What happens if the unthinkable happens?

[W2R]

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Originally Posted by shoe I think the one of the saddest things we humans face is the death of expectations. DH and I always dreamed that when we retired we would be able to winter far away from these awful northern winters. Some place warm and beautiful. I realize now that that will never happen. Oh, not that we couldn't manage a week or two here and there, but certainly not a whole winter. Now we will have to do more with less money like most of the people here.

South Louisiana doesn't cost much. It is warm (REALLY warm) down here in the summer. My house is only 1600 square feet, but I think it is beautiful. There are flowers everywhere in my neighborhood, and it was sunshiny and around 80 today. You can have it for a modest price at any closing date you wish in the next year. No beer required!

[Running_Man]

The question of what will happen if the S&P500 hits 150 is not an impossibility. As a matter of fact our government has basically been arguing that without their intervention into AIG , Citicorp BOA and all the other entities it might have happened already.

My take is that if the S&P500 hit 150 it would be similar to what happened in the 1930's when all the banks went bust. The great wealth of the country just evaporated. Now more people own equities than at any other time. it would be likely with S&P500 at 150 that there would be a severe lack of confidence in government at that point and many banks would have been closed or shut down.

If the S&P was at 150 most likely we would be engulfed in deflation and not inflation or else the prices of the stocks would be higher even if it was in inflated dollars. Therefore anyone not in debt and with cash available to purchase goods will see a gigantic increase in their living standard even though the economy at large would be in shambles. Scapegoats would be dragged out by politicians for the cause of the misery and conflicts between countries will surely escalate.

The idea of living under underpasses would not be likely as there are a whole lot more citizens than there are underpasses.

But from the bottom when finally struck, will come a growth that can last. But to survive and thrive one would need a healthy amount of cash that could survive intact from the chaos that would surely be engulfing the country if the S&P500 were to go to 150.

[freebird5825]

There is a life stress scale published at Holmes and Rahe stress scale - Wikipedia, the free encyclopedia

The unthinkable...that can take many forms. I've already collected the top 100 points, so I have a different perspective on what "the unthinkable" is.

On the lighter side, it is an interesting list...in our context...
Retirement earns 45 points.
Change in financial situation is 38 points.
So the combo for recent FIRE folks is 83 points.
then add a change in residence (20 pts) and you have 103 points.

Hmmmmm...so may we conclude that we should not retire, move, and lose our derriere in the market all at once?

[bbbamI]

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Originally Posted by Running_Man The idea of living under underpasses would not be likely as there are a whole lot more citizens than there are underpasses.

I've already have this figured out. I'm going to get two refrigerator boxes, tape them together and ta dah.....a duplex. I'll live in one box and rent out the other.

[REWahoo]

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Originally Posted by bbbamI I've already have this figured out. I'm going to get two refrigerator boxes, tape them together and ta dah.....a duplex. I'll live in one box and rent out the other.

If you start gathering boxes now you might be able to corner the DFW market...

[bbbamI]

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Originally Posted by REWahoo If you start gathering boxes now you might be able to corner the DFW market...

[mf15]

bbbamI: The refrigerator boxes are probably made in China from crappy cardboard, they will dissolve during the first rain.
I also just love the pressed sawdust baby furniture.
Old Mike

[ziggy29]

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Originally Posted by mf15 bbbamI: The refrigerator boxes are probably made in China from crappy cardboard, they will dissolve during the first rain.

What is this thing called "rain" of which you speak?

[bbbamI]

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Originally Posted by ziggy29 What is this thing called "rain" of which you speak?

Yep...never heard tell of it around these parts....

[CuppaJoe]

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Originally Posted by ziggy29 What is this thing called "rain" of which you speak?

It was just here a minute ago. When it comes back, I'll push it your way.

[Ed_The_Gypsy]

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Quote: Originally Posted by Ed_The_Gypsy Dividends will continue. Just like in the Great Depression. You do own stocks that pay dividends, don't you? I keep seeing stuff like this, finally have to butt in refute this (at least to a certain extent). According to Value Line data, the DOW stocks had $12.8 in dividends in 1929. This dropped to $11.1 in 1930, $8.4 in 1931, $4.6 in 1932, and $3.4 in 1933. It wasn't until 1949 when dividends on the dow stocks returned to 1929 levels. In percentage terms, almost three quarters (73.4%) of the dividends were lost by 1933. I own lot's of dividend stocks, but please don't believe that the dividends are sacrosanct. (In comparison, the dow stocks earnings went from $19.9 in 1929 to a low of -0.5 in 1932, while book value didn't have nearly the same drop... $91.3 in 1929, $80.5 in 1933.)

This is interesting!

So, earnings declined steeply, as did the stocks themselves (share prices). The 30 Dow stocks paid out 56% of earnings as dividends in 1929, but went on to pay out dividends without earnings to support them in 1932. And in 1929, dividends were paid at the rate of 14% of book values that year? That seems odd to me. It seems high. What is it today?

Then in the doomsday scenario, stock prices decline to 'nothing', and so do dividends. But book value might go down only 12%.

I wonder how the broader market behaved over the same time? The Dow is just 30 stocks. The broader market was much smaller then, I know.

I do miss the significance of book value to those of us in the deep doo-doo. We can't sell at book value; we can only sell for what the market will pay. This is from the perspective of having to live off one's investments.

