Might It Actually Be Different This Time?

Investing Strategies Retirement Investing
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I posted the other day about Ray Dalio and the post was not well received here. So I’ll try gain from another angle. My concern is that it really IS different this time. I’m 62 years old and remember how bad things where in 1979 when I was 19. Gas lines, inflation, crappy investment returns (although I wasn’t part of investing at the time and didn’t understand what happened until years later). I really thought my financial future would be bad. Despite everything, things turned out OK.

It sort of feels like 1979(ish) again as I approach retirement. For the past 40 years, it seems that the USA has a new crisis every few years and the crisis gets solved with an ever higher debt-to-GDP ratio. Basically 40 years of kicking the financial can. There was a short time around 1999-2000 where debt seemed to be headed in the right direction, but 9/11 revived the urge to borrow as the quick financial solution to whatever the problem du jour was. Along with a growing debt-to-GDP, all through these 40 years, we discussed and knew that Social Security and Medicare were not properly funded. But that, too, got kicked down the road with no solution. It seems that we might be at the end of our ability to print and/or borrow our way out. Even inflating doesn’t seem to be a solution because it causes higher rates to service the national debt and much higher Social Security costs (estimated to be up 8.5%ish Jan 1st).

So is the 2022 financial swoon (stocks and bonds down) the beginning of a huge decline in the standard of living that 62 year old won’t live to see fixed? Or is this just another crisis du jour that will work out somehow and we’ll muddle through? I’m generally not a doom and gloomer or an extremist. But I’m trying to see how this can turn out OK for myself and other affluent (but not filthy rich) Boomers heading into retirement. I’d bet that there are others here who share my concerns.

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For the past 40 years, it seems that the USA has a new crisis every few years and the crisis gets solved with an ever higher debt-to-GDP ratio.

It will likely just pass as an uncomfortable spell and we’ll all move on. On another board here just today I mentioned that at age 65, I have seen the world end many times. Or that’s what they told me it was, but it didn’t end. And we not only survived but prospered.

Now, as far as this: For the past 40 years, it seems that the USA has a new crisis every few years and the crisis gets solved with an ever higher debt-to-GDP ratio.

The Capitalists insist on it. They make a lot of money on it with no downside. It’s how capitalism works nowadays. Sure, people see flaws in it. But the reality is before Big Government, before Central Banks, before deficit spending, it was even worse. Even though people can point to progress & development. It worked in spite of its vices, not because of its virtues. Communism in Russia and China can be said to have done the same. " You should have been here when the Tsar was in charge" was a common Soviet era catch phrase. The reason we have central banks, big government and deficit spending is because it makes things work better than they did before. Not perfect but they addressed things seen as problems.

I’m not saying “Hurray for mega-deficit spending!” and it would be nice for once if we actually solved and actual problem for a change but the usual bogey person is not as bad as it seems.

Things could go south in a big way for other reasons but that would be a discussion of politics and I don’t want to get into that

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I think we mostly believe the long term trend is upward. That implies recovery will follow.

A variety of disasters could get in the way. Nuclear war. Global warming. Massive earthquakes or weather events.

We do enjoy abundant resources, a well educated work force, and strong financial expertise.

Immigrants still want to move here. I think our optimism is well deserved.

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It sort of feels like 1979(ish) again

I had just started my senior year of high school at this point in 1979, but during that year I remember waiting in gas lines for gas that was over $1/gallon (gasp!), among other things. I would point out that 1979 was different in a couple of ways. This chart gives unemployment rates, GDP growth and inflation by year since 1929. https://www.thebalancemoney.com/unemployment-rate-by-year-33…

In 1979, unemployment was 6.0%, 8 months into this year, it’s ranged from 4.0% to 3.5%, meaning that for the year, it will be nowhere near 6.0%, even if before the end of the year we have a boatload of layoffs without people being able to find new jobs soon. Even though WARN (Worker Adjustment and Retraining Notification) notices have been up in 2022, as of August, there were still 10MM job openings and only 8.6MM people looking for jobs. And that’s with the labor participation rate increasing back to where it was pre-pandemic. So, it seems unlikely that the unemployment rate is going to suddenly increase to double digits.

In 1979, inflation was at 13.3%, in 1980, it was 12.5% So far this year, inflation has peaked at 9.1% in June, and the PPI (a leading indicator) has been dropping for a few months now.

So at least from employment and inflation stats, we seem to be in a better place now than we were in 1979. So maybe it is different.

