A couple of very bearish investment books showed up in my mailbox last month, just in time for me to finish reading them before 2-27's big market plunge. Though I was happy to receive them (courtesy of the publishers, no less), my first thought was that their appearance alone might be a contrary indicator of sorts. After all, the publishing industry issued a flood of bearish investment books in the late 1970's and early 80's - just as the greatest bull market ever prepared for liftoff. Readers may remember Ravi Batra's late 80's warning, The Great Depression of 1990. In 1995 came Robert Prechter's At the Crest of the Tidal Wave, which I recall being heavily advertised on CNBC. Batra was back in 1999 with The Crash of the Millenium, and Prechter in 2003 with Conquer the Crash. All of the books mentioned share two things in common. They predicted 1) the onset of a second great depression, which 2) never came. At least not yet.
Perhaps it is because the first great depression had such a profound impact on my father - in many ways he lived his life in its shadow - that I have always believed (unlike most people) that a second great depression would inevitably visit us once again someday in the future. I own and have read all the books mentioned above and more. Nearly all make the excellent, logical case for economic collapse based on the startling notion that the country cannot continue going deeper into debt forever; that eventually, a day of reckoning comes. This argument remains just as solid, just valid today as back then. The only problem is that we've heard it so many times that we no longer believe it, since the ultimate day of reckoning has been postponed. Twenty-seven years of what George Bush Sr. himself called "voodoo economics" in 1980 can have that effect. Eight years later, vice presidential candidate Lloyd Bentsen reminded Senior's running mate, Dan Quayle -- to laughter and applause -- that, "...if you let me write $200 billion worth of hot checks every year, I could give you an illusion of prosperity, too!" In those days, politicians at least paid lip service to the idea of fiscal responsibility. Twenty years later, in true 1984-fashion, Junior's VP boldly proclaimed "Weakness is Strength!" in admonishing the justifiably concerned Treasury Secretary Paul O'Neil that Reagan - the original voodoo economist himself - proved to the world that "deficits don't matter."
Well, of course they don't. That is, until suddenly they do.
Bear #1 - Michael Panzner, Financial Armageddon
Michael Panzner's Financial Armageddon is in many ways an updated version of the 1970's debt warning books, since the original debt threats were never resolved, and they never went away. They just got worse. And with the passing of time, the existing threats were joined by altogether new ones, which Panzner elaborates on. His book's subtitle is Protecting your future from four impending catastrophes, which he sees as: 1) Debt, (excessive consumer, corporate and government debt) 2) The retirement system (excessive corporate and government retirement promises that cannot be paid, and a huge baby-boom population that is woefully unprepared to support themselves in their sunset years) 3) Government guarantees (real and implied that cannot be delivered in the event they are needed - think FDIC, Fannie Mae and Freddie Mac, as well as PBGC - the Pension Benefit Guaranty Corporation) and 4) Derivatives (think Long Term Capital Management, and its 1998 crisis that nearly brought down the global financial house).
Anyone who is familiar with websites such as this one are already aware of these threats (and more), but the advantage of this book is that Panzner has managed to consolidate, organize, explain and draw the relevant connections between them clearly and concisely in a single work. This book is extremely well organized and easy to read - I devoured it in two days - leading to many "ah-ha!" and many more "uh-oh" moments. It is an excellent introduction for anyone who gets the majority of their news from the established media. For such readers, this book is certain to be an eye opener - and after last week - not a moment too soon.
As Panzner points out, the risks are intertwined, making a systemic financial breakdown nearly inevitable. The US economy hasn't seen a serious downturn since the early 1990's. When the next recession does begin (it may have already begun), we are likely to find out first-hand that the leverage built into our system through debt and derivatives cuts both ways. Debt was instrumental in building the illusion of wealth quickly, and for many. But it will serve its purpose equally well in destroying it, too. Anyone holding tech stocks on margin back in Y2000 need not be reminded of the dangers of leverage. Our over-leveraged economy ensures that once a downturn does hit, its impacts will be magnified tremendously, perhaps beyond the system's ability to withstand.
In Part II of the book, Panzner goes on to explain how the economic malaise brought about by even a mild downturn could snowball into a systemic crisis, featuring first deflation and ultimately hyperinflation. In Part III, he goes over the likely fallout - economic, financial, social and geopolitical. It is not a pretty picture. However, this is precisely why the book is so valuable. So many of us sit at our computers, reading about the impending crisis, theorizing about an economic collapse and how to "profit" from it, as though we will be the only ones to escape unscathed. Panzner takes the abstract concept of the economic decline we all know is coming and depicts what it will be like in graphic detail. The value in such rarely seen description, in my opinion, is that it causes readers to think more deeply about the issues at the root of the coming depression. Everyone will be affected, and those who are least prepared will be impacted the most. They won't know what hit them. From page 121:
Unable to cope with the harsh new economic environment, growing numbers of Americans will end up on the streets - confused, homeless and hungry. With that, begging will increase to previously unseen levels. So too will a range of other social ills, especially when those who have lost hope seek solace in drugs or alcohol...Even once-model citizens will have little choice but to break the law to take care of themselves and their families.
Part IV of the book deals with preparation and defenses for the financial ultimate disaster. This section goes beyond the standard financial advice you normally hear to focus on deeper social and lifestyle issues as well. In addition to managing your investments, he emphasizes the importance of staying aware, alert, and focused on the changing circumstances so that you can act accordingly as the situation shifts. The title of the book "Financial Armageddon" is not a metaphor. Panzner is talking about the destruction of the financial system as we know it, first by deflation, then by hyperinflation. In such a breakdown, your critical thinking skills and ability to react quickly and independently to a world in which nothing is as it seems will be among your best assets. As such, Panzner recommends a number of resources and websites (including bullnotbull.com) to help guide you through the transition. Panzner also runs his own blog/website at FinancialArmageddon.com
Overall, this is an informative work with much food for thought and excellent advice in preparing for the coming financial storm. It provides concrete and uncommon ideas on how to protect yourself and your investments. As one reviewer on Amazon put it, "If even a fraction of Panzner's predictions come to pass, investors will be grateful for the recommendations contained in this book."
For many, this will be a disturbing book. But if it is disturbing enough to awaken Americans from their current slumber, that is precisely its value.
Later this week - Bear #2 - Crash Proof, by Peter Schiff. Sign up to my low volume announcement list to be notified.
