Comments on financial planning scenario?greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
If you get a chance, take a look at the financial planning "decision table" that I've posted at http://www.yourdon.com/books/fallback/CH05/pfplan.html
There are lots of other things we need to plan for (food, utilities, jobs, etc.), but in terms of our financial assets, what do you think of the four key "variables" I've identified? What about the first-cut strategies that I've suggested? Any comments, additions, criticisms, etc.?
Most of all, what probability would you assign to each of the scenarios? Which one is most likely, which is least likely? Why?
This is not an academic exercise. Like virtually everything else in our "Time Bomb" book, this is part of my own personal planning activity. Every one of us will have to make a personal decision by 12/31/99 (or 12/31/98 if you're cautious) about how best to safeguard whatever savings and investments you've been lucky enough to accumulate. NOT making a decision is, in itself, a decision; I think most of us would prefer to make a conscious, considered, informed decision -- rather than shrugging our shoulders, abdicating, and muttering, "Well, I sure hope 'they' manage to take care of it all!"
-- Ed Yourdon (firstname.lastname@example.org), January 12, 1998
Ed, I'm no financial expert but I'll weigh in based on history. I would predict deflation with significant but not total bank failures and frozen assets for however long it takes to restore confidence, beginning in Summer of '99 when I think bank runs will start. Sound familiar? Like America in 1933. Governments know that hyperinflation is the seed of potentially violent revolutions, and will try to avoid that at all costs.
There are hedge funds that can provide insurance in uncertain times. They have a mix of assets like: 25% common stocks, 25% bonds, 20% cash and 30% gold. I think that over the last 20 years, returns on these funds have been very poor, but in a crisis could be a real asset saver. Hope this provides a focus for more discussion in this crucial area.
-- Craig (email@example.com), January 13, 1998.
This is an area that I have been struggling with for quite some time myself. While the preparations for short term food, water, heat, medicine and basic daily necessities take some time and money to accomplish it can be a do-able project. You decide how long you think the crisis could impact you (3-6-9 months???) and then spend a weekend making a list. Over the next few weeks you execute your plan. This part of preparation can have an easily defined set of parameters based on your location and anticipated level of need. You can find where to get your supplies, how much they cost, how to store them etc.,etc. Maybe not an easy job but with the right effort it can be done. If you are wrong you can donate your food to charity, take a tax deduction, wipe the egg off your face and go on with life. With financial assets there is a huge unknown factor and a great deal of possible outcomes that nobody can predict with assured accuracy. Those who have substantial assets that need protecting enter a gray area of Y2K that currently is impossible to assess. Any of Eds scenarios are possible and an educated economist could make a very compelling case for any or all of them. The stock market is impossible to assess. Your cant tell if your mutual fund is ready or if the stocks it invests in are ready or if the transfer agent is ready if the SEC is ready etc.etc.. Many links are necessary to keep this asset viable. Bank CDs are also questionable. I have called many small and large banks to gain some Y2K assurances and have received no good answers. Are banks, their service providers, the FED, the Controller of the Currency and numerous other agencies ready? Good luck finding out. Government securities are part of a Treasury Dept. that is dangerously late in preparing for Y2K and these assets pass through numerous different processing centers before you could actually cash them in. Should cash be in the hands of the Government or is the private sector a better safe haven? Precious metals have vastly different responses to scenarios of inflation, deflation and currency crises and have always been very volatile and risky. Who will want gold coins if they dont know where their next meal will be coming from or will a silver coin be the only thing that will get you a meal? Your mattress will only hold so much cash and reporting guidelines require disclosure for withdrawals over $10,000. Will paper money be worthless if the confidence in the Government erodes? Real estate is totally unpredictable in a Y2K crises scenario. Residential vs. commercial vs. industrial will react differently with inflation or deflation. Can tenants pay rent ? Can banks process mortgage payments? Your small business-Can it remain viable? Is it Y2K compliant? It is virtually impossible to access upstream and downstream vendors that could put you out of business. Where will you live? Big cities will have big problems but so will small towns and rural areas. Small seems better but can you afford financially and emotionally to sell the house, quit the job, pull the kids out of school etc. and become an overnight survivalist? This is a very simplified(tip of the proverbial iceberg)set of questions that no one can ever answer until its over and we can look back on it. There is no Silver Bullet solution for investing and securing financial assets as Y2K approaches. Spread out your financial assets and allocate them defensively. Use as many different banks, mutual funds and institutions as possible. Have some cash and have some gold and silver. Prepare for food and necessities as outlined in the first paragraph. So what can you really do? Dont try to predict the future, you will be wrong. Dont ask for answers from your bank, mutual fund, employer or financial institution. You will not get them or they will be misconceptions or you will be placated by some one who does not have a clue. Research the Internet, read some of the many books now available and form your own opinion about Y2K. But dont wait -start now. If the worst case scenario hits and the financial institutions cant operate, the utilities cant generate, stocks crash, food cant be delivered, the Government cant provide or protect, and the basic infrastructure is useless then no amount of preparation will be enough. There will be mass anarchy,rioting, looting, starvation, disease, and your worst nightmare will ensue. All your preparations could be taken from you by the desperate side of society, be it mankind or government intervention.This situation is highly unlikely and extremely difficult to prepare for. Do what you feel is best, feel good about your decisions, remain optimistic and positive, and hope for the best. Dont sit and think about it-do it now. You can prepare for a contained amount of disruption.