AJ

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“I’m 62 years old and remember how bad things where in 1979 when I was 19. Gas lines, inflation, crappy investment returns (although I wasn’t part of investing at the time and didn’t understand what happened until years later). I really thought my financial future would be bad. Despite everything, things turned out OK.”

Go back another decade or two. 1966 was the worst time to retire …

I got out of college in 1968. The Vietnam War was going on and costing a bundle. 55,000 US servicemen/women were killed in that war that finally ended 1970-71 when we disengaged. They won/we lost. Defense industry crashed as gov’t cut back military spending. Crash of 1971-73. Stock market down to half! There were no discount brokers. If you wanted to buy individual stocks, it cost you a chunk to buy and sell, and there was no mutual fund industry. Horrors , gas doubled around then, and we had a 55 mph nationwide speed limit. Rationed gas by last digit of license plate, alternate days. Limits to 8 gal of gas at a time.

Mortgage rates of 7-8%. It hurt when I bought my first house in 1977.

30 year bonds would pay up to 15% interest.

well, Reagan replaced Carter. The Middle East oil spigot opened. It was ‘star wars’ era and lots of defense spending. Inflation got whipped.

1983 on - great rise in market.

then we got into Middle East wars…more defense spending.

Bank crisis…car industry crisis…bailouts…

pandemic - bloated budgets and borrowing and it continues with record deficits.

Back to 13% inflation.

well, hope you didn’t have all your assets only in stocks… might be a bumpy ride. Even worse if ‘tech stocks’.

Future returns on market? who knows?

Might be different this time. Can you count on 11% SP rise each year? hmmmm…only if corp profits rise at good clip over inflation. Who is doing that?

You bought Peloton? Nice fad stock - now down 90%. Might not be saved…

t.

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For me it feels very different from late 70s and early 80s. I remember how back then every store, gas station, etc. had big signs that they were NOT hiring. Today, everywhere I look, every business needs workers. When I go to a fast food, many lobbies are closed because they have no employees to work. Back then construction came to screeching halt and people were laid off. Now every mile or so there is a new subdivision, school, or store being built. In 1981 you could get a 3-month CD with 18 or more percent interest. Now even though it went up, a 3-month CD will earn you about 1.5 percent. When you look at S&P 500 annual results, 1979 has 12.31, 1980 had 25.77, 1981 -9.73, and 1982 back to positive 14.73. 2022 is not over yet so who knows what it will end up being but it’s about -17%.

So the only thing similar is the inflation but personally I believe that for the past 10 or more years the Fed has been artificially suppressing the measure of inflation. I have felt the actual inflation based on how much it cost me to buy what I need to live all along. So while fed claimed no inflation, my expenses kept going up every year for food, clothes, insurance, etc. Therefore I consider it BS that we had no inflation and then boom it is 10%. Having said that, I am definitely paying more for food in the past year then before and it is significantly. higher and so our paper and cleaning products.

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In 1979, inflation was at 13.3%, in 1980, it was 12.5% So far this year, inflation has peaked at 9.1% in June…

IIRC, the calculation of inflation has changed since then, so not a direct apples to apples comparison. But probably close enough.

JLC

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we discussed and knew that Social Security and Medicare were not properly funded. But that, too, got kicked down the road with no solution. It seems that we might be at the end of our ability to print and/or borrow our way out. Even inflating doesn’t seem to be a solution because it causes higher rates to service the national debt and much higher Social Security costs (estimated to be up 8.5%ish Jan 1st).

All of what you state may be true, but that does not mean that no solutions exist. While I think we can, for a lack of better term, muddle along for a while longer, there are obvious and simple (though not politically easy) solutions - and surprise surprise, they are probably the same solutions that were applied in the 80s when we much of the same. History rhymes.

The Mostly Forgotten Tax Increases of 1982-1993
https://www.bloomberg.com/opinion/articles/2017-12-15/the-mo…

The 1980s tax increases are less well-known, in part because they didn’t involve increases in individual income tax rates. The biggest, the Tax Equity and Fiscal Responsibility Act of 1982, increased revenue mainly by tightening up rules on depreciation, leasing, contract accounting and investment tax credits. The Social Security Amendments of 1983 sped up planned increases in payroll tax rates, among other things. The Deficit Reduction Act of 1984 changed rules on interest exclusions, income averaging and such. The Omnibus Budget Reconciliation Act of 1987 closed a few loopholes and extended a telephone excise tax. And the Tax Reform Act of 1986, while it lowered the top individual income tax rate to 28 percent from 50 percent, contained enough offsetting changes that, for the first two years after enactment, it raised tax revenue.

