Ask the grumpies: Aftershock

Linda asks:

The book description of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown notes: “From the authors who accurately predicted the bursting of the global bubble economy comes the definitive look at what lies ahead in 2013 and beyond.”

My reading of this book is summarized thusly: there are still more economic bubbles yet to burst and the global economy is “evolving” and not just “cycling” up and down. The authors acknowledge that it is very hard to accurately predict when this big “afterschock” will hit us. They recommend some employment and investing strategies that they say will help one better ride out the “aftershock,” although they note that one could lose some big returns if one shifts assets too early. The principal author is an economist, but he sounds very critical of economists in general.

The book was an easy read (maybe because there was so much repetition) and it appeals to the part of me that is always concerned that in my lifetime our society will become increasingly dystopian. (Could it be that I’ve read too much Margaret Atwood and Octavia Butler?) I’m wondering if true academics such as yourselves have a different opinion or general guidance on what to read to balance out the hype of this Aftershock idea.

Somewhat related: if one had a chunk of cash (such as from the sale of a home), what are the better options for saving or investing it for a short term (2 to 5 years)? I’m starting to think about what to do with the equity I’ll get when I sell my house later this year for my big move to the Bay Area, hence my unusual interest in investing and PF books. I will also be meeting with my (fee-based) financial adviser, but I like to have some ideas to discuss with him first.

 

Lots of economists were talking about the market crashing before it crashed.  I don’t think anybody really understood the *extent* of the housing crisis, but we all knew it was unsustainable and going to crash.  Ditto the earlier tech crash.  We’re actually pretty good at seeing bubbles but nobody knows when exactly they’re going to pop, probably because there’s an element of chaos theory there.  The bubbles in my lifetime have seemed to grow bigger than possible before inevitably popping.

With the current lack of regulation, of course there are going to be more bubbles.  The system is still set up for bubbles.  Government has to interfere for there to be no bubbles (as it did after the depression and again after the S&L crisis in the 1980s), but there’s a lot of money to be made in bubbles and the people with money are the people in power these days.

And yes, the US is growing increasingly dystopian.  This depresses me because I grew up thinking it would get better.  Two steps forward and half a step back.  But income inequality has been broadening and things have been getting worse for the poor.  There’s a lot of bad stuff that happens when income inequality gets bigger.  Very depressing.  (I voted for Al Gore, and I like to think in some parallel universe things are better.  More likely though there’s a backlash in that universe and the inevitable was just delayed a couple of decades.  *sigh*)  One of my (libertarian) colleagues is always saying, “Bread and circuses” and forecasting the downfall of civilization.  I hope he’s not right.  I still have the little fairy of Hope in my heart.

So, what to do?  Well, the standard advice *still applies*.  Bubbles mean you need money in stocks.  Bubbles popping mean you need money in bonds.  We can’t predict when a bubble is going to pop or how big it’s going to get.  So we diversify.

Investing for the short term is the same standard boring advice as well– if you’re going to need the money, put it someplace safe (with lower returns).  Bonds, laddered CDs, etc.  If you feel like gambling, put it in the stock market.  (Because houses in SF are so very expensive, and it’s generally a seller’s market, plenty of folks keep that “short term” money in the stock market rather than pulling it out.  When tech bubbles burst, so do housing prices in the SF bay area, so it isn’t quite as big a risk for them, but that’s a very unique market.)

Even if we go into hyperinflation, you’ll need money in stocks for the long-term.  If society collapses, then probably you’ll need bullets and bottled water more than anything else.  But it’s hard to say.  We’re not prepared for a zombie apocalypse.

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14 Responses to “Ask the grumpies: Aftershock”

  1. Sandyl FirstgenAmerican Says:

    Re: dystopia…Perhaps that’s why I have a garden and chickens and land. The kids know how to fish and forage and how to start a fire (but not hunt yet). Our values are aligned with knowing where your food comes from and understanding how one’s basic needs are met. Yes, perhaps I too have been reading too many end of the world novels out there, but I’ve also been to a lot of developing countries where “the basics” are anything anyone every worries about. There’s no keeping up with the jones or maintaining 8 million electronics devices, etc.

