I’ve been watching youtube video and have discovered Raul Pal and Real Vision Finance (Also). He is talking about in a clearer way my concerns. In my opinion he is right on. We are heading into deflation, not growth, not recession. Recession is about the business cycle. It’s a temporary downturn that later reverts to an upturn. In America we expect the down turn 30% of the time and the upturn 70% of the time. As long as that happens we grow. Growth has been spurred by consumption. The FIRE movement turns its nose up at consumption, as if “those people” are lepers the Jones keeper uppers. It’s the Jones keeper uppers that support the business cycle so when you are turning up your nose at these folks you are turning up your nose at economic growth and economic growth is how you expect to pay for your hamburgers in retirement. The Jones are the golden goose.
The boomers are retiring and one thing happens when boomers retire consumption plummets. The reason unemployment is low is boomers are quitting more than the economy is booming. It is the reason we ave low unemployment AND low inflation. People leaving the workforce explains that. People own a ton of equities. Equities are directly tied to consumption, and equities have been leveraged by corporations buying back shares using debt. There is a corporate debt bomb out there of greater impact than the 2008 consumer debt bomb. so expect a huge crash aka a huge reversion to the mean as the leverage gets un-levered. What this means if the market is riding 90% above the mean, when it reverts literally 45% of the dough especially equity dough is going away permanently. You can expect a 45% permanent (or possibly decades long) hair cut on your portfolio. With permanently curtailed consumption the motor that drives growth will no longer pull the train. It’s happened in both Europe and Japan. If it happens here China is also hosed.
I retired normally at 65, so I have less time to live, and I have a pretty large portfolio and a small WR of under 2%. If my assets permanently fall in half my WR only goes to 4% and I have only about 20 years for my portfolio’s survival. I have further reduced my equity risk into other non correlated assets like gold bonds and cash and some BTC so my exposure to the leverage in equities is muted. Imagine if you are 45, heavily invested in equities and retired and have a 45 year horizon and only half the money and still have kids to send through school, or not because no one will be able to afford it. Imagine you’re sitting on a 1M property or a 1M apartment building and can only rent for 1/3 of the break even or sell for 250K. That’s what could happen with permanent deflation. People will dump their homes and move into cars and trailers. This happened in 2008. Excess leverage will eat your lunch. The problem with deflation is it’s near impossible to re-ignite inflation aka growth. This is a graph of the Nikkei, Once 45,000 now hovers around 10,000
Watch this video and consider deeply the consequences. If you are FI, are you still FI with a 50% hair cut? If you are FIRE can you survive twice the time on half the money? I find this guys argument entirely credible.