Help me to become rich when the global economy goes pop!
June 21, 2012 10:05 AM   Subscribe

A friend has advised me of a way to rake it in when the economy goes boom. Can you guys have a look at this and see if he is wise or just deluded.

So he tells me that the global economy is going to go into meltdown sometime soon, maybe this year, maybe next but soon. He tells me to invest some money, something like £1000, into FAZ.

Once the economy starts to fail this money will turn into lots more money.

He has shown me some videos of rather prominent "money experts" warning of the economical collapse and says that over a year this £1000, in his eyes, is "insurance" incase the collapse happens. Looking at graphs of the great depression and what might happen again he seems right about the whole thing.

Providing the collapse happens AND monetary systems arent completely worthless is this a good idea?

(apologies if my use of terms is incorrect regarding the subject!)
posted by aqueousdan to Work & Money (31 answers total) 5 users marked this as a favorite
There are no legal get rich quick schemes, and no one knows when or if the global economy will go boom.

Your friend is deluded.
posted by Aizkolari at 10:09 AM on June 21, 2012 [9 favorites]

It's a ETF. Like any other fincial product, it has risks. Ask yourself this; if your friend was so smart, why aren't they independently wealthy and living on an island somewhere?

Everyone has a scheme. One of my friends is a diehard commodities (hard metals) believer.

ETFs can be a good idea as a small percentage of your overall portfolio, but you will not become a millionaire through some single fund. Or else everyone would be in it and we would all be happy ducks.
posted by rich at 10:12 AM on June 21, 2012 [2 favorites]

>Once the economy starts to fail this money will turn into lots more money.

If you're banking on economic collapse, why not buy gold, real estate, or some other tangible asset (that doesn't devaluate) instead?
posted by thermonuclear.jive.turkey at 10:12 AM on June 21, 2012 [4 favorites]

There definitely are legal get rich quick schemes.

However, there are no risk-free legal get rich quick schemes.

Basically you have three questions to answer:

- Does the premise of the investment hold up?
- What is the risk profile?
- What can you afford to lose?

The last one is the most important.
posted by MuffinMan at 10:13 AM on June 21, 2012

Well in the sense that it's a hedge, yes it makes a kind of sense.

But if the global economy totally collapses, is it going to matter if you have 5trillion USD if a loaf of bread costs 10trillion USD?
posted by Grither at 10:13 AM on June 21, 2012 [2 favorites]

A simple rule to follow is to make sure you understand what you're investing in.

Do you understand what an investment in FAZ does?

It provides you with 3x the DAILY INVERSE return of the Russell 1000 Financials Index. Do you understand what this investment performs like in the long term? (6m, 1yr, etc.)

In my experience, many people don't understand leveraged ETFs like these and are very surprised when they put them in their portfolio. Depending on what happens between now and some "collapse" that your friend is predicting, this investment could actually deliver *negative* returns even if a collapse occurs. Please be careful. Leveraged ETFs are meant for short term (aka a few days) trading, not as long term investments.
posted by musicismath at 10:17 AM on June 21, 2012 [10 favorites]

Honestly if you're counting on global economic collapse, stock up on guns, dried food, ammo, seeds, and gold.

I'm not suggesting doing it, mind you, but in the event of a massive economic collapse, having paper or electronic money won't be nearly as useful as hard currency and ammo. The survivalists have it right on this point.
posted by Ghostride The Whip at 10:19 AM on June 21, 2012 [14 favorites]

IANAFinancialPlanner. This is not financial planning advice. Please don't do anything with your money on the advice of people on the internet.

After looking a little bit, this fund is a hedge. It's set up to perform in inverse relation to the performance of a particular index of Financial Services securities performs. When that index goes up, this one goes down, and vice versa.

It's leveraged 300%, which is not uncommon for this sort of thing, from what I understand. Think of it this way: you have an idea about a particular stock, but you only have $100 to invest. If the stock goes up 25% next week, you've only made $25. Say, instead, you put your $100 as collateral and borrow $300, you can invest that $300 and make $75 next week, and only pay a small amount of money in a week's interest on $300. Of course, if you're wrong and the stock drops 25%, now you've lost $75.

Because this security will go up and down three times as much as the underlying market, and because it's built to go against (what I'm assuming is) the historical trend of the underlying index, it doesn't make sense to me to buy and hold something like this. This is an investment that is important to time your purchase and your sale on.
posted by gauche at 10:25 AM on June 21, 2012 [1 favorite]

2nding Grither.

The only thing that you should invest in preparation for the global economic collapse are skills. Gold and land makes you the target of people with guns. If you have useful skills (animal husbandry, carpenter, game cook, handyman, gun repair etc.) the people with guns will protect you and feed you the stuff they steal from the people with the gold and land.
posted by chiefthe at 10:29 AM on June 21, 2012 [16 favorites]

musicmath is right--leveraged short ETFs are very complex and flawed. ETFs are meant to be passive investments, but shorting and use of leverage are tools that really require active risk management.

If you had a ton of money, you'd be better off investing with a hedge fund manager that shared your outlook. But with £1000 you are relegated to retail offerings. I have no idea what's available outside the US, but there are explicitly bearish mutual funds (like Federated's Prudent Bear) and hedge fund-like mutual funds run by bearish managers (like Hussman).

