How to Position Investments for the Coming Depression?

[FinallyRetired]

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Originally Posted by Midpack My Dad (no not OP) lived through the Depression (though his Dad was a dentist who did just fine) and he tells me about people jumping out of windows every time the market and/or economy even thinks about going down. He's never owned a stock in his life AFAIK and never taught me anything about investing (fortunately) growing up. He has full pension with COLA and full healthcare (so he's never been confronted with today's world). I've profited immensely by ignoring his unsoliticed 'advice' every time, and will this time too... However my sister has asked my Dad for investing advice all her life. And sadly, well into her 50's, by her own admission she will have to work until she is 70 and live modestly for all her years. Now she asks both of us but it's too late. I try to 'teach her to fish' (simple like Couch Potato or Coffeehouse) and my Dad still gives her advice, and I suspect she's still going with the latter. She's probably 100% cash about now...

I'm caring for depression-era parents and in-laws, and they definitely have a different mindset. A penny saved is a penny earned type of thing, not a bad idea. No debt, no frills, keep it simple. Sort of a FIRE mentality learned by hard knocks.

I don't think we will have a repeat in my lifetime but, if we do, I worry about the inability of modern society to live off the land. Back then, as my parents told me, they always had the small farm, or just the backyard plot, and could exchange food with neighbors to eat. As long as they had that and a roof over their heads, they could ride out some pretty bad years. But what if we had a repeat today? What would the condo society do? Eat stock certificates or commercial paper, I guess.

[Slarty]

SoonToRetire and Midpack, thanks for those stories. I think we can learn a lot from people who have lived through it. My grandparents lived through the 1930's and none of them ever owned any stock. They had a small plot of land and I was always amazed at how they could feed the whole extended family from it. They heard stories of people jumping out of windows, but they said it wasn't as bad as the fear that people have looking back on it. They said there was always enough to eat and people still had plenty of good times and most of that was built around social events with friends and family so it didn't cost much. They were amazingly frugal people, but it wasn't like they were of the apocalyptic mentality that pops up everytime a depression scenario like this is explored. I think the biggest pain would be just a readjustment of expectations. I guess the best thing I learned from them is to not over react to such scenarios, but to consider all possibilities in the planning processes with provocative questions like the one I opened this thread with. It's only a catastrophe if you choose to react that way to it. I saw the comment about beer stocks doing well. It would be interested to see a plot of beer and alcohol stock through the 1930's.

[danm]

The OP has a valid point. I brought it up two years ago here, and was ridiculed as a tin hat foil wearer. And I'm not even predicting a depression, simply mild deflation. Now look where we are.

Housing is deflating to many trillions. Derivatives (CDO's and such) are too, Goldman estimates to 1T (the estimate progressively gets higher over time). Auto's are in depression, airlines have been so for a long time. The only thing inflating is energy and commodities, and that's probably due to speculation (since commodities are the new undiscovered asset class) Wall Mart et. al. have dropped prices hugely to retain market share.

Mild deflation? You bet, and notice what's happened to long term Treasuries? They've been doing very well. All it will take to cinch it is consumers continuing to retrench. Given the state of their retirement funds, and that they've been spending more than income by 1-2% each year for 25 years (fueled by credit growth, internet bubble, and housing in that order), I don't think it's unreasonable to expect this to continue.

I have private paid research which investigates what consumers have left to tap. The only significant funds are pensions, which are generally hard to get ahold of and sitting in conservative hands.

Keep an open mind folks ...

[Notmuchlonger]

Booze probably did pretty good 1933 and on. Bootleggers probably did pretty well the 13 years before that

[ziggy29]

The "coming depression?" Good grief. Have some Kool-Aid.

Yes, it could happen, but it's happened once in the last 20 times it was forecast by foil-hat doom and gloomers, I'd guess. I don't like those odds. Still, you never know.

But to expand, diversify your investments, keep your skills sharp and employable if you still need to work, and don't go on a debt orgy.

[brewer12345]

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Originally Posted by danm I have private paid research which investigates ...

How much do the Gnomes of Zurich charge to do a custom economic study? Did you have to pay in virgin's blood?

