What is your PLAN for the next Depression ?

[Patosan]

Firstly I am NOT saying that a depression is coming.
As most people I have no idea of the chances.

Recently there has been talk of a major recession or even depression coming within the next 10 years. The scenario is booming times for a while more then the bottom falls out. A current thread on this topic dicusses more the reasons for such events, belief or otherwise, gurus, guns and cows. Most seem to agree on not being alarmist, expect to do well and have a plan ... or backup plan ... for the worst.

Here I'm not so much concerned with everyone's opinion / guess on the chances of a depression ... rather let's for argument sake assume that a depression IS definitely coming. What are your plans to best ride out and even profit from this ?

e.g.
In anticipation would you sell all / half / some / none of all your equities ?
Would LOC be useless if inflation is high or banks change the rules ?
Which method of gold aquisition / storage would you use ?
What banks would be best in such cases ?
When you start buying again would you do so in different locals ?
etc, etc.

Your specific action plans / views.

 

[The Y-man]

Hi Patosan,

1. Continue building up gold holdings
2. Continue building holdings in absolute return funds
3. Selling our entire residential portfolio in 08-09
4. Cashing out of long shares and long share funds mid 09 (exact timing will depend on techincal analysis at the time) and converting to gold.
5. Setting up options trades - probably bear spreads - mid-late 09 (exact timing will depend on techincal analysis at the time)

Cheers,

The Y-man

 

[Belu]

on this topic - as the time set for the decline will be in 2-4 years - is it worth buying in say a years time?

 

[lizzie]

be totally out of shares by end of '08. sell the dog properties and the redeveloped single holdings and put all the cash into the townhouse developments to reduce lvr ... sit tight.

 

[stretchy]

Look at history - check what assets performed well during the high inflation of the 70's and the Great Depression in the 30's.

AFAIK, its gold and other hard assets that are the best. You dont necessarily make money, but at least you dont lose it. Stock markets tend to be a terrible place to invest - the Dow Jones index hit the high 800's in the late 1960's and didnt reach that level again until the early 1980's... thats nearly 15 years of flat growth (and negative once you count in the effects of high inflation).

 

[Andrew_A]

The 70's and the great depression?

Look at history - check what assets performed well during the high inflation of the 70's and the Great Depression in the 30's.

How are these two time periods connected?

Depressions tend do live up to their name, not much does well. I certainly am interested in how lessons of the great depression and the 1970's tie together anyhow.

I see the cliche repeated often that gold does well during recessions or depressions.

Most recently Peter Spann at his Investor Update said 'The price of gold skyrockets during a depression'. Is anyone actually able to provide evidence that this is the case? I certainly don't see any.

I see the price of gold doing poorly during the 29 and 87 and 00 market tanks.

Yes gold does well during inflationary times which is an orthodoxy that does actually have merit as best as I can work out.

 

[Jamie]

Most recently Peter Spann at his Investor Update said 'The price of gold skyrockets during a depression'. Is anyone actually able to provide evidence that this is the case? I certainly don't see any.

Peter also predicted 12-14% interest rates in the next few years, and when I asked for his rationale I got no reply. Youre not alone in questioning his thinking Andy

Interest rates will not hit double digits for the rest of this decade, and I'll go Peter double or nothing for his stash if he'd like to back his thinking up. Im here to learn.

Jamie.

 

[alexlee]

Does anyone think that we're unlikly to see interest rates in double digits because debt is much higher now and therefore interest rate rises have a much bigger impact than before? The general reason for raising official interest rates is to slow growth and/or inflation. Our (the whole Western world, really) high debt means the RBA doesn't need to raise interest rates much before it bites, especially coupled with higher oil prices.
Alex

 

[Jamie]

Does anyone think that we're unlikly to see interest rates in double digits because debt is much higher now and therefore interest rate rises have a much bigger impact than before? The general reason for raising official interest rates is to slow growth and/or inflation. Our (the whole Western world, really) high debt means the RBA doesn't need to raise interest rates much before it bites, especially coupled with higher oil prices.
Alex

I think we're unlikely to see interest rates of 14% because the only thing that will necessitate them is almost double digit inflation.

