We haven't recovered from the 2007 crisis. Much more pain is coming. I outline what it will likely look like, what you can do to protect yourself, and what can be done politically to hold it off or at least prevent another event and get us to recovery.
THE REAL CRISIS: A BRIEF OVERVIEW
The 2007 financial crisis was never solved. We are not in a recovery. The stock market is up, in nominal terms, from the 2009 bottom. In real terms, it’s down.
Consider this. In 2000, gold was let’s say $300/oz and the DJIA was $14,000. Priced in gold, the DJIA was about 46 ounces of gold. Today, gold is $1770/oz. 46 ounces of gold would be worth $81,000. In other words, if we price the Dow Jones Industrial Average in gold, it would have to be $81,000 to be on par with the real value of the market 12 years ago. Today it is $13,500, down 84%!
Assume this is off considerably. Suppose gold was too low in 2000 or too high now; let’s divide that in two. So DJIA should be $40,000. But we’re still about 1/3 of that.
Still don’t buy it? Halve it again – to $20,000. We’re still well below that number.
The stock market has not recovered. We have not met our all-time highs. The NASDAQ is nowhere near its tech bubble high of 5,000.
Here’s a chart showing the gold price of stocks, using some different numbers. The trend shows the truth. http://goldnews.bullionvault.com/gold_stocks_053120116
This is not, in real dollars, a good market.
Employment is worse than reported. The 8.1% number is a statistical ruse, not taking into account those who are “underemployed” or those who stopped looking for work. Went back to school because you couldn’t get a job? You’re no longer considered unemployed. If we calculate unemployment using the method used in the 70s or earlier, the picture is much worse: over 20%.
http://www.shadowstats.com/alternate_data/unemployment-charts
Real estate is faring no better. Some areas still
attract investment and are nice places to live – Orange County, CA or the Bay
Area, for instance. Overall, though, there’s a lack of investing in new
developments, a lack of new construction, a drop in sales volume.
Recently, banks began lending again. Potential
home owners are reporting more credit is becoming available again.
But by itself, this isn’t good. Too much credit
contributed to the problem. A person earning minimum wage doesn’t have the
income to support a million-dollar home. For the moment, that degree of
craziness is not showing up. But that didn’t show up early in the last bubble
either; it was a contrary indicator of the peak of the bubble.
The indication is that Washington is pushing to
reflate the housing bubble, so that people will once again have the illusion of
wealth – not realizing that their current spending is paid out of their future
poverty.
The stock market, the job market, and the real
estate market all point to a simple fact: the economy is not doing well. If
we’re honest about the numbers, we are in a depression.
My goal in this blog post is to indicate at a high
level what’s happening with the economy, where I think we’re headed, what you
can do about it, and what ought to be done politically.
Given the introductory thumbnail sketch of the
economy, what lies ahead?
The root of the problem is a welfare state
spending itself into oblivion, using borrowed money and a fiat currency. The
solution has to be massive spending cuts, paying off the debt, and returning to
the gold standard. Doing these gives us the best chance of averting catastrophe
– if it isn’t too late.
Government at all levels – local, state, and
federal – is supporting an unsustainable welfare state. We transfer far too
much money from producers to moochers. This is a huge sinkhole for wealth that
is accelerating, especially as the Baby Boomers retire and draw Social Security
and Medicare. The simple math shows this will collapse.
Governments around the world are experiencing the
same thing. The USSR could not support itself, and it economically failed, and
with it, East Germany and the rest of the Iron Curtain. Today, Greece was first
to fall, and today limping along on handouts from Germany, the IMF, and the US.
They have no plan for changing their situation. Fortunately for the rest of us,
their economy is relatively small compared to the EU, so paying them off isn’t
too much of a burden. However, paying them off sets up a dangerous precedent
for bailing out the other PIIGS.
Right now, it looks like Spain and Italy will be
next to fall; maybe France. These economies are much larger, and the EU won’t
be able to bail them out continuously. When one of the falls, the weight on the
rest of the EU will grow, and accelerate the collapse of other EU countries.
