The Aftershock Investor

David Wiedemer, Robert Wiedemer, Cindy Pitzer; “The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy”  Wiley, 2012, 292 pps  

This book is last in a series by the same authors.  It follows America's Bubble Economy (Wiley, 2006), Aftershock (Wiley, 2009), and Aftershock, Second Edition (Wiley, 2011).  The authors’ gained credibility in 2006 with their prediction of the coming 2007 real estate and credit crash.   This latest book provides direction for the reader to minimize the financial blows the next global money meltdown will present--they believe this will occur in the next two to three years.  When inflation gets to 5% they expect the remaining bubbles to begin popping. 

This book is not fun to read and is, frankly, quite disturbing; but it is a must read.  This is especially so as they make a convincing case that we are still in all six bubbles (see below); it may surprise some people that, among these bubbles, real estate remains and is predicted to fall even further. 

But what about the recovery we are in: Combined government borrowing and money printing are not only key to our current “recovery”—they are the recovery.

I have always felt gold is not an investment and is more like catastrophic insurance.  I still believe this and am accordingly weighing whether or not to put around 10% of my investable assets into gold.  Also, capital stocks should be reviewed: This book convinced me to immediately sell my Caterpillar stock as that stock is too dependent on China (my notes cover more on this topic).  The author maintains that over the next two to three years, certainly no longer than five, investors must move away from endangered asset classes, such as stocks and bonds, to safer asset classes, such as short-term debt and gold.  Gold will eventually be the biggest, most profitable bubble of our lifetime.

Pg. 60:  Beginning in the 1980s, slow and steady growth driven by real fundamental economic drivers was replaced by rapid growth driven by rising bubbles beginning at various times and still simultaneously present today, even though some retraction of some of these bubbles has occurred since 2000:

·        Stock market bubble.

·        Real estate bubble

·        Private debt bubble

·        Consumer spending bubble

·        Government debt bubble

·        Dollar bubble

·        (Gold is not yet a bubble, but will be)

Since 2000, the Dow and the Standard & Poor’s (S&P) index have been essentially flat, while the Nasdaq fell 50 percent.  Conventional Wisdom (CW) believes we will recover because the U.S. economy possesses a reliable “natural” growth rate; therefore we can always count on a rebound from any recession. CW makes no acknowledgment that the U.S. and the world could be in a bubble economy, which we are, and the key assumption behind all CW investing is that the future will be just like the past.  The old ways of investing based on CW are becoming increasingly ineffective and even dangerous.  The economy we are in now is not merely a bearish “down cycle.”  This economy is evolving.  We are not going back to how it was before. (P. 5).

Pg. 7:  Authors define a bubble as an asset value that temporarily rises and eventually falls, primarily due to changing investor psychology rather than due to underlying, fundamental economic drivers that are sustainable over time.

Pg. 11 to 17: 

·        The Real Estate Bubble: now that it is partially popped, the real estate bubble is easy to see.  From 2000 to 2006, home prices grew almost 100 percent.  If you decide to keep your current home, understand that you will not be able to sell it in the next 5 to 10 years without taking a big loss compared to selling it today.

·        The Stock Market Bubble:  from 1980 to 2000 GDP went up 260 percent but the Dow went up more than 1,100 percent.  (In 2000 the Nasdaq went down 50% but bonds continued to climb; and now in 2012 the Nasdaq has climbed back).  When you consider that the population of the U.S. grew only 25 percent in this interim and population growth is one driver of GDP growth, and given that GDP growth is the fundamental driver of corporate earnings growth, you would expect to see the Dow rise about as much as GDP.

·        The Private Debt Bubble:  We can simplify the complex private debt bubble by seeing it as essentially a derivative bubble, driven by two other bubbles: (1) the rapidly rising home price bubble; and (2) the rapidly rising stock market bubble, which combined to make for a rapidly growing economy.  (Private debt is debt such as credit cards, home loans, home equity loans, auto loans, and any other debt owed by individuals and businesses, who borrow to fuel their growth). 

·        The Consumer Discretionary Spending Bubble: Consumer spending accounts for about 70 percent of the U.S. economy and a large portion of that spending is discretionary.  The discretionary spending always retracts in a recession; but this time, it had grown to such heights fueled by such items as home equity loans, that the drop is much more severe than in the past.

The combined fall of these first four bubbles (above) make up what the authors call the Bubblequake of late 2008 and 2009.  Unfortunately, our troubles don’t end there.  Two more giant bubbles are about to burst in the coming Aftershock. The above four have not fully popped and are being held up by the remaining two:

·        The Dollar Bubble:  the dollar has become an unsustainable currency bubble.  Investors worldwide have been purchasing dollars but this has made it more vulnerable.  It is more vulnerable because we didn’t really have a true booming economy based on real underlying, fundamental economic drivers.  We had a rising multibubble economy.  Demand for U.S. dollars has currently remained pretty strong, probably because of the current European debt crisis as well as conventional wisdom believing this is just another ordinary recession which will bounce back.  But the dollar’s strength will wane as the falling bubbles lead to falling demand for dollars.  Making matters worse has been the Quantitative Easing (QE) program of the government.  Two rounds of massive money printing (QE1 and QE2) have increased the U.S. money supply from $80 billion in March 2009 to more than $2.4 trillion by July 2011.  QE3 is now in process.

