Investing during a Great Depression

Marketplace ^ | Sep 30, 2008 | Chris Farrell

[fightinJAG]

Question: How do you *depression-proof* your assets. My husband says there's no way; that's what a depression means. My grandmother who survived the Depression said to just keep working and hang onto what ever real property you can; she never has believed in stocks, bonds, or anything "that I can't see". Nancy, Columbus, OH

Answer: I don't think we are going into another Great Depression. That said, it's a question I've been getting more and more. The bottom line is that if we were heading into another deflationary depression the best assets to own are default-free Treasury bills and Treasury bonds, with some other very high quality fixed income securities thrown into the mix.

In my book, "Deflation: What Happens When Prices Fall", I looked into what investments did well during the Great Depression. Here's what I found out:

[ari-freedom]

we will not have deflation, not with this Fed. We will have a contraction plus inflation: major stagflation.

[stockstrader]

‘Helicopter Ben’ has promised no depression and no deflation.

[eyedigress]

My investments pick up at this point. I’m a number of shares kind of guy. America has wealth.

[BGHater]

http://www.freerepublic.com/focus/f-news/2092491/posts

No, I think Ben’s plan is deflation.

[conservative cat]

My dad had a great aunt and uncle who bought up property during the depression. They ended up being very wealthy.

[KoRn]

"if we were heading into another deflationary depression the best assets to own are default-free Treasury bills and Treasury bonds"

He neglected to mention guns & ammo. Depression aside, with a dem house, a possible filibuster proof dem senate, and socialist president coming next year, it would be a wise move to buy all of the 'hardware' you can afford and get your hands on. I don't think Hussein will move on gun controls during his first 100 days, there are other matters they will want to screw us on right away. I believe there will be a 6-12 month window to get what you need.

[diamond6]

bttt

[BGHater]

I think it will be a great time to invest. Soon.

I would suggest reading up on Floyd Odlum, he set the standard.

[Wpin]

You are exactly right. Giving the Treasury unlimited approval to back all FDIC insured deposits up to $250,000 by simply printing more dollars and feeding them into the system is highly inflationary. Not to mention backing all these mortgages AND the lenders...while presently the credit markets are tied down with panic. Will be interesting to see if they can stave off this democrat created economic storm. I don’t believe they can let the air out of the balloon slow enough...

[Babu]

My portfolio is now composed of cash and gold, about 75% cash and 25% gold. I am reluctant to overweight further into gold, but I am considering it depending on what happens next.

This is the wildest financial situation I have seen in my lifetime, and I have been investing for multiple decades. I cannot find glasses tinted rose enough to make this look good.

[ari-freedom]

what we need to do is not focus so much on cutting taxes but rather cut spending and get the fiscal house in order. the market needs security right now

[VOA]

bump

[Attention Surplus Disorder]

I’m a big fan and longtime student of precious metals as a SINGLE DIGIT percentage of one’s portfolio.

That said: physical gold and silver are hardly reacting as one would expect during these times. They are are not only NOT acting as “inflation insurance”, they are in many cases being liquidated. I won’t even mention the losses that have been suffered of late by the commodity stocks, the steels, the coals, the PM stocks, just jaw dropping 70-75% drops. OF COURSE we must realize that this effect is seriously exacerbated by the idea that many many hedge funds had loaded up on these and had good profits in them. In fact, many hedgies were short banks and long commods, and as we have seen since the recent days of $147 oil, not only have the Fed actions gouged the eyeballs out of these guys (generating mass forced liquidation) but further dumping these sectors as the anticipation of a global slowdown takes root. (gee, do we think that GS knows the positions of lots of hedge funds and knows how to squeeze their livers and reports same to Hanky Panky so he can act...to GS’ benefit, since they can front run the attack? Naaaah, too tinfoil) Regardless of the theory, the markets are so chock full of weird distortions that the unwinding of same is generating tremendous upheaval. Evel Kneivel upheavel.

I realized what I am trying to say the other day when some gold/silver weasel called me to sell me some bullion (already own all I want) but we had a lengthy conversation about this and that.

During a depression or a serious recession, there is an excellent investment to own, and that is GREEN CASH. Why? Because with cash-cash, you can buy assets at distressed prices. With cash, you have a “currency” that is in scarcity. One easy to picture example is, you can buy beaten down stocks. But I am thinking other stuff too. For example, we imagine there is a 8% long term gain to be had investing in the stock market provided you collect dividends. Well, suppose you can buy....a rare car that you crave...or a piece of real estate that MAKES SENSE to you...at 20% discount because YOU have cash and few others do. Doesn’t that amount to a 2.5 year run rate at 8%.

This is my point. All the stories you heard about sharks swooping in and buying price-distressed assets from holders who could not hold on...yeah, those guys/gals were sharp. But THEY HAD TO HAVE HAD THE CASH to swoop. They had to have “dry powder”. They must NOT have been in a similary distressed condition themselves. Think about it. And that is why I think building up cash in a “depression” is an absolutely valid “investment”. And let’s not forget, if you have been bottom fishing stocks during the past few weeks, you are already down a couple of years right here right now. Yeah, sure, stocks could recover, they probably will. In the meantime, they are CANCELING dividends and being repriced lower. Bonds? Longer term bonds will return their miserable coupon, well behind purchasing power inflation, but are IMO likely to lose value because we are alreadyseeing the bond market forcing HIGHER, yes HIGHER rates due to heightened perceived risks, both in coupon AND inflation. So what’s wrong with owning cash? Doesn’t earn interest? How about losing 10% in the past few days? Pick your poison.

[umgud]

what we need to do is not focus so much on cutting taxes but rather cut spending and get the fiscal house in order.

We can't and the politicians we keep sending to Washington won't.

[ari-freedom]

ok. well what *we* can do is cut our own debt and try to produce or acquire more real things.

[ari-freedom]

PM companies are highly leveraged if I’m not mistaken. The concern is that cash will be worthless if the govt is overleveraged.

[Professional]

Dang, how many hundred years old are you?

Wikipedia has some great history about market corrections and manias, going wayyyyy back.

Every major market crash has seen a significant recovery, in not too long a tiem period. Betting that this time, it doesn’t is playing against the odds.

The real problem for folks, is if they need the money now, or you want to buy stuff, would like to, but have spent all your cash. Most folks only have about 7% of their net worth liquid at any given time, making buying low hard. And it just gets lower, and lower, and lower. But, there will be the odd ball few, that will indeed pick this bottom, and become rich. I’d be willing to bet Uncle Sam is one of them.

[TDT]

<img src=”http://ak.buy.com/db_assets/prod_lrg_images/939/206861939.jpg";

An a very good
<img src=”http://us.st12.yimg.com/us.st.yimg.com/I/basegear_2019_4898135";

[Attention Surplus Disorder]

What you say about PM companies is true, in general. We are of course talking about their equity (stock) prices vs owning the physical metal(s). But your second sentence is not especially realted to your first sentence, at least as I read it.

What I was trying to say, and perhaps I wasn’t being clear, is that the gains the PM holder expects to make when “dollars approach being worthless” are perversely and paradoxically not in evidence. I think that one can “swoop down on bargains” in distressed situations, but one has to HAVE that purchasing power...and, as we are seeing, being locked up even in “safe” PMs isn’t the way to go, at least with more than a small fraction of ones’ assets. No. You need that PURCHASING POWER. Only ONE THING is purchasing power and that is green cash. It isn’t credit; you may not be able to get much credit during later phases of what we are going thru. It isn’t stocks; yes, you readily sell them for their liquidity, but of course only at badly depressed values. The logical conclusion: Cashola.