“I told my therapist I was having nightmares about nuclear explosions. He said, don’t worry it’s not the end of the world”.
—Jay London
Hello everyone.
Are you afraid of future catastrophes? It turns out that Americans fear a financial doomsday more than anything else. In a recent Ipsos poll, one-third identified that as their biggest worry.
According to the same poll, fear of thermonuclear war is a distant second. And climate change is a mere third. Brain-eating zombies are not listed as a threat but are of concern to some people, too, I suppose. However, zombies lag behind the fear of killer robots, which garnered two percent of the votes from poll participants.
As much as I make light of it, it is easy to see why people are worried. There are more economic and social uncertainties than I have ever seen before. I will briefly discuss some of these uncertainties to provide a context for this discussion. Right now, uncertainty is the only certainty.
At the heart of this worry is a central issue: what kind of financial challenge should you be afraid of if financial doomsday happens? And then, what kind of assets fare best in various types of crises?
Whether you believe that the end is at hand or if you just want to profit from others’ doomsday thinking, the following discussion should be of interest.
Is there a best investment to prepare for financial doomsday?
To start this discussion, first, let’s look at the factors that feed uncertainty.
UNCERTAINTY FACTOR 1: WAR
Wars impact economies, and that is a compelling cause for concern, especially if there is a threat of a widening war.
Right now, foreign conflicts are disturbingly common.
As I am writing this, the Russia-Ukraine war shows no sign of slowing. Ukrainians are attacking Russia’s oil facilities and hoping that choking the spigot of money and energy will slow Putin down.
Expect higher oil prices.
More slaughter is in the offing, too.
The conflict in Gaza is a major issue too, especially with all the extreme regional actors involved. Just prior to writing this, Iran and Israel fired salvos at each other. Peace is nowhere in sight and it will be several months or even years before this conflict simmers down.
Oh, and China wants Taiwan, too. There is no open conflict yet, thank goodness.
And North Korea, well, they are an unpredictable nuclear power. They have designs in the south.
UNCERTAINTY FACTOR 2: INTEREST RATES
It is hard to know when inflation will be tamed at this writing. With the latest data, the Federal Reserve has become entirely unclear about when and if interest rates will come down.
UNCERTAINTY FACTOR 3: NATIONAL DEBT/DEBT OF OTHER COUNTRIES
The International Monetary Fund has been increasingly concerned about the level of debt in China and the US.
However, with current national policies in place, it does not seem that the world’s two largest economies will soon slow their borrowing. If nothing is done about it, there could be a gradual financial asphyxiation as debt rises.
FACTOR 4: POLITICS
I do not remember a time when people got along less. Although the notion of vilifying political opponents is not new, it seems more extreme than ever.
FACTOR 5: EROSION OF LIVING STANDARDS
There are several causes of this phenomenon. Part of it is due to the widening gap between rich and poor, with the poor often facing a declining standard of living.
Of course, the wealthy fear the issue too, especially if taxation is required to fix the nation’s debt problem.
BUT WHAT KIND OF FINANCIAL DOOMSDAY ARE WE TALKING ABOUT?
So, to summarize, all the worries I listed are understandable. But you get the feeling that fear about our financial future is general, but is not specific. Instead, it is just a low-level panic. Are we worried about a doomsday inflation meltdown? Or is it a doomsday financial debt meltdown? Or is it some kind of general meltdown?
If we cannot define our concerns, it is hard to act and control what we can.
To look at financial doomsday economic crises in the most general terms, here are the three broadest meltdown scenarios:
- Money backed by a government remains valuable, but deflation racks the economy. This scenario occurred during the Great Depression when real estate prices collapsed, but cash held its value. In that scenario, governmental backing of currency remained intact and was mostly trusted by the public.
- Money backed by a government is not valuable—and inflation racks the economy instead. For example, the Deutschmark became worthless in Germany in the 1920s and 30s due to inflation. The stories of people using wheelbarrows to lug around money to pay their bills were no joke. Not surprisingly, people there began to gravitate toward hard assets like gold, silver, diamonds, etc. These assets held their value, not because they generated cash by being invested, but because others inside and outside the country still wanted them, and they could still be bartered for other goods or exchanged for solid currencies.
- No matter what, our living standard will go down—this can be because of economic cycles, high taxes to pay back debt, losing a war, politics, or the continuing trend toward income inequality.
SO, WHAT TO DO?
Well, breathe.
Then, define what you are actually afraid of. Determining an issue is the first step to resolving it, or at least acting.
That is why the remainder of this post discusses the various types of economic crises and the actions and strategies you can take to deal with them if a meltdown is a real concern for you.
Since approximately a third of you reading this appear to be worried, hopefully, what you read here can help set your mind at ease or suggest a strategy that might be helpful to cope.
THE RELATIONSHIP BETWEEN ECONOMIC CATASTROPHE AND ASSETS
Economic catastrophes come in different forms.
Strategies to cope are intimately tied to the type of situation and asset characteristics.
There are three forms of essential assets. These are those that:
- Can generate more cash—businesses, rentals, investments, dividend-paying stocks, cash accounts that generate interest, etc, fall into this category. The value of these assets rests on the belief that money and a monetary system will endure.
- Have value solely because others want them, but do not generate cash from investment except upon sale and then only from appreciation. They include gold, precious metals, cryptocurrency, collectibles, fine art, etc. Of all these items, crypto is the hardest to predict the value of in a crisis because it does not have a physical form and has little history on which to base a forecast. In some disaster scenarios, access via the internet may not be possible, which could render it valueless. Of course, if that happens, we may all have more to worry about.
- Help you to survive—food, shelter, water, fuel etc. This last category is a favorite of survivalists and highly independent people who often live off the grid.
These characteristics underlie how we strategize during different types of crises. To summarize people tend to gravitate to different assets during different types of crises:
- Deflation Strategy: retain cash assets and avoid debt.
- Inflation Strategy: retain hard assets and borrow if rates are low and cheaper than saving.
- Declining Standard of Living Strategy: Leave for a place with a better, cheaper, or potentially more stable economy (See here for an analysis of what some wealthy families are doing).
- Survival Strategy: become self-sufficient so you do not depend on others.
SOME OF THE WEALTHY ARE HEDGING THEIR BETS
If you are stratospherically wealthy, you can hedge your end-of-the-world doomsday strategy more effectively than the rest of us. Many Americans fear an economic meltdown, and some of the elites have made plans, too—just in case.
For example, Mark Zuckerberg has plans. He bought significant portions of the island of Kauai and built a compound there with a massive house. I suspect his holdings are extensive enough to add and grow enough food to be self-sustaining if the situation called for it–beyond the macadamia nuts and beef he already farms there.
Zuckerberg also has plans to add a 5,000-square-foot underground bunker. Just in case.
FINAL THOUGHTS
While I believe these fears are overblown, I have concerns about the direction of our economy, too. But they are not to the point of paranoia. We continue to save, stay out of debt, and monitor things to see what will happen.
Challenges come and go.
But hedging your bets is usually a good idea, too. Doing something instead of nothing often helps you sleep at night too.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Jp Valery
License: Unsplash