How To Prepare For The Coming Stock Market Crash...greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
How To Prepare For The Coming Stock Market Crash
I'm guessing that you, the reader, are here because of an uneasiness over the future of your financial assets. Or possibly you have anxiety over the future of society in general. Your concern probably stems from your interest in the Stock Market, and it's role in gauging the health of the economic organ to the body of civilized society. You are not alone in your concern, in the climate of the ongoing world financial crisis many others have been asking: why is the crisis growing, what is the cause, where is it taking us, who caused it and who will end it, how do I survive or even succeed during the upcoming events?
I will try to offer answers to these questions in this and other upcoming articles. This first article conveys my feelings of the scope of the economic problem and offers some advice of what you can do right now to get ready for the upcoming stock market crash. Later I will offer information that outlines the problem and its sollution. I do not believe that the upcoming stock market crash can be averted, but I do have faith that there are many individuals with understanding who will help make the future brighter, beyond the crash.
The Bubble, How we got into this mess.
Just a few years ago, the DJIA hit a new high of 4500. It took most of the twentieth century to get there. But by early 1999 it had more than doubled and broke 10,000, despite a global economic slowdown. Americans of the 90's unlike those of any other time before in history, have become heavily invested in stocks. Small investors have entered the stock market in droves. And talk of easy money from the stock market has been everywhere: at work, lunch rooms, burger joints, health spas, family reunions and over the dinner table. Investment brokers seem to be more common than insurance, Avon and Amway people. CNBC and related financial programs have become more commonly watched than Sports Networks.
Americans no longer save money in banks but instead invest their savings in an over-inflated stock market. Debt levels have been climbing to all time highs, taking advantage of the "good times" climate of the 90's, and record proportions of America's (borrowed) wealth has been invested in financial assets. American consumers have been borrowing like there was no tomorrow. Household debt has climbed to 91% of disposable income, compared with 65% in 1980. Consumer financing has been as easy as paying with cash. Good credit is no longer required of the American consumer in order to purchase anything, from college to cars to computers. Nation wide real-estate values have risen dramatically and finance companies have been loaning Americans up to 125% of the over-inflated value of their homes. Credit card debt is at record levels and banks are continuously bulk mailing upwards of 5 billion credit card applications per year to the poor and anyone else. Student loans have over 7 million recent graduates in debt. Life insurance and 401(k) loans have been creating still more buying power. The stock market has been transformed into a nationwide social security plan for the working class, who have come to expect 15% to 20%+ returns. Savings for retirement that used to go to the banks has been invested into highly overvalued stocks.
These are signs of a huge over-swollen bubble economy that certainly could and has been falling prey to external destructive forces! During this period many advisors have been forecasting truly devastating financial and economic consequences. I started seriously researching this subject in September 1997 and began to know for myself that for these and other reasons, the Stock Market would soon crash. I studied the works of many bearish financial advisors that predicted the stock market has been finishing a cycle that would throw us into an all out crash. I began a web site later in 1997 to offer the information I was finding (http://darren.lib.utah.edu) and my explanation and answers to the questions I mentioned earlier.
Run on the Banks (1930's)
"In 1929, only a small percentage of Americans invested (or speculated) in the stock market (under 5%). Today, 43% of U.S. households (over 75 million investors) have the lion's share of their savings and retirement assets in the stock market or equity mutual funds. When the crash comes, America will be far more devastated than in 1929 or the 1930s." ---The McAlvany Intelligence Advisor, August, 1997.
The first and most important steps you can do to protect yourself now.
1. Get Debt Free. As a stock market crash progresses, those with the least debt will be least affected. Get control of your credit cards and pay off those balances.
2. Get out of real estate investments. Many are advising that real estate will fall by half or more of its 1998 value. Liquidate idle property. Delay any planed real estate purchases until after the crash. Asia's real estate prices have fallen upwards of 70% in the recent period after their stock market crash.
3. Safe-guard your retirement funds. Investigate and see if your retirement funds are invested into over-inflated stocks, bonds, or annuities. Peril is coming to these paper assets. Flee stock market based retirement programs. Be very conservitive with your retirement investments.