It might require political change for us to get to the above - not because a different party will get a different result but because it might take both parties to fail at fixing things before the public demands a solution that stands a chance at working. Currently, we keep using a hammer to drive screws and while that will eventually get the screw in the wall if you pound it hard enough, it will make a mess of things in the process.

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If it’s different this time, it will be because of nuclear war, climate change damage that makes the planet uninhabitable, or right-wing insurrection and Civil War.

There really isn’t a financial planning solution to these events. The living will likely be envying the dead.

intercst

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Or could it perhaps be a Left Wing overreach that ends the ability of the affluent to accumulate and keep enough to live like the prior generation of retirees?

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If it’s different this time, it will be because of nuclear war, climate change damage that makes the planet uninhabitable, or right-wing insurrection and Civil War.

There really isn’t a financial planning solution to these events. The living will likely be envying the dead.

intercst

HAH! That’s what I was hinting at when I wrote: Things could go south in a big way for other reasons but that would be a discussion of politics and I don’t want to get into that
My understanding was the Big “P” is discouraged on this board.

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"If it’s different this time, it will be because of nuclear war, climate change damage that makes the planet uninhabitable, or right-wing insurrection and Civil War.

There really isn’t a financial planning solution to these events. The living will likely be envying the dead.

intercst"

–

Could be a lot less, but more likely scenarios. North Korea invades South. China takes over Taiwan. Iran decides to nuke Israel. Some terrorist group detonates a nuke or two. or bio-weapon.

Then there is always a meteor /asteroid hit…

the ‘big one’ in California…Magnitude 11 quake…

New Madrid fault Mag 10 quake…

Yellowstone super volcano erupts…

t.

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Circling back to my original question: What are the odds that our record debt-to-GDP (similar to WW2, but without the “king of the hill” benefit we had in 1945) will cause a significant decline in the standard of living for retirees, for the rest of their lives, living on stock and bond interest/dividends/capital gains/consumption of principal?

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What are the odds that the dollar will fail? That’s an economic disaster that some worry about. Especially if politicians think their ability to borrow is unlimited. What happens if investors stop financing the deficits by buying bonds?

But if they take their assets out of dollars (and sell), what do they do with their funds? What asset do you buy instead? What currency do you buy as an alternative?

Land ownership is probably the best asset. If it has minerals or trees or farm lands, etc, whatever it produces can be valued in whatever currency is acceptable at the time.

Our very strong asset base makes you think failure is very unlikely. And we have many assets to sell if necessary. Imagine selling our national parks to someone like Disney. How much would they pay for Yellowstone or Yosimine?

Its good that people worry about these potential problems but lets hope it doesn’t happen in my lifetime.

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For my retirement, I’m not worried about this. Short of a civil war, the next couple of decades should be OK. As someone said, “muddle along”. My investments will go up and down, but over the next decade they almost assuredly will go up. My retirement should last longer than a decade.

I don’t pretend to know when debt vs gdp becomes an issue, but at some point I’m sure it will. Taxes must go up at some point, and they need to be targeted at money that the government generally doesn’t have access to (e.g. legacy assets that aren’t dividends or via W2/1099 earnings). Selling national parks isn’t the answer. We should have been charging more for access to public lands (e.g. oil and gas), but that ship has already sailed.

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Imagine selling our national parks to someone like Disney. How much would they pay for Yellowstone or Yosimine?

Disney already has an Old Faithful. It blows daily at the Ft. Wilderness resort at Walt Disney World. :slight_smile:

I don’t bother with worrying about the future. You could look at all the doomsday scenarios, but you can also ask, what if the scientists actually solve the issues of fusion, delivering an unlimited perpetual environmentally clean energy supply? What if Putin is overthrown and Russia surrenders to Ukraine, leading to a new Eurocentric world order? What if a centrist 3rd party sends both the Dems and Repubs packing? There are so many possibilities, you could drive yourself crazy trying to strategize for what might happen.

The best strategy, especially for someone about to retire or living in retirement, is to make sure you have 5-8 years retirement income needs in cash or equivalent to protect you against market volatility over the next few years. It’s amazing how much better you can sleep at night not having to wonder if you can pay the bills tomorrow.