Even today, the wealthy have pulled assets out. Expect
that to continue.
http://www.nytimes.com/2012/09/04/business/global/money-and-people-leave-spain-as-economic-gloom-deepens.html?pagewanted=all
http://www.nytimes.com/2012/09/04/business/global/money-and-people-leave-spain-as-economic-gloom-deepens.html?pagewanted=all
The bank runs will get worse, as people gradually
wise up and pull their money out. Many have already done so. http://theeconomiccollapseblog.com/archives/the-bank-runs-in-greece-will-soon-be-followed-by-bank-runs-in-other-european-nations
The problems we see worldwide stem from the end of
the welfare state: it was never sustainable, and it’s taken a long time to
reach its end. But they can’t borrow more money or tax more businesses to
sustain it, and the game is ending.
The EU, for decades more socialist than the US, is
worse off. They are starting off with higher unemployment, taxes, and
regulations, as well as cultures less entrepreneurial and more focused on
entitlements than working hard. So, they are not only further along on their
descent, but have less reserve (economically, culturally, philosophically,
politically) to turn themselves around.
For a good discussion of the cultures of the
nations affected in the 2007 crisis, and how their cultures shaped the form of
the collapse for them and what obstacles they face, see Michael Lewis’s Boomerang http://www.amazon.com/Boomerang-Travels-New-Third-World/dp/0393081818
and http://abcnews.go.com/Business/10-lessons-michael-lewis-book-boomerang/story?id=14617422
For these reasons, Europe is starting to collapse.
As it unfolds, it will accelerate, and it isn’t clear which countries will fall
when. It could take 2-3 years for things
to run their course. Given its political nature, there may be another chance to
kick the can down the road – or not; another bailout – or not; a real
turnaround – or not.
Other countries like Japan may fall before all of
Europe.
Japan, as the world’s third largest economy, is a
special problem. It’s size and international trade means other countries don’t
want to see it collapse.
But Japan’s welfare state is old, having piled up
debt for so many years. This is the big reason their central bank keeps
interest at zero – if it were higher, the tax revenue would be swallowed up
making interest payments on their debt! Hedge fund head Kyle Bass has made a
famously big bet on Japan going belly-up. http://kylebassblog.blogspot.com/
What about the good ol’ US of A? For the moment,
we’re not collapsing. All those people in Europe, China, Japan with cash to
keep safe view the USA as a safe haven. That money is coming here and buying up
T-bills, bonds, other assets, which provides more credit for the borrowing (be
it consumers, businesses, or governments). This is keeping the dollar exchange
rate fairly high, despite Washington’s best efforts to devalue it.
In the long run, though, the fiat currency of the
dollar will collapse – period. A fiat currency can’t be maintained long term.
When it does, those same foreign investors will dump US assets and go to the
final refuge: hard assets – real estate, precious metals – but especially:
gold.
If the dollar collapses, unemployment will soar.
With no income, housing payments will stop, so the housing market will plunge.
At worst, it would mimic the hyperinflation of Argentina or Weimar Germany; at
best, it would be the 1970’s again. Most likely, we’ll be somewhere in between.
These are long-term forecasts. In between now and
then, things will be volatile. The stock market will bounce around, as will
commodity prices like that for gold. Unemployment will likely go up.
This will be a global event. The dollar is the
world’s reserve currency. We live in an age of global trade and world-spanning
supply chains. This means there’s nowhere to hide from it.
Some countries will fare better than others.
Culturally, my money’s on the USA. Even I four economy slashed in half, we’d
still be the biggest. We have a spirit of individualism and a work ethic that
will get us through tough times, and recover more quickly. We are less likely
to see severe food riots or group upon group ethnic fighting.
In the very long run, we’ll survive. It isn’t a
descent into the dark ages like the fall of Rome; that would take far longer to
happen.
In a nutshell, the likely sequence would be:
1.
EU collapse
2.
Japan collapse
3.
Dollar collapse
4.