    I think the best way to spot a bubble is when every Tom, Dick and Harry starts investing in stocks. Similarly, when people who have no business becoming homeowners and/or landlords start thinking it’s a get rich quick scheme and enter those ventures, you know trouble is on it’s way. That’s when you know it’s time to get the hell out. True, prices still may continue to rise to ridiculous levels before the big crash comes, but the crash is not far behind. I timed the crash of the 90’s pretty well, but the last one I got burned on. (My mistake in trusting a financial planner to execute on what I asked him to do. Worst money I ever spent..and lost.)

    • Contingent Cassandra Says:

      As someone who bought real estate at the top of the last bubble (I had good reasons to do so, knew it was a bubble, but didn’t, of course, know when it would end; I also bought something that would rent for its full carrying costs, which limited my options considerably, but made the purchase a much less risky venture), I agree that the time *not* to buy is when everyone else is saying “buy, buy, buy.” But I’m not so sure about the “get the hell out” advice — it’s time to get the hell out if you need to be out sometime in the next 5-10 years (the scenario in the question), but there’s no need to do so if you’re in for the long haul (e.g. retirement funds when you’re still a way away from retirement). Real estate can still be lived in (or rented if you bought carefully in the first place; I do think not buying something that can’t be rented at at least a break-even level is a pretty good rule of thumb,but of course that means not buying at all, or buying only with a very large down payment that you’re willing to tie up, in some areas), and stocks in an index fund will eventually recover, and may well throw off dividends that can be automatically reinvested at bargain prices in the meantime. But if you might need the money soon, yes, that’s a pretty good time to get out. Of course, if you’re in the middle of a period like the current one, where things have been bouncing all over the place for almost a decade with little apparent rhyme or reason, I suspect this barometer may be less than perfectly calibrated, too; I’m not hearing a lot of people touting stocks, because everybody’s apparently feeling cautious about everything right now, but they’re probably, if not in a bubble, then at least on the high side and due for a correction at the moment.

      I’d love to have land, and a garden, and maybe eventually chickens to fall back on. Still trying to figure that one out.

      • Sandyl FirstgenAmerican Says:

        You make some good points. I actually bought a house in 2005..pretty close to the peak…but my mom wanted chickens and a garden and the rent vs buy calculation was still in favor of buy, so we bought. But we bought a house that was low in price to begin with to minimize the $$ loss. I actually did an analysis of the last crash in the area and analyzed the % drop at different price points. (Dorky I know but I wanted to know the worst case). Anyway, we are now selling that property at a loss (closing soon hopefully), but after 9 years of being there, we’re still way way ahead of the game vs renting and my mom had a much higher quality of life by having the flexibility to have her mini-farm on site, so it was all good.

  2. nicoleandmaggie Says:

    I’ll be the first to die when the apocalypse comes. Turns out I *hate* maintaining land, can’t stand gardening, think chickens are loud and dirty. Perhaps humanity will save me as a knowledge worker because I have no practical skills at all. I think food tastes better when someone else does the work for you. But I’m a curmudgeon that way.

    • Rented life Says:

      Chickens are loud and dirty but pigs are even worse. (Chickens go to sleep but the pigs we had as a kid never seemed to.) I’m friends with farmers now, so I’m counting on that to help when all hell breaks lose. And my parents still own tons of land.

    • Rosa Says:

      have you read Cory Doctorow’s “The Last Sysadmin”? I’m doomed, since I have no real useful skills and hate dealing with people. But I think my husband and son might be set for the postapocalypse.

      In the meantime I’m investing in stocks, trusting the rich people to keep that going as long as possible. And seeing Glacier National Park and the Everglades before they’re gone :(

  3. Linda Says:

    Glad to see my question up today! :-)

    I currently own a house with enough of a garden plot to feed me pretty well and keep my small flock of chickens. When I started down this path of home ownership and building my “mini farm” in the city, I had similar goals to FGA: I need to learn practical skills for the coming collapse of society. The house is much larger than I need and the gardening is exhausting on my own PLUS a demanding full-time (more than 40 hour a week) job that I need to keep so I can continue to sock away money for retirement. While I haven’t been renting out the entire house, I have been leveraging the extra space to bring in money by taking on roommates (for about 3 years) and renting out a large room to travelers through Airbnb (since last fall). So, I think I’ve been using my assets wisely in that sense.

