Tuesday, March 20, 2012

Aftershock: Protect yourself and profit in the next global meltdown by David Wiedemer Phd et al ( 2011 )

Now for an unprecedented event on the Steel Bookshelf; I have a guest blogger today, my old friend John Mannschreck, whose opinion I highly respect. Without further ado, here's his review:

The author, David Weidemer holds a PhD in economics from the U of Wisconsin. He published a book, "America's Bubble Economy" in 2006 that was prescient in his prediction of both the housing and stock market crash of 2007-9.
In this follow up book, " Aftershock ", he describes six economic "bubbles" inflated chiefly by poor govt policy. Four of these, real estate, private debt, stocks and consumer spending already burst in 07- 09. The two final (and most egregious), the dollar and U.S. debt bubbles, are still inflating.

He logically explains the causes and consequences of rupturing each bubble . Recommendations are provided to protect your money and profit from the forthcoming calamity. (He's obviously making royalties from the book sale and he does have a website where I m sure other products are peddled, but I don t sense any extraordinary commercial bias.) The book itself is 352 pages, but only about one third is true "core" information. There is a fair amount of repetition, some self congratulation ( for his previous correct predictions ) and some rehashing of various classic economic theories.

Each bubble ( in a nutshell ) : The real estate bubble collapsed because, from 2001-2006, housing prices went up 80 % , but income increased only 2% and there was very little population growth. There was no solid economic underpinning for the increase. It was purely due to poor credit policy and wild speculation.
Private debt increased because of easy credit with lax lending standards leading to a " no risk" mentality from lenders and borrowers alike. Credit card, home equity loans, commercial real estate all boomed during this period and then burst when credit contracted.

The stock market increased in value 1200 % from 1980 - 2000 , but the growth in corporate earnings and GDP only grew 300 % during this same time, so there was no strong economic underpinning for this increase. It crashed in 2000 , partially recovered and crashed again in 2008. Since reflating in Mar 2009, stocks are up primarily due to massive money printing, rather than significant improvements in employment and private spending.

Consumer spending was fueled by easy credit including home equity loans ( the ultimate ATM ), consumer loans and credit cards. It crashed when credit dried up.
The dollar bubble, yet to burst, is being fueled by increased demand for dollar denominated assets without any true gains in productivity. This is particularly true for foreign investment. However, there has been a massive increase in M3 money supply over the past ten years (300 % over the last three years alone ! ) It is now becoming inflationary and will become much worse. The author predicts inflation increases of 10 % or more in 1 - 5 years. When that happens, the dollar will crater and the massive U.S. assets owned by foreigners including stocks, real estate, treasuries etc will also plummet. The massive and growing U.S. trade deficit will accelerate the dollar decline.
Govt debt is described as the biggest, baddest bubble of all. It is now nearing $ 15 trillion and we can t possibly pay it off. Historically, we have only paid interest on this debt, never principle. If interest rates rise above 10 % , as predicted, we won t even be able to service the debt. It will even exceed Medicare outlays. A technical default on this astronomical debt would be disastrous for our economy. An ENORMOUS increase in economic demand or productivity might save us, but an increase of this magnitude has never occurred and is highly implausible. This debt implosion is only a matter of time and the Chinese and Japanese willingness to buy our assets. We are completely beholden to them.

What to watch: He suggests monitoring foreign purchases of US treasuries. China holds over $3 trillion in US debt, but is slowing purchases of new treasuries. Any significant decrease is major potential trouble. Inflation increases which will lead to interest rate increases. A continued rise in the trade deficit which will deflate the dollar. Rise in gold prices which are proportional to loss in dollar confidence. Black Swan events such as pandemics, wars or major terrorist events.

What to do: He is not a salesman, so he isn't peddling any specific product, but merely recommends asset categories to place your money. To no surprise, his favorite is gold, despite it's incredible run up in recent years. Gold, unlike stocks, bonds and real estate, will increase with inflation and interest rate increases. The global gold market is a tiny fraction of large markets, so even a small shift from stocks, bonds and real estate to gold should send it much higher. Gold is the only hard acceptable currency alternative globally accepted. He does say that Gold is also in a bubble, however it won t burst for 5-10 years, well after all other assets have cratered in price, so there will be plenty of time to reallocate. He recommends buying physical gold online as opposed to gold ETFs . ( less prone to manipulative mischief) .

Other actions include: buy silver ( Not as desirable as gold, according to him, but it has also not experienced golds' meteoric run up, so it's better valued.), investment grade diamonds and sapphires, dollar bear funds that short the US dollar ( Ex . UDN ), and ETF s that short US Treasuries anticipating interest rate increases ( TBT,TBTF,RRPIX, RYJUX etc) .

He also recommends buying put stock options to put "floors" under the price of any stock you own, selling stocks in capital goods and consumer discretionary sectors, selling real estate NOW ( markedly increased 30 year mortgage rates will crater the housing market...again) Wait for the phenomenal bargains in 2- 5 years to repurchase these asset classes.

I know this as alarming for you as it was for me. The author freely admits, that he doesn't know when this catastrophe will occur. His best guess is 1-5 years from now. If I were to hazard a guess, I would say 2013. The federal govt has tremendous motivation to "keep this party going" in an election year and will do nothing about responsible spending cuts or decreasing foreign borrowing. This inaction, of course, will inflate the govt debt and dollar bubbles even further and make the day of reckoning that much worse. I fear for our beloved country. We are in uncharted waters and normal business cycles of expansion and contraction can no longer guide us.

BTW, there are other highly intellectual economists and pundits that have also been very prescient in their predictions that COMPLETELY agree with this author. Most of them are billionaires , so they do have some credibility. These include Peter Schiff , Jimmy Rogers and Bill Gross.


Anonymous said...

After catching this book in September 2011 I too was a bit worried. Today I think that book was just a bunch of facts that are used to put fear in the minds of Americans (demagoguery).

Will the dollar crash? No one knows. But for sure it is not the current debt that will bring it down. Our GDP is high enough to sustain the debt. Compare our countries' ratio to the worst ratios around the world. Their countries have not crashed and so we would have to regress for many many years (not 5) before we get to this aftershock point.

Author forgot one more bubble. College expense (student debt) bubble.

Jon said...

Thanks Anonymous. I'll pass the comment along to the author if this post.
I've read enough of this alarmist literature over the years to take most of it with a grain of salt.
In my opinion, one simply should assign a probability to any type of disaster, economic or natural, and make prudent plans to mitigate its effects.