4. Get out of the stock market. As the stock market crash progresses it will destroy most paper assets, consider switching most of your investment money into hard assets.
5. Invest in enduring hard assets. With your investment money buy gold and silver bullion and coins, preferably a variety of widely recgonizable units for trade including U.S. gold and silver eagles and junk silver coins (pre-1964) For reasons I will explain later these are the best investments to carry your wealth safely to the other side of the stock market crash.
6. Build a cash reserve. This means, according to the experts you must have cash on hand; then, as the stock market crash progresses and banks limit or suspend withdraws, you will be able to buy pennies on the dollar. Also, during this period banking services will be non-existent: checks, credit cards, etc. will be useless. An assortment of newer copper-clad coins, $1, $5, $10 and $20 bills is recommended (it may be difficult to get change for larger bills).The amount you feel comfortable storing is up to you. Keep the cash where you can easily get your hands on it. You may not have access to your safety deposit box.
7. Obtain food storage and survival items. This is most important for peace of mind, stock up your food storage now.
8. Learn the sequence of the crash. Visualize how you would be impacted from the following, from my research this is the sequence of the coming Stock Market Crash:
A. The Stock Market goes into a deep prolonged bear market (50% correction or worse). Most investors will be completely ruined and mutual funds will be wiped out.
B. Bank failures begin shortly after the crash, Bank runs. (President Clinton will probably call for a national banking holiday so the banks can have time to sort out the mess). You will not have access to your accounts or safe-deposit boxes. Most banks will suspend withdraws.
C. Liquidity crises now occurs with the bank failures: This is the time to have "cash on hand". A short period where cash money is scarce. Purchase those bargains, especially items that will allow you to barter in the next stage.
D. Liquidity crises passes and the dollar devalues (it becomes worthless): the federal government takes over the failed banks, they make good on the FDIC and FSLIC goverment bank guaranty by printing new larger denomination paper money. Foreign stock piles of US money flood the market causing a confidence crisis.
$100,000.00 dollar bills were issued by the Government in 1934.
$500, $1,000, $5,000 and then $10,000 bills will be reissued by the federal reserve in huge quantities, and/or they will issue a new currency. Copper-clad coins, and small bills will be worthless, unless you have wheel-barrels full of them. Run-away Inflation. This is the time to already have your, gold and silver, food storage and any other items you will want and to barter with. Government controlled rationing will be setup and the Black Market will be in operation.
9. Rebuff yourself. You need to ask yourself honestly, "How prepared am I and my family for the stock market crash?", get going, get mentally, physically and spiritually prepared.
Darren Perkins - Gold Eagle
-- Andy (2000EOD@prodigy.net), April 15, 1999
A few bits of good personal financial advice, mixed with a gold sales pitch and some just plain bad economics. Despite the fervent hopes of the "gold bugs," there will be no return to commidity-based currency (silver and gold) or convertible currency. Now, will someone explain how "runaway inflation" can coincide with a 50% decline in real estate values?
-- Mr. Decker (email@example.com), April 15, 1999.
From Yourdon's Planning for Personal Y2K Financial Scenarios
These four scenarios seem logically inconsistent: you can't have severe inflation and severe deflation at the same time. However, it's conceivable that we might experience inflation for "necessities" whos production or distribution has been disrupted by Y2K problems, while simultaneously experiencing deflation for "discretionary" items that we can easily live without. A simple example: my family needs food, and I'll pay whatever it costs to acquire it. On the other hand, I already have three pairs of expensive jogging shoes in my closet, and even though the TV commercials are desperately trying to persuade me that I need a fourth pair, an economic disruption will provide a much stronger persuasion that I really don't need an additional pair of shoes after all. The classic economic response to falling demand is to drop the price; thus, the manufacturers of jogging shoes (and a lot of other items that Madison Avenue and Hollywood tell us we desperately need in our lives) may suffer deflation, while the manufacturers of bread, meat, gasoline, and other necessities might be rapidly raising their price to balance a desparate demand against a limited supply.
