How bad is the economy going to get?

busymom2006May 6, 2008

I know this has been brought up before but now that areas have been declared "declining markets" and HELOCs have been taken away, I'm wondering: Is the worst over? Or is there more trouble on the way.

How do we protect our assets? What should a couple with 2 young kids, and (aside from the mortgage) very little debt invest in? We are able to save for retirement and college. And our 40 year old house is in good shape. We have a 30 yr fixed rate mortgage with a decent interest rate. No HELOC.

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Oil companies seem to be doing well...

    Bookmark   May 6, 2008 at 8:04PM
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Today I paid over $57 to fill up my compact car. I remember when you could fill up for $5 or $7. Back in the sixties. My husband is of the opinion we are headed for a depression, not just a recession.

    Bookmark   May 6, 2008 at 8:10PM
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Which brings up the question:

What is the best financial position for times of depression?
What about recession?

Is cash the best position? gold?

    Bookmark   May 6, 2008 at 8:26PM
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Just like when EVERYONE was upbeat and positive on housing,the housing market tanked..Now EVERYONE is saying the economy is headed to the toilet, and perhaps it might..But when everyone says so, it is time to think about the opposite..Invest in a no-load,index fund regularly ,without out concern of what the market is doing...And i think i can say,over time, you'll be fine

    Bookmark   May 6, 2008 at 8:31PM
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Your best bet is to have many 'baskets', so that no matter which one goes bust the others may do just the opposite at any time (just as gold used to be the barometer of good or bad times, tho' lately it's all over the place). I personally would want to have some good artwork in there, but only if I liked it, and knew well that it was good investment material - if you don't know, don't do it as the art world is as full of fakes and just bad art as anything else. I'd also have a ix of currencies from Europe, the far east (be very careful though) and home, plus well researched property and carefully invested funds that grow slowly over the years, but rarely lose all their value, so a really good advisor's important too.

    Bookmark   May 7, 2008 at 5:58AM
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I assume you are investing in 401K's at work. After that, a Roth IRA is a good idea. You can diversify it to control risk. Because it is tax free at withdrawal, you can put a certain percentage of it into tax free bonds which will help its performance when the stock market goes down.

If you have more money after that, you can start a municipal bond fund. You can retain it over the years to lower your risks further, build it over the years as a supplemental "pension fund" for your retirement years, or consider it your big bank account that is now paying around 3.7% per month.

Layering your risks is a good idea. Having some growth stocks, middle risk stocks,some that focus on income,etc. can hold your performance in such a volitile market.

Talk was going around on the news shows,yesterday, about how oil is going to be $200 a barrel within a year or two. Well, it would seem that the Fed is now done with lowering interest rates and they will ultimately need to start raising them because inflation is rampant now and will become worse over the next 12 months. The value of the dollar will have to go up, lowering oil prices. Nothing stays the same forever. But from where we stand right now---if these conditions persist too long---you certainly CAN see the road leading to a depression.

    Bookmark   May 7, 2008 at 10:02AM
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Doesn't seem as though we're bottoming out quite yet and I'm trying to get beyond the textbook definitions of recession and depression to give myself a clearer picture of where we are and where we might be going. Can really get some mixed messages when both terms are bandied about in the media and elsewhere.

I don't know who is buying gold at the moment. It's dropped, but still too high at $870 to start getting in on that bandwagon. Municipal bonds are a favorite, have many of them purchased over the last dozen or so years and am open to buying more if they come at a discount with a good rate without being out until the end of time. Lately there haven't been any good offerings.

If you think about it, financial strategies are the farthest thing from a one size fits all. Diversification makes you better positioned to weather economic ups and downs. How much - and in what - you invest hinges on your discretionary funds, your risk tolerance, and your financial goals. Can't deny that luck sometimes plays a role.

Stocks, munis, Treasuries, gold, cash, art - even Grandma's Sterling tea service crafted by Paul Revere himself - are all good. Values may wax and wane, but if you're willing to buy and hold it's more likely you'll come out on top.

