Wow. That’s all I can say about this book. Wow. If everything they predict in this book is coming true, we are all in TROUBLE!
Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown is a book about economic “bubbles”. In short, a bubble is when the price of something grows out of control beyond its true value. Eventually, the erratic price becomes unsustainable, and the bubble “pops” meaning that it rapidly drops in price. Bubbles are nothing new; they can be found all throughout history. Some examples of recent, prominent economic bubbles include the “dot.com” bubble and the “housing market” bubble which many of us are still suffering.
This was very exciting read. It was written in 2009, and some of the events of 2011 have leaned towards their otherwise haunting predictions. The authors vividly and thoroughly explain away the financial breakdown of the past decade, explain why our current recovery is basically artificial and a fake, and paint a very bleak picture of the world to come.
Aftershock Book Review Summary:
In the first part of the book, the authors analyze the events between 2008-2009 that have already happened, and they give them the term the “Bubblequake”. These events can be broken into four major bubbles:
The “Real Estate” bubble:
• Between 2000-2006, house prices went up 100% while income wages only went up 2%.
• “Innovations” in the mortgage industry such as interest-only loans, etc. put mortgages in the hands of people who could not afford them. This fact combined with packaging the loans as mortgage backed-securities lead to collapse of the credit market which popped the “Stock Market” bubble.
The “Stock Market” bubble:
• Between 1928-1982, the Dow Jones Industrial Average went up 300%. But over the next 20 years, it went up another 1200%! There was not, however, a 4-fold increase in company earnings or national GDP.
• Trouble occurred when the credit market dried up and banks collapsed.
The “Private Debt” bubble:
• Bad loans on homes and private equity (things people believed would rise in value forever) were the first thing to pop this bubble.
• As a result, good loans were the next thing to go due to rising unemployment, inflation, and interest rates.
The “Discretionary Spending” bubble:
• As the credit market dried up and jobs disappeared, consumers spent less on the things that move the economy.
Sidebar – Supposedly, the authors predicted these initial 4 bubbles in their first book in 2006, and they are not subtle about reminding the reader every chance they get!
In the second part of the book, the authors predict the events to follow post 2009 which they term the “Aftershock”. These events will occur through two more major bubbles:
The “Dollar” bubble:
• Currency, like many things, is set by supply and demand. Most of our debt is financed by Europe and Asia. As the problems within the US continue, foreign investors will slow investing in the US. Eventually, interest rates will need to be increased to attract demand back towards these assets.
• Markets will continue to go down and money will literally evaporate as stocks lose value. (To visualize this, think about your 401k value back in 2009!)
• Since the government’s tax intake is only about $2 trillion per year, the Fed will need to print money to keep things going. This will increase our money supply and raise inflation.
• The US will move forward into double-digit unemployment, inflation, and interest rates.
We’ve already begun to experience several of the items described in the Dollar bubble chapter. Has anyone heard the term “Quantitative Easing” (also called QE1 and QE2) mentioned in the news? This is basically a fancy way of saying that the Central Bank is “printing money” (actually it’s all electronic these days). There are recent talks about a possible QE3! Or how about the US losing it’s AAA rating meaning we are not as strong against a possible default? Or how about that $14 trillion dollar debt?
The “Government Debt” bubble:
• Eventually the US will neither be able to borrow more money or support programs with government backing.
• Capital spending will be reduced and everything will slow to standstill causing a worldwide economic crisis (or reset depending on how you look at it).
• Although things in the US will not be pleasant, we will suffer the least compared with other countries such as such as Europe and Japan, China, Middle East and Elsewhere.
What Do the Authors Suggest We Do About It:
In this section of the book, the authors make several recommendations about what investments you should use to take cover. Obviously, if stocks fall, bonds are not safe, and inflation is rising, there will be few investments out there that will be “safe”. They recommend, of course, not investing in stocks and real estate until long after the bubbles pop. In short, buy gold (too bad this book was published two years ago!)
My Thoughts on the Aftershock Book:
Although I would recommend this book to anyone, there was certainly its share of cons. First, there are the constant reminders by the authors that they got their theories right in the first book. Also, there are the tons of references to their website and solicitations for their business. Perhaps the thing that is most notably absent from this writing is the possibility of any new ideas or change brought on by some great leader that could bring about an end to the financial crisis. Finally, their “Science of Economics” section is a little silly.
I certainly don’t believe all their “Aftershock” predictions, but it is hard to watch the news and see how some of the recent economic events of 2011 are playing out as foreshadowed by their predictions. If anything, read this book to gain some excellent insight into how we got into this mess in the first place. For both our sakes, I hope we don’t need it to figure out how to get out!
* Editor’s Note – This review is based on my read of the first edition print in 2009. In August of 2011, the authors released a Second Edition of “Aftershock” where they have updated much of their material in light of recent events between 2009 and 2011.