The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy (2 page)

Of course, my gratitude goes to Dave Wiedemer and Cindy Spitzer for being, quite clearly, the best collaborators you could ever have. It was truly a great team effort. Most of all, I thank my wife, Serap, and children, Seline and John, without whose love and support this book, and a really great life, would not be possible.

Thank you, David and Bob Wiedemer, once again for the honor of collaborating with you on our fourth book. It is always an exciting experience, and I look forward to many more.

For their endless patience and support, my deep appreciation and love go to my husband, Philip Terbush, our children Chelsea, Anya, and Zachary, and my dear friend Cindi Callanan.

I am also filled with a lifetime of gratitude for two wonderful teachers: Christine Gronkowski (SUNY Purchase College) and two-time Pulitzer Prize winner Jon Franklin (UMCP College of Journalism), who each in their own ways moved me along a path exceptional.

My appreciation also goes to Beth Goldstein and Christie Chroniger for their ongoing help with all things great and small.

Introduction

We wrote our first book,
America’s Bubble Economy
, back in 2004 and finished it in 2005, long before the housing bubble was visible to many people. We asked our publisher, John Wiley & Sons, to hold the book as long as they could because we were concerned that nobody would buy it. Few people believed there was a housing bubble at that time, much less a whole bubble economy. They wouldn’t hold it any longer than fall 2006, and so it was published.

With that book and
Aftershock
, we have built up a good track record of predicting much of what has happened since then, certainly better than most analysts. Almost no economists or analysts wrote an entire book about such issues at the time, although many have written books since. But many of those books are more historical than predictive. It’s still scary to predict the future. It’s much easier to review the past.

We have been criticized by some as being one-trick ponies—that we made one good prediction and that’s it. Certainly, there have been cases of this in the past, such as Elaine Garzarelli, the market analyst who famously predicted the 1987 stock market crash. But we’re not trying to predict a crash. What we are trying to do is predict a far larger change in the entire economy. Yes, an earlier real estate crash and stock market crash was part of that, but there is much more to what’s going on in the U.S. economy and world economy. Anyone who reads our books will see that.

Some people may say we were right about one prediction, but in fact, it was a range of related predictions, many of which we predicted will not occur for years more. We’ll have to wait to see if those come true. But even if we got only one prediction right, that’s better than many people who get far more attention for their predictions than we do, such as Ben Bernanke. He predicted, after the Bear Stearns collapse in June 2008 and just four months before the biggest financial crisis in our history, that all was fine with our financial system. Well, it’s better to be right once than never. At least it should give us more credibility.

But our forecasts are not meant to cheerlead or paint a rosy picture, and we know that leads many people to giving us less credibility, for obvious reasons. They would rather listen to a more bullish outlook, such as Mr. Bernanke’s, especially on the stock market. As one of our good friends on Wall Street said, “Nobody likes a bear, especially when they’re right!”

We’re not trying to be a bear or a bull, we’re just trying to help people better understand the economy. As another friend on Wall Street said, “What you’re really doing is teaching people.” And that’s exactly what we want to do. Some people have said we are arrogant, but we try not to be arrogant. Of course, maybe in the act of teaching something very new that others aren’t teaching, there is a certain inherent arrogance.

The best teachers have a passion for what they teach. And when you have a passion, you try to make strong points of great substance that will stick with the people you are teaching. If we have overreached in some of our chapters and appeared arrogant, we apologize. We try to keep the book as nonarrogant and easy to read and enjoyable as possible, while still getting our message across. In fact, we think that is critical to good writing and good teaching.

We don’t try to attack anyone personally. If we do make a reference to someone personally, it is to make a larger point about the economy or the way people look at the economy, not to personally put anyone down.

We try to be as fair as possible because we need to be as believable as possible. That is absolutely critical to teaching anything new.

In this book we hope to expand on what we have taught in the past, and we hope more people will benefit. The greatest joy of writing a book is that someone benefits from it—whether that’s because they are entertained, or live a more financially secure life, or simply have a better understanding of the way our society works. It’s all about feeling that you are somehow better off after reading the book than before. We wrote this latest book,
The Aftershock Investor
, in response to our readers’ demands for more details about how to put the ideas in
Aftershock
into action. The old ways of investing based on Conventional Wisdom are becoming increasingly ineffective and even dangerous. For those lucky enough to see what is coming, we need a new investing approach. Rather than passively waiting for things to get better, we need to actively manage our investment portfolios, based on the correct macroeconomic view of the current and future economy. For that, we now offer you
The Aftershock Investor
.

We are not Ben Bernanke, chairman of the Federal Reserve. We are not economic Nobel Prize winners, like Paul Krugman. We don’t run huge investment firms, such as Goldman Sachs or Merrill Lynch.
But they were all wrong, and we were right
. That is why this book is worth reading. We don’t have a crystal ball—no one does. But we do have something even more reliable over the long term: the
correct
macroeconomic view of what is occurring and what’s coming next. Once you have this correct Big Picture too, you can be just as right as we have been. With this book, you and your family and associates will likely have a better chance than most to cover your assets, protect yourself, and perhaps even find profits in the coming Aftershock.