-- Steve P. (firstname.lastname@example.org), January 14, 1998.
Ed, you state that you can not have deflation at the same time you have inflation. You subscribe to Gary North's Remnant Review, right? His latest issue was the best yet--North changes his mind from favoring Gold/Silver to cash, because as he argues, Cash will be king in 2000. He states that the government will not be able to print enough cash to meet people's needs--it takes 3 years to build a new money making plant and the existing plants run 24 hours a day. If that is true, and North allows for somehow (such as stretching out the time to recycle (burn) old cash to twice the lifespan now), that the cash supply would only double. So I can imagine checking dollars and credit card dollars going into hyper inflation while cash going into deflation--you could have merchants who have been so burned out dealing with banks and credit cards and checks, that if you pay by check or credit card, it could cost you $200 but if you pay by cash, it would cost you $40 or something.
I also would include scrip (local/state-issued emergency money that was sometimes created during the depression) in the inflated category -- although if it was state-issued currency and the state forced all merchants in the state to honor the scrip, the scrip would not be as valued as true cash as cash is good worldwide, but the scrip would only be good in that state--but scrip would be as good as cash inside the state--so scrip would have a value between cash and trouble-plagued checks/credit cards (if y2k problems were that bad).
So would this not be a scenario where you have inflation and deflation at the same time (or a third -- neutral due to the scrip midway value)?
--Roleigh Martin http://ourworld.compuserve.com/homepages/roleigh_martin (On Y2k Threat to Core Infrastructure services)
P.S. For those who want to know more about North's Remnant Review (it's a fee-charged, paper newsletter from North), go to my bibliog.htm page for details. People may accuse North of being Dr. Doomsday but his research skills are sometimes phenomenal; make sure your subscription starts with the Cash is King issue which is the latest issue out now. That issue alone is worth the subscription fee.
-- Roleigh Martin (email@example.com), January 15, 1998.
Dear Mr. Yourdan et al, I am not an economist or financial planner. I am, however, a student of the markets and successful trader since 1989. That's not a long time, but I have studied many decades of market behavior. This includes most of the currently traded markets, not just stocks, bonds, and metals. I believe there are several underlying assumptions that should be considered before considering the probability of various performance scenerios. As for the likelihood of bank failures and freezing of accounts--wow, I don't know. However, could it be that the most likely conclusions, based on current knowledge, are those that are hardest to accept? Is there any reason to believe that several large banking institutions (assuming widely distributed branches and assuming total internal y2k compliance) could operate in a manner that would even closely resemble the current system? Can you say UPS strike? I don't think they have the capacity. If they did, or could manage the capacity, and assuming an ability to gain favorable regulatory treatment, they would be gobbling up more and more of the system daily. However, despite many mergers and acquisitions, they are still many hundreds of individual institutions. given the current time, the historical perspective, and the interdependance of the system, is it logical to draw a conclusion that does not include the high probability of at least one year's choas? If it is, please explain how. Sorry, I digress. With respect to the proposed fp scenerios and the assumptions I mentioned: 1. All non-tangible assets require confidence--especially debt instruments and stocks because there really is little (if any) value behind the paper. Instead, there is paper and promise behind the paper. There are currently very few stocks trading for less than 3x book value. Current p/e ratios are around 20 for the indices, and can be as high a a couple hundred for the "high fliers". Indeed, many biotech stocks have never put a dime on the bottom line, yet the stocks trade for ridiculous prices. With a p/e of 20, "investors" are paying $200K for a hotdog stand that will earn $10K per year. Why? They are buying the promise. This requires confidence (or deep denial--but that's another topic). While the details are different, the same is true of debt instruments. Particularily of government debt instruments. Would you buy the debt of a company that was $20 trillion (real natl debt) in debt and was running a $200 billion dollar defecit? Who couldn't even successfully service the debt? Who had to keep borrowing more and more to service the debt? Then why do people do it? Because they have confidence in an ability to repay the debt--with interest. 