October 19, 1987: 20 year retrospective

I started my full time career as software engineer on July, 1987. A few weeks after Black Monday, my employer had a 401k training session and people were nervous about investing and making small jokes about it. I invested in the market anyways and have done so pretty much until now. I turned to mostly cash in 2001 and all cash earlier this year. I've started a new full time job this summer, so I'm now putting money into 401k to get my full match and I'm throwing 100% into an international fund. Meanwhile, as I wrote earlier, I am 60% short the market (DXD, QID, SH) which are still negative since I got in too quick (was about +10% and then went all the way down to -14%, and now that the market has gone down a little bit, I'm "only" at -10%).

Here's a painful sign of the times: "Living paycheck to paycheck gets harder"

What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.
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Family Dollar, whose food offerings were limited to candy and snacks until two years ago, has expanded its mix of groceries like fruit cups, cereal and such refrigerated items as milk and ice cream while cutting back on shoes. This summer the chain began accepting food stamps.

So Americans are feeling the squeeze of the higher prices and hardly any wage increases (or loss of jobs), even though the unemployment statistic is very low historically and official GDP is still on track for growth. This trend (pinching pennies, barely surviving paycheck-to-paycheck) is not good for the economy, as more homedebtors get foreclosed and kicked out of their homes. Why? Because funny loans are about to reset higher next year (peaks around Q1/Q2), which means foreclosures will get higher Q3 or Q4 of 2008. But it won't be the peak: I believe we will hit it few years out (2010 or later) as American recession gets worse and people start losing their jobs and/or (severe) cuts in their income. Current foreclosures are mainly due to people borrowing more than they can afford and their ARM rates are resetting and no longer can pay the monthly due amount. These foreclosures will continue to increase for many years but to add on top, many people who have lost (and will lose) jobs and no longer cannot pay, as well. People have done well the past 7+ years of fattening so they have savings like 401K and IRA to tap on, to paying their bills. As we enter the 7+ years of lean times, many people will be hurt financially.

Do I expect a depression? Yes. When? Hard to say. How long? Again, hard to say. How am I preparing for it? Be debt free (we are renters). Have some cash (I have both dollar and yen handy) and hard assets on hand, which can be used to barter. Most of my recent "precious metal" investments have been in lead and brass -- granted, price per size/weight isn't as good as gold or diamond but I do have a big diesel pickup to carry it all (why diesel? because if oil/gasoline/diesel becomes impossible to obtain, I can always run it off of vegetable oil). Plus, with lead, it can be converted into protein (just to be clear, I'm thinking deer, quail, and the likes).

Last but not least, on Dow index: here's an interesting perspective on Dow members of 1987: "Dow members on "Black Monday" 1987." Note that 8 companies are no longer represented in the Dow (gone out of business, merged, etc.). And 4 of them are not part of the Dow component (but still alive). So, only 18 companie of the original 1987 Dow companies are part of the composite. I'll let you form your own conclusions....

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