Next American Depression

[Jbird]

It’s been a while since I've visited this board. Busy socking away my money that I unfortunately have to work for.

I was curious if there were any good threads or if anyone else had any suggestions about preparing investments for a possible depression. Is there anything that can be done to prepare a portfolio besides having about 25% in foreign currency? Our economy scares the sh%@ out of me and I'm having a hard time getting excited about saving 30% of my salary only to watch inflation chew it all up. I'm not a Dooms Day type but some level of depression seems inevitable.

Hope to hear some good advice.

 

[brewer12345]

Uh, you worried about a depression or inflation. Pick one.

In inflationary times, commodities, hard assets and the companies that own/produce them reigh supreme.

In the great depression, the highest returns were from 30 year fixed treasury bonds.

But as long as you have an appropriately diversified portfolio and not too much debt, I wouldn't sweat it.

 

[maddythebeagle]

I'm having a hard time getting excited about saving 30% of my salary only to watch inflation chew it all up.

And the contrary for many is working for a salary with increases that dont keep with inflation...

 

[Fred333]

I would have to say in this day and age you have to worry about the now rather then the future. Times are so volatile that looking tens years down the road is not very feasible for a young professional. Things might be different for those about to retire though.

 

[retire@40]

...I was curious if there were any good threads or if anyone else had any suggestions about preparing investments for a possible depression. Is there anything that can be done to prepare a portfolio besides having about 25% in foreign currency?...

What makes you think foreign currency would help? Wasn't the Depression a worldwide depression?

 

[ziggy29]

I was curious if there were any good threads or if anyone else had any suggestions about preparing investments for a possible depression. Is there anything that can be done to prepare a portfolio besides having about 25% in foreign currency? Our economy scares the sh%@ out of me and I'm having a hard time getting excited about saving 30% of my salary only to watch inflation chew it all up. I'm not a Dooms Day type but some level of depression seems inevitable.

Well, I'd only say that prudent, age-appropriate and adequately diversified investments are your best bet for keeping up with (or ahead of) inflation.


I have about 30% of my portfolio in foreign stocks (non-dollar denominated) and about 5% in gold mining stocks. These help hedge against a plummeting dollar. I've also overweighted energy and health care in my domestic portfolio, since it's my opinion that these are likely to be the most inflationary sectors out there for the foreseeable future and thus stand to grow earnings faster as long as that's the case...allowing me to hedge inflation in those critical budgetary areas.

I suspect in the long term, I might do better NOT doing some of these things (especially the gold miners), but I consider some of this at least partial "insurance" against a domestic financial apocalypse. I think a fair amount of the economy is being propped up by smoke and mirrors -- not as much as the doomsayers but I think it is just as surely as the official inflation numbers are cooked on the low side.

Think about the bad things that can happen, and ask yourself how you could profit from them. And maybe, just maybe, consider putting a chunk (not a majority, but a modest chunk) of your portfolio in those areas.

 

[FIREd]

I would be careful about being completely bearish on the US dollar. Sure there are some headwinds that will prevent the dollar from rising in the short term. But companies in other countries are not happy about their currency being so strong relative to the dollar (because it makes their products more expensive and therefore less competitive) and they are pressuring their central banks to keep the strength of their currency Vs. the dollar in check (I guess we are playing a similar game with China). Also a weak dollar actually helps big multinational companies based in the US, so it's not all bad for the economy. But you have to remember that in less than 7 years, the euro went from $0.8 to almost $1.4. So the value of the dollar could eventually go back up quite rapidly (remember it's another one of those cyclical assets) and I think it is a good idea to remain diversified and not bet the house on currency markets as they are notoriously unpredictable. Closets are full of the skeletons of smart people who got burn trading on currency valuation.

Talking about betting the house, if you think another great depression is coming back, then I would suggest you finish paying your mortgage ASAP. During the great depression, many people lost their jobs and in turn lost their homes and ended up being homeless. To me, it would be my number one priority if I thought a depression was coming. I would also pile up enough cash to pay for several years worth of expenses so that you can weather the storm without starving (as brewer said depression and inflation usually don't go together since you can't have inflation when demand is low as it would be during a depression, so I think keeping cash on hands makes sense in that situation).

 

[Grizz]

Go get some gold or quality producing gold mining stocks. Historically they've been a good defense against inflation. Also consider trading in some of your money for Canadian dollars. They are at about 98.5 cents U.S. right now, up from 61 cents in 2002, and the trend doesn't seem to be slowing. I was surprised to learn that there have been lots of places in the States (mostly northern) accepting the two currencies at par since about the 96 cents level. The reasoning seemed to be that the inconvenience of exchanging the currencies just wasn't worth the hassle to retailers. It may be worth it to you since that could mean instant profit to you, depending on where you are and where you shop.

If there is a depression, like an earlier poster said, easier said than done, but find a way to get out of debt, quick.

 

[Zipper]

The Zipper's mom gets a U.S. Railroad retirement cheque each month. (~$1000).

She was getting over $1.60 a few years ago.

When I take her to the bank for her October cheque she will probably get $1.00. (par)

On the other hand when Mrs. Zipper and I head to FL for a few weeks in FE were laughing.

 

[RunningBum]

Inflation is eating up your savings?? Really?? What are you invested in now?

 

[jnojr]

Inflation is eating up your savings?? Really?? What are you invested in now?

1) Savings =! investments

2) Inflation destroys the purchasing power of your dollars... you have the same number of dollars, but they buy less.

 

[FinanceGeek]

I completely agree with you that inflation is under-reported. There are a variety of political and fiscal reasons why this is necessary, having to do with keeping COLAs low for social security recipients and keeping TIPS payouts low.