Economic collapse (global)
5.
Legal reform - Restoration of gold standard,
lower taxes and regulations
6.
Recovery
This WILL NOT be a straight line. It has been, is,
and will be very volatile; see the recent history of the gold price for proof
of that.
When we have huge economic turmoil across many
nations, expect war to break out. (See Currency Wars for some discussion of
this.) A China-Russia axis could push against a weakened US to establish
control over Asia. A nuclear Iran could destroy Israel and push Islam further
into a weakened Europe.
PROTECT YOURSELF
This is a very brief overview. The first and best thing to do is get educated. Start by reading these below.
(Key: $ = highly recommended. * = I haven’t read
it but expect lots of good information)
The big four:Atlas Shrugged – The biggest big picture, covering philosophy, politics, psychology, and economics. It’ll help you see the big picture and make sense out of it, even if you don’t understand all the economic details. ($) http://atlasshrugged.com/
Currency Wars – a look at the international aspects of the global crisis. A currency war begat WWII. Will the current currency war (a race to the bottom between USA, EU, and China) lead to a shooting war? Good history of 20th century international economics and politics. Chapter 11 is entitled “Endgame – Paper, Gold, or Chaos?” It looks at the options for what’s coming, and what each entails. ($) http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495
The Financial Crisis and the Free Market Cure
– John Allison, retired CEO of BB&T (one of the biggest banks in the US) and
new head of Cato Institute digs in deep to the causes and solutions to the
financial crisis. He has the financial, business, economic, and philosophical
perspective to analyze this crisis. ($*) http://www.amazon.com/Financial-Crisis-Free-Market-Cure/dp/0071806776/ref=sr_1_1?s=books&ie=UTF8&qid=1347612286&sr=1-1&keywords=john+allison
Others to consider:
I.O.U.S.A. (DVD, 2008) – Easy to follow
overview of the numbers behind the debt. It doesn’t give the whole story behind
the crisis, but the massive debt, and especially the unfunded liabilities, are
having an impact already on the economy.http://en.wikipedia.org/wiki/I.O.U.S.A
http://www.iousathemovie.com/http://www.youtube.com/watch?v=e5dT2uwj5jA Part 1 on YouTube. Links to the other parts from there.
Endgame – Covers much the same material as
Crash Proof. (*) http://www.amazon.com/Endgame-Debt-Supercycle-Changes-Everything/dp/1118004574/ref=sr_1_1?s=books&ie=UTF8&qid=1347642926&sr=1-1&keywords=endgame
Empire of Debt
“[F]inancial analysts Bill Bonner and Addison Wiggin argue passionately that not only is the United States an empire, but it is also one whose end is coming soon. Bonner and Wiggin are the brains behind www.dailyreckoning.com, an iconoclastic and irreverent market advisory service that has long raised concerns about American indebtedness and warned of a looming dollar crisis. In Empire of Debt, a sequel to their earlier doom-and-gloom book Financial Reckoning Day, they elaborate on their argument that the U.S. economy is about to implode.” http://www.amazon.com/Empire-Debt-Financial-Crisis-Series/dp/047198048X
The Real Crash – a follow-up by Peter
Schiff to his Crash Proof 2.0 (*) http://www.amazon.com/Real-Crash-Americas-Bankruptcy---How-Yourself/dp/1250004470/ref=sr_1_1?s=books&ie=UTF8&qid=1347644851&sr=1-1&keywords=the+real+crash
“In The Real
Crash, New York Times bestselling author Peter D. Schiff argues that America is
enjoying a government-inflated bubble, one that reality will explode . . . with
disastrous consequences for the economy and for each of us. Schiff demonstrates
how the infusion of billions of dollars of stimulus money has only dug a deeper
hole: the United States government simply spends too much and does not collect
enough money to pay its debts, and in the end, Americans from all walks of life
will face a crushing consequence. “We’re in hock to China, we can’t afford the homes we own, and the entire premise of our currency---backed by the full faith and credit of the United States---is false. Our system is broken, Schiff says, and there are only two paths forward. The one we’re on now leads to a currency and sovereign debt crisis that will utterly destroy our economy and impoverish the vast majority of our citizens.
