Contents Executive Summary Acknowledgments Preface to the Second Edition of Aftershock Introduction: Your Guide to the Second Edition of Aftershock Part I: First the Bubblequake, Next the Aftershock Chapter 1: America’s Bubble Economy Because Our First Two Books Were Right, Now You Can Be Right, Too Didn’t Other Bearish Analysts Get It Right, Too? How the “Experts” Got It Wrong Predictions from Ben Bernanke and Henry Paulson—We Trust These Officials with Our Economy Where We Have Been Wrong Leave ’em Laughing Chapter 2: Phase I: The Bubblequake Bubbles “R” Us: A Quick Review of America’s Bubble Economy From Boom to Bust: The Virtuous Upward Spiral Becomes a Vicious Downward Spiral Pop Goes the Housing Bubble Pop Goes the Stock Market Bubble Pop Goes the Private Debt Bubble Pop Goes the Discretionary Spending Bubble The Biggest, Baddest, Bad Loan of Them All Chapter 3: The Medicine Becomes Poison: Dangerous Inflation Ahead What Is Inflation? Printing Money Is Easy Short-Term Medicine for the Economy That Becomes Long-Term Poison in the Form of Inflation Why Don’t More People See the Threat of Inflation? Because Inflation Is as Hard to See as the Housing Bubble Before It Popped Many Experts Don’t See That We Are in a Bubble Economy So They Aren’t Worried About Inflation The Arguments against Future Inflation Don’t Hold Up How the Fed May Delay the Onset of Inflation Exactly When Will Inflation Begin? The Deeper Causes of Inflation Chapter 4: Phase II: The Aftershock The Dollar Bubble: Hard to See without Bubble-Vision Glasses Think Like a Foreign Investor: How Much of This Will They Take? The Government Debt Bubble Pops Aftershock: All the Bubbles Fully Collapse Where Did All This Begin? When Could It Have Been Stopped? The Six Psychological Stages of Denial Is There Any Scenario for a Soft Landing? Chapter 5: Global Mega-Money Meltdown The United States Will Suffer the Least Think of the World’s Bubble Economy in Two Categories: Manufacturing and Resource Extraction How the Bursting Bubbles Will Impact the World A Closer Look at China’s Current Bubble Economy: This Dragon Is More Smoke Than Fire If the World’s Bubble Economy Is Hit Harder Than the U.S Bubble Economy, Won’t That Be Good for the Dollar? If the Rest of the World Is Collapsing, Won’t That Be Good for Gold? International Investment Recommendations Part II: Aftershock Dangers and Profits Chapter 6: Covering Your Assets This Is Not a Down Market Cycle; It’s a Big Multibubble Pop, Pop, Pop Long Term versus Short Term Rule Number One: Get Ready to Exit Stocks Rule Number Two: Stay Away from Real Estate Until After the Dollar Bubble Pops Rule Number Three: Stay Away from Long-Term Bonds What about Municipal Bonds? Where’s the Best Place to Stash Cash? How Long Do I Have to Follow These Three Rules? Letting Go Is Hard to Do What to Do If You Sort of Believe Us, but Not 100 Percent What Else Can I Do to Protect Myself? What about Retirement? What about Bankruptcy? Remember, Your Net Worth Is Not Your Self Worth Chapter 7: Cashing in on Chaos Plenty of Profit Opportunities, but They Will Feel Quite Uncomfortable, Even Scary at Times Best Short-Term and Long-Term Aftershock Investments In the Short Term, the Key Is Protection, Protection, Protection! In the Long Term, the Key Is to Take Advantage of a Falling Stock Market and a Falling Dollar Be Careful with Commodities (Other than Precious Metals, Such as Gold) Gold Is a Great Aftershock Investment Because It Takes Advantage of a Falling Dollar, a Falling Stock Market, and a Falling World Economy What if the Environment for Gold Turned Positive? Will Gold Be Confiscated or Become Illegal, as It Was During the Great Depression? Leveraging Gold The Future Gold Bubble: The Biggest, Baddest Bubble of All How Will Other Investment Vehicles, Such as Life Insurance, Annuities, and Collectibles Perform? Putting It All Together: Aftershock in Action Chapter 8: Aftershock Jobs and Businesses This Ain’t Your Daddy’s Economic Slowdown The Capital Goods Sector (Autos, Construction, Major Industrial Equipment, and So On) The Discretionary Spending Sector (Travel, Restaurants, Entertainment, etc.) Some Limited Good News: The Necessities Sector (Health Care, Education, Food, Basic Clothing, Transportation, Government Services, and Utilities) Big Opportunities after the Bubbles Pop: Cashing in on Distressed Assets Chapter 9: Understanding Our Problems Is the First Step Toward Solving Our Problems If You Don’t Understand Why an Economy Grows, You Can’t Understand Why It Doesn’t Grow You Need to See the Big Picture Before You Start to Focus The