2. Markets are made up of human participants who are essentially motivated by fear and greed. That is why they are often volatile and seemingly unpredictable. However, consistently across markets and over time there are identifiable patterns that coincide with swings in the mass pysche of the market's participants. Therefore, I believe any scenerio that contemplates either bank failures (I'm talking more than 5%) or imposed bank "holidays" will have significant negative effects on non-tangible assets. There are instances in history when stocks and bonds didn't produce returns--at the same time. Also, if there are bank failures and/or imposed bank holidays what will happen to the demand for cash (roughly defines inflation)? I believe it is very likely that the demand will explode! Finally, officials at the Fed have already gone on record that they will provide "liquidity" should any be needed. While a thorough trashing of the economy could lead to deflation over time, I believe the likely near term effects would include a serious inflationary environment. I believe that any longer term scenerio (I can easily imagine 3 years: can you say the depression?) would likely dessimate paper (non-tangibles). In that event, I would be happy to pay my 10% early withdrawal penalty and hold tangibles. Why not have the tangibles held by someone else? I don't believe there exists a reasonable way to insure compliance--even for individual companies. How many officials from any company (I include myself--from a ten year previous life in the corporate world) are going to announce before hand that they'll not make it? You say--what about fiduciary responsibility and their legal liability? They are likely to take the calculated potential risk post y2k (in a system they already know is likely to be completely clogged with litigation), as oppossed to taking the sure risk of announcing early that they won't be able to assure confidence of continued operations pre y2k. CEO's and CFO's that I know and have known do not think in those terms. They think in terms of getting things done. Corporate counsel may be screaming bloody murder every day--until they are terminated. The CEO wants to know--"how do we make it happen", not "how do we tell our customers we won't". Sorry for this long posting. I'd certainly welcome alternate points of view and criticisms of the underlying assumptions.
-- P. Larson (firstname.lastname@example.org), January 15, 1998.
Wow! Steve P's Jan 14th posting on this thread basically managed to condense the essence of our entire "Time Bomb" book into one long paragraph! Bravo!
I agree that there is nothing definite, known, or predictable ... but in order to spread the risks, you need to at least imagine a few scenarios and develop some defensive plans for dealing with them.
Nevertheless, I'm getting more and more of a feeling that the complexity of the situation makes it entirely unknowable, unpredictable, unplannable. That being the case, I want to position my family and myself such that we can be as liquid, flexible, and unencumbered as possible. "Flexible" is a word that has financial, physical, and psychological connotations here.
Moving from a culture where we're bombarded into thinking that "things" are important (car, house, jewelry, bank account, private office in big company, etc.) to a mindset where little or nothing is REALLY important except your family, your health, and a couple of basic "fundamentals" ... well, this is a big change for most of us to go through. The psychological readjustment is, I think, the hardest -- but starting now (or, as was the case for me, in the spring of 1997), I think it's possible to be psychologically prepared for almost anything on 1/1/2000
-- Ed Yourdon (email@example.com), January 15, 1998.
Ed, it's odd--this forum software. You replied that Steve P's post was great. I've been receiving the replies by email and filtered into a separate folder. There is not Steve P. reference, so I went up to the forum to find out what I was missing. See this line:
Answered by Steve P. (firstname.lastname@example.org) on January 14, 1998.
That line does not show up in auto-forwarded email replies, so all I had in my folder was email@example.com.
Just a FYI. Everybody might want to reference another person's name as their name, Steve P (firstname.lastname@example.org) -- yes, I know that would be a nuisance, but for those following t he posts by email, they'll be tearing their hair out trying to figure out what is wrong and who is saying what!
-- Roleigh Martin (email@example.com), January 15, 1998.
I've been thinking about this issue for awhile. My post may not be as scholarly as the others but I've got 20 years of computer systems experience to help bolster my paranoia levels.
I think that it will J.Q. Publics response to pervieved financial systems problems after 2000 that will drive the "right" strategy. I believe problems will happen, with a minimum impact of having bank assests frozen.
Again, J.Q.P. unlike some of the posters here do not have large amounts of assests tied up in stocks and bonds. Most at risk would be company pension plan assests and some IRA money if your lucky.