    The one thing I hadn’t accounted for, though, is my rapidly increasing distaste for our brutal winters here in Chicago. And the summers aren’t much better for me since I detest high humidity. This summer has been really outstanding as it as been cooler and there are whole weeks that go by when I don’t have to turn on the A/C. (Wow!) But winter is coming…and I don’t want to be here for another one.

    The house goes on the market soon and I will become a renter again for at least a few years (or maybe even the rest of my life) in the extraordinarily high-priced market in the Bay area of California. My long term plans are to settle into a smaller community in central or northern CA where I can again keep a garden and raise poultry (and maybe even keep a horse!), but I also don’t want to be taking on those commitments by myself again. Bay area will be great for continuing my professional career in the mean time.

  4. Cloud Says:

    I’ve got the bottled water and canned food laid in for the zombie apocalypse, but I am not interested in the bullets. So clearly, I’ll need to make some alliances QUICK when that goes down.

    My husband and I have done quite well, and are living comfortably and investing following all the standard advice. But I don’t really expect it to last- which is one of the things that made it so hard to quit a well-paying job even when it was making me miserable and we could clearly afford for me to take a gamble on something new. I wonder how rich I’d have to be to feel safe that it would last?

    I agree with you on the depressingly dystopian trend in US society. I keep joking that we should open a savings account in New Zealand as our ultimate fallback plan. Only, I’m not sure I’m really joking. The problem being, of course, that we’d have to recognize the breakdown before it got so bad that we couldn’t buy flights to New Zealand.

  5. Debbie M Says:

    Yeah, it was clear there was a tech bubble in 1995. It kept growing (doubling and doubling) until 1999. So, you never know when it’s time to get out. Also, right after Japan’s stock plummeted seemed like a good time to get in. I was wrong about that. So I’m going to have to agree with the advice to diversify (and rebalance).

    I’d like to diversify as much as reasonably possible. Most personal finance advisors recommend stocks AND bonds. Or maybe stocks, bonds and cash. Some mention gold or collectibles, but those are extra risky. Some mention real estate, but it’s hard to not put a gigantic portion of your money into that unless you buy REITs.

    Y’all have also recommended bullets and bottled water (canned food is good too–Mormons are the experts on this strategy), crops and chickens (well, I did get a rosemary bush to grow out front), and extra real estate space at home. Perhaps it’s good to keep your gas tank at least half full and your passport renewed.

    Another strategy I learned from history books–the way to make money is to cater to the people who are making the bubble. Gold rush? Open a business near the mines and/or along the route to the mines.

    • nicoleandmaggie Says:

      This sounds like a lot of work. I’ll just hope my cat eats me swiftly.

    • chacha1 Says:

      It is a lot of work. My age-in-place plan for the Sierra house features container gardens, solar power, and chickens, but beyond that … I’m going to be OLD. To think I could be completely self-sufficient in my last third of life is ludicrous.

  6. chacha1 Says:

    Very timely because I had been thinking “financial news is increasingly bubblicious” and intending to go and fiddle with my 401(k). So thanks, this was the kick in the pants I needed to do that easy ten-minute thing. I de-selected (for future contributions) the Mid-Cap Growth fund with higher fees, and moved 60% of what was in that fund to my Global Equity and Total Bond Market funds. This will probably cost me a bit in transaction fees, but the top of the market is the time to do that stuff.

    Re: dystopia … if the end of civilization as we know it comes swiftly, I am pretty much screwed. But there is truly not a thing in the world I can do to prevent that or – in reality – to prepare for it; we are completely dependent on municipal services and our only recourse in a true disaster is going to be to leave town however we can. So all I can do is stay fit and keep cash on hand, and not let stuff like this keep me up at night. The odds are against the world ending unexpectedly. :-)


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