointment on hand to minimize the localized reaction. Similarly, it is highly likely that not all of my investments will have positive returns, so it is wise to take some appropriate preemptive steps (diversifying, hedging, etc.) Or, like most homeowners, I have an insurance policy that will compensate me in the unlikely but devastating event that my house burns down.

David Wiedemer, Robert A. Wiedemer, and Cindy Spitzer, authors of the revised and substantially (30%) updated third edition of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown (Wiley, 2014), believe that more financial pain is inevitable, that its consequences will be huge, and that investors must act now, or at least soon, to protect themselves.

The authors gained fame when their first book, America’s Bubble Economy (2006), highlighted the housing bubble and called attention to four other bubbles: a stock market bubble, a dollar bubble, a consumer debt bubble, and a U.S. debt bubble. They predicted that when the five collided in a “bubblequake,” we would see a deflation in American assets and people’s standard of living.

Now that we’ve had the major quake, we can expect an aftershock which will, in fact, be worse than the quake itself. The current so-called recovery, the authors contend, is 100% fake, and we are slowly working our way toward the market cliff (stage 4). Right now we are in stage 2, poised to enter early stage 3, characterized by “an oscillating stock market and continued money printing that will at first keep the market from falling significantly.”(p. 91) In general, stage 3 is marked by increasing instability where “the stock market falls gradually in spite of intervention,” “interest rates rise in spite of actions by the Fed,” we see “more government stimulus by foreign countries, as well as interventions in foreign currencies and foreign economies,” “gold prices increase significantly,” “people increasingly begin to see the connection between money printing and inflation, which radically decreases the positive impacts of money printing,” and the U.S. experiences “foreign capital outflow.” (pp. 91-92)

In stage 4 we have a rapid collapse. “Gold prices soar,” “intervention in the stock market fails,” “the bond market falls,” “the real estate market falls,” and “the dollar falls.” And, the authors add in Armageddon boldface, “The Aftershock begins.” (p. 93)

Although it’s well nigh impossible to time these stages, the authors advise investors to get out of the stock market now: “don’t play chicken with the approaching crash, even though it may mean missing out on some additional upside.” (p. 96) Actually, they write, the best time to have gotten out of the stock market and bought gold instead would have been 1999, but the second best time is “any time before we go over the Market Cliff.”(p. 97)

If we assume that their doomsday scenario is correct (and that’s a very big assumption, although they vigorously defend their position), what should an investor do pre- and post-Aftershock? By way of preparation, an investor should exit stocks, stay away from real estate, and avoid bonds and most fixed-rate investments. If he follows that advice, he’ll be sitting on a pile of cash. Short of putting it under the mattress, where should he keep it? For the time being, anything short term is pretty safe. “But when the Aftershock hits, even short-term U.S. government debt will be problematic, which means you should be moving heavily toward precious metals, such as gold and silver … , and similar inflation-driven investments, such as some foreign short-term debt instruments, as pressure on the dollar and government debt increases.” (p. 222)

Oh well, think on what is, I guess, one bright side to the impending financial collapse. “[I]f your credit card debt is quite high relative to your income and assets, you might want to consider not paying your credit cards at all. When the bubbles pop, many credit card companies will go out of business. … you will likely still owe your credit card debt balance to the government but at that point, who knows when they will get around to collecting it, and in any case, high inflation will rapidly destroy the debt. … Not paying your credit card debts will significantly harm your credit score, but after all the bubbles pop, credit scores are going to be pretty lousy all around, and few people will have the need for a high credit score. … Even the U.S. federal government will have a very poor credit score!” (pp. 226-27)

Call me a Pollyanna, but I will continue to pay my bills, continue to hold onto financial assets (though, as always, on a relatively short leash--here and there I even get the timing right), and continue to coexist peaceably with the local wild life.

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