Will You Survive The Great Depression 2.0?

the-great-depression-2.0

I’m not really sure how the topic of The Great Depression 2.0 came to be on such a sunny and beautiful afternoon here in Seattle. I woke up early this morning (and by early I mean 7AM which is considered early for me).

Anyways, the first thing I usually do is make a grab at my phone. Just like everyone else, admit it…you grab your phone first. In the mornings, I do my usual rounds of blog reading and since it’s Sunday things are generally slower. With some free time, I went over to one of my favorite real estate forum where they yap about local real estate and market predictions.

Let me summarized up to you any forum that has the word ‘prediction’ and ‘market’ tied to it. There’s usually two opposing sides: Bulls and Bears.

Both of them are kind of pointless.

The perma-Bulls are positive. They make the world sound like rainbows and can put a neutral to positive spin on any bad news. They believe money will never stop flowing.  Bulls don’t reject corrections or downturns but they tend to believe that brighter and brighter days will be on the horizon. They are the “glass is half-full” people.

Then there’s the perma-Bears.  The Bears are constantly pointing out the flaws or potential disruptions in the environment. They look at speculations that might put a damper on the market even when things are rosey. They’re the type of characters that think the “glass is half empty.”

I consider myself more bear than bull when it comes to real estate. Although not by very much – plus I rarely participate. I read, I stalk on the forums, but I rarely speak up. I’m playing the “third-party voyeur” and listening to both sides of the argument, taking the best points and analyzing the points for myself.

If there’s anything in life that I’ve learned it’s this: when there’s two directly opposing sides then the answer is usually never completely right with either side.

Life is funny like that.

The result is usually a mix of both or something completely different that no one has even brought up or thought about.

I’m a big U.S. history buff to the extent that I even developed a huge, stubborn crush on my AP US History teacher in high school…ahem…for his intelligence and wit. Usually things work out to be really neither side and a little both. This is no different. The Bulls and the Bears are both right and equally wrong.

Even a broken clock is correct two times a day.

Some of the gloom & doom discussions today piqued my interest. I am a freak of sorts and after reading all the comments, it had me interested in the Bear’s worst case scenarios. After my husband woke up, I asked him to help calculate the worst cases since he’s more adept in mathematics than I am. Naturally, hubby from his sleeping slumber and realizing he’s married to a crazy person, pulls outs the net worth sheet.

I can’t believe we lived so long without a net worth sheet – I wish we kept track of our net worth a long time ago.

Psst, we uploaded our net worth tracker to our Freebies tab if you wanted to mess with your own numbers.

old-ancient-calendarWe started playing with the numbers.

The first observation was how high the markets are flying right now. We are currently in the longest Bull run in history without any major corrections.

Historically, a healthy PE ratio floats around 14-16 range with the 16 range edging towards the pricier side.

The PE ratio right now of the SPX 500? Almost 26. That’s more than 10 points higher than the historical healthy average suggesting how overpriced everything seems.

Eek!

A delightfully disastrous financial afternoon chat with my husband on a beautiful Sunday afternoon.

“Honey, where would we be if the entire market tanked by half?” I asked.


“What, why?” Jared replied.

 

“Just do it.”

 

*Beep boop beep*

 

“If the entire market and everything we had tanked, then we’ll have $260K left including what’s left in our retirement accounts.”

 

“…and our rental exploded-” I said.

 

“…HOW would that…”

 

“Just do it.”

 

*Beep boop beep*

 

“Our remaining net worth would be $42K if you only counted the value of the land.”

 

“OK and our primary residence burned down completely.”

 

“…what is wrong wi…” Jared holds back a laugh.

 

“Just do it.”

 

*Beep boop beep*

 

-225K.

 

“Ouch, that hurts!”

 

My husband (barely holding in his laugh now) observed…

 

“you’re just not happy until you’re unhappy, aren’t you?”

 

*Gasp!!!*

 

“What?!?! Is that what you think of me!!!” 😤

 

“( ͡° ͜ʖ ͡°)”

 

Well, OK, he’s not far from the truth. I like the macabre. I remember by the third month we were dating, Jared screamed something along the lines of “there’s no pleasing you woman!!!

 

“This IS making me feel better though.” I said.

 

“Because there’s nothing to fear after losing everything?”

 

Smart hubby.

 

“Exactly! So let’s keep going!” I exclaimed.

 

“Yes, dear.”

 

-We both laugh-

The Great Depression 2.0

We’re not playing macabre anymore. I’m happy to report that realistically, homes don’t spontaneously combust.

“Let’s make this more realistic. Let’s see if we would be able to survive The Great Depression 2.0!”

 

Hubby replied, “I need some values then.”

