Don’t Get Burned

Fire is raging down towards my mountain home. The Rough Fire has consumed 120,000 acres and is proving hard to control. Five years of drought and a little bit of lightening have created a fire that is jumping the clearings made by the fire fighters.

The assigned fire service commander has said that the mountainous terrain is more rugged than he has ever experienced. Anything can happen . .. prepare for the worse.

The only thing one can do in response to a wild fire is run. Get out of the way, and try to take whatever you can with you. When the fire is lapping at your fence line, it’s almost always too late to move all that you would not like to lose to the fire or to the thieves that invariable accompany mandatory evacuations.

So you grab the things that are most valuable, impossible to replace, and small enough to fit into your means of transport. You leave the rest to God’s will.

Nothing left to do but to watch the news reports as I sit safely at a distance.

Odd as it may sound, it’s not the possible loss of my home that is the greatest threat to my future and family. There is a bigger fire than the Rough Fire that threatens. And not just me, but all of us.

The local mountainsides of dry brush and dead trees left by years of drought pale in comparison to the tinder box that is building in the nation’s economy. Years of mismanagement of the economy by our government and the Federal Reserve Bank have created a pile of combustible equities. The stocks and bonds in pension funds and IRA’s. The prices of real estate. Indeed, any thing priced in dollars.

Markets that are not manipulated are free to engage in what is known as price discovery. Prices fluctuate with the demand and availability. Interest rates are set by what borrowers and lenders are willing to accept. Savers are rewarded for stashing their cash.

But none of that has been around for a long time. Years and years of artificially-low interest rates and borrowing have driven up the prices of almost every asset. Debt of all types has reached bubble proportions.

Picture a clown holding an enormous bouquet of balloons walking into a crowded room full of people holding long pins.

When the fire starts in the economy, you will find out that you won’t get much of an evacuation warning. The checkout line as the sales counter will be long, and chances are that by the time you get to the front of the line, there will be nobody wanting to buy what you are selling. And if you can sell, expect fire sale prices.

After the smoke clears comes the difficult task of getting back to life. Clearing the rubble and assessing what is left. Trying to use what years you have remaining to put together enough to survive the years ahead. The the more you have lost, the more difficult will be the recovery. Which is why not losing things to begin with is far more important than your future earnings and savings.

For every percentage of loss in your investments, you will need two two percentage points of gain just to return to where you started. If you had $10,000 to begin with, and it drops 50% to $5000, you will need an investment that gains you 100% just to get back to your original balance. And gaining 100% from any investment is a herculean task. Even if you could somehow manage a record-breaking 10% per year, it would take 10 years just to recover your losses.

After the crash that occurred during the Great Depression, it took over 20 years for the average stock to regain its value. It shouldn’t surprise us that the generations that witnessed that conflagration were not enthusiastic investors in the stock market in the decades that followed.

If you are old enough to have had investments during the money fires of 2000 and 2008, you watched up to half of your retirement nest egg go up in smoke. Poof. And if the indicators are correct today, you are likely to see it happen once again.

You may or may not have the ability to control the assets that are in your particular retirement account, if it is provided via your employer. If you do have the ability, you may want to use this time of crazy dips and surges in the markets to make a nice exit into something less flammable. There is nothing that is currently fireproof. Just some things that don’t burn as readily or quickly.

Keeping in mind that nothing is not overpriced at the moment, nothing is fireproof, consider the things that a bit retardant. The age-old wisdom is that cash is safer than bonds, which are safer than stocks. And then throw in the fact that bonds are not nearly as safe as they once were. Consider removing things that complicate fires—like debt. And buying a little bit of something that never burns up completely, such as precious metals.

Are you also prepared to deal with the vandals and thieves that always accompany fires and disasters? Some of them will be wearing white hats. Governments will be coming to the rescue of pension funds, which are already in bad shape. Expect increased taxes—sales, income, and property.

Don’t rule out a “bail-in”. In 2008 the government quickly moved to bail-out the corrupt and incompetent banking system—their political sponsors. But this time there isn’t the ready pile of money to repeat that crime. A bank bail-in, which is no more than government legalizing the theft of part of your account holding, is a possibility.

In a the next week or two, I’ll have to make the track back to whatever is left of my mountain property. That portion of the fire should have run its course. I don’t look forward to the drive as it will take me through the communities of my friends and neighbors. People who, for the most part, populate the lower middle class, just getting by in our current economy. But they are tough people and it will take more than a physical fire to stop most of them.

What will be going through my mind is that behind this physical fire lies another, more devastating financial fire, just waiting to ignite. Unlike the physical fire it won’t simply come and be done with, allowing the survivors to begin rebuilding. This fire may take years or even decades to play out, each wave of damage followed by another, more devastating wall of flames. What will be left of all that people have saved? All that they have invested? The pensions they have been counting on?

In the end, it will all play out in accordance with God’s providence. And if we find ourselves sitting in ashes, perhaps we can do no better than did Job, the main character of the Bible book by the same name. In a matter out hours Job discovered that he had lost everyone. His ten children. And all of his wealth, which was considerable. We can learn from his response:

Then Job arose and tore his robe and shaved his head and fell on the ground and worshiped. And he said, “Naked I came from my mother’s womb, and naked shall I return. The LORD gave, and the LORD has taken away; blessed be the name of the LORD.” In all this Job did not sin or charge God with wrong. (Job 1: 20 – 23, English Standard Version)

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