"However, if we change course, the road ahead will be a bit rockier at first, but the final destination will be far more appealing. If we want to avoid complete collapse, we must drastically reduce government spending---eliminate entire agencies, end costly foreign military escapades and focus only on national defense---and stop student loan or mortgage interest deductions, as well as drug wars and bank-and-business bailouts. We must also do what no politician or pundit has proposed: America should declare bankruptcy, restructure its debts, and reform our system from the ground up."
If you’re interested in more of the history of
economics and finance, take a look at these:
The Ascent of Money – Niall Ferguson looks
at how societies have continually created and survived financial crises, with
the goal of finding solid solutions to today s worldwide economic emergency.http://www.amazon.com/Ascent-Money-Financial-History-World/dp/0143116177/ref=sr_1_1?s=books&ie=UTF8&qid=1347641579&sr=1-1&keywords=the+ascent+of+money (*)
DVD version available: http://www.amazon.com/Ascent-Money-Presented-Niall-Ferguson/dp/B001Q7JM2S
($)
(Of course, the DVD has nowhere near the detail of
the book, but it is an excellent overview.)
When Money Dies - For a close-up look at
life under hyperinflation, see this. Be careful not to extrapolate from this
one situation to every financial crisis.http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?s=books&ie=UTF8&qid=1347641659&sr=1-1&keywords=when+money+dies
This Time is Different – Harvard
researchers look at 800 years of financial history, “a
comprehensive look at the varieties of financial crises, and guides us through
eight astonishing centuries of government defaults, banking panics, and
inflationary spikes--from medieval currency debasements to today's subprime
catastrophe.” ($*) http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640/ref=sr_1_1?s=books&ie=UTF8&qid=1347641787&sr=1-1&keywords=this+time+is+different
I predict we’ll see massive inflation, but there’s
a plausible argument for deflation to consider: we’re in the middle of the
popping of the biggest credit bubble in history. That credit has pushed up
prices. When the bubble pops, there’ll be less credit chasing goods, so prices
should drop tremendously.
Conquer the Crash – Robert Prechter gives
the best deflation argument http://www.amazon.com/Conquer-Crash-Survive-Deflationary-Depression/dp/047056797X/ref=sr_1_1?s=books&ie=UTF8&qid=1347641986&sr=1-1&keywords=conquer+the+crash
The Great Depression Ahead - Harry Dent argues for deflation. The book
came out in 2009, and already, his predictions are way off. He uses a lot of
the same ideas as Prechter – demographics and Kondratieff cycles. http://www.amazon.com/Great-Depression-Ahead-Prosper-Crisis/dp/141658899X/ref=sr_1_2?s=books&ie=UTF8&qid=1347643127&sr=1-2&keywords=great+depression+ahead
For details on Kondratieff:
There’re a lot of good online resources. A few
include blogs or videos by/of authors like Niall Ferguson (history of money);
Marc Faber; Peter Schiff; Mike “Mish” Shedlock; Yaron Brook; Jim Rogers; John
Allison; Kyle Bass.
Websites (a partial list):
www.aynrand.org http://www.zerohedge.com/
http://www.shadowstats.com/ - the best source of info on employment stats
http://dollarcollapse.com/
http://usdebtclock.org/ Continually updated estimate of state and federal debt. On Sept 14 2012, liability per taxpayer (Social Security, Medicare, Drug benefit) is over $1,000,000. Current debt of over $16 trillion works to $140,173 per taxpayer.