 

“Uhm, let’s say the SPX dropped 45% under it’s current value for us. I think historically the real bad downturns dipped about 30% but we have more assets that are tied to a specific sector (technology) so if something happens – and a tech bubble isn’t impossible especially these days – we’re going to fare worst than others. Let’s say 45%. Oh and not to mention our assets in Cloud City (Seattle’s nickname as the birthplace of cloud computing) so let’s assume a 30% drop in home values as well. No inflation. Rampant unemployment to the tune of about 25% like in the Great Depression. Let’s also draw it out for 10 years since that’s how long it usually takes for stuff like this to ride out (ie. 1929 and 2008).”

 

“Are we both crippled in this scenario or just you?”

 

“Har har. Just do it.”

 

“Well, if there’s a tech bust and hard ramifications to the rest of the markets to the tune of 45%…and an overall housing depreciation of 30%…AND we have no sources of income coming in then our remaining net worth will be about $335K.”

 

“We can’t touch retirement since we probably won’t be able to afford the tax penalties. We also can’t produce tenants because there’s blood on every street…” I reminded Jared.

 

*Beep boop beep*

 

“Without any retirement and no income from our house to cover the mortgage…$182K.”

 

“Don’t forget we’re both either unemployed or underemployed for 10 years!” I added.

 

“We won’t make it past 3 years.”

We wouldn’t last past 3 years in The Great Depression 2.0 with mortgage and unemployment…

“That’s actually not that bad. I’m talking about hell on top of hell on top of misfortune and maybe a 7.0 earthquake thrown in. Why not? I’m a lovely person! It would be nice if we could make it out to 10 years without solvency or bankruptcy looming though. I’m going to put that as a baseline for real wealth. Total financial indestructibility!” I cheered.

…when are we indestructible?

*Beep boop beep*

 

“In your scenario: 1.2 million liquid assets in current dollars give or take 100K” Jared answered back quickly.

 

My hubby’s so smart – he did all that in his head.

 

“Which is perfect” he continued “…because I’m aiming for 2 million in liquidity before calling it quits.”

 

“Oh. Wait. $2 million?! We agreed on 3!”

 

“You’re including real estate honey.”

 

“Oh yeah…right. That makes more sense. So you’re FIREing at 2 million liquid and for me 1+ million in non-liquid minus liabilities.”

 

Deal!

It’s good to feel semi-prepared. The entire conversation made me feel oddly relaxed. Some investors are sitting on the edge of their seats, like nervous wrecks, skittishly waiting for another Black Thursday. I think it’s beneficial to actually make an estimate for the worst-of-the-worst scenario and brace it, even if it’s just in your head. After all, the younger generation (like myself) have never seen anything but a bull market.

It’s very soothing actually. We’re the lucky some who don’t have to worry about having small mouths to feed. We have a strong nuclear family to band with during unpleasant trials of time. My husband noted that I am a formidable planner when it comes to money (aka the thing that I care about) whereas he is not the planner type at all. I’ve mentioned several times on this blog that my husband is the definition of a happy-go-lucky person…maybe that’s one reason why I love him so much.

May nothing I’ve theorized above come true and if it does then tie me to a wheelchair and push me down a steep hill. Thank you Hubby for an amusing afternoon chat and thank you dearest readers for visiting!

That’s all for now! Don’t forget to check out our free net worth tracker in the Freebies tab if you’re subscribed.

How would you fare during The Great Depression 2.0? What is your “indestructible” number? Has anyone made one of these worst-of-the-worst calculations before?

 



25 thoughts on “Will You Survive The Great Depression 2.0?”

  • I think about financial disaster scenarios all the time! Full unemployment scenario, no touching retirement, we’d last around 3-4 years. With market drop that goes down to 2. Our “indestructible” number is paid off house + 1.1M, but we’re risk-takers (read: too lazy to do the same work for that much longer) so we’ll probably semi-retire at a lower number than that.

  • This is an interesting and scary scenario. I always fear for the worst, so I do think about what would happen to us if both Mr. FAF and I lost our jobs. Our parents can’t support us forever. The most scariest thing for me would be to lose our house and us ending up on the street or our car since we’d have no money to stay at a motel/hotel/Airbnb. That’s why I want to pay off the mortgage early. At least we would still have a roof over our head >_<
    Ms. Frugal Asian Finance recently posted…How To Deal With Spousal Envy

  • You’re starting to sound like me, with all my “prepare for emergencies” and emergency fund posts.

    You may feel a bit crazy for suggesting a 45% SPX decline, 30% property value decline, and being un/underemployed, but that’s reality.

    If you’ve got a family with significant debt (like a mortgage), you need to have a game plan for things like this. Right now, I don’t have enough extra cash to cover more than 6 months of pain and suffering, but I’ll also do whatever it takes to survive And provide for my family.

    • I love your emergency post! It’s too expensive to be caught unprepared. I read over the stats (they do differ) from the original Great Depression and I took the worst cases. It’s not the drop that scares me…it’s the 10 years of stagnation and unemployment, yeek!