Key Breakthroughs in the History of Economic Thought Economics Needs a Breakthrough Idea, like Continental Drift So Why Aren’t We Getting an Alfred Wegener or a Breakthrough Idea Like Continental Drift? Economists Have Become Academia’s Version of Financial Cheerleaders The Combination of the Demands to Get Tenure and the Rewards of the Good Life after Tenure Has Been a One-Two Punch to Creative Economic Thought Where to Now? Answer: Economics Needs to Move from Being a Set of Competing Philosophies to Being a Science Four Key Elements for Making Economics More of a Science Where Do We Stand Today in Making This Transition? The Economics Profession Does Not Want to Make the Transition The Solution to the Lack of Interest in Making Such an Important Change in Economics Chapter 10: Our Predictions Have Been Accurate, So Why Do Some People Still Dislike Them? It’s Not a Cheerleading Book It’s Not a Complex Book (Although It Is Based on Complex Analysis) It’s Not a Crazy Book It’s Not an Academic Book It’s Not Suggesting Armageddon It’s Not a Status Quo Book Us versus the Comforters: How Aftershock Stacks Up Against Other Bearish Books Epilogue Appendix: Are the Stock and Gold Markets Manipulated? Bibliography Index Copyright © 2011 by David Wiedemer, Robert A Wiedemer, and Cindy Spitzer All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate percopy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Wiedemer, David (John David) Aftershock : protect yourself and profit in the next global financial meltdown / David Wiedemer, Robert A Wiedemer, Cindy Spitzer — 2nd ed p cm Includes bibliographical references and index ISBN 978-0-470-91814-2 (cloth); 978-1-118-12750-6 (ebk); 978-1-118-12751-3 (ebk); 978-1118-12752-0 (ebk) Finance, Personal Investments Financial crises I Wiedemer, Robert A II Spitzer, Cindy S III Title HG179.W5264 2011 332.024—dc22 2011016577 Executive Summary What Is a Bubble? An asset value that temporarily booms and eventually busts, based on changing investor psychology, rather than on underlying fundamental economic drivers that are sustainable over time What Is a Bubble Economy? An economy that grows in a virtuous upward spiral of multiple rising bubbles (real estate, stocks, private debt, dollar, and government debt) that interact to drive each other up, and that will inevitably fall in a vicious downward spiral as each falling bubble puts downward pressure on the rest, eventually pulling the whole economy down What Is the Bubblequake? Phase I of the popping of the bubble economy, including the fall of the real estate bubble, private debt bubble, stock market bubble, and discretionary spending bubble What Is the Aftershock? Phase II of the popping of the bubble economy Just when many people think the worst is over, then comes the Aftershock, when the dollar bubble and the government debt bubble will burst foreign investors government debt bubble margin valuation Roubini on as safe haven and U.S government debt and yen Dollar bubble collapse Dollar flow Dollar purchases Dollar support Dollar-denominated investments Dollars, supply and demand of Domestic manufacturing dot.com bubble Dow levels Dynamic equilibrium vs static equilibrium Early inflation Econometric approach vs empirical approach Econometrics Economic bubbles Economic evolution Economic gravity Economic growth Economic problem understanding big picture breakthrough ideas economic creative thought and self-interest economic growth economists as financial cheerleaders transition Economic problems, improved theory of Economic rebound Economic research Economic slowdown after Aftershock Economic stimulus Economic thought, history of about capital, payment for capital, role of economic evolution free markets macroeconomics mathematic models momentary and fiscal policy property rights supply and demand Economics as science analytical and prediction methodology elements of information dynamics need for vs philosophy property rights theory technological changes Economists environment of failure of profession by as financial cheerleaders funding cuts for new entrants in societal value of status quo thinking Education jobs and business Employment Energy sales Epidemics Equilibrium modelling Estate planning and gifts Ethanol Europe European Central Bank (ECB) European debt crisis Euros Evolving economy Excess reserves Exchange traded funds (ETFs) Exit plans Exporting nations Failed tax system Falling bubbles Falling equity value Famines Fannie Mae and Freddie Mac Farmer, Doyne Farms and farmland Farrell, Paul Federal deficits Federal Reserve See also money