The Online Investing AI Blog

Depression is more than just a name for sliding GDP numbers. True, it may be an economic condition; but, it can also be a mass psychological effect that turns into an dire economic feedback loop.

People are depressed and the economy suffers; the economy suffers and people get more depressed. And so on. Think of Japan in the 1980s.

Forget profits and jobs. We know they have been damaged. What is more frightening–and far more devastating–is that the psyche has been damaged because of the recent financial turmoil. Factories can be rebuilt and jobs can be created, but when people stop believing, the chances for recovery are slim.

There’s one more sign that our collective conscious is slipping into a deeper funk.

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Ms. President @ Flickr

The rose-colored glasses aren’t always on.

We’ve talked about the current economic problems and possible future ills… here and here.

But that doesn’t mean that the bad times are here to stay. There are some fundamental reasons to be positive about the future.

As we covered recently, recessions teach. Once we’ve cleared this dip–or double dip–we have it in our power to have an even stronger economy. This isn’t guaranteed. We can flub things up for a long, long time, but eventually markets self-repair. If you let them.

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sneakerdog @ Flickr

I’m not a big fan of spinach.

It doesn’t looks good. It doesn’t taste good. It rarely smells good.

But I can’t deny the healthy boost it gives you.  (And I’m not even referring to the power it gives under-sized Popeye the power to take on over-sized bullies.) It has lots of protein and vitamins. No denying it.

Sometimes it’s necessary to put up with short-term pain to create long-term strength. Same thing goes for your financial health.

In the world of personal finance, there’s no more willing taskmaster than a recession. A recession is painful and stressful. But it might also be the impetus that leads to our long-term financial freedom and well-being.

Here’s how.

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In Pennsylvania, where I’m writing this, the leaves are now tipped with deep reds and flashes of yellows. On the mountains, a brush stroke of orange has exploded in spots.

There’s also a chill in the air.

Autumn officially arrived and so did the first thoughts of winter.

Historically, fall was the time you made preparations for winter. People stored up food and prepared their homes to keep out the invasion of cold weather that would soon be on the way.

This week, I’d like to pass on some financial preparation, so you’ll survive any monetary challenges that pass your way.

Here are some things to think about… but most of all act on.

Start your reading off with this post on It’s What You Do, Not What You Say from Fiscal Fizzle.

Scott Adams, the guy who created Dilbert, is dead-on when he writes about office life. Who knew he could be so perceptive about personal finance. Check out Dilbert’s Unified Financial Theory.Thanks to Joe Taxpayer for this.

When I went to high school, three of us rode in my friend’s 20-year-old Ford Fairlane. And loved every mile of it. So, I have some sympathy for FiscalGeek and this post on making his kids drive a piece of crap.

My Money Minute offers Five Things Jay Leno Has Taught Me About Finances.

Need to save money? Make money? Make some money to save? Here are some five minute financial fixes from Dumb Little Man.

Need a little more time in your life. Try cutting down on the Top Five Time Wasters, according to Five Cent Nickle.

Always a good spot for financial advice, Wallet Pop offers a few ways people are thriving in a recession. (Although the image of the ukulele nerds that accompanies the story has me a bit perplexed. Do I have to take up the uke to thrive? Anyhoo. Check it out.)

The Adventurous Writer offers five ways to make more money as a writer.

Dividend stocks are a popular investment for buy-and-holders and are good ideas for tempestuous markets. Seeking Alpha has a look at the best double-digi dividend stocks. If you’re new to investing, options can be a bit confusing. Check out Moolanomy for an introduction to options and put calls.

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Now that the recession appears to have abated and everyone is saying that we can relax, I think it’s time to reevaluate the situation. If you consider that the country’s financial situation has worsened significantly, it’s pretty clear that we are not out of the proverbial woods. The government spending of trillions of dollars may have stopped the recession, but it may also have set us up for a worldwide depression.

