Sunday, November 15, 2009

Financial Reckoning Day Fallout: Surviving Today's Global Depression - Book Review

Coast to coast flights are fantastic for getting uninterrupted reading time in, and on my flight back to the West Coast last Monday, I was able to devour Financial Reckoning Day Fallout: Surviving Today's Global Depression, by Bill Bonner and Addison Wiggin.

Bonner and Wiggin are the two top guys at Agora Financial, an extremely successful investment publishing house that is as renowned for their marketing prowess as they are for the high quality of their investment research and newsletters. You may be familiar with many of their free or paid investment products, such as The Daily Reckoning, a free daily e-letter they've published since 1999.

A quick note on Bill Bonner before we get into the book - the more I follow his writings and career, the more I'm in pure awe of the guy. A really, really smart dude...and that's an understatement. Not only is he an astute investor, a stellar writer, but he also founded and built Agora Financial into a publishing powerhouse. A true renaissance man with awesome accomplishments.

Bonner and Wiggin originally wrote Financial Reckoning Day earlier this decade, predicting a long, soft depression for the United States. I've been a reader of The Daily Reckoning since 2004, where they've continued to follow, update, and expand upon their original hypothesis that the US was destined to follow in Japan's economic footsteps with a long, slow, soft depression.

The credit and debt explosion in the middle of this decade drove up one last asset bubble that tested the patience of investors who shared these bearish views. But ultimately their patience has been rewarded, as the authors;: "trade of the decade" - long gold and short stocks - has been right on the money.

Financial Reckoning Day Fallout begins by revisiting the hysteria of the tech bubble, which, as time passes, seems to increase in absurdity for me personally. The authors polk fun at George Gilder, the "messiah" of the of the New Era.

Gilder's articles in Forbes ASAP were not merely hard to read, they were incomprehensible. But never mind. He was a genius...but he had worked himself into such a state of rapture over the possibilities of the Internet that he seemed to have gone a little mad.

One caveat, "I don't do price," Gilder commented. Too bad. Because, as investors would discover later, prices are important. A technology may be spectacular; the company owns it may be a great company; but the stock is only a good investment at the right price.

Lest we be tempted to think of the tech bubble as a unique occurence, the next chapter, entitled Progress, Perfectibility, and the End of History, pays an amusing tribute to other times in history in which men have declared the entire race of humanity to have been perfected, or nearly so.

Francis Fukuyama takes a solid ribbing for his essay, which he published in 1989, entitled "The End of History."

The document was remarkable; for rarely did someone manage to get so much so wrong in such a short essay. Fukuyama saw all of history as a march toward democracy and capitalism. He believed the collapse of communism marked the triumph of both...and hence, history was dead.

If sarcasm, witty humor, and history are your cup of tea, then you'll get a real kick out of this book. Bonner and Wiggin are real students of history, and their true talent is their ability to relate back tales in a very funny, insightful way.

John Law, perhaps the ultimate target for the authors, has a whole chapter devoted to his financial shennanigans. Law, you may recall, is the "financial genius" who is largely credited as the father of paper money. An innovative money printer who would even put Bernanke & Co to shame, his inflationary creation is largely responsible for the Mississippi Scheme and South Sea Bubble manias - amusing accounts of both are contained in this chapter.

Alan Greenspan's career is also traced through, also in farcical fashion. I knew he had libertarian leanings when he began his career, but did not realize the extent to which he was a disciple of Ayn Rand and hard money. It was eye opening to see how much the political world corrupted Greenspan's views - which were reinforced by the seeming success he was having in "guiding" the economy to steady booms and soft landings.

There are a couple of chapters devoted to the comparison of the US with Japan (the parallels of which are downright scary), along with the demographic sledgehammer the US is about to be hit over the head with. Some of Harry Dent's demographic research is cited here.

The book wraps up with one of my favorite chapters, in which the authors introduce the concept of Ought. The idea is that no matter how many numbers you crunch, markets are the ultimate arbiters of morality. Everything that "Ought" to happen usually does, in which financial sinners are published for their transgressions, and fools are ultimately separated from their foolishly invested capital.

Here's an intro to Ought - which made me laugh out loud several times on the plane:

If "Ought" were a person, Ought would not be a bartender or a good-hearted prostitute. Ought is not the kind of word you would want to hang out with on a Saturday night, or relax at home for it would always be reminding you to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more like a shrewish wife than a willing mistress. For Ought is judgemental - a nag, a scold. Even the sound of it is sharp; it comes up from the throat, like a dagger and heads right for the soft tissue, remembering the location of weak spots and raw nerves for many years.

Ought is neither a good-time girl nor a boom-time companion, but more like I-told-you-so who hands you asprin on Sunday morning, tells you what a fool you were, and warns you what will happen if you keep it up. "You get what you deserve," she reminds you.

Financial Reckoning Day Fallout is different from most investment books in that it will not give you specific investment advice per se - which is exactly what I like best about it. Most investment books that give advice end up being completely wrong - typically more of a contrarian signal than anything - seen any good books about making millions in real estate lately?

I prefer books like this one, which challenge your assumptions, and help develop and shape your thinking. I tend to read very few newly released books in the finance/investing genre, finding most of them to be shallow and full of bad advice. Tried and true investment insights, though, are timeless. And I think this is a book you could pick up 25 years from now, and still get just as much out of.

I'll close by sharing that I find the doom and gloom that Bonner and Wiggin revel in absolutely hysterical. When my wife saw the title of this book, she remarked that it's a wonder I'm not suicidal. I happily showed her a few of the chapter subheads during the flight, my favorite being "How to Relax and Enjoy the End of the World." Really funny stuff.

Marc Faber in the Daily Reckoning

Speaking of The Daily Reckoning, Marc Faber wrote a guest essay in Wednesday's edition entitled When Currencies Crash.

Faber believes the US is dedicated to debasing its currency - which I think everyone agrees upon. The question is - will they be able to successfully do it?

Anyway a good read for Faber fans - I love to read anything he writes.

Is This Rally Finally Losing Steam?

Tom Dyson believes so. I know we've been crying wolf about this for a little while, but there are some real telling signs that could be foreshadowing an end of this rally.

Positions Update - Short the S&P, Long the Dollar

That's our story, and we're sticking to it! I was definitely early on both trades - time will tell if I was merely early, or flat wrong. Reason #78 why trying to time tops/bottoms is a fool's game!

The market is quite overbought, and should open lower this week. How much lower it heads will be interesting to see.

We have many divergences taking place - the "junk", such as bank stocks, have not confirmed these new highs yet. Neither has oil, and neither has China. So for now, we wait.

The dollar still searches for a bottom.

Was last week a countertrend bounce for the S&P, or the start of a rally to new highs?

Open positions:

Thanks for reading!

Current Account Value: $20,012.03

Cashed out: $20,000.00
Total value: $40,012.03
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

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