The purpose of this book is to move you closer to that with every page.

Please note
: If you have not yet read any of our previous books, the rest of this chapter will serve as your quick executive summary.
If you have already read
Aftershock
,
Second Edition, you could just skip ahead to Chapter 2
, which offers a brief update since our 2011 book. However, you may want to stay with us here just for the quick review. If nothing else, it will help you hold up your end of the discussion with some people who may still be in the dark about what is really happening.

Back in 2006, when the U.S. economy was still looking pretty good, our first book,
America’s Bubble Economy
, accurately predicted the future popping of the real estate bubble, the fall of the stock market bubble, the decline of the private debt and consumer spending bubbles, and the widespread pain all this was about to inflict on our vulnerable, multibubble economy. Of these bubbles, we said the real estate bubble would be the first to go, kicking off the fall of stocks and the decline of private debt and consumer spending—exactly what occurred in the financial crisis of 2008. We also predicted the eventual bursting of the dollar bubble and the massive government debt bubble, which are both still to come.

Other bearish analysts have also predicted some of our current economic troubles, but very few did so as early as 2006. Even those who did see parts of this mess coming are still failing to connect all of the dots. They don’t fully understand what’s happened so far, and they can’t tell us what will happen next.
America’s Bubble Economy
was the only book to
both
warn about the current economic problems here and around the world, and also to go way out on a limb by predicting in substantial detail what would occur, why it would occur, and when. Not too many authors have been willing to go that far out on a limb, mostly because they can’t. They don’t yet see the whole story, and they don’t dare take a chance on making inaccurate predictions that may come back to haunt them later. We went out on a limb and it turned out to be rock solid.

Of course, back in 2006, our prescient predictions were largely ignored.

Then our next two books,
Aftershock
(2009) and
Aftershock
, Second Edition (2011), further fine-tuned our forecasts, explaining in more detail how massive stimulus spending by the federal government and massive money printing by the Federal Reserve would temporarily boost the falling multibubble economy, particularly the stock market, but would only kick the can down the road and later make our bubble economy crash even harder.

This time, with the memory of the 2008 financial crisis still painfully fresh, more people began to take notice. In 2009,
Aftershock
was named one of
SmartMoney
’s Best Books. And in 2011, within weeks of publication in August,
Aftershock
, Second Edition, became a
New York Times
business bestseller, a
Wall Street Journal
business bestseller, and the number one Amazon personal finance book and number one Amazon economics book. Since then, the book has been translated into Japanese, Chinese, Polish, and Korean, and recently became a Korean bestseller. The book was made even more accessible in the form of an audio book, beautifully read by Christopher Kipiniak, which was nominated for an Audie Award. By the end of 2011,
Aftershock
, Second Edition, was named by
The Economist
magazine as Amazon’s third bestselling personal finance book, not just in the United States but in the world.

What a difference a crash makes! Some people are clearly starting to wake up.

But despite all the kudos and recognition our books have gotten, our basic macroeconomic message is still falling mostly on deaf ears—or, more accurately, on
denying minds
. Most people simply do not want to wake up and fully face the truth of what is really happening. Even the bear-oriented analysts are missing the bigger picture. This is not merely a bearish “down cycle” that will eventually be followed by a bullish “up cycle.”
This economy is evolving
. We are not going back to how it was before. We are going forward to something new.

For a fuller explanation of our macroeconomic views, we encourage you to take a look at
Aftershock
, Second Edition. For your convenience, we are also summarizing the key ideas of that book in this first chapter, before we tell you how you can potentially protect and grow assets in this dangerous and evolving economy.

But before we get to that, we would like to take a moment to congratulate you—the person who is reading these words right now—not just for opening this book, but more importantly for
opening your mind
, if not to our entire macroeconomic point of view, at least to the
possibility
that something is not quite right with this so-called “recovery.” Perhaps we are headed not back to the prosperity of the past but forward, toward something entirely new, highly dangerous, and potentially profitable. You are part of an elite, early group of people with their eyes open and their lights on. You may not know everything about what is occurring or exactly what to do about it, but you, dear reader, are not asleep with the sheep!

The first thing you need to know about our current and future economic problems is that they didn’t start yesterday. It all started decades ago with a combination of declining productivity growth beginning in the 1970s, coupled with a growing propensity to run big government deficits beginning in the 1980s.

Please understand that, in and of itself, running big deficits is not necessarily a bad thing. In fact, there are times when borrowing big money is really quite smart. For example, you might borrow a large sum of money to start a profitable business or to go to medical school, which among other benefits can increase your real wealth in the future. But this big government borrowing was not the equivalent of starting a profitable business or going to medical school, and it did not lead to increasing the nation’s
real
wealth in the future. Instead, we just borrowed money to buy things we wanted without having to raise taxes—the equivalent of being able to go shopping with a credit card without having to get a better-paying job.