[al_bundy]

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Originally Posted by danm The OP has a valid point. I brought it up two years ago here, and was ridiculed as a tin hat foil wearer. And I'm not even predicting a depression, simply mild deflation. Now look where we are. Housing is deflating to many trillions. Derivatives (CDO's and such) are too, Goldman estimates to 1T (the estimate progressively gets higher over time). Auto's are in depression, airlines have been so for a long time. The only thing inflating is energy and commodities, and that's probably due to speculation (since commodities are the new undiscovered asset class) Wall Mart et. al. have dropped prices hugely to retain market share. Mild deflation? You bet, and notice what's happened to long term Treasuries? They've been doing very well. All it will take to cinch it is consumers continuing to retrench. Given the state of their retirement funds, and that they've been spending more than income by 1-2% each year for 25 years (fueled by credit growth, internet bubble, and housing in that order), I don't think it's unreasonable to expect this to continue. I have private paid research which investigates what consumers have left to tap. The only significant funds are pensions, which are generally hard to get ahold of and sitting in conservative hands. Keep an open mind folks ...

The Great Depression only turned into a depression once the bank runs started in 1931 and wiped out people's savings. Unless the FDIC goes broke i don't see this happening.

historically we've had worse depressions than the Great Depression. the mid 1830's and the aftermath of the panic of 1873 are two such events and things turned out OK. only reason they call it The Great Depression is the media coverage

[al_bundy]

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Originally Posted by Slarty OK, here is a summary of what I've heard so far: - Make yourself as employable as possible (i.e. diverse experience and good networking). - Get into some long federal bonds but don't get too unbalanced or you'll be forced to wear a tin foil hat. - Remove all debt (Would you go so far as to sell all real estate and rent for a few years to see if the scenarios being bantered about play out?) Renting would certainly remove all debt for me, but is this a bit extreme? - Rent a house with a little land where you can raise a garden, if you enjoy that, so you can be productive by reducing your food costs if you happen to end up being unemployed. You can also dig a hole to bury your tin foil there if need be. But, I have a hard time believing there aren't some additional approaches to add to this list. I'm sure some people must have had successful growth in the 1930's as well as the 1970's in case a stagflation scenario were to play out. Maybe certain types of businesses do well in deflation and owning one is a good option? The theme I'm getting here is that flexibility and having multiple options would be a prudent way to handle the uncertainty of it. So, what other options might be less obvious?

who is going to give you a mortgage in a deflationary environment when the asset that secures the loan is predicted to drop in value?

[Delawaredave5]

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Originally Posted by Slarty I don't believe there would be anywhere to "hide" due to the globally connected economy

If the US went into "Great Depression II", I am not convinced global markets would be overly-connected.

You gotta stay in equities- and I think having your equities roughly proportional to global market capitalization (50% US, 50 global, etc) provides a lot of valuable diversification.

Yes the collapse of the "US consumption machine" would take a hit on foreign company earnings. But the dollar would also tank -- so when the reduced earnings come back to you in dollars -- you're going to have some stability of returns and downside buffers.

[danm]

It's a well known economist, and his advice earned me 75% last year. I would have had 600% if I had been more aggressive.

Edit:
Are there posting guidelines on this board? This thread, and some others I've seen, fall into abusive ridicule. It seems to come from a few individuals, on most other boards it wouldn't be tolerated.

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Originally Posted by brewer12345 How much do the Gnomes of Zurich charge to do a custom economic study? Did you have to pay in virgin's blood?

[danm]

Very true, it was really a psychological event. My mom tells the story of having to eat a squirrel. Everybody came out fine and did very well afterwards, but it was scarring.

Deflation comes in many flavors. Pre GD, mild deflationary periods were common. They were the mild deflation of excess supply, not the severe deflation of deficient demand (=great depression).

Interestingly the GDP continues to grow during mild deflations. They're not all bad, if you're even somewhat prepared.

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Originally Posted by al_bundy The Great Depression only turned into a depression once the bank runs started in 1931 and wiped out people's savings. Unless the FDIC goes broke i don't see this happening. historically we've had worse depressions than the Great Depression. the mid 1830's and the aftermath of the panic of 1873 are two such events and things turned out OK. only reason they call it The Great Depression is the media coverage

[packrat44]

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Originally Posted by Zathras Beer stocks tend to do well in hard economic times

I am using commodities for my hedge - 30 year supply of bourbon and rum.