None of this is intended as actual investment advice.
posted by mullacc at 10:38 AM on June 21, 2012

If you are going to "invest," i.e. speculate, a lot of money on something like this obviously do a lot of research on it first. Read into leveraged short funds in particular. Here's an article I found with a quick web search.

From yahoo finance: "The fund, under normal circumstances, creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts;" It's also leveraged 3-to-1.

These kind of ETF's that are based on futures contracts and options often fail to track very well due to Contango and Backwardation. Take a look at a 1 year chart of FAZ compared to the Russel 1000 Financial Services index and see if it actually is giving the same return as a 3x short position in the underlying index.

If it is so obvious that the economy is going to crash, then there should be trillions of dollars out there betting on collapse--affect futures and options prices and making it difficult for anyone to make money if the expectation comes true--and this FAZ instrument might do far worse than just buying futures contracts or options directly.

The global economy and political situation is so massive and complicated, that I find it hard to believe anyone can predict what will happen with much accuracy. Perhaps the best idea is to take a contrarian position when mass hysteria has taken over and one can take advantage of distorted futures/options prices, but who knows.

It's unrelated but I find it odd that Intrade is only giving Romney 43% chance to win the election, yet he is doing far better in the poles--and would seem to have an electoral advantage. I have half a mind (actually I have far less than this) to bet on Romney both because it seems like Intrade has mispriced this, and as an emotional hedge if Obama loses.

There definitely are legal get rich quick schemes. Like becoming an executive for a financial company; using any available funds to give your self multi-million dollar bonuses and stock incentives, then GTFO before the sh*t hits the fan.
posted by Golden Eternity at 10:38 AM on June 21, 2012

It's worth noting that people have been continuously predicting the apocalyptic end of the global economy for the last 80 years running. There has never been a point in our lifetimes in which there wasn't a vocal minority of people proclaiming the imminent doom of the financial system.
posted by 0xFCAF at 10:39 AM on June 21, 2012 [4 favorites]

It's worth noting that people have been continuously predicting the apocalyptic end of the global economy for the last 80 years running.

I think 8,000 years would be a little closer to it. Invest in your skills, not the markets. Whatever you choose to learn, you keep; whatever you put your money in could go south in a heartbeat. Even the best laid financial plans are 95% luck, pure and simple, for good or bad.
posted by halfbuckaroo at 10:56 AM on June 21, 2012

It's worth noting that people have been continuously predicting the apocalyptic end of the global economy for the last 80 years running.

In the US, at least, it started after the Panic of 1873.
posted by Sidhedevil at 10:56 AM on June 21, 2012 [1 favorite]

Well, at the height of the economic crisis in 2008, the price of that ETF spiked up to about 700, and it's trading at about 20, now. So it is possible, however unlikely, that if there was another crisis that created the same sort of panic as had occurred in late 2008 that FAZ could see another big spike while stock markets around the world crashed, like they did in 2008 and 2009.

You'll see similar patterns in the VIX ETF, which is supposed to track the "volatility" of the market (the more volatile, the higher the value).

Traders profit of these kinds of ETFs by timing the markets correctly regarding when to buy and when to sell, and market timing is essentially a matter of luck. "Investing" in something like FAZ is essentially gambling and you're betting both that the stock market will have a steep decline AND that you will tell the ETF at the right time to profit off of it. Managing your assets to be prepared for economic instability should be the exact OPPOSITE of gambling, however.
posted by deanc at 10:56 AM on June 21, 2012

Also, rake WHAT in? If "the global economy goes boom," how are you going to convert your shares in FAZ into anything useful to you? You can't eat ETF holdings; you can't even take them in a wheelbarrow to the store to buy a loaf of bread a la hyperinflated Zimbabwe or the Weimar Republic.
posted by Sidhedevil at 10:58 AM on June 21, 2012 [2 favorites]

These kind of ETF's that are based on futures contracts and options often fail to track very well due to Contango and Backwardation.

I don't think contango applies here because there's no cost of carry on a security option-- you don't have to store it somewhere like a barrel of oil.

Returning to the original question:

Providing the collapse happens AND monetary systems arent completely worthless is this a good idea?

Yes, assuming the stock market plunges soon, but our markets remain functional, you could make 3x your investment. Those are two big assumptions.

Do you remember November 2008? All the doom and gloomers were certain the big collapse was upon us. £1000 invested into this index then would be worth a whopping £35 today. A better investment than using it for toilet paper I suppose, but not by much.
posted by justkevin at 10:59 AM on June 21, 2012 [1 favorite]

Looking at this, with my very basic knowledge of the financial market, I could just about make out the shape of what musicismath said. This looks like a complex investment vehicle, for the short term, not suitable for some event that could occur at some time in the future.

1. It is possible to learn to understand securities at a normal-guy level, and that's the level you should be trading at, and you should be thinking five years into the future, and only with money you can afford to lose because, while you mustn't confuse it with gambling, you must also acknowledge the possibility of loss. So, try to understand what you'd be doing first. I used to look at The Motley Fool for this kind of thing, I don't know if it's still