Case 5: We have severe inflation, bank accounts have been frozen, and the banking system (or at least mybank) has failed.
Action A: the fact that bank accounts are frozen is irrelevant. If the banks have failed, why would I care whether the government allows me to withdraw money or not? The only way of protecting my financial assets in this scenario is to have all of my money outside the bank (and since I don't know which bank(s) might fail, I need to keep them outside all banks). If I'm dealing with severe inflation, then I don't want to have my assets in the form of cash; gold would be much better. Tangible assets (real estate, household goods, etc.) would also be okay.
Case 6: We have severe inflation, bank accounts have been frozen, but the banking system is still intact.
Action B: In this case, I can afford to keep most of my long-term savings and retirement accounts in a financial institution, because I won't need need them them until my retirement, or some emergency. But it's crucial to ensure that those long-term savings are invested in an inflation-proof fashion. In this scenario, presumably bonds would be bad, stocks good; also, commodities such as gold should do well. It's interesting in this regard that IRA/Keogh accounts are now allowed to hold gold in various forms.
Case 7: There is severe inflation, bank accounts have not been frozen by the government, but the banking system has failed.
Action A: this is essentially the same situation as Case 5. Whether or not the government has frozen our assets, the key aspect of Case 5 and Case 7 is that the banking system has failed, or at least my bank has failed, and has taken my assets down with it.
Case 8: We have severe inflation, bank accounts have not been frozen, and the banking system is still intact.
Action C: This is effectively the scenario we had in the early 1980s, when inflation was 20% per year, and interest rates were also approx 20% per year. If the banking system is intact, and if my accounts have not been frozen by the government, then presumably I can invest in whatever fashion will cope with inflation. In this scenario, stocks are good, bonds are bad(?), commodities (gold) may be good, real-estate would be good. Savings accounts would be bad, and holding the assets in cash outside the banking system would also be bad.
Case 9: We have severe deflation, assets have been frozen, and the banking system has failed.
Action D: If the banking system has failed, then it doesn't matter to me that the government has frozen the assets within the bank. The only way I'm going to succeed in this scenario is to have my financial assets entirely out of the banking system. But if it's a deflationary environment, then my assets should be in cash, or invested in my own business (which will presumably provide an income); gold may be okay as
Case 10: We have severe deflation, assets have been frozen, but the banking system is intact.
Action E: In this case, I can afford to keep most of my long-term savings and retirements accounts in a financial institution, as with Case 6. But it's crucial to ensure that they have been invested, before 2000, to take advantage of deflation. In this scenario, stocks are bad, bonds are good(?), and insured savings accounts are probably the safest.
Case 11: We have severe deflation, assets have not been frozen, but the banking system has failed.
Action D: This is essentially the same scenario as Case 9: if the banking system has failed, it doesn't matter to us whether the government has frozen the assets within the failed banks.
Case 12: We have severe deflation, assets have not been frozen, and the banking system is still intact.
Action F: This is only slightly different than Case 10 above, since the good news is a functioning banking system, and the bad news is a severe deflation. But if assets have not been frozen, then I'll have more flexibility to make investment decisions after 1/1/2000 to protect my assets as well as a I can. But in this scenario, we still assume that stocks are bad, bonds are good, and insured savings accounts are the safest.
Case 13: We have neithersevere inflation nor severe deflation, but assets have been frozen, and the banking system has failed.
If the banking system has failed, then it doesn't matter whether the government has frozen the assets within those accounts. But it's difficult to imagine a scenario in which inflation/deflation would be unaffected by such a cataclysmic event as a failure of the banking system. Thus, I've marked this as a "logically inconsistent" scenario.
Case 14: We have neither severe inflation nor severe deflation, and assets have been frozen, but the banking system is intact.
Action G: details to be filled in later...
Case 15: We have neither severe inflation nor severe deflation, and assets have not been frozen, but the banking system has failed.