Economic commentators:
http://marcfaberblog.blogspot.com/http://www.niallferguson.com/
http://peterschiffblog.blogspot.com/
http://globaleconomicanalysis.blogspot.com/ - Mike Shedlock’s blog
http://www.jimrogers.com/
http://www.kylebassblog.blogspot.com/
Fascinating Kyle Bass video (long and technical but worthwhile; from 2010):
http://www.youtube.com/watch?v=HF3sJFCyyMM
On housing:
http://thehousingbubbleblog.com/index.htmlhttp://www.doctorhousingbubble.com/
http://piggington.com/ (San Diego market analysis)
http://www.irvinehousingblog.com/ (Irvine / Orange County analysis; excellent commentary and good links to other resources)
http://www.amazon.com/Housing-Boom-Bust-Thomas-Sowell/dp/0465018807
I’m not a financial advisor, just a concerned person with an interest in economics and investing. Yet I’d be remiss if I didn’t recommend a few things to consider:
GOLD
Buy gold, in various forms – ETFs, mining company
stock, options, physical. Plan to hold for a long time. Buy over time, using
dollar cost averaging.
When to sell? There’s a tricky thing. Consider the
following chart: http://stratcomments.blogspot.com/2010_11_01_archive.html
(from Jim Roger’s book Hot Commodities)
This shows 36-year cycles, in which for 18 years or so, stocks outperform
commodities, then for the next 18 or so, it reverses. Notice the stock market
bull run from 1982-2000 was 18 years, and since 2000, commodities have outpaced
the stock market – by a large margin.
If this trend continues, then commodities should
be good until 2018 or so, and then the stock market will begin a new bull
market. (Timing won’t have to be perfect, and you won’t have to pick individual
companies; maybe just swap a gold ETF for a DJIA ETF.)Considering how far back the data goes in that chart, I’d be surprised to see things change. Consider all of the political upheaval the nation saw, and how that pattern kept going. It isn’t sacrosanct, but give it some weight. At some point, I’m optimistic about the American economy rebounding for good, having more than a dead cat bounce.
If the economy really collapses, those who hold real assets will have real wealth; those holding paper will have nothing. At the bottom, real estate could be purchased for very low prices. That trade should be considered.
OTHER ASSETS
Silver is good. Consider in fact any real asset,
including real estate. Gold is good, but be sure to diversify somewhat to hedge
against risk. These may not be as good as gold, or they may be better under
certain conditions. Land, food, guns.
If you are convinced massive inflation is coming,
consider borrowing. A loan today for money you’ll pay back pennies on the
dollar may make sense. If severe deflation happens, though, you could be wiped
out.
If you have experience with them, or can learn in
time, consider using options to profit from the collapse.
LIVING
If there is big-time economic collapse, how will
you support yourself? Consider what kinds of work, in what areas to live, to
best whether the storm. Save now what you can, and plan for the future. Consider
being mobile with few assets versus being self-sufficient (largely) away from
dangerous populated areas. Consider which populated areas will be safer.
Consider building a network of friends to share information, or perhaps help in
other ways. Consider what it means to live daily according to any possible plan
you consider; is that life acceptable?
Consider the ways in which inflation will affect
you – gas prices, food prices, utilities, rent. Consider the ways social
unrest, even food riots, will affect your safety.
Of course, take measures to protect yourself –
physically and economically – but don’t give up on life. Plan for the future,
but don’t give up on enjoying the present as you do so.
POLITICS
What can be done politically?
End the welfare state – personal and corporate
welfare; subsidies; Medicare/Medicaid; social security. Learn about the Chilean
model to see how one nation got its people to voluntarily quit the Chilean
equivalent of Social Security; that could work in the USA or anywhere.
Cut taxes and regulations. That will help grow the
economy and lower unemployment.
Restore the gold standard. This will kill
inflation and grant the market visibility into interest rates. It will allow
banks to better compete for customers.
There are lots of issues with restoring the gold
standard correctly; see the chapter in Currency Wars. He prices the gold
standard at $2,500 - $44,000/oz depending on how the money supply is calculated, which is well above the current price. (Pricing
it wrong after WWI caused Britain years of heartache.) If we go back on the
gold standard, holding gold would be prudent.
Shrink the roles of government. If the government
isn’t permitted to do as much as it does today, the cost of it would sink,
helping restore fiscal balance.
Hope this helps.