Think I am full of doom and gloom? Absolutely not. Both Matt and I are extreme optimists. But consider these facts: depressions happen on average once per lifetime, or every 80 years or so. It’s been 80 years since the last depression. The government is running budget deficits on a scale that has never been seen before, and has no way of paying back the money. The housing market has leveled off, but there is nothing to help it recover after the current first time house buyer’s stimulus wears off. The unemployment rate is getting higher, and there is nothing to slow that down. The US automakers have recovered for this month, but only because of $3 billion dollars of free money for (mostly American) clunkers. As soon as that stimulus effect wears off, the American car manufacturers will be in even worse shape than they were last month.

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Economic storm a'brewin' or good times coming? (Photo Wes Rogers, Creative Commons)

Here’s a shock: There’s conflicting information that’s hitting the investing world about the state of the economy.

As we fight through one of the worst economies in recent memory, stock market analysts and economists are peeping their heads out of the fallout shelter and making their predictions. One trend forecaster believes that we’re looking at a Super Depression in just a few years.

Gerald Celente, who predicted the ‘87 crash and the rise of Starbucks, said last year that 2012 will be a bad year economically. (That’s my understatement of the year.)  Celente talks about revolutions in the street and a total bank failure.

Paul Farrell has dire predictions, too, in his article on the 2012 bubble burst. Here’s where Farrell is coming from:

Behind the hoopla, the Wall Street conspiracy has dumped $23.7 trillion new bailout debt on taxpayers. The bill will come due. But for now, we’re getting their wish: A new bubble is accelerating, thanks to America’s “too-greedy-to-fail” Wall Street banks.

Other economists have a different view.

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The sudden collapse of the debt market and it’s catastrophic ricochet into the stock market has a lot of people saying that they “lost everything” in the recession.

Other people have lost their homes and their cars.

Then there are those who lost their jobs.

I was talking to a friend who did the trifecta: He lost his job. He lost his home. And he lost most of his retirement. (He actually lost his girlfriend, too, but his story sounded too much like a country and western song. Plus, I never heard of a “four-fecta” before. Or is it quadfecta?)

You’d guess that after this devastating string of bad luck, he would tell you that he had no more assets. But, that’s not how he looks at things. Despite the heavy loss of material possessions, my friend said his most valuable assets are continuing to produce high returns.

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The news is dominated by stories about how rising unemployment, layoffs, and falling markets are causing massive pain for millions of people. The media assumes that everyone is powerless to improve their situation, and that they are at the mercy of their employer and the economy.

I don’t know if that’s really the most constructive approach. Yes, we are affected by the economy, but how it affects us is our choice. We can find fear and despair in “bad” news, or we can find a way to make it work for us. Yes, it’s true that many businesses are disappearing because they cannot compete in this economy. But, it is also true that as competition is reduced, the strongest and best companies will flourish, regardless of the economic climate.

Case in point, my friend Steve at My Wife Quite Her Job. Steve and his wife launched their online store two years ago, and have seen great success and profits. For the first half of this year, when the economy was “bad”, their profits rose 72%, year over year. So that leads to an interesting question. Why is it that their store is doing great, and other businesses are going bankrupt?

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Are we on the verge of economic collapse? Are millions of people going to see their retirement saving dwindle to 20% of of the previous value?

I don’t know. I don’t think anyone can predict the future with perfect accuracy. But I do think we should be prepared for whatever happens in the future. And that includes economic collapse.

Most people just assume that things will continue going the same way as the last few years. They stay at their jobs and try to save money. Financial planners assume that stocks will return 7%. There is just one small problem with this approach. Massive economic depressions happen on average once in a lifetime. It’s been 80 years since the start of the last depression.

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Many investors have breathed a sigh of relief because the stock market has made a significant rebound. But there is one small problem.

What is driving the massive rally of the last few months?

Consider the graph below:

This is a chart of the NASDAQ leading up to the crash of 2000. It’s been nearly 10 years now, so most people have forgotten what happened. Perhaps it is precisely that we forget that causes history to repeat itself.

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