Aftershock by David Wiedemer

I can't add a whole lot to the very thorough review of this book I posted earlier by my friend, John. This is a follow-up book to Wiedemer's earlier work, America's Bubble Economy, and a clever bit of pre-buzz for his coming "sequels", which he promotes heavily at the end of the book. For the most part, I felt like this book was mostly intended to promote the author's web site, newsletter and other products. Wiedemer may have been either very astute when he predicted the collapse of the real estate bubble, stock market, and consumer spending in 2006, or merely lucky...I'm leaning towards lucky.

The other two "bubbles" he describes are the U.S. Dollar and Government Debt. I don't know what seems so revolutionary about this thinking - those of us who have consistently tried to vote in fiscal conservatives over the years have been harping on these themes since...well, forever. We haven't actually had a president in office in decades who was seriously interested in cutting spending across the board - deeply. They've all had to either play the compromise game and allow more spending than they wanted in order to get their own programs supported, or have been irresponsible spenders to begin with. Despite the political football games being played with the debt ceiling recently, it's obvious to anyone with any sense whatsoever that you cannot go on borrowing money indefinitely - something's gotta give. And when you borrow and spend money the way our country has over the last fifty years, at some point, the "full faith" upon which our currency's value is based becomes ridiculous, and the dollar's utility as a reserve currency will come to an end.

So, one point where it started to go off the tracks for me was when Wiedemer talked about the collapse of the dollar, and said it would be followed soon by the collapse of the Euro. The Euro may be collapsing right now, so I begin to wonder how prescient he really is, if he misses the fundamental instability of the EU currency and the complete fiscal irresponsibility of a number of its member states. What is discouraging, however, is that few in our country can extrapolate from the situation in Greece, Italy, or France, and see that the social welfare state we are creating here, mimicking theirs, is unsustainable over the long haul.

Wiedemer also talks about the coming global currency, which he calls the IMU - International Monetary Unit. While I don't think the idea itself is all that far-fetched, and could indeed be rolled into place, it's not going to come about as the result of the great wisdom of our statesmen and economists, as he seems to believe, but because of the submission of many countries around the world to the idea of a one world government, controlled by something resembling the U.N. Some of our leaders already are trying to give up U.S. sovereignty to the U.N. and World Court, and may eventually succeed, as the idea of American exceptionalism is destroyed through our educational system.

Wiedemer's prescriptions to protect ourselves are pretty limited - and parrot the usual recommendations of the perennial doom and gloom crowd. Gold, precious metals, investment grade gemstones - all seem to do quite well in hyperinflationary times, but they are not usually very liquid - somewhat impractical to use to generate income in retirement, and you pay sales commissions coming and going, which really eats into returns. Stay away from real estate, he says. So, if the real estate market is going lower, that shouldn't affect rental income streams from investment properties in a major way, should it? This type of investment, too, is a good one for retirees - generating a generally steady and inflation protected income. He also says to get out of both the domestic and foreign stock market. If your 401K plan is like 99% of those offered by employers in this country, your automatic retirement savings are going to either the stock market, money market, bond market...some sort of mutual fund. You can't buy gold and jewels there, and one of the investments he does recommend, once we get to high inflation, short term bonds, isn't usually a choice in most of those plans, either.

About the only thing I can recommend is for anyone who's trying to invest for their future to stay diversified - pick an assett mix and rebalance when a particular area gets too far out of line - pop your personal bubbles before they burst in a painful manner. I'm not sure that Wiedemer's book, or his advice, should be taken with anything but a grain of salt.

Aftershock: Protect yourself and profit in the next global meltdown by David Wiedemer Phd et al ( 2011 )

Now for an unprecedented event on the Steel Bookshelf; I have a guest blogger today, my old friend John Mannschreck, whose opinion I highly respect. Without further ado, here's his review:

The author, David Weidemer holds a PhD in economics from the U of Wisconsin. He published a book, "America's Bubble Economy" in 2006 that was prescient in his prediction of both the housing and stock market crash of 2007-9.
In this follow up book, " Aftershock ", he describes six economic "bubbles" inflated chiefly by poor govt policy. Four of these, real estate, private debt, stocks and consumer spending already burst in 07- 09. The two final (and most egregious), the dollar and U.S. debt bubbles, are still inflating.

He logically explains the causes and consequences of rupturing each bubble . Recommendations are provided to protect your money and profit from the forthcoming calamity. (He's obviously making royalties from the book sale and he does have a website where I m sure other products are peddled, but I don t sense any extraordinary commercial bias.) The book itself is 352 pages, but only about one third is true "core" information. There is a fair amount of repetition, some self congratulation ( for his previous correct predictions ) and some rehashing of various classic economic theories.