If you can sift through all the available information or have a good broker who provides valuable guidance you're partway there. Just keep in mind that brokers don't know everything - if they did, they'd be in a villa in a warm climate living high off their own portfolios rather than sitting in an office trying to help you build yours.

    Bookmark   May 7, 2008 at 3:09PM
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I'd even wonder about municipals in a real Depression. How will municipalities pay if half the taxpayers are broke?

As for the idea of just regularly contributing to a stock fund... Well, it took investors a LONG time to recover from the last Depression -- even the most recent Recessions!

We'll probably see what's what in about 18 months. Aren't you glad you decided not to run for President?

    Bookmark   May 7, 2008 at 5:25PM
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depression? ....highly unlikely...dollar cost average into a stock index fund with $$$ you don't need for 5+'ll be fine...depression??? ay caramba, you read too much liberal media,,, ;)

    Bookmark   May 7, 2008 at 5:30PM
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Just taken out a HELOC. Only did it because we thought it would be a good idea to have a large sum of money available it needed. (have a mortgage and car loan, no other debt)..Have read about HELOC's being 'taken away' and asked the bank about it. They said that normally these are only stopped if the lending institution is over extended. Or the homeowners credit score drops dramatically ( not sure how they would know about that unless they monitored it).

    Bookmark   May 7, 2008 at 6:30PM
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Lenders contact credit agencies whenever they feel like it ... and certainly if they're about to make a major loan to someone. For one thing, the interest rate will vary due to the borrower's credit score: somewhat upwards if it's low.

The Dollar carries no gold border.

It used to be that the U.S. was the world's major creditor ... in recent years it's becoming one of the world's major debtors, with much of that debt carried by foreign agencies.

With the U.S. government running huge annual deficits, how much longer do you figure that they'll be willing to pick up more U.S. debt instruments, as the value of the U.S. Dollar drops every recent year?

As the U.S. must offer higher interest rates in order to entice those lenders to make more loans, how will that affect borrowers locally?

A number of petroleum producers have been getting restless at continuing to price petroleum in U.S. Dollars, given its recent decline in value.

There is this to be said, though ... the stock market usually begins to rebound before the economy does.

It's been gaining in recent months, but more than likely will test recent lows ... if it penetrates them, there'll be some more reductions in value.

What if it goes down more?

I'll buy more.

But I'm investigating Chinese, Indian, Brazilian, etc. stocks ... their economies are growing at 6 - 8 - 10% per annum ... and they're looking for more capital to build a modern productive capacity.

Which we're doing less of - and our country has a worse record than yours, as our efficiency has been lower than yours, and the gap is growing.

ole joyful

    Bookmark   May 7, 2008 at 10:18PM
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Thanks everyone!

For the most, our little nest egg is diversified. But I'm wondering what percentage we should be putting into international funds. Is there any formula for that? Which international funds would you buy?

    Bookmark   May 8, 2008 at 4:07PM
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check out Vanguard,they have several international index funds, though they have outproduced over the last several years, and may not be as smart a play as it was...

    Bookmark   May 8, 2008 at 4:41PM
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I have the belief that we are at or soon approaching peak oil. This by itself, without including the credit/housing crisis, will have the ability to put us in a depression. I think we have a very rough road before us.

    Bookmark   May 9, 2008 at 3:04AM
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I agree that we are in for a rough road. Contrarian investing is smart, but this seems like more than a cyclical correction to me. Oil isn't ever going to get cheap again, even if the dollar strengthens.

But in the long run, expensive oil is probably a good thing.

I feel like we're going through a huge fundamental transition from a petroleum-powered economy to... something else. Could be biofuels, nuclear, wind or water power, solar, hydrogen, or all of the above.

Transitions are painful.

    Bookmark   May 11, 2008 at 8:28PM
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Who "ships" more oil to the U.S. than any other supplier?

Canada, that's who ... and many U.S. entities have been buying their oil (plus other) companies, which is quite likely one major reason for the recent substantial rise in the Cdn. Dollar.

Plus, no sheiks here: well, not in charge, anyhow.

They have increasing cash assets ... still, for they're still pumping oil. At increasing price.