The RBA's target rate is 2-3% - they hit the upper level last month, and they raised rates.

Can any other sane person see the RBA letting inflation triple in 3 years? Let oil go to $US120 a barrel, we still wont have double digit rates in Australia. I'm happy to take bets from anyone that thinks otherwise

And its not like Howard and Costello didnt learn from Laurel and Hardy (Hawke and Keating) about dampening inflationary pressures before they got out of hand...

Pitt St, back me up here

Jamie.

 

[alexlee]

I think we're unlikely to see interest rates of 14% because the only thing that will necessitate them is almost double digit inflation.

The RBA's target rate is 2-3% - they hit the upper level last month, and they raised rates.

Can any other sane person see the RBA letting inflation triple in 3 years? Let oil go to $US120 a barrel, we still wont have double digit rates in Australia. I'm happy to take bets from anyone that thinks otherwise

And its not like Howard and Costello didnt learn from Laurel and Hardy (Hawke and Keating) about dampening inflationary pressures before they got out of hand...

Pitt St, back me up here

Jamie.

I agree. I think the RBA would rather kick the economy to the ground before they let inflation rise. A recent Goldman Sachs report suggested $105 is likely if there is further political unrest regarding oil, but then I remember a while ago some of the investment banks suggested $70 oil would cripple the world economy.

The question for the Eastern states, in particular, are just how on the edge people are. An interest point is that the RBA seems to focus on the Eastern states (chiefly sydney and melbourne). e.g. those interest rate rises a year ago were aimed in part at cooling the property markets in Sydney etc to control inflation. Certainly the media always extrapolated Sydney and Melbourne issues to the whole country.

Now that NSW isn't in great shape, I wonder whether the RBA might use monetary policy to control the market in WA?
Alex

 

[Patosan]

3. Selling our entire residential portfolio in 08-09

Thanks Y-man for your action plan. What books or other sources did you use to assist in it's formation ?
Would you then become a buyer again after the depression has run it's course ?
If so what would you target ?

Belu has a good question re prudence of buying now if one should sell in a few years time.
I believe Michael Yardney expects a boom over the next few years, though haven't read his book, does this tie in with the boom then bust theory ?
Should buying be done with an extreme short term view only ?
What exactly is Michael's advice for riding the imediate boom ?

Alexlee and Jamie - the chances of a depression aside, that should be debated in the other thread, IF there is to be one what would you do now and over the next few years ?

its gold and other hard assets that are the best

What do you mean by other hard assets ?

I see the price of gold doing poorly during the 29 and 87 and 00 market tanks

Then what is best during a depression ?
In fact what do interest rates usually do in a depression ?

Sorry if these questions seem basic but I really don't have knowledge on this topic and there could be others like me needing serious education here.

 

[kph]

Just make sure you are not in a position where you have to sell ( property/shares) by maintaining a low lvr, and batten down the hatches and hang in there, and ride it out.
No need to get alarmed or to panic.
Back to basics. There have been recessions before, so whats the big deal ?
It won't be the end of the world...
In the meantime, don't let the thought of a possible recession at some time in the future paralize you into inaction.
There is plenty of wealth to be created before the onset of this 'gloom'
Talk of a recession is one thing, but a 'depression' is being alarmist...

kp

 

[alexlee]

Alexlee and Jamie - the chances of a depression aside, that should be debated in the other thread, IF there is to be one what would you do now and over the next few years ?

Assuming we're talking about 1930's depression and not Mad Max here, I would say long cash and gold. Then, during the depression I would buy land. When the recession ends, land will be in demand again as businesses open and people buy homes. If you are that way inclined you can also short the market using derivatives.

So I would sell shares and property, and sit in cash and gold, then wait for the opportunities to buy land.

Not that I think we'll have one that bad. I DO think we'll have a recession soon, though, so I'm lightening up a bit on shares, locking in interest rates on loans and have some LOCs ready.
Alex

 

[round12tko]

what recession? Barring any major war, the next 10 years will be the great resources boom but this time it's real. IF oil hits $90/barrel there's justification for another war over oil.

 

[Patosan]

I would say long cash and gold. Then, during the depression I would buy land

Can you explain long cash ?

a 'depression' is being alarmist...