This is essentially the same as Case 13: if the banking system has failed, then it doesn't matter to us whether the government has frozen the assets within those banks. But as noted with Case 13, it's very difficult to imagine a failure of the banking system without a concurrent impact on inflation/deflation
Case 16: We have neither severe inflation nor severe deflation, assets have not been frozen, and the banking system is intact.
Action H: this is the best of all possible worlds, in a sense -- for it means that we can continue making our investment decisions in the same fashion we do now. We may need to take into account the effect of a recession/depression, but our savings are safe.
-- a (firstname.lastname@example.org), April 15, 1999.
Monsieur Decker, I would be sincerely interested in you giving a scenario for the best way to handle investments and personal finances starting now if we Y2K doomers are correct (let's call it Y2K "chaos" beginning Dec. 99, including banking, and extending for at least a year without over-specifying it in this thread). I understand you don't EXPECT that, but bringing your own expertise to bear in a way that would be helpful to those of us who do is useful to the forum. It's not like us few whackos have the ability to wreck the system by our weird financial machinations later this year ....
-- BigDog (BigDog@duffer.com), April 15, 1999.
A length of rope... for me? And so beautifully wrapped. (laughter)
In fact, I wrote a post earlier on just this subject:
Avoiding Poverty 101 (Y2K Compliant)
"1. Get out of debt. Cut up all the credit cards but one. Only borrow to make a wise investment (home, college or business). Investments do not include new cars, vacations or toys. Wait until you can pay cash... then you'll know if you really want it."
Ironically, if everyone actually followed my advice, the consumer- fueled economy would slow greatly. As a student of history, you must realize debt collectors are harder to eliminate than cockroaches. No matter the Y2K disruptions, someone will find you if you owe them money.
"2. Downsize. The size of the average American house has doubled since the 1950s while family size has decreased. Find a house just large enough to live in... and save the extra income. Sell the stuff you used to think you couldn't live without."
I am a fan of Thorstein Veblen. I assume you have ready "Theory of Lesiure Class." If it has been awhile, Veblen deserves a second read at the turn of the millenium.
"3. Save. Before you pay the bills, pay yourself. Live on the rest. Have six months of living expenses in savings."
As always, the best financial advice is deadly boring. You will ask, I presume, if I mean to keep six months of savings in the bank? As a cautious man, I keep money in a few different places including a commercial bank, credit union and brokerage money market account.
Not wanting to tax the currency situation, I may purchase cashier's checks for my January and February bills... in November. Personally, I do not like large piles of small bills lying about. While there may be processing problems with personal checks (particularly interest-bearing NOW accounts rather than DDAs), the cashier's checks will move through the system.
"4. Work as hard spending your money as you do earning it. Shop smart. Buy in bulk. A membership in a Costco (or a clone) will save you money on items across the board. Many items, like cleaning supplies and #10 cans of beans, last a long, long time."
I like Costco. A member since 1985, I find the prices quite compelling. To borrow a phrase from automotive advertising, your savings may vary. The best deals are often the nonfood items. I can purchase a gallon of "Windex" for the cost of a quart at the local grocery. Laundry detergent, toilet tissue and light bulbs are usually extraordinarily inexpensive.
Were I a survivalist/fatalist, I would purchase food in #10 cans. The sheer size of a #10 can of beans (about 7 pounds, I believe) keeps the average person from opening them as a snack. Unlike dry products, they already hydrated... a valuable quality if one questions the ability to find potable water. A can costs about $3. Costco stocks #10 cans of potatoes, pears, peaches, applesauce and many others. Of course, one might suffer "apetite fatigue," but one would not starve. And for much less in cash outlay.
"5. Invest, but the watchwords for the next few years are defense and diversity. The market is overvalued. The worst offenders are the Internet and tech stocks. You can find value a la Ben Graham, but it takes careful research. It doesn't make sense to abandon stocks completely, but you might think about taking some profits and keeping a large portion of your portfolio in a money market fund. There are some good international stocks available for bargain prices for the gutsy investor. You can buy into U.S. market after the inevitable correction. Remember, profits are just paper until you sell."