U.S. assets, due to their huge debt ... plus that major annual deficit (some of those overseas borrowings recently being used to pay for ludicrous tax cuts) ... are decreasing.

Would be a good idea to buy foreign oil sources as well as growth-oriented future assets of other kinds, wouldn't it, while your dollar buys more?

And I shouldn't be saying this, as I've been trying to tell Canadians for years to buy their own assets, damn it!

And some U.S. folks recently got pretty upset that the Chinese were using some of those U.S. bonds that the products which they've shipped over here have earned them, to buy some Canadian oil companies and propose building some pipelines from Alberta to the West Coast.

As for holding bonds ... as U.S. debt continues to increase and foreigners become less willing to buy their bonds, they'll have to offer higher interest rates in order to entice them to buy those bonds.

Which will have an impact at home.

And you know what happens to bond prices when interest rates rise?! No guarantees of non-shrinkage of price offered, prior to their maturing at the agreed price.

One of the largest Canadian suppliers of oil and natural gas has been talking of methods to maximize value, and their stock price has risen 17% since mid-March ... they've just announced that they're planning to split their company into oil producer and natural gas producer. Analysts expect price to be up, tomorrow (Mon, May 12) from close of just over 86 on Fri..

Several of our major mining and smelting companies have been sold overseas, several of them privatized (so we can't buy company shares, even based in the country to which they've gone): Brascan, Noranda, Inco, Falconbridge, Alcan, Dofasco, Stelco, Ipsco. All gone.

I bought shares of one of the ones left ... up substantially since Jan ... one of my best deals (of only a few) in years.

ole joyful

    Bookmark   May 12, 2008 at 12:36AM
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Does the U.S. (or world) economy look any worse than it did in 1973? 1979?

As a child, I think I can remember adults talking economic doom and gloom during that period... as though the U.S. "party" was over.

Don't get me wrong. I am as concerned as anyone here, but I am wondering if we tend to lose our perspective when we are actualing living "in" the time of concern. Comparable to the ways we lose perspective in the middle of an argument... but once it is long past, we can't believe we were so annoyed by it.

As far as I can tell, the only thing new about the current concerns is the massive debts involved at the individual level (in the U.S.).

    Bookmark   May 12, 2008 at 7:50AM
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You're absolutely correct, the economy naturally goes through cycles. The goal of monetary and fiscal policy is to minimize the effects of those cycles. Like in the 70's, the biggest problem right now is rising prices (mainly due to the cost of commodities) and rising unemployment. The two together are very hard to "fix" because to address one, makes the other worse.

The economy will, of course, rebound. The recession of '80-'81 was followed by almost a decade of economic growth.

This is why it's important to put some aside for a rainy day.

    Bookmark   May 12, 2008 at 8:37AM
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I don't think the economy depended so heavily on the consumer in 1979's (70% today).

Was our level of national debt this high?

Inflation was high. Unemployment was high.

'Third World' nations were not bidding up prices on our commodities.

Countries in the middle east were unhappy with us over our support for Israel. (Oil embargo.)

Seems to me the dollar was still strong against the pound sterling.

We bought a house with a 4.5% 80% mortgage.

We had Cd's earning double digits.

1971 hospital bills for our DS were under $400.

The Draft was in effect; debacle of Viet Nam was costly.

    Bookmark   May 12, 2008 at 2:29PM
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You were lucky enough in '79 to have an "old" mortgage and could benefit from the high interest rates on CD's. I remember people quite excited when they could _refinance_ for 12%!.

The reason interest rates were so high is that the Fed was trying to slow inflation. Higher interest rates slow aggregate demand, which also raises unemployment. Unemployment is already on the rise from the supply side. If the Fed raises rates now, unemployment gets even higher. It's a double edged sword and somebody is going to get cut before we get out of this.

Your bills were less back then but your paycheck was smaller too.

    Bookmark   May 13, 2008 at 11:59PM
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The U.S. was a creditor nation - now it's a debtor ... and that not mostly to entities within the nation, but abroad.