If you’re more of a pessimist than I am, consider 7-10 years of retirement needs in cash. But either way, this simple approach gives you the financial flexibility to not have to stress out over the things that could go wrong with the world.

Fuskie
Who was once asked what he would do with his portfolio if the world came to an end, and his response was that if the world came to an end, he’d have more important worries than what to do with his portfolio…

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That’s the first time I’ve heard “5-8 years”. Usually it’s “2-3” in cash or equivalent. We have about 2 years, give or take.

I’m going to start liquidating my ESPP (slowly) to generate cash, and diversify investments.

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“What are the odds that our record debt-to-GDP (similar to WW2, but without the “king of the hill” benefit we had in 1945) will cause a significant decline in the standard of living for retirees, for the rest of their lives, living on stock and bond interest/dividends/capital gains/consumption of principal?”

The biggest risk is hyper inflation. Germany where it took a wheel barrow of money to buy a loaf of bread.

Venezuela where you had an hour to spend your paycheck before the next 100% rise in prices.

Of course, a decade of 10% inflation will kill bonds, will kill retirees with non-inflation protected pensions, etc. Even there, the COLAs will lag inflation even if you have one.

Of course, taxes , real estate taxes, and everything else will continue to go up and up and up.

Yeah, it might not be fun having a decade of 8 or 9% annual inflation - or more. I lived through the 77-85 era when US Treasury 30 year bonds hit 15%. Then whammo it went back down, year by year.

Wasn’t long ago that CDs paid 5% annual interest. 10 years ago?

Of course, the worse case scenario I can envision is ‘someone’ launches an EMP attack against the US. Just explode your nuke 30-50 miles above the east coast…say NYC, one down around GA, one over TX, one in CA…and you wipe out the grid, the financial sectors, 90% of all computers, cars, electricity service to 200 million homes/businesses. Toast. Gone.

With a week, the armed groups go door to door for food. Stores stripped. warehouses stripped.
Half the households don’t have 3 days of food no less a week or two, and of course, no refrigeration…

Could launch from ships 200 miles off the coast

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“I don’t pretend to know when debt vs gdp becomes an issue, but at some point I’m sure it will. Taxes must go up at some point, and they need to be targeted at money that the government generally doesn’t have access to (e.g. legacy assets that aren’t dividends or via W2/1099 earnings). Selling national parks isn’t the answer. We should have been charging more for access to public lands (e.g. oil and gas), but that ship has already sailed.”

The oil/gas companies already contribute a LOT more in taxes than they get in any ‘tax breaks’. You tax them too much, they cut back and you import oil from the Middle East and other not so friendly places (Iran, Iraq, Venezuela) and you get ZERO taxes from those folks. I think the oil companies coughed up close to 100 billion in fees, lease payments, corporate taxes, etc.

And of course, it’s the consumer that would pay any additional costs on oil and gas companies. Oil and gas companies just pass profits through to stock holders. Reduce their ‘profits’ and stockholders get less, including just about every state pension plan, and 100 million retirees who own mutual funds. Oh, and of course, you get less taxes on reduced profits. A lose lose situation.

inexpensive oil - great - economy does well

1970s oil embargo by the Arabs - sky high prices, terrible inflation, travel botched up - and when the oil became available again - economy took off.

Just wait till winter to find out how important ‘fossil fuels’ are to Europe. Half their industry will shut down. GDP will plummet. Despite a 10-20 year ‘advantage’ to Green Policies - their burning record amounts of coal - and wish they had more plants burning coal to keep the lights on at night.

t.

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I’ve been living off my portfolio for 20 years.

Now I’m mid 70s, typical life expectancy for males is mid 80s. Maybe mid 90s if very lucky and one of the few. Not likely due to ‘prior existing conditions’.

So…do I need to worry too much? Nope. Short of a 90% drop in the stock indexes, and bonds down 50%, I’m set.

or another extreme scenario (The End of the World As We Know It type thing)…then all bets are off.

Now just imagine that power went off in a 300 mile radius of where you live. Everywhere. Any time of year. No food available. No fast food. Banks don’t operate. Credit cards don’t work. Cash only transactions. Fuel pumps don’t work. No cars/trucks on the road. Food stores empty. Businesses shut. No gas after a week. No water after a few days. You got 30 days of non perishable foods and a way to cook them? Enough water to survive? Enough firepower to keep it?

t.