Apocalypse...Now!

A few weeks back, I decided something important about these book reviews: If a book isn't worth your time then there isn't much point in spending a lot of digital ink excoriating it. I'm not much for vitriol (except generally against commies). 

Yet, after reading Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown by David Wiedemer, Robert Wiedemer, and Cindy Spitzer, I realized this particular brand of delusion holds very important investing lessons worth exploring. So, let's indulge. 

First, credit is due: The authors also wrote America's Bubble Economy: Profit When It Pops, which was published in October 2006—truly prescient. (And they take pains to remind us of this fact, scores of times, in Aftershock.) In the investing/economic forecasting game, a lot of folks are right occasionally (hello, Nouriel Roubini?), and this is the perma-bears' moment in the sun. There is a part of me that salutes the opportunism here. 

This is one of the most rhetorically "nimble" books I've ever read. It constantly says it isn't something, then turns around and becomes exactly that. To the authors, this isn't a doomsday book and they aren't pessimists; yet they go on to tell us in the next few years hyperinflation is inevitable, US unemployment will range from 40% to 60%, and US GDP will halve. The book says all the other doomsday books about debt are different than theirs; then we read chapter upon chapter about today's debt ills (the differentiator is they say it's not that debt is bad but that people are stupid). We are told people only want cheerleader economists and that no one but they are willing to tell you the truth about today's economy; then go on to pen an entire chapter about the viability of other prominent doomsday books out there. 

There is no way out, nowhere to hide—we are all doomed. Hyperbole is a virtue—the authors say the only safe place for money is gold (but that too, alas, is a bubble), and if you don't work in healthcare or education or produce some other indispensible good/service (as defined by the authors), you should quit right now, take a pay cut, and go into those sectors. Moreover, the book says, there haven't been any real productivity gains in the last 30 years. Period. I dare say even Voltaire's head might spin at all this (even in the best of all possible worlds). 

The final chapters on the future are the most entertaining in this regard. We are lectured about how clinical depression will hit an all-time high, as will obesity. Even though we'll have hyperinflation and expanding global population, somehow the price of today's cheap, high-calorie food will remain unaffected—so, of course, people will turn to their refrigerators for respite. 

Indeed, the bulk of Aftershock is comprised of rambling sarcasm and condescension of this kind, then backfilled with hyperbolic "theory" (a term used loosely here since there's seldom logic or empirical analysis applied to their prophecies). In place of rigor, we are told modern economics simply cannot see today's problems, and therefore we must all become "evolutionary" economists who see very long-term trends. (Strange, because evolutionary economics, as I understand it, most often employs complexity theory and posits that, because of this, forecasting far into the future is foolish. But I digress.) In the glow of this evolutionary light, we are told that ever since the end of Bretton Woods in the early ‘70s the world economy has been a series of inflating and deflating bubbles, and the US dollar "bubble" (the biggest and baddest of all bubbles) is next to pop, toppling the world into global depression. 

We are told that others who saw the 2008 downturn coming got it right for the wrong reasons—but this book will get it right for the right reasons and correctly anticipate the anguish of 2010 and beyond. Yet, it's truly rare a book turns out to be wrong so quickly. Aftershock was published in November 2009, about 1.5 months before positive Q3 2009 US GDP growth (+2.2%) was announced, surging productivity prevailed, and second estimate Q4 2009 GDP shot through the roof at 5.9%—not to mention the strong market recovery throughout. 

Above all else, this book isn't so unique as it posits: 

• The Ultimate Depression Survival Guide by Martin Weiss
• The Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets by James Turk and John Rubino
• The Return of Depression Economics by Paul Krugman
• Surviving the Second Great Depression by Joseph Morse
• Fiscal Hangover: How to Profit From The New Global Economy by Keith Fitz-Gerald
• The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen by Arthur B. Laffer
• When Markets Collide by Mohamed El-Erian 

This is just to name a few. All these books were published recently, all of them basically cry bloody doom from the mountaintop, and all of them say "it's different this time." Is Aftershock really a lone voice in the crowd?  

So, let's flip this around—how many books are crying at the top of their lungs the period ahead is ultra, mega, super bullish? Maybe one exists, but I can't find it. Fact is, right now folks have almost no problem contemplating ruin and have huge difficulty viewing today as a fairly typical recovery. And that is fairly typical of how sentiment works. 

Indeed, the landscape is always littered with gloomy books and high profile articles at turning points in stock markets. 2009 was such a turning point. People naturally extrapolate what has been a bad few years (and flattish decade overall for stocks) into the period ahead—pattern continuation is something our brains can't help but do. It's a basic lesson of behavioral finance: People want to corroborate how they're feeling—this is called confirmation bias. And Aftershock does that in spades. 

The psychologist in me looks at this book, notices how many times the authors feel compelled to say things like "people won't want to hear this, but…" and realizes it's probably a compensation for a baser uncertainty in their own guts. We are referred to their website—over and over—for updates on the aftershock, and yet the site hasn't been updated rigorously in some time, and certain features have been taken down for "updating." I would venture that's because the last 12 months worth of economic and market data haven't been kind to their views. 

But all that can be easily shrugged off, can't it? The huge V-shaped recovery in stocks and the broader economy is just a mini-bounce before the broader fall, right? Yikes. That kind of thinking meant missing one of the strongest first years of any bull market in history, returning 75% for global stocks off the March 9^th bottom.* Ouch. 

Believe it or not, I'm glad I picked this book up. In a perverse way, I recommend it to you. This is one of those tomes you'll look back on 10 or 20 years from now and wonder at the paranoia and pessimism of the current era. (Not unlike history's infamous gaffes at the other end of the market cycle—prominent economist, Irving Fisher, proclaimed stocks had "reached what [looked] like a permanently high plateau" in October 1929, or all the "New Economy" speak in 2000.)  

Never trust a forecaster who is so sure so far into the future (Aftershock tells us how the next many decades will go). The best market forecasters are right more often than they're wrong—but wrong quite a lot and will admit to it. Yet, good forecasters never succumb to the hubris of peering more than a couple years forward. And, vitally, they manage money with the ethos of "always know you could be wrong."  

If you're going to read an "it's different this time" doomsday missive, it's probably better to go with Mohamed El-Erian's, When Markets Collide. There is much to disagree with in that one, but it's not nearly so alarmist. At a minimum, El-Erian is an excellent investor and economist who will put you through rigorous, intelligent discourse and make you smarter for reading it. We still may not agree, but at least we can learn something as we stare into the abyss.

*Source: Bloomberg, 03/09/2009 to 03/19/2010
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Michael Hanson is an analyst at Fisher Investments, author of 20/20 Money, and a blogger at InvestingIQ.