I agree with a previous poster, cash will be king. Even though the idea that precious metals are durable has been drilled into us since we were little, "as good as gold", people will not be prepared to take gold/silver in trade. It's hard to do fairly and accurately, what is the value of an ounce of gold today anyway? Isn't this why we have paper money? As well, people will still believe in the governments' promise to pay. A total government collapse is "unthinkable" and won't be a concern to most people. This gets me back to my personnal plan. Load up on cash and debt. If the banking system goes down I want the fact that I owe $100K to be the piece of information that gets lost for a year or two or forever. Best case, the bank sends me a check for -100 years of interest on my loans. A major stumbling block to this plan is trying to survive on an all cash basis which you need to do for at least a few months before 2K to properly prepare. Getting your employer to pay you in cash is a problem which will probably get more difficult as 2K approaches. The next problem is paying all your bills in a timely manner and convining the local authorities your not a drug dealer.
This, I think, will be a common strategy.
-- Gerry Dubois (firstname.lastname@example.org), January 31, 1998.
The lastest poster, Gerry, worries rightly about holding a lot of cash and convincing the local authorities your not a drug dealer. I've been thinking about this lately. What about instead of hoarding cash (which collectively would hurt the economy terribly), in which case you have to worry about your own physical security then; what about hoarding some small amount of cash but then a large amount of $25 federal saving bonds, where you hold the actual bond certificate. I would think US Savings bonds, in an economy where cash is tight (perhaps rationed), where nobody trust the banks, checks or credit cards, that you could do barter with small $25 US Savings bonds. Of course the merchent would discount it for its maturity value at the then-present (easily done), and perhaps charge you a small handling fee, but I bet the merchant would do the deal, because he knows the banks will honor US Savings Bonds and the merchant could get cash for it or equal equivalent; plus it's a physical piece of currency; plus there is a third party proof of the transaction to prevent someone from stealing your bonds; plus you're getting interests; plus the banks and the police would not suspect anything illegal; plus society benefits in the large scale if everybody did likewise, as it would pump a lot of money into a government that would then be very tight for cash. How's everybody like that Idea, I circulated that idea with my friends tonight and they all thought it was a winner? Any downside to this idea? Ed, are you listening?
-- Roleigh Martin (email@example.com), February 01, 1998.
The one BIG problem I see with your idea is that you are investing in a government that may not be functioning and/or may not have the funds to be able to honor the redeeming of the savings bonds.
-- Rebecca Kutcher (firstname.lastname@example.org), February 01, 1998.
"The one BIG problem I see with your idea is that you are investing in a government that may not be functioning and/or may not have the funds to be able to honor the redeeming of the savings bonds."
That's why I favor small denominations like $25 savings bonds, you would not need to cash it; just buy the goods equal to its face value (which would be around $12.50 or more). The merchant could barter with it equally without needing cash in return--just goods. It could be a second-class alternative to cash more preferable than checks or credit card. Also, I doubt if the federal government will disappear; the current politicians could fall, but the structure of the federal government will survive in it's core essentials (an entity that has the power to wage war, issue currency, pass laws, etc.) .
The problem with the cash route is that security is tough and precarious, hoarding could be outlawed, no interest in the interim, considered unpatriotic if considered as hoarding; could be confiscated via the drug laws; and there is not enough cash to handle everybody. However, US Savings Bonds plus cash is a near-double supply issue and together, the two sources of income are better than only cash by itself.
---------------------------------------------------------------------- Roleigh Martin email@example.com (home email) http://ourworld.compuserve.com/homepages/roleigh_martin (A Web Site that focuses on Y2k threat to Utilities & more!)
-- Roleigh Martin (firstname.lastname@example.org), February 02, 1998.
Granted, pulling large ammounts of cash out is a pain in the $%^&. I don't know what to do about retirement funds or large size accounts (how much would be safe in a plain old savings account?) but I routienely pull $40-60 a week out of the ATM. This is March, so 21 months x $60 = $1260 x 3 adults in household = $3780. Plus say one of those little 1/10 oz gold coins/week (I don't think those need to be reported) at $30 x 2 adults (my grandfather still has Great Depression nightmares, I'm leaving him out) = $5040 + $3780 = $8820. OK not a big hord, but enough to get by for quite a while if you barter as much as you can. Check out any of The Tightwad Gazette books for ideas and getting into the right mindset for living close. Speaking of bartering, I learned, during a "difficult" childhood that the things that no one can take away are the things that you store between your ears. Check out community colleges for courses on skils that will be needed if the worst case senario comes to pass, you can barter them later!
-- Annie O'Dea (email@example.com), March 02, 1998.