Just creating a resource of plans ... not trying to fuel panic or gloom.
For sure recessions come and go and for the most part life goes on unchanged for many people.
Have you ever thought what you'd do if faced with an impending depression ?

 

[FrankGrimes]

Does anyone else think we are getting a little ahead of ourselves here? There are a few things which have the potential to cause a recession or slowdown, such as Oil and Inflation. But Depression? Aren't we going a bit far? You are starting to sound like the people that left the cities to live in Caravans in 1999 to avoid the Year 2000 end of the world...

Even the 90's recession over the longterm has been a minor setback for long term investors, property and shares have still managed to perform 8%+ over the longterm, even through the 90's.

Me personally, I will keep buying as money permits with a long term view that property will keep growing in line with inflation +2%-5%. However, I will only buy property in the big 3 (Sydney, Melbourne and Brisbane). I will have some cash available in the form of a LOC or money sitting in an offset account for emergencies (10%-20% of the value). I will also be fixing some of my loan, perhaps around 50%. I'm young (23) with no dependants and if I have to live off rice and water then so be it.

I will keep watching the stockmarket and if there are any major warning signs I will sell up, however, I won't be selling any property. We will have to see how the China/India situation unfolds.

 

[The Y-man]

Thanks Y-man for your action plan. What books or other sources did you use to assist in it's formation ?
Would you then become a buyer again after the depression has run it's course ?
If so what would you target ?

Belu has a good question re prudence of buying now if one should sell in a few years time.
.

Ooo... many interesting questions Patosan.

I basically articulated what Peter Spann presented, within our own situation.

Would we become a buyer - yes.
What would we target - I am not sure yet - as in what proportion to go shares, commercial prop or res prop.... depending on the state of the various markets.

Also, should the big crunch NOT come along, it would still give us a golden opportunity to reallocate our available capital (between growth elements and income elements).

I was going to answer Belu separately, however, seeing as you have asked... My sister was in a position earlier this year where she had saved enough to buy her first IP. After much thought, we came to the conclusion that because of the costs in purchasing an IP (which was going to chew up 1/2 of her savings - the other half going to the deposit for a 90% loan), she would be better off allocating some of the capital to managed funds / CPT's and a decent amount into a geared hedge fund (for the volatile market scenario, and immediate tax relief).

Cheers,

The Y-man

 

[willy1111]

Hi Patosan,

I am pretty sure that Michael Yardney talks about imigration and population growth being drivers of the next big property boom.

He tends to think (and supports with statistics) that there will be enough demand that prices will rise.

At least that was my take on it.

Cheers

 

[stretchy]

How are these two time periods connected?

Depressions tend do live up to their name, not much does well. I certainly am interested in how lessons of the great depression and the 1970's tie together anyhow.

I see the cliche repeated often that gold does well during recessions or depressions.

Most recently Peter Spann at his Investor Update said 'The price of gold skyrockets during a depression'. Is anyone actually able to provide evidence that this is the case? I certainly don't see any.

I see the price of gold doing poorly during the 29 and 87 and 00 market tanks.

Yes gold does well during inflationary times which is an orthodoxy that does actually have merit as best as I can work out.

Gold is good for high inflation only. I have no idea what goes well in a depression. My concern wont be making money, it will be wealth preservation. I guess its a matter of picking the asset class that decreases the least.

I picked those 2 periods because they were both difficult times - sure the 70's wasnt a depression but with various recessions throughout the decade it certainly wasnt a easy time to make money. Interest rates hitting the high teens (in the US at least) was the only thing that tamed the inflation, at a very high cost. I have a very US-centric view (most of the info I read is US-based) so I am unsure how Australia went during the 70's.

Regarding the Great Depression - I severely doubt anything like that period will ever come to bear again. One of the major issues during that time was the Federal Reserve withdrawing liquidity at the height of the recession, hence turning it into something much worse. Central banks know better now. They may be causing asset bubbles by injecting liquidity whenever there is a crisis, but its sure better than the alternative...

 

[stretchy]

What do you mean by other hard assets ?

Hard assets are usually considered anything 'real' - like houses, gold and other metals. Anything you can touch is hard. Its a stretch, but you get the picture