[Zoocat]

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Originally Posted by sander06 Lest we forget, there are obviously many people on this planet that would love to raise their living standard to that of a depression-level America. Those people are happy and are living their lives to the fullest. Our only problem as a nation is that we have lived the good life for so long that we will definitely be challenged to accept our new condition gracefully. However, we also happen to be a species that is virtually defined by its ability to adapt. And we will adapt. Bottom line, enjoy the ride. I would suggest that no matter what, we aren't going to starve (although I could be wrong!) and we will always have our families and friends. Cheers... Steve

Traveled much in third world countries, Steve? There aren't many old people in Tanzania. By old, I mean over 50. Also, since we are on this cheerful topic, I suggest all cheerful people read "Collapse" by Jared Diamond. After you read it, you will be ready to study Buddhism. I suggest Pema Chodron.

[citrine]

If the unthinkable happens, I think we will all be fine.
Maybe we will learn as a society that the most important things are not money related......life will go on, the sun will still rise and set.....the world would not end, only a way of life.

[Dawg52]

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Originally Posted by Want2retire No beer required!

That's a show stopper for me.

[copyright1997reloaded]

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Originally Posted by Ed_The_Gypsy This is interesting! I do miss the significance of book value to those of us in the deep doo-doo. We can't sell at book value; we can only sell for what the market will pay. This is from the perspective of having to live off one's investments.

I find myself looking at stocks as cheap by comparing them to book value. I mentioned book value as a reminder (mostly to myself) that when under severe stress, it may not be that good of a measure, and that stocks can easily trade way under book value. As I understand it, in the (last?) great depression, there were quite a few securities whose market caps were less than their holdings in cash/cash equivalents.

[sander06]

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Originally Posted by Oldbabe Traveled much in third world countries, Steve? There aren't many old people in Tanzania. By old, I mean over 50. Also, since we are on this cheerful topic, I suggest all cheerful people read "Collapse" by Jared Diamond. After you read it, you will be ready to study Buddhism. I suggest Pema Chodron.

Point taken.

I was in Tanzania last year to climb Kilimanjaro and noted the very young population. Average life-span roughly 48 years old! Lots of under/not employed men hanging around all day while the women sell tomatoes, etc. along the road. On the other hand, I was amazed at their happy, happy outlook on their lives, as short as it sometimes is!!

Loved the country and the people!!!!!!!!!!!!!!!!!!!

P.S. By the by, I've have, indeed , been to many, many third-world and, sometimes it would seem, fourth-world countries.

[Independent]

Back to the OP:

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Originally Posted by newporttony My apologies if this topic has been covered before. I have been hearing some very dire predictions of where the market might find a bottom and I've been wondering about the real-life implications. Say, as some have predicted, the S&P 500 falls to 150; is the impact primarily to the "investment class" (which I believe is now about 60% of Americans), or is the impact more broadly felt? I believe it would have catastrophic results outside of people's investment portfolis, but maybe I am wrong and life just goes on as normal for most people.

I'd say that the S&P "can't" go to 150 without a severe recession in the real economy. The reason is that earnings and dividends have to fall to get prices that low. (If earnings and dividends stay up while prices fall, yields would be so much better than on anything else that prices would find a floor.)

Of course, this is all hypothetical, since the real economy is already in a severe recession. Shiller had S&P earnings at $26 last December, compared to $85 in '07 (that's a much bigger drop than I expected, I haven't tried to check his numbers). If that number is right, and I guess 7.5 as the practical low bound on P/E ratios, then I get a price of 195, with earnings still dropping.

[simple girl]

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Originally Posted by FIREdreamer The funny thing is this: with all the talks about great-depression lately, I realized that I have been preparing for years for bad economic times. When I was younger I learned from my great depression-era grandparents how to stretch resources and be self-reliant (recycle everything, grow food, make bread, etc...). I bought a plot of raw land with my first pay check on the advice of my grandparents: their thinking was that, with raw land you can farm, you can't go hungry.

This makes make think of a conversation I just had yesterday with a client of mine (I work with senior citizens). She was born in 1923, and was 6 years old when the crash of '29 occurred. She said her father had owned a lumber business, and eventually lost it. He agreed to go live in the Delta (in Mississippi), and they lived and worked on someone else's farm for a year or two. He was paid something crazy like $1 a day, and this was just enough to barely feed their family.

A few years later she said the government passed some kind of legislation that allowed people to borrow money for farming. She said her father was definitely NOT a farmer, but since it was the only way to get money, he took out this loan, bought land, cows, etc., and they made a living off of the land.

Fascinating to hear her story. She says she worries about her children/grandchildren if it turns out that we are in/going into a depression. She doesn't feel our generation is prepared to handle living on so little, sacrificing like they did to get by.

I think it would be a great struggle for many, but, somehow, we would pull through...it is human nature to survive.

[Gone4Good]

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Originally Posted by copyright1997reloaded I own lot's of dividend stocks, but please don't believe that the dividends are sacrosanct.

Agree.

Dividends are paid out of earnings. If you don't believe earnings will hold up I'm not sure why you would be more optimistic about dividends.

[Gone4Good]

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Originally Posted by Independent Shiller had S&P earnings at $26 last December, compared to $85 in '07 (that's a much bigger drop than I expected, I haven't tried to check his numbers).

The $26 in earnings includes all the massive writedowns and impairments that were taken recently. You can only write down an asset from 100% to 20% once, so I don't think the $26 December earnings figure is a good measure of "recurring" earnings. That is why Shiller averages earnings over 10 years. By that calculation earnings currently stand at $57.74, which would put S&P 150 at a 2.6x multiple - the lowest ever recorded by a long shot.