  • Interesting! So you sound very much like a glass half empty person. But preparing for the worst case is not un-wise. After all if you can survive that, everything else is easy-peasy. Right? I’ve thought about this myself, and maybe we’re a bit cash-heavy because of it. Who knows?

    And debt makes it that much harder, which is why I’ve been trying to get rid of our mortgage. I keep trying to drop it off at the bank, but they keep sending it back every month. Pesky mortgage. 😉

    Great Post Lily.

    • We’re more than half way killed our primary residence’s mortgage in the 2.5 years we’ve been here but I asked my husband if he was interested in killing it off but he said no. It’s very very very pesky hahaha!

  • With the stock market on a bullish market for so long you know it has to become bear some point and it’s nice you prepare for the worst and making your husband to come up with possible numbers you might have if the worst happens. It is good to know all scenarios so you can be ready for it.
    Kris recently posted…Book Review: The Millionaire Next Door

  • Better fill my basement with gold. Oh wait, instead I’ll just fill it with food from my garden! Better to put my money in the market and accept that a crash may come! We’d still be good for a couple of years if the crash you presented were true! But the chances of us both losing our jobs at the same time seems unlikely! Good thing we have our hustling skills handy if needed!

  • For me, the moment of calm and clarity came when I had enough money saved to live for a couple years and enough confidence in my resume and my abilities to believe that there’s no way I would go that long without income. The two components both hit suddenly, but at separate times. On the first part, I hit a point where I no longer feared losing my job. This made me more outspoken and confident, which improved my performance and my reputation. Now with a bigger network and more respect in my industry I have a lot more confidence in my ability to find employment. Plus I have so many other interests that I could just start a new career path (and enough money in the bank that it doesn’t matter if I start at the bottom of the ladder).

    Re-reading this it sounds unnecessarily cocky. The point is to say that I am with you – I am not comfortable with my position until I believe that I can weather the worst possible storm.
    Matt @ Optimize Your Life recently posted…Getting Better Results in Less Time

  • Typically it takes a bad downturn about 18-24 months to recover, so if you want to be “recession proof” have 2-3 years in something semi-liquid (Savings, CDs, short-term bonds, etc.). When it turns down, live off this for the 24 months it takes to recover, then start living off your recovered investments (while replenishing the savings).

    Based on the “timing the market, long-term” article back on August 5th 2017, I’ve moved to investing in bonds right now, because the metrics are showing the market is in a “don’t buy” status. Note that this is a long-term timing strategy, so the market could continue up for the next 5 years before it crashes. Its just that the prices paid now for stocks don’t make up for the risk.

    In the end, the market will have a big drop, but in the long-term, it will go up. The key is to not retire early right before it comes crashing down (unless you have that money socked away in savings)

    Mr. 39 months

    • Ah excellent! So with our 3 years (in a bad downturn) we would just about make it through with our depleted nest.

      Interesting strategy – I’ll talk to my husband about shifting more to bonds since we only have 2%. Do you think bond funds are overpriced right now because people are nervous?

  • 1. History buffs unite!

    2. We also can’t produce tenants because there’s blood on every street…

    ^^OMG haha I can’t say I haven’t thought of the worst-case scenario either–and not just for economics. I’m still building my net worth up to a point where it would be financially devastating to lose it all. I started late. I wouldn’t be happy to start over, but I think the scariest part is that you might not be *able* to start over–at least not immediately. And the turmoil happening around you….
    Femme recently posted…Budget Drama: Expensive Cat Food Edition

  • Hi Lily,

    It’s tough to figure out what will happen to military retirement pensions if the government cannot control their expenditures during tough times. I suppose this, and my young children, motivate me to keep building up different streams of passive income.

    I just shifted my focus, since the market PE is so high, on paying down my mortgage until the next correction…or worse. 😁

    This was a fun read.

  • I fall into the perma bull camp. Sure there will be corrections but even when they are awful it isn’t that bad. If you would have invested all your money at the worst possible time (late 2007) and not invested another dollar you would have almost doubled your money right now.

    I’m actually looking forward to the next correction so house prices will drop and I can buy one and turn my current home into a rental.
    Grant @ Life Prep Couple recently posted…Benefits of 24 Hour Fasting

    • Me too, but last time I told someone that, they called me insensitive. I was a bit grumpy at that, I wasn’t being insensitive, I was making a financial plan for myself…

  • Now you have me wondering what PiC would do if I made him go through this with me 😀 😀 I mentally run through worst case scenarios frequently but I so far spare him the middle of the night OMG – WHAT IF IT CRASHES!! moments 🙂

    I’m still plotting how we might kill off more than half our mortgage and how quickly we can do it without sacrificing too much of our cash and investment ratios. Also, I’m planning our garden so if it really falls in the drink, we will have food of our own to eat if cash is nearly unobtainable or worthless! End of the world type planning, here I come 😉
    Revanche @ A Gai Shan Life recently posted…Just a little (link) love: high five edition

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