As I discussed last week, a financial crisis could be on its way.
The math paints a frightening picture.
Unemployment – true unemployment, including the underemployed and the people no longer looking for work – has hovered around or above 10% for a decade.
Baby boomers have no savings, and many of them are still “underwater” with their mortgages. According to a BlackRock survey, the average boomer’s savings are only 12% of what they need to live well in retirement.
Another survey found that more than 40% of Americans have less than $10,000 saved for retirement. Sixty-one percent said they wouldn’t be able to cover a $1,000 emergency expense.
Trillions of dollars in consumer, corporate and government debt is still out there. The debt-to-GDP ratio is more than 100%. The federal government might use this as an excuse to let the dollar’s value collapse so it can repay its debt with cheaper money.
In other words, we are still broke. The government is not doing enough. And printing huge amounts of money has clearly not done the trick.
In fact, one of the big-picture writers I follow recently said that the political situation today reminds him of 1929, when Herbert Hoover inherited an economy that quickly spiraled downward into the Great Depression. As far as he’s concerned, Trump may well be the new Hoover.
All this seems grim. But I’m not panicking.
Because I’ve read more than a thousand end-of-the-world predictions since I got into the financial newsletter publishing industry 30-plus years ago.
And although we’ve had several serious market dives and a recession during that time, we’ve never had the sort of total worldwide collapse that would scare me.
Still, it could happen. Next year or next month or next week, we could wake up one morning to nationwide bank closures, widespread looting and violence, and a complete breakdown of law and order.
So what can you do?
Here’s what I recommend:
1. Have an SOA Fund
Make sure you have what I call a “start over again” (SOA) fund – a store of liquid wealth that can cover the costs of starting your financial life over again if all your intangible assets (stocks, bonds and cash held in banks) disappear.
The amount of money you should have in an SOA fund depends on your situation. If you are an employee, make sure you have at least one year’s income. If you own a business, make sure you have enough to restart it or a similar business.
Your fund should consist of gold coins and cash stored in local safe deposit boxes or home safes.
If things really do implode, you don’t want to be calling a broker or banker and asking them to cash in your accounts only to hear that the government has frozen such transactions.
2. Invest in “Earth”
If you can afford to buy rental real estate, do so. I’ve said this many times. Rental real estate is an exceptional source of part-time income. It’s easy to understand. And as long as the price is right, it can be very attractive.
If you can find a single-family three-bedroom, two-bath house for $144,000 that rents for $1,500-plus per month, buy it. Buy as much property as you can in the same neighborhood to make management easy.
If you can’t afford the down payment, you can find partners to work with you. This is something any smart person can do. You don’t need to have a lot of cash.
3. Cut Your Risky Holdings
Review your stock portfolio to make sure that it is safely invested. This is not the time to be overly speculative. Try to buy only big, cash-flowing businesses sure to weather any “black swan” event in the markets – companies that make products that are always in demand, no matter what the economy is doing. They’re often labeled “consumer defensive” or “consumer staple” companies.
Investing this way will ensure that your equity holdings will survive a large-scale financial collapse. And if there is a collapse, the decreased stock prices of these companies will present a great opportunity to pick up more shares on the cheap.
4. Go Abroad
Consider becoming an “international” person. By that, I mean having an offshore residence, business, bank account, and passport or residency permit.
This may seem like a very exotic option, but it’s easier and cheaper than you might think. You could, for example, have all three of these things in Nicaragua or Panama for less than $150,000.
Looking offshore gives you several benefits, least of all a way to earn extra income with big tax advantages.
Two Things You Should NOT Do…
I’ve told you what I think you should do to guard against a financial Armageddon while you profit from the tail end of this secular bull market we’ve been enjoying.
My recommendations are based on what I’m doing. They are by no means definitive. There are dozens of strategies that will do as well or perhaps better… but only so long as they share the basic elements of reducing risk. That is, they must focus on quality and income and use diversification, position sizing, stop losses and insurance.
No matter what, though, there are two things I recommend you not do.
Don’t panic and get out of stocks, bonds and real estate completely. And don’t put all your money in gold or bitcoin. I’m not going to tell you why. I’m just going to say that if you do this, you will surely regret it.
The other thing you should not do is nothing.
We are talking about the possibility of financial chaos. If that happens, it will happen quickly. And the cost of being unprepared could be huge. You could lose every intangible asset you have if banks and brokerages pillage customer accounts to pay for current expenses.
Again, this is not a scenario I deem likely. But I do think it is possible. And since it’s possible, it seems only wise to take sensible and immediate precautions.
You can’t expect the government or the big financial institutions to get the economy working well again. They are the very institutions that got us into this mess in the first place.
The only person you can rely on is yourself. You owe it to yourself and your family to prepare.
So make a commitment now. Start building your own chaos protection strategy today. Allocate your stock portfolio to favor big, safe companies. Buy cash-flow-positive rental real estate. Use diversification, position sizing and stop losses. Review and, if necessary, bolster your SOA fund. And, if possible, establish a financial base outside of U.S. jurisdiction.
By taking action now, you won’t have to worry about being caught off guard. In the (in my view) highly unlikely scenario of a total worldwide economic meltdown, you will already have all the tough and smart decisions made.
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