printing bond purchases as buyer of last resort dollar support by inflation onset delay liquidity injection money supply Feynman, Richard Financial institutions, regulation of Financial protection, additional See also asset coverage/protection Financial regulation Fiscal policy Fixed-rate assets Fixed-rate debt Fixed-rate loans Flash Crash Flight to safety Food sales Foreign exchange risk Foreign goods Foreign governments’ debt size Foreign investors Foreign stocks Fortune’s Investors Guide 2008 401k’s and IRAs Frank, Barney Free markets Friedman, Milton Frydman, Roman Garzarelli, Elaine GDP growth General Electric (GE) General Motors (GM) Germany Gertler, Mark Global bubble economy Global financial stabilization Global mega-money meltdown Gold about advantages of black market as class by itself confiscation of and euros as gift gold depositories gold mining stocks government actions in investment demand legality of peak levels physical gold positive environment purchasing paths Roubini on Schiff on short-term outlook for as store of monetary value volatility of Gold bubble Gold bugs Gold depositories Gold ETFs Gold mining stocks Gold prices Gold sales Goldman Sachs Government borrowing Government debt Government debt bubble Government deficits Government intervention Government jobs and businesses Government spending Grain Great Depression Green economy Greenspan, Alan Health care Heilbroner, Robert High quality gems High-end manufacturers Homeowner equity The Homeowner’s Guide to Foreclosure: How to Protect Your Home and Your Rights, Second Edition (James Wiedemer) Household debt Houses, already owned Housing bubble Housing prices in China collapse of decline of fundamental problem with future of impact of rising predictions of Humor Hyper-drive boom Hyperinflation Illegal activities Import restrictions Imported goods prices Income Income inequality India Inflation cause of in China concerns about confiscation by damage from deeper causes of vs deflation described future impact of rising impact on size of government debt increases in and interest rates measurement of and money printing and money supply problems with vs real price increase rising threat of timing of Inflation prediction Information dynamics Innovations in mortgage industry Integrated comprehensive economic theory Interest payments Interest rates on government bond debt impact of rising and inflation lag between inflation and and money printing rising rising, asset values after Internet bubble The Internet Bubble (Perkins) Introductory interest rates Investing for falling stock market Bear Funds for shorting stocks foreign currencies LEAPS for shorting stocks long-term focus shorting fixed-rate bonds using ETFs Investment change difficulties Investment judgment Investment opportunities Investment properties Investment rules See also asset coverage/protection Investor safety Investor’s Resource Package (IRP) Israel JP Morgan Chase Janszen, Eric Japan Jewelery Job creation Job loss Job pay levels Job prospects Jobs and businesses in Aftershock John Bates Clark awards Johnson, Simon Kaufman, Henry Kennedy, James Ketterer, Sarah Keynes, John Maynard Krugman, Paul Lag factors Layoffs LEAPS (Long-Term Equity Anticipation Securities) Lehman Brothers Liar loans Life insurance Liquidity vs bad loans Lombard Street Associates Long-term advice Long-term asset plans Long-term bonds Long-term evaluation effects Long-term focus Long-term investments Long-term predictions Long-term stock investing Long-term stock options Long-term trends Long-term vs short term plans Low-end manufacturers MacAllaster, Archie Macroeconomic environment Macroeconomics, history of Madoff, Bernard Manufacturing Market bubble collapse Market cycles Market stoppage Marshall, Barry Marshall, John Marx, Karl Mathematical models Mathematical skill vs creative skill Medicine as science Mega-depression Merrill Lynch Mexico Microeconomic theory Middle East Moazami, Bijan Momentary and fiscal policy Monarchy to democracy Monetary policy Monetary velocity “Money from Heaven” “Money Heaven” Money market funds Money printing vs borrowed money and cheerleading dollar bubble extent of goal of impacts of and inflation and interest rates Krugman on long-term impacts of short-term impacts of and stock prices and supply and demand Money supply Monopolies Mortgage industry Mortgage payments Mortgage rates Mortgage-backed securities Mortgages Multibubble economy Multiplier effect Municipal bonds Narrow focus problem NASA NASDAQ National Association of Business Economics National debt repayment plan Natural gas prices