My Two Cents

The sky will fall on many people

Chris Farrell Oct 6, 2008

That’s the title of an essay by Henry “Bud” Hebeler. You can read his financial advice at www.analyzenow.com. This is the part of the essay that deals with his “where to put the money” now that we’re going through this credit crunch, recession, bailout, and fiscal nightmare.

“…The only people who may come out of this situation with some semblance of the American Dream are those who have already saved and those who will start saving and stop spending NOW! That’s true if we don’t have something like the revolt against imperial Russia where real estate ownership disappeared, homes were shared by many families assigned by the government, and savings were taken away and consumed largely by the government.

Those that will save, and those who already have saved, will be asking, “Where shall we put our money?” I certainly don’t see the financial market future any better than anyone else, so I can only tell you what I am doing. I effectively divide my investments into three parts. The first part assumes that I want to be able to live through the Great Depression II. The second part assumes that it will take people a number of years to wake up to the problems, so this part is very conventional mix of stock and bond funds. The third part assumes that we will have hyper inflation. Only the Great Depression II and hyper inflation provide environments to solve the huge debt problem: the former by defaulting on loans and the latter by so cheapening the value of the payments that debt payments are a small part of a huge income denominated in almost worthless money.

The largest part of my own investments is conventional, but the amount I have in the hyper inflation portion and Great Depression II are sufficient to get me by, especially if the conventional part ends up having some value and not wiped out entirely. Those who would do similar splits would end up with the sizes of the three parts dependent on the extent of their savings, age, employment security, expectations for the future and probably lots of other factors.

Understand that I don’t pretend that I am wise about what to do in either of these extremes. Still, my own choices for a hyperinflation scenario include candidates like leveraged real estate, stocks, I Bonds, TIPS and inflation-adjusted immediate annuities. I have been thinking about this for years and so built up my supply of I Bonds when you could buy large amounts at interest rates of over 3% plus inflation. I know that others more venturesome than I am would now add commodities as well as metals such as gold and platinum. Very wealthy people often gain inflation protection by saving valuable art and rare collectibles. Art and collectibles are beyond my financial capability, just as some of my choices are beyond the capability of other people. For example, a young person probably doesn’t have the resources to buy an immediate annuity and should never buy one in the first place.

The Great Depression II portfolio is much more difficult. My choices here would include money markets, CDs, EE Bonds, treasuries and debt-free real estate. I know that my parents would add another category. My parents were struggling young adults during the great depression and gave us children strong encouragement to learn at least one musical instrument so we could earn something even if we lost our regular jobs. I played the piano, flute and trumpet–not knowing what I might need. I learned something about diversification even then.

Perhaps the best protection during the Great Depression II outcome would be strong and varied work skills. Even non working spouses and older children should learn some work skills that could bring income if necessary. Think Rosie the riveter during World War II as opposed to soccer mom. Learning to be frugal combined with doing as many home, car and clothes repairs yourself is important in a depression environment as could be supplementing your food supply with a home garden. You might want to store some vegetable seeds for next year.

The nation’s debt problems are so large that the sky will fall on the majority. I firmly believe that to survive, people will have to save–lots. They will also have to invest it well. We can’t tell which direction the economy will turn, but we know it has to make drastic changes. Hence, in addition to having good work skills and savings lots, it’s important to be well diversified and include some things that might help in the Great Depression II or hyper inflation….”

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