[HFWR]

Stay diversified (ho hum) across asset classes, have a j*b or a fallback, go into cheap bastardhood...

I think a severe depression, however unlikely, would be different in that much of the US was still rural in the 30s. Most folks in urban/suburban settings would have a harder time going self-sufficient.

Plus, I don't think many people these days know how to live that way. Used to every light in the house being on, used to the water running while they brush their teeth, used to idling in the car (while parked smack in the middle of the walkway) while their SO runs in for a couple of items...

But I do have some generic foil, just in case...

[growing_older]

I've grown a big garden and kept my neighbors in vegetables all summer, lived rough on the land while camping and even done some "survival" stuff out on the woods for a week with nothing but a knife. But I have no where near the farming and subsistence living skills that used to be commonplace. I would venture that the vast majority of Americans have no better skills than I and many even less. In rural areas that may still be a valid option for folks if the monetary system tanks in some way, but for most of the urban population there's no way that's going to work. Likewise dispersal to rural areas (a former nuclear holocaust post-survival staple for planners) is unlikely to fare any better. I don't see any of these extreme scenarios coming to pass, but if they did, people's responses and survival strategies would likely be different from anything we've seen before. Most of the agrarian underpinnings are too far gone to be useful to most of the people anymore.

[Notmuchlonger]

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Originally Posted by packrat44 I am using commodities for my hedge - 30 year supply of bourbon and rum.

No tequila that would be a no go for me...

[packrat44]

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Originally Posted by Notmuchlonger No tequila that would be a no go for me...

Have only a 3 year stock of tequila. Hoping any depression is short.

[Midpack]

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Originally Posted by danm Keep an open mind folks ...

Despite what you see, you might be underestimating the restraint in responses...

[danm]

I guess so. The bear baiting always surprises me though, especially the total unwillingness to even listen to contrary ideas. Maybe because folks are frightened of anything that threatens their early retiree livelihood (investment income).

I know a close friend of Bernstein. Retired at 43, did quite well riding the stock bubble, by listening to Bill before he was famous (Bernstein had some internet following back then). But he doesn't follow it like a religion. In 2000 he took everything out and put it into one asset class. I suppose he rediversified after the carnage was over.

He taught me that there's degrees of market timing, and catching the big turning points can be wise.

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Originally Posted by Midpack Despite what you see, you might be underestimating the restraint in responses...

[REWahoo]

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Originally Posted by danm I guess so. The bear baiting always surprises me though, especially the total unwillingness to even listen to contrary ideas. Maybe because folks are frightened of anything that threatens their early retiree livelihood (investment income).

Seems to me that fearing anything that threatens your livelihood is a perfectly normal and healthy reaction.

Perhaps folks react the way they do because they have seen and/or experienced the highly unsatisfactory results of listening to those who believe in their ability to successfully and consistently time the market. Call it "the total unwillingness to even listen to contrary ideas" if you like. I prefer to think of it more along the lines of sound judgment based on 60+ years of personal experience.

The bottom line is whatever investment strategy works for you is the best way to go. Just don't be surprised if everyone doesn't buy into your investment methodology - just as you don't buy into theirs.

[brewer12345]

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Originally Posted by danm I guess so. The bear baiting always surprises me though, especially the total unwillingness to even listen to contrary ideas. Maybe because folks are frightened of anything that threatens their early retiree livelihood (investment income).

I'm not retired, so I don't know what to tell you on that score.

My skepticism stems from the knowledge that accurate market timing over any length of time is prety much impossible. So the sensible choice or a retiree with a long time horizon is to remain diversified and ignore people screaming whatever it is they are screaming about the markets/economy. Most people are more likely to do a lot more damage to their portfolio by constant fiddling rather than making the right timing moves. Since there is a large industry that lives off people who react to the screaming, I pre-emptively dump on the screamers.

You will note that I generally suggest (when I make suggestions, which is increasingly rare) that people stay diversified and have a slug ofeverything, including commodities (which do well in inflationary environments) and high grade/sovereign bonds (which do well in deflationary times). To think you can accurate forecast and time what will happen is foolish, at best.