Skip to comments.Investing during a Great Depression
Posted on 10/09/2008 10:26:27 PM PDT by 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:
(Excerpt) Read more at publicradio.org ...
we will not have deflation, not with this Fed. We will have a contraction plus inflation: major stagflation.
‘Helicopter Ben’ has promised no depression and no deflation.
My investments pick up at this point. I’m a number of shares kind of guy. America has wealth.
No, I think Ben’s plan is deflation.
My dad had a great aunt and uncle who bought up property during the depression. They ended up being very wealthy.
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.
I think it will be a great time to invest. Soon.
I would suggest reading up on Floyd Odlum, he set the standard.
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...
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.
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
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.
We can't and the politicians we keep sending to Washington won't.
ok. well what *we* can do is cut our own debt and try to produce or acquire more real things.
PM companies are highly leveraged if I’m not mistaken. The concern is that cash will be worthless if the govt is overleveraged.
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.
An a very good
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.
during a depression, cash is king
during an inflation, gold is king
if all the banks go broke, what happens to all that cash?
The great depression didn’t have 100 million people who have no qualms about taking. (all breed by 60 years of socialist education) If we were to have another depression the best place to be is alone in the hills or in a militia armed community subdivision.
At the point where the currency no longer has value, we are all indeed screwed.
But I think you are having a critical misunderstanding of what I’m trying to say which is: If the bank is broke, closed down, ATMs shut down, FDIC “in suspension” (or whatever you’d like to call it)....in short...a “bank holiday”....then obviously you have a problem.
Ahh, but see, I am talking about GREEN cash. Not electronic cash. GREEN cash. In your hand. Inside the bank, your “cash” is blips. Outside the bank, in your hand, it has been de-blipped. Inside the bank, it isn’t really cash, it is only CREDIT with an assumed ease-of-conversion to cash. Should that assumed ease-of-conversion suddenly disappear, as you imply, it isn’t cash at all. “Cash in the bank” is under 99.99% of circumstances, readily convertible to cash, and we never even think about it. What about the other .01%?
ah under the mattress is what you meant.
Yup. Bank of Sealy.
If Obama is elected, these assets should appreciate, yes.
My husband’s grandfather did quite well during the depression. He had a depression proof business, a business that probably grew due to the depression. He sold candles to the Catholic church, he had the contract for the whole city of Philadelphia, and the church was his only contract. He never really worked a day in his life. Maybe you could look into that.
The idea is to move into cash before the depression, then spend it on discounted properties and stocks during the depression. You don’t hold the cash during the depression other than what you need to survive. I don’t know if I would be in PMs unless I had a little in physical form at home to use for collateral. Owning gold via ETFs are some other company with the gold stored in another state is useless. We have been in obviously inflationary times these past few years. People should of been selling off, taking profits, and hording their cash for the eventual downturn.
I wish I had been in position to do such a thing, but I screwed up early in life, debt wise. I was hoping that the downturn would hold off until March when my vehicle would be paid off. Oh well, hears to holding on to the job until then. :P
Yes deflation is the plan .....of course there will be some things that inflate (food? guns? gold? ammo?) but the Fed’s game plan is deflation.
Serious inflation cannot be done these days because markets render instantaneous harsh judgment
DE-blipped cash—yup! With the low interest rates you get on deposits no harm in keeping $$$ in a safe place. Inflation kills cold hard cash but we will be getting a nasty deflation, not inflation
I agree. Personally I dumped everything I had in the middle of February and was in cash until 9.15 when I put some into treasuries and other govt backed obligations. Have made a bit of money there and increased my income a bit (I'm retired).
Lately I've been contemplating getting back in slowly, perhaps over a six month period. I personally prefer Mutual Funds and in particular balanced funds. I have no problem paying the management fee since the folks running the fund know a lot more then I do. My current favorite is Vanguards Wellington Fund (VWELX). Still I'm hesitant about sticking my toe back in although I realize nobody rings a bell to announce a market bottom. I had been fully invested in the market since 1980 and never sold anyhting even in 1987 when it all came apart (DOW down 21%). This time though I kept having this nagging nervous feeling that something bad was coming down the road. Mostly what mad me nervous was that no one seemed to have a clue what was actually going on and what if anyhting could be done. The worst thing for the markets always has been uncertainty and in this instance the levels of uncertainty reached highs never seen before. The Chinese have a saying, "May you live in interesting times". We are certainly doing that. Unfortunately interesting doesn't always mean good.
Much of the rush to gold preassumes the economy and the currency system will remain intact and viable and that the gold or gold backed investment itself will never have to be used to actually purchase or barter for something else, especially for smaller items and everyday goods.
Gold backed securities or stocks they are really still just paper certificates, perhaps still held in the broker’s home office. Like any stock certificate, their lack of liquidity means they will be relatively worthless in the short term in the event of a disasterous currency collapse or runaway inflation.
Gold coins, ingots, etc. are a fairly easy way to invest relatively large sums but there are some issues to consider.
The problem with gold coins is that most of them are too large in value to easily be used as a currency replacement in a real collapse. They are probably a good way to invest fairly large sums but, like ingots and boullion, don’t lend themselves well as replacements for everyday currency.
If you actually have gold coins like Kugerands or US “$50” coins that are valued somewhere around $1,000 each how do you use denominations that high to purchase or barter for a tank of gasoline or a package of toilet paper?
There are some smaller denominations available but the value of the individual coins is still fairly high.
As far as gold boullion or ingots, they are even less usable as currency replacements than coins, not only because of their larger size and gold content, but because their authenticity is not easily verified. Most people never actually take possession of gold in this form.
If you take actual possession of boullion or ingots you have to pay to have them re-assayed before you can resell them.
How many of us can tell the real gold content and value of an ingot?
In a TEOTWAWKI scenario a case of pork and beans, some garden seeds or a few bricks of .22 cartridges may be worth more than a gold ingot.
An alternative investment to gold is older, pre 1965 silver coins. The fluctuations in Silver value tracks the rise and fall of gold somewhat, but unlike gold coins, the denominatons of silver coins are small enough to be conveniently used as currency or for barter.
The coins themselves are easily recognized and the ultimate real value is in the silver content itself.
Gold is no doubt a better medium for large investments but rolls of silver coins are a good option for smaller investments with the advantage of being more easily bought, sold or bartered, especially in the event of a disasterous crash.
Here is a good link to see the relative value of silver coins:
You can call me stupid for liquidating my stock holdings weeks ago, but there are millions of investors about now who wish they had done just what I did. It’s called preservation of capital during a meltdown.
I didn’t say I did not believe there would be a recovery. And in fact when there is one, I’m poised on the sidelines with dry powder to get in, if I choose to.