If you want to sleep well, don’t read “Aftershock,” a story of imminent financial doom from a trio who proved their prescience in 2006 with a book entitled “America’s Bubble Economy.”
Then again, if their megabear predictions prove correct, you’ll have many more sleepless nights in the future.
According to David Wiedemer, his brother Robert, and co-author Cindy Spitzer, last year’s financial crisis was just the beginning. The U.S.–and by extension, the whole world—-is living through a “bubblequake,” with the two biggest bubbles yet to pop: the U.S. government debt bubble and the dollar bubble. Rapidly nearing $15 trillion in debt, Washington will soon hit its “credit limit”, the authors say. Then all bets are off.
This quake of popping bubbles will produce a brutal aftershock (the book indulges in mixed metaphors, but you get the idea.) The authors predict that unemployment, inflation and interest rates will all move well into double digits by 2011.
But “Aftershock,” whose subtitle is “Protect Yourself and Profit in the Next Global Financial Meltdown,” also explains how to make money from this. You might end up surrounded by misery, but you’ll be the one household on the block with a safe portfolio.
In a chapter entitled “Cashing in on Chaos,” the authors recommend the following:
*Buy gold. Its rally will continue as more people hedge against inflation and a declining dollar.
*Trade LEAPS (Long-Term Equity AnticiPation Securities), with which you can short (or bet against) stocks for long periods without the volatility risk of put options. Alternatively, buy and hold “bear funds” or ETFs that short fixed-income bonds.
*Put your cash in euros. As the most liquid alternative currency, the euro will soar as the dollar collapses.
*Avoid emerging markets, whose exports will be walloped by a falling dollar and plunging global trade. (The “decoupling” thesis is bunk, the authors say. China’s 2009 rebound is a stimulus-stoked illusion.)
*Buy U.S.-produced primary products like grain and coal, which will benefit from the cheaper dollar. Otherwise, except for gold, avoid most other commodities.
*Dump all your stocks, U.S. bonds (both corporate and government) and real estate investments.
*If you must own a home, get a low, fixed-rate mortgage now. (Inflation will eventually make the repayments tiny in real terms.)
*Seek work in “necessity” industries (health, education, food). Avoid discretionary spending sectors (restaurants, tourism, luxury goods.)
The “Aftershock” authors are not the only ones favoring “chaos trades.” Hedge fund manager John Paulson, who made $2 billion betting against the housing bubble, just put $250 million of his own seed money into a new gold fund.
I’m not sure how many people are psychologically capable of embracing this hyper-gloomy outlook. But if enough do, doesn’t it hasten the descent?
If so, that would be good, if painful, says Robert Wiedemer. The U.S. has lived beyond its means for three decades and can’t afford to “keep kicking the can down the road” as the Federal Reserve is doing with its liquidity injections, Wiedemer said in an interview. An earlier blowup means a quicker reversion to a stable, “responsible” economic model, he argues.
There are reasons why Wiedemer could be wrong: A productivity boom could deliver a growth and tax revenue surge; governments could jointly rebalance the global economy–gradually, without abruptly ending Asia’s dollar purchases–making China more consumption-dependent and boosting U.S. savings and exports; or the dollar could be saved by safe-haven flows.
But as bitter as it is, “Aftershock’s” message–that America has yet to pay its bills–deserves an audience. After all, the authors were right once before.