There are no checks and balances in a system where the entity paying you an inflation adjusted amount of money gets to decide what the inflation rate is.

 

[chinaco]

I am fairly sure that the Great Depression was a time when the US suffered from deflation.

Gold is often considered as a hedge for inflation today... But I think it is really touted as a hedge against deflation. Having some portion of the portfolio tied to the shiny stuff is a reasonable hedge.

Personally, I am not too worried about hyperinflation or Depression style deflation. More worried about slightly high inflation (over longer periods) or possibly stagflation.

 

[dumpster56]

I just don't see much inflation. Food some, energy YES but when it gets so high we are not gonna use so much. Housing sinking fast.

 

[unclemick]

Inflation or deflation? When I visit with fellow old pharts at the doughnut shop(haven't picked "The One yet") - the quality of both the doughnuts and waitresses seems to help determine the outcome of the world's future.

Nothing like a sugar high, cute friendly waitress and great black coffee to save the world - especially come winter.



P.S. Take take it from an old phart who fought both inflation and the depression that never came in the 70's: use your guns at the gravel pit on weekends - it's fun and relieves stress, make sure your gold and other mining stocks pay at least 4% dividends, and skip the 7 years of freeze dryed food - technology has marched on and it takes up space. Oh and don't listen to Brit engineers no matter what they tell you about Swiss Francs and offshore investments. Remember the Beatles came back home - I think.

Katrina took the last of the guns and my buddy Jerry out in Colorado says we're going to our grave with our patented gold mine - the suburbs are growing the other direction and the last of the Oregon timberland/Spotted Owls/turned vacation plots sold in 2005. Slice and Dice is like malaria - flares up from time to time - but massive doses of lifecycle fund keep it semi controled.

And Dat was my second cup of coffee P.S.!

heh heh heh

 

[W2R]

Nothing like a sugar high, cute friendly waitress and great black coffee to save the world - especially come winter.

Well, unless it's beignets with lots of powdered sugar and some nice, strong cafe au lait at Morning Call... if Frank and I end up there tomorrow morning, I'll have a little extra for you. (Or maybe for me! )

 

[MikeD]

That Reminds Me

It's tea time!

Mike D.

(I drink coffee in the morning.)

 

[Goonie]

Well, unless it's beignets with lots of powdered sugar and some nice, strong cafe au lait at Morning Call... if Frank and I end up there tomorrow morning, I'll have a little extra for you. (Or maybe for me! )

Have a little extra for me too! That was always my favorite place to go when I would come down to visit my DS. I'd catch the ferry across and meander down there for a good caffiene/sugar buzz......and sit an 'people watch'.

 

[teejayevans]

Go get some gold or quality producing gold mining stocks. Historically they've been a good defense against inflation.

Gold was $895 in 1980.
Gold doesn't pay dividends.
Gold is the worst investment I can think of.

If you think a depression is coming, best thing you could do is get a
government job. Excellent benefits and low risk of losing your job.
TJ

 

[unclemick]

One more thing - do careful shopping and buy some rental property.

One of three things will happen

1. You love being a landlord - taking to it like a duck to water. Thus in a sense you never retire.

2. You hate being a landlord - I learned that stocks don't call in the dead of night about A/C or the furnace. Sold the duplex early in ER.

3. You become aware they have you locked in the rubber room in a straight jacket - and ER is taken care of.

RE is mostly touted as an inflation fighter - don't know how it fares in a depression.

heh heh heh

 

[ziggy29]

Gold was $895 in 1980.
Gold doesn't pay dividends.
Gold is the worst investment I can think of.

Gold isn't an investment.

Gold is a hedge against things going to hell in a handbasket in terms of inflation and the dollar. In a traditional economic depression it would be a horrible choice. In a typical economic depression, cash is king. The question, though, is: if a depression is coming and is triggered or exacerbated by staginflation and/or a tumbling dollar, then what?

 

[dex]

Maybe protectionism? Whatever it is, it will have a different spin than what happened in the past.

 

[Webzter]

Well, it's all a gamble. The great depression was world-wide, but who's to say that the US alone couldn't have a major setback. And, with the number of multi-national corporations based here, would that affect investments?

Could we have deflation from falling housing prices and then inflation from a falling dollar?

Are we so dependant on imported goods now that we can't even move to a protectionist position now?

Is China able to hold us hostage with the $1.5 trillion in dollar reserves? If they decided that dollars were a bad hedge, or if they wanted to cause some sort of backlash, would they dump the dollars on the market or slowly switch to something like euros?

With the Saudi's sitting on $800 billion in dollar reserves, how at risk are we for oil being repriced in euros across the board by OPEC?

Let's say everyone dumps currency, are we at risk for hyperinflation? If we enter a period of hyperinflation, is gold still an effective hedge?

Is it possible that the future could be much worse than the future? Is it conceivable that the US would switch to barter or even the euro as a means of commerce?

Personally, I'm not smart enough to know if I'm even thinking of the right things much less able to know what the outcome would be. So, I take the last depression into account, understand that we came out of it, and just stay the course I'm on.

 

[chinaco]

Gold was $895 in 1980.
Gold doesn't pay dividends.
Gold is the worst investment I can think of.

Not a gold bug myself. Gold is not a great investment... Some speculate on it and the price moves.

It can be a hedge when the financial stability of a country (or world economy) is a concern.

Some would say that a small portion of the portfolio in precious metal is not a bad way to go for diversification (low correlation). One can rebalance to keep it at the appropriate level and take some profit if it goes up.


I am thinking about it seriously. But I would not enter the market now. I am not concerned about pending doom. However, once that sector cools way down I may do so... I am a contrarian (may take 5-10 years). I will probably be using an ETF or VG fund and hold perhaps <= 5%.