I will have to write a full post on investment strategies. In an earlier post, some wunderkind was talking about shorting Walmart.... There are many companyies who stand to take a huge belly flop during the next correction. Walmart, however, is one of the stores supplying the Y2K prepared. In an economic downturn, I expect Walmart to increase market share. The Nordstrom yuppies will need to pinch pennies.
If you specifics of my portfolio strategy, simply ask.
"6. If you must have a vice, pick an inexpensive one... and just one."
My secret hope is that Y2K worries will stop a few people from smoking cigarettes.
"7. Learn the difference between wanting and having. And please teach your children."
This comment was lost on the immediate gratification crowd.
"8. Invest in yourself. Improving your skills, developing alternative career options and just getting smarter will always be your best investment. Your education is portable, always available and will last as long as you do. Read."
My personal favorite.
"9. Do it yourself. Even if you pay to have someone fix your car, you're less likely to be cheated if you know the difference between the head gasket and tail pipe."
In my formative years, my father questioned my mechanical ability. To prove him wrong, I rebuilt an old pickup truck from the frame up. There are a few things involved in running a small farm/ranch I cannot do... the more people with a broad marketbasket of skills, the better.
"10. Give something to the church or charity of your choice. It makes one feel a little richer... and feeling a little richer goes a long way to avoiding poverty."
This, good sir, comes not from me, but from the Teacher.
-- Mr. Decker (email@example.com), April 15, 1999.
Mr. Decker commented:
"5. Invest, but the watchwords for the next few years are defense and diversity. The market is overvalued. The worst offenders are the Internet and tech stocks. You can find value a la Ben Graham, but it takes careful research. It doesn't make sense to abandon stocks completely, but you might think about taking some profits and keeping a large portion of your portfolio in a money market fund. There are some good international stocks available for bargain prices for the gutsy investor. You can buy into U.S. market after the inevitable correction. Remember, profits are just paper until you sell." >I
Ben Graham is probably rolling over in his grave on a daily basis over the valuations in this market. Most investors these days can't even spell research much less take the time to do it or understand it.
What folks fail to comprehend is that this is a LIQUIDITY DRIVEN MARKET. Money for the most part is give to a third party through 401ks etc ...who are reimbursed based on the return they produce for the sheeple.
When the DIVIDEND YIELD on the Dow hovers around 1 1/2% it only leaves one reason for owning stocks, Capital Appreciation. Last year a poll was taken of stockowner's that showed they expected 25% to 30% annual returns on their investments for the next 10 years.
The stock market for the most part turned into a Bear market last year. Indices like the Russell 2000 have lagged dramatically. Breadth on the NYSE has been horrible. When folks get their quarterly statements they are going to scratch their heads and say HOW COME I AIN'T MADE NO MONEY!!
Remember that it took 25 years before the market returned to the valuations seen in 1929. This time it will be longer!!
-- Ray (firstname.lastname@example.org), April 15, 1999.
Mr. Decker -
Your advice is indeed boring. It is also absolutely spot-on. As the breadwinner for a single-income family in this double-income economy, I must tell you that many of your points are fundamentals in my family's financial life. My thanks for sharing this posting, which contains much wisdom.
-- Mac (email@example.com), April 15, 1999.
Attempt to turn off SOMEONE's italics (Ray...) 8-}]
-- Mac (firstname.lastname@example.org), April 15, 1999.
Nice Mr. Decker. In this part
"7. Learn the difference between wanting and having. And please teach your children."
did you mean "wanting and needing" instead of "wanting and having" ? One could find interpretations for both alternates, of course. Just wondering.
-- Blue Himalayan (email@example.com), April 15, 1999.
It was an homage to an episode of the original television series, "Star Trek." Mr. Spock returns to his home planet to consumate his pre-arranged marriage. His bride-to-be actually wants another Vulcan male for her husband. In the end, the bride has her wish and Spock makes a pithy observation on the difference between "wanting" and "having." It has been years since I saw the episode, but I remember the thought and its wisdom.
-- Mr. Decker (firstname.lastname@example.org), April 15, 1999.