·        The Government Debt Bubble:  Government debt was at $8.5 trillion in 2006 and is now, in 2012 at $16 trillion (in 1980 it was as $930 billion).

(Note: It’s not just America’s bubble economy—the linked world economy is also a bubble economy).

Pg. 36:  China’s construction boom is unprecedented in human history.  By some estimates as much as 50 percent of their GDP is now driven by fixed investment, a large part of which is construction.  Even at the height of the U.S. housing bubble, U.S construction was only 17 percent of the economy; 23 percent of Spain’s; and 30% of Dubai’s.  China’s construction economy is truly unsustainable and is a big deal for the rest of the world as it is the world’s second-largest economy. (Hence: sell CAT).

Pg. 62:  Real (nonbubble) economic growth is driven by population growth and productivity growth.  However, our focus should be on productivity since we are primarily interested in becoming wealthier per person, not just having a larger economy with lots and lots of poor people.  So, productivity growth is the source of economic growth.

Pg. 68:  Most hedge funds are surprisingly unhedged and very conventional.  They are essentially leveraged stock funds which hedge nothing. 

Pg. 74: Milton Friedman explained inflation quite simply: inflation is a direct result of increasing the money supply; increase the money supply, relative to the size of the economy and you get inflation; decrease the money supply relative to the economy and you get deflation.

Pg. 134:  Moderately Rising Interest Rates Equal Sharply Falling Bond Prices

Interest Rate	Lost Bond Value
5%	18% lost
6%	25% lost
7%	31% lost
10%	46% lost
15%	63% lost

Example: Assume you just bought a 10-year Treasury bond that is earning 3 percent.  If the interest rate rises from 3 percent to just 4 percent, your bond loses 12 percent of its value.  Table above shows what happens if interest rates go even higher.

The dollar bubble and the government debt bubble will be the last of the six conjoined bubbles to burst.  The first four (stocks, real estate, private debt, and discretionary spending) bubbles have already begun to fall, and they will all fully pop when the last two finally go.  Only the government’s huge deficit spending and massive money printing has kept the bubbles from fully deflating.  Even if the Fed were to stop all money printing today, we have already increased the money supply threefold since March 2009.  That is more than enough to give us plenty of future inflation and rising interest rates.

Pg. 143:  In the short term, investments to consider are:

·        Mortgage-backed securities

·        Short-term T-bills and Treasury notes

·        Tips

·        Gold

·        High-dividend stocks

Later add:

·        Foreign currencies

·        Commodities

·        Short stock exchange-traded funds (ETF’s)

·        Short bond ETF’s.

Pg. 177:  There are three basic types of Long Term Care (LTC) insurance: indemnity, expense-incurred, or cash policies.  Indemnity plans pay a fixed daily rate regardless of what you spend on care.  Expense-incurred policies reimburse you for actual expenses, up to a fixed amount. Cash-based policies pay you a fixed amount even if you incur no expenses (for example, if a relative provides your care).   Author recommends keeping these policies only if you are already 70 or are in poor health. (see P. 184).

Pg. 191:  Gold has a specific gravity of 19.3 which means gold weighs 19.3 times more than an equal volume of water.  Just one cubic foot of gold weighs 1,206 pounds.

Ways to buy gold:

·         Gold coins (expect sales commission ranging from 3 to 6 percent per ounce).

·         ETF’s:  most popular are “GLD, IAU, PHYS”

·         Gold Depository: 

·         Gold Mining Stocks.  ETF GDX

Author does not believe the government will confiscate gold this time as FDR did because gold is not that important now to the daily functioning of the economy as we are no longer on a gold standard.

Pg. 212:  Even with the present massive government stimulus and the earlier rising housing bubble, we did not gain any net job growth from 2000 to 2010.  While the number of jobs from 1980 to 2000 increased by 40 million, there was zero job growth from 2000 to 2010.  In fact, we lost jobs—almost 200,000.  Most of the nonfarm jobs created during the rise of the real estate bubble are now gone.

Pg. 231:  For the record, the numbers on retirement savings are pretty dismal.  Among peo0ple ages 50 to 59, the median retirement savings is just $29,000.

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In case readers think it has improved here is an excerpt I found on the internet today: Bowles/Simpson on 10/11/12:

Bowles identified four problem areas in the U.S.: Health care spending that's twice any other country's; defense spending higher than the next 17 nations combined; a tax code that is "inefficient, ineffective and globally anti-competitive"; and a Social Security program that has a $900 billion hole to fill over the next decade.

He expressed worry over whether other countries would continue to lend to the U.S. considering its current $16 trillion debt and $1.2 trillion budget deficit.

Bowles pointed out that revenue does nothing more than pay for Medicare, Medicaid and Social Security. All other expenses are paid for with borrowing "and half of it was borrowed from foreign countries," he said.

CPI can be followed at www.bls.gov

authors can be followed at www.aftershockpublishing.com