And it's running huge deficits ... some of them to finance tax cuts, for heaven's sake!

The U.S. was earlier an exporter of products ... now is a net importer, and that on a large scale.

It used to do a lot of research and register many patents, and then license others to build the goods, for a royalty.

Now many patents are being registered by a large number of foreigners, as well.

Many of the activities that we thought were safely ensconced within our area have been outsourced ... e.g. call centres ... even income tax preparation, and on the part of small preparation agencies, at that.

Guys being laid off from the auto manufacturers at age 50, with minimal skillsets ... are scared. One local guy on terminal layoff had a settlement of $70,000. plus a new car ... and blew a major portion on a fancy motorcycle ... that he'd wanted for a long time. Says he's now retired, in his 50s ... and had to take out a second mortgage, a while ago when he bought a home.

What's he going to do to provide anything like a comparable income for himself and wife (kids gone)?

A McJob just ain't gonna cut it!

My daughter recently bought a home in the Phoenix area. I think that she could have bought comparable, later, for less ... maybe quite a lot less.

I hope that I'm wrong ... I take no joy in making these pronouncements.

Good wishes for finding your way through the problems ... if you're in the middle of some, or anticipating them.

ole joyful

    Bookmark   May 14, 2008 at 5:02AM
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We are at the end of a credit bubbble and beginning the downturn. How bad it will get for individuals depends on your industry.

If you are in an industry that provides credit like the financial industry or relies on credit for purchases (especially purchases that can be delayed) i.e. real estate or the auto industry, it will get pretty bad. Also industries that support those industries like the home furnishing industry will get bad. Then there are the industries that are fed with disposable income like tourism and entertainment that will suffer. If you are employed in one of those industries it will get bad.

If you are employed by an industry like healthcare or most government work, you will likely be better off.

As for what people can do ... The only thing I would suggest is having a diversified portfolio (of course this doesn't help most Americans who don't have any money saved). And I mean diversified (a mutual fund of foreign companies including emerging markets, precious metals, industrial metals, comodities etc) An S&P 500 mutual fund is nice but I believe more diversification is needed.

One thing I'm doing that I believe will help is that I am renting. This way I have more flexiblity to move for job relocation or to downsize in case of income loss. Since I see house prices depreciating for the next several years, I also think it will give me a chance to buy a house at a better price 5 years down the road.

    Bookmark   May 14, 2008 at 9:03AM
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Just FYI from the US Census Bureau:
Median income in 1979: $16,461 (worth $42,606 in 2006 $)
Median income in 2006: $48,201

On the advice of my CFP boss, my DH and I had a lovely run in 2006/2007 on foreign and big cap stocks. Dubya (or BushLite, as some of us folks like to call our fearless leader), wouldn't have been able to pay for his wars under the table without the Fed printing soft money. Nobody, not even the US, can just "find" $16B/monthly under the nearest mattress, every month for five years.

However, I thank Dubya for the nice FX boost, it was much appreciated.

Now that people from all and any political party are screaming bloody murder at the gas pump, Bush has at last signaled to the G7 that we need a strong dollar. The Euro failed to break the $1.75 mark a month ago and has been easing lower ever since.

I halved our FX fund investment last week, it was a very high percentage of the portfolio, and a good time to shift into another sector. We only trade within my DH's retirement portfolio, so we have a very good but limited choice of 18 funds from various fund companies. Since this is a 401/457 pension fund, the funds offered are a conservative choice (required by law) - there are no ETFs or Emerging Market funds, for example.

So I can't chase "hot market sectors" even if I wanted to, which is probably a good thing, LOL. Otherwise I would have shifted that money into something other than I did. Being forced to be a little conservative is not such a bad move, when you are aggressively invested as we are.

I don't expect to perform up to our portfolio average this year, but looking out another 12-18 months I'm very comfortable with where we're allocated. Our assets have returned in the mid-teens over the last 20 years, much of which was probably dumb luck.

But if I did have outside money to invest, I would have sunk it into Petrobras last June when I thought it was a good buying opportunity!

    Bookmark   May 14, 2008 at 12:02PM
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