Each bubble ( in a nutshell ) : The real estate bubble collapsed because, from 2001-2006, housing prices went up 80 % , but income increased only 2% and there was very little population growth. There was no solid economic underpinning for the increase. It was purely due to poor credit policy and wild speculation.
Private debt increased because of easy credit with lax lending standards leading to a " no risk" mentality from lenders and borrowers alike. Credit card, home equity loans, commercial real estate all boomed during this period and then burst when credit contracted.

The stock market increased in value 1200 % from 1980 - 2000 , but the growth in corporate earnings and GDP only grew 300 % during this same time, so there was no strong economic underpinning for this increase. It crashed in 2000 , partially recovered and crashed again in 2008. Since reflating in Mar 2009, stocks are up primarily due to massive money printing, rather than significant improvements in employment and private spending.

Consumer spending was fueled by easy credit including home equity loans ( the ultimate ATM ), consumer loans and credit cards. It crashed when credit dried up.
The dollar bubble, yet to burst, is being fueled by increased demand for dollar denominated assets without any true gains in productivity. This is particularly true for foreign investment. However, there has been a massive increase in M3 money supply over the past ten years (300 % over the last three years alone ! ) It is now becoming inflationary and will become much worse. The author predicts inflation increases of 10 % or more in 1 - 5 years. When that happens, the dollar will crater and the massive U.S. assets owned by foreigners including stocks, real estate, treasuries etc will also plummet. The massive and growing U.S. trade deficit will accelerate the dollar decline.
Govt debt is described as the biggest, baddest bubble of all. It is now nearing $ 15 trillion and we can t possibly pay it off. Historically, we have only paid interest on this debt, never principle. If interest rates rise above 10 % , as predicted, we won t even be able to service the debt. It will even exceed Medicare outlays. A technical default on this astronomical debt would be disastrous for our economy. An ENORMOUS increase in economic demand or productivity might save us, but an increase of this magnitude has never occurred and is highly implausible. This debt implosion is only a matter of time and the Chinese and Japanese willingness to buy our assets. We are completely beholden to them.

What to watch: He suggests monitoring foreign purchases of US treasuries. China holds over $3 trillion in US debt, but is slowing purchases of new treasuries. Any significant decrease is major potential trouble. Inflation increases which will lead to interest rate increases. A continued rise in the trade deficit which will deflate the dollar. Rise in gold prices which are proportional to loss in dollar confidence. Black Swan events such as pandemics, wars or major terrorist events.

What to do: He is not a salesman, so he isn't peddling any specific product, but merely recommends asset categories to place your money. To no surprise, his favorite is gold, despite it's incredible run up in recent years. Gold, unlike stocks, bonds and real estate, will increase with inflation and interest rate increases. The global gold market is a tiny fraction of large markets, so even a small shift from stocks, bonds and real estate to gold should send it much higher. Gold is the only hard acceptable currency alternative globally accepted. He does say that Gold is also in a bubble, however it won t burst for 5-10 years, well after all other assets have cratered in price, so there will be plenty of time to reallocate. He recommends buying physical gold online as opposed to gold ETFs . ( less prone to manipulative mischief) .

Other actions include: buy silver ( Not as desirable as gold, according to him, but it has also not experienced golds' meteoric run up, so it's better valued.), investment grade diamonds and sapphires, dollar bear funds that short the US dollar ( Ex . UDN ), and ETF s that short US Treasuries anticipating interest rate increases ( TBT,TBTF,RRPIX, RYJUX etc) .

He also recommends buying put stock options to put "floors" under the price of any stock you own, selling stocks in capital goods and consumer discretionary sectors, selling real estate NOW ( markedly increased 30 year mortgage rates will crater the housing market...again) Wait for the phenomenal bargains in 2- 5 years to repurchase these asset classes.

I know this as alarming for you as it was for me. The author freely admits, that he doesn't know when this catastrophe will occur. His best guess is 1-5 years from now. If I were to hazard a guess, I would say 2013. The federal govt has tremendous motivation to "keep this party going" in an election year and will do nothing about responsible spending cuts or decreasing foreign borrowing. This inaction, of course, will inflate the govt debt and dollar bubbles even further and make the day of reckoning that much worse. I fear for our beloved country. We are in uncharted waters and normal business cycles of expansion and contraction can no longer guide us.

BTW, there are other highly intellectual economists and pundits that have also been very prescient in their predictions that COMPLETELY agree with this author. Most of them are billionaires , so they do have some credibility. These include Peter Schiff , Jimmy Rogers and Bill Gross.