Necessities sector Net worth vs self worth New York (magazine) No-documentation loans Nominal prices Non–status quo thinking Numerical simulation models, predictions from Oil Oil prices Old-fashioned investing Opportunities after bubble collapse Optimism The Origin of Continents and Oceans (Wegener) Ownership prospects Ownership timing Pasteur, Louis Patronage jobs Paulson, Henry Pearlstein, Steve Pensions, corporate Perkins, Michael Phase II See Aftershock (Phase II) Philosophical camps Pickens, T Boone Platinum Plausible news Popping bubbles See bubble collapse Post-dollar bubble Pounds (British) Precious gem stones Precious metals Predictions See also Aftershock predictions, comparisons to of Aftershock jobs and businesses AIG banks expert of fundamental underlying pattern GDP growth General Electric (GE) Goldman Sachs home prices illegal activities mortgages from numerical simulation models oil stock market validity of Pretend Armageddon approach Primary residences Private credit Private debt Private debt bubble Private debt bubble collapse Private equity buyout bubble Production and consumption Productivity Profit opportunities Progressive taxes Property rights Property rights theory Protection focus Protection strategies Psychological comfort Psychological stages Put options Qualified buyers Quantitative easing (QE) See money printing Rating agencies Real estate Real estate bubble Real estate market Real estate plans Real estate values Real interest rates Real price increase vs inflation Real productivity Recovery myth Regulation of financial institutions Regulations, backward-looking Reich, Robert Renting vs buying Reserve currencies Resource allocation Resource demand Resource extraction Restaurant business Retirement Reverse mortgages Rising bubble status quo Rising inflation Rising interest Risk and return theory Risk investment compensation Roubini, Nouriel Russia Safe-haven purchases Samuelson, Robert Savings Schiff, Peter School teachers Scientific and experimental theory Shiller, Robert Short indexes Short sales Shorting fixed-rate bonds using ETFs Short-term asset plans Short-term bonds Short-term debt Short-term focus Short-term investments Short-term stimulus Short-term trends Silent Spring (Carlson) Silver Single-bubble focus Smith, Adam Smolin, Lee Social Security payments Social welfare programs South America South Korea Sovereign debt default Spending cuts Spending reduction, personal Squatting State Grid Corporation of China (SGCC) Static equilibrium Statistics Status quo thinking Stimulation, targeted Stimulus spending Stock market Stock market bubble Stock market exit plan Stock prices Stomach ulcers Stowe, Harriet Beecher Student loans Sub-prime loans Subsidies Suicide loans Supply and demand of dollars model of Smith on theory of Sustainable capital generation Swiss franc Tax avoidance Tax cuts Tax increases Teaching jobs vs construction jobs Technological changes Technological evolution Tenure “Theory of Economic Evolution” Time value of money Timing of asset coverage/protection Toxic assets Transition opposition Transition situation Transition solution Treasury Inflation Protected Securities (TIPS) Trends Trigger points The Trouble with Physics (Smolin) Turkey Twain, Mark Uncle Tom’s Cabin (Stowe) Underwater mortgages Underwriters Unemployment Unqualified buyers U.S bonds sales U.S debt default U.S deficit and U.S government debt U.S dollar in bubble economy decline of demand for vs euro falling demand supply and demand of U.S Dollar Index (DXY) U.S economy U.S exports U.S GDP U.S government bond ratings credit rating debt-to-income ratio U.S housing bubble U.S inflation U.S investors in foreign markets U.S Treasuries Utopian Socialism Vacation homes Virtuous upward spiral and vicious downward spiral Volatility Wage pressure Want vs need decisions Wealth of Nations (Smith) Wealth preservation Wegner, Alfred Weimar Republic, hyperinflation Welfare-type support The Worldly Philosophers (Helibroner) Yellen, Joan Zimbabwe ... David) Aftershock : protect yourself and profit in the next global financial meltdown / David Wiedemer, Robert A Wiedemer, Cindy Spitzer — 2nd ed p cm Includes bibliographical references and index... in more detail in the next chapter, these bubbles worked together in a seemingly virtuous upward spiral to lift the economy up in the longest economic expansion in U.S history, and together these... not They see a financial crisis in late 2008, and then they see the short term positive impact of massive federal government borrowing and money printing on the stock market, helping to create the