Financial Reckoning Day: Surviving the Soft Depression of the 21st Century [Englisch] [Gebundene Ausgabe]

I found the first three chapters hard trudging. Chapter One rehashes the bursting of the internet bubble and blames the Internet for amplifying the hasty judgments of the mob. Chapter Two aims to show us that every binge must be followed by a hangover, economically speaking. To prove this, they indulge in many, many military metaphors, like the Japanese "expansion" into Pearl Harbor that led to the hangover at Midway. I'm not much for military history so this was of passing interest to me, but I was interested in the introduction of Hyman Minsky and his theory that "stability [itself] is destabilizing." The idea is that when everything is going well economically, the banks and other "merchants of debt" will inevitably market their liabilities and send the economy into a vicious cycle of credit. Chapter Three tells the story of John Law's early attempt to create a paper currency and the ensuing speculative bubble; but mostly it a broadside against central banks who think they can save an economy merely by printing more money.

After this, with the exception of the Chapter Six, the book really started to grab my attention. Chapter Four presents the comparison between our economy today and Japan's ten years ago. Sure, the metaphor isn't perfect (e.g., American capital markets are arguably more nimble and ruthless) but I bet it will spook you if you have money in the stock market. Chapter Five dethrones Alan Greenspan and laments his reversal from a "gold bugger" (i.e., money should be backed by gold) to a devotee of managed paper currency whose overconfidence helped fuel the bubble, and who, the authors plainly believe, cannot save us with interest rate cuts. Regarding Chapter Six, I'm with another reviewer who thought this part was tough. It's an abstract philosophical treatise on why the masses are, you know, bunk. Maybe they needed to make a place for the obligatory Nietzsche quotes? I would have much rather they elaborated on their all-to-brief discussion of fiscal policy, where they start to make a case for the dangers of a Bush-inspired expansion of fiscal spending.

Chapter Seven (The Hard Math of Demography) is a great chapter and is the heart of the matter. Whereas in the earlier Chapter they drew the cosmetic analogy to Japan ten years back, here they outline the causes that doom us to repeat Japan's performance. Drawn largely from a study by the Cowles Foundation, they show that the stock market has historically trended along with demographics. Specifically, when the proportion of people who are "peak-investors" (i.e., people in their 40s) is high relative to spenders (in their 20s) and retirees (who pull money out of the market), then demand for equities runs high and the market rises. But this ratio has recently peaked, and we are looking at two decades where the proportion of investor-aged population is going to decrease as more people move into retirement and will be selling, not buying, stocks. This is the authors' concern: that as American depends increasingly on debt-financed consumer consumption, fewer investors will demand equities, so we will have less investment capital. Compelling, but the authors did not cover all their flanks. For example, they do not seem to acknowledge that consumer spending provides companies with revenue and retained earnings that can be a source of investment capital; they seem to imply throughout that the only investment capital comes through savings which are invested in the equity markets. Also, you can argue that the historical comparison between U.S. Equity markets and domestic demographics is challenged going forward given increasing globalization. In other words, the US stock market hardly depends only on domestic investors for demand; as we mature, other economies are supplying plenty of prime-aged investors.

So this is a worthwhile debate for any long-term investor and this book is sure to make you think about the risks in holding equities into the next decade. I was not at all disappointed that the authors' go-forward advice amounted to "sell equities, buy gold, we think." It was a welcome bit of humility from them. But the book is really a case for selling equities, it is not by itself a very persuasive argument for buying gold, unless you simply believe that historical inverse relationships between the two asset classes is going to hold up.

One of the things the authors illustrate is a chart showing the cycle of bear and bull markets, and how they tend to last 15-18 yrs. If that trend holds, then we've got another decade or so before we see another bull market. Another point they make that I found interesting is that a person's maximum salary occurs at an average age of 46. Up to that point, those people are buying stocks and consumer goods, pushing the stock market up. After age 46, those people begin to start selling stocks more than buying them. Plus, they begin to make fewer and fewer purchases. Where this comes into play is with the Baby Boomers. The beginning of the BB age was mid-1950's. When you add 46, you get roughly year 2000. That's when our market peaked. The implication is that our aging population will no longer be contributing to the stock market's push upward, just the opposite. And when you consider that there are 70-80 million BB, then that's an incredible force to be reckoned with.

While I was disappointed in the lack of direction the book offers, it was a worthwhile read. The authors did a good job researching the material, and the chapters were easy enough to read once each night. The book is mostly a historical account of monetary systems and it isn't until the last few chapters that the here-and-now stuff is discussed. The authors do tend to make simplistic arguments which I thought was an oversimplification of the problem. They also make a comparison with Japan, which I keep hearing the finance types talking about, so it was educational to read more about why a comparison is warranted.

Another good book is "Rational Investing in Irrational Times." It's premise is that diversification is the only way to make money in the market, especially when you can diversify using index funds. "Rational Investing" makes the important point that there are only a few days in the year that make a difference in a stock's price, so you'd better be in the market when those days occur. "Rational Investing" looks at the market from a purely statistical perspective and presents a methodical approach to investing. In contrast, "Final Reckoning Day" looks at the market from a centralized money management and demographics perspective.

Overall, the authors resign to the fact that we simply don't know what will happen next. And each time we try to do something, we change the system somehow, creating new variables. If anything, what I've gotten out of these books is that (1) the buy and hold strategy is a myth, (2) history repeats itself in almost predictable cycles, (3) our monetary systems are incredibly complex when you try to make forward projections, and (4) finanical analysts are making guesses at best. Books like these really should be made part of the high school curriculum so young people can start developing opinions on the matter and be better prepared to make the right financial decisions in their lives.