I rarely read the financial sections of newspapers, nor do I frequent online blogs about investing, the economy, and the politics that affect these parts of our world. I’m busy writing most of the time.
However, I have friends who live and breath finance. They take in a steady, global diet information that often has relevance to personal finance, namely how to invest, preserve, and grow wealth.
They digest it, weigh it, and use it to profit in the long term…and sometimes the short term.
When we discuss financial and economic news, my eyes typically glaze over after a few minutes. Okay, two minutes. But I perked up last week when two separate conversations mentioned Michael Burry, the famous/infamous investor who predicted the 2008 crash and subsequently made tens of millions of dollars betting on a downturn. (See the film The Big Short for a cinematic telling of the story.)
The synopsis of Burry’s comments recounted by two of my friends (who do not know each other) goes something like this: all of the economic indicators that preceded the 1929 crash and the 2008 crash are now gathering like storm clouds on the horizon, here in 2022. So buckle up, we’re in for another not very good, very bad period for the US economy and possibly for the global economy. I may have not summarized that as articulately as other pundits, but you get the picture.
“Burry just doesn’t get it wrong,” groaned one friend. “Not on big things. And ‘wrong’ for him is just early. It still happens, just later than he thought.”
Sobering commentary, to be sure. Granted, regulators, governments, and banks have much more sophisticated tools with which to tweak and correct issues in financial markets. I know several guys who were certain that the EU would not survive past 2013, but here we are, still paying for our croissants with euros. So I remain distanced from much opinion.
And it is true that political will and a roomful of really smart people seeking solutions can be a powerful force when addressing a crisis. However, the politicians at the wheel and the really smart people in the room have to be aware and accepting of reality in order to take timely and effective action to curb the impact of ‘financial corrections’, as they call them.
Few were aware or accepting in 2008. And things got ugly. People lost jobs, homes, life savings, and most critically, hope. Many of us remember all too well.
As depressing as this blog post sounds so far, I’m notoriously impatient with Doom & Gloom. I’m incredibly passionate about Awareness and Action.
But first, let’s say the legendary and quite successful professional investor Michael Burry is wrong, and the next 5 years are going to be peaches a cream with just a smidgen (is that spelled correctly?) of inflation.
Great. Lovely. Good for you. Ignore the advice that follows.
If Michael Burry is more or less correct and an economic downturn is on its way in a very big way, what can each of us do to prepare? First, look at the math of your own personal situation. In this case, the math is your own state of Financial Independence.
Financial Independence can be defined as a relative situation, namely, how long you can go without your job? Some people have enough cash stacked in the bank and enough passive income from investments to pay the rent and eat beans for a month, some for 6 months, some for 2 years, and some can live comfortably for a lifetime.
How long you can go without worry and without selling the family silver in order to survive is your measure of Financial Independence.
Because Americans live in a consumer society, it is often difficult for us to become aware of things we can live without, things that aren’t helping us be more financially independent.
A wake up call like Burry’s can be beneficial if we look at it correctly and respond mindfully. So, how do we look at it?
First, as a Lifestyle Adjustment Call To Arms. If consumer spending is a part of your weekly or monthly ritual, online or in stores, think about that. If restaurants and clubs are a part of your weekly routine, think about those expenses. If online gambling is a part of your leisure time, think about that, too.
Think about Awareness and Action…as an Actor.
Let’s say a stage director calls you in for a dress rehearsal. Let’s try that approach. You’re called on stage and the director says something like this… Okay, Jen, you’ve just been given notice that your position at work will be terminated in 3 months. You’ll be given a severance package, but you’re out of a job, right before the holidays. What do you do?
Very unpleasant improv, but let’s follow it and see where it leads… Jen takes a deep breath, processes her emotions, curses her corporate bosses, then gathers her thoughts. She sits down at her laptop on stage. She types. What are you doing, Jen? the director asks. I’m going to pay off my high interest credit card balance, not all at once, but quickly. I’ve been delaying that painful process, but now I need to address it.
What will you do next? I’m going to get my resume out there and look for another position, maybe in a different industry, so that I can be ready to make a move without a long lapse in income. Being able to just bank and save that severance package money would be a wonderful opportunity.
Then I’m going to review my finances and see where I’m wasting money each month, see what my options are as far as looking at a smaller apartment. Just look at everything I can to make sure I’m living as efficiently as possible without depriving myself. And I’ll visit the dentist for a cleaning while I’ve still got coverage for that expense.
Good. What else? I’m going to look at taking mass transit instead of driving to work. Maybe I can pick up a used bicycle and do without a car for awhile. I’m not sure. I’m definitely going to sell or giveaway some of this exercise equipment I’ve accumulated. I’m going to get rid of all the clothes I don’t wear. I’ll lose the clutter and maybe pick up a few bucks in the process. I’ll definitely have a cleaner, more harmonious living space.
I’m going to see how I can generate a second income, something that makes sense. I’m going to focus on accumulating as much cash on hand as I can in the next 90 days and see where that puts me.
Anything else? I may not take a vacation over the holidays like I’d planned. Not with this on the horizon.
So that’s the thought process for ‘Jen’. It’s hypothetical, but it’s a very accessible scenario for all of us to consider…and act upon in the present moment, even if–and especially if–things are going just fine right now.
As I’ve said before, it’s easier to make these adjustments when you can than to make them when you have to. So what adjustments can we make?
I’d love to hear your thoughts…about how you see the economy, what your plans for the rest of the year involve, and how you think we can best address the coming winter.
I remain optimistic. I remain realistic.
- BGT
The idea that bad economic times are coming is very much the mainstream opinion right now, and one which I reluctantly share. As for Dr. Michael Burry, he was right about the real estate bubble in 2008 and subsequent financial crisis, but he hasn’t been right about much since then. Of course, if one constantly predicts that something bad is about to happen, eventually one will be right.
I have long been an advocate for financial minimalism. One of the advantages of the old money style of living is that one is always prepared for a downturn. It reminds me of the New Yorker cartoon where they say “We decided to just stay preppy, as though nothing had happened.” By living below your means in good times, you can continue to live at the same level in bad times.
Amy–my exact thought–the New Yorker cartoon! And Byron’s readers practice the OMG way of life, or strive to. For the sake of all, we hope the dire predictions don’t come to pass. While I have the floor . . . I shop at Target a lot. Using Target’s RedCard at Target saves you 5%. To fully appreciate this, you need to pay the bill in full each month. Just now I was on the site, paying my bill in full, so it was top of mind. It all adds up, as they say.
Katie, that’s so funny! That cartoon has certainly stood the test of time! I would say that paying your credit card bills in full every month and not carrying credit card debt is entirely consistent with old money principles.
This is a prevalent topic these days, they jury is still out whether it is just a trend or the wisdom of crowds speaking. I heard an interesting talk between two other writers/political scientists – Peter Zeihan and Ian Bremmer (hosted by Sam Harris). Worth a listen if you want other perspectives on this.
I am a born pessimist, so these types of prognostications always get my attention. However, I also appreciate looking at things through different perspectives. One of the things that impresses me about Old Money families is how they emphasize optimism and seeing opportunities, and eschew doom and gloom outlooks. And that’s how I am trying to look at the world stage right now.
We made the “Lifestyle Adjustments” years ago, but now I am trying to do even better. Rather than just survive, I am trying to think — WWOMGsD?
I’m optimistic that we’ll see tremendous growth and transformation this decade driven by advancements in Solar Wind Battery (SWB), autonomous vehicles, precision fermentation, AI/ML, digital currencies, genomics and low-cost DNA sequencing, along with many other technologies. I have a friend who lost a fortune during the 2008 crash – he was never the same.
I too share the view that we are in for a rather severe economic downturn. Regardless of which way the broader economic winds blow, the old money principles Byron has outlined will serve well. I don’t have a crystal ball, and am not sophisticated enough financially to say what the future holds. Having grown up in the working class and having experienced some minor deprivations, I have a greater fear than most of falling back into poverty. I contribute to my 401K, have cash savings, and a taxable brokerage account. But I have taken some unusual steps at “insurance” that some of you might consider.
As a youth I had more than just a passing interest in the stories and habits of my elders. Many had come of age in the depression or immediately after. The sitter that gave groceries for Easter presents. The Great Grandmother that stockpiled extra toasters and dishes in the basement. A Grandmother who recalled only an orange and a few homemade paper doll dresses under the Christmas tree as a girl. Though comfortably working class when I knew them, they were people who embodied the ideals of thrift. They were old money without the money! The story that really struck me though, was of my Grandfather. Like almost all of my relatives, he was decidedly NOT old money.
He grew up shoeless in West Virginia and was drafted out of a one room school house at age 17 to fight the Japanese in WWII. He spent several months in a hospital in the Philippines with malaria. And only got his first decent job as a low level civil servant in his 40’s. Not a man of leisure!
After he died my Grandmother told me how there was a time when they ate only potatoes, green beans, and gravy for a month so that they could afford milk for their three children (no meat). When food was scarce he would have a cup of coffee for dinner so his family could fill their bellies. Later, he told my grandmother that he hoped he was never that poor again. I never heard him complain. But he wouldn’t stand for waste, especially of food. Now I’ve had times when I couldn’t afford to eat what I wanted (In college I would visit my girlfriend (now wife) several hours away on weekends. I had to forego fast food lunches with friends and would eat all week off the grocery store end cap specials so as to still have enough money to take her out to dinner) but I’ve never been forced to forego a meal to feed my family. And so I arrive at unusual step number one: I have a ROBUST pantry. We could survive for months off of the canned and dry goods I keep on hand. I view it as the insurance policy you can eat! It has the added benefit of acting as a hedge against inflation. Those of you who do the grocery shopping know what I mean. Besides, if Covid taught us anything, it is that the supply lines we all depend upon are fragile. One just never knows.
The second unusual “Insurance policy” I have comes from a darker place, but I hope you all can indulge me. Charlie Munger (Of Berkshire Hathaway fame) once said, “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939; I think civilized people don’t buy gold, they invest in productive businesses.”. And fair enough. As I stated earlier, I fully fund my 401k. That Grandmother with the paper doll dresses under the tree? Her Father enlisted in the Army to fight in WWII. He was a concert pianist by trade, but wound up as a radio operator attached to Patton’s Third Army during the war. (I actually have the pocket new testament the Army issued to him). He died before I was born, but my Grandmother told me the only time she ever saw him cry was at the party celebrating his return home from the war. Evidently the liquor was flowing and he talked a little bit about participating in the liberation of Buchenwald. I’ll spare you the few details she recalled, but they were as horrible as you probably suspect. What does that morbid story have to do with economic difficulties? Economic troubles often precede, precipitate, and accompany wars. Sometimes economic troubles (or yes, even wars) can be so bad as to require you to move. Maybe on short notice or maybe with only the clothes on your back. If you ever wind up like Charlie Munger’s proverbial family in Vienna, being able to carry some concentrated wealth in the form of gold might just provide you the seed money you need to start anew someplace else.
So that’s it. Probably too extreme for this crowd, but there it is. Will this coming downturn be just another post war recession like all the others over the last 80 years? Very probably. And thrift, debt avoidance, and a little luck will likely carry you through just fine. But for those of you that both have the means and who take the longer, intergenerational view of history, consider stocking the pantry deep and adding some physical gold to your holdings. Its insurance to protect your family against some of the worst possible outcomes.
Karl, I agree with everything you just posted on this subject. I, too, came from very lower middle class family, just on the edge of poverty. I remember being hungry, but it only lasted untill school lunch the next day. We weren’t allowed to eat our lunch food at any other time. The memories run deep. My husband was never hungry as a child and had good, working-class parents who provided for him and his siblings. He and I both keep a robust pantry because of my memories. It’s also part of living in cold New England where winters can be harsh and trips to the store are done thoughtfully, not willy nilly. I thank you for your stories and your advice. They have been heard.
Karl, Many thanks for writing all of this and sharing it with us. Very thoughtful and sobering. I’ll be re-reading it later today.
No matter how the economy ends up I suppose two of the most important things one can have are skills and tools. If you haven’t done much cooking at home now may be the time to invest in tools like good pots and pans and knives. Here in the US Mid Atlantic you get get good quality items for pennies on the dollar at your average Saturday Morning yard sale or if you prefer new, restaurant supply stores are often open to the public. As rumors of shortages continue to fly, finding versions of similar recipes can be useful, a soup with rice or a stew with potatoes, a cake with no eggs and a cake with very little flour.
My Father lived through the Great Depression stayed frugal his whole life. Fixed things, did without, fixed things a second time. I can only recall him complaining about ‘Cheap’ things three times coffee, fish and cheese (no, he wasn’t French). Guess it’s true about apples and trees, with some of the Covid Stimulus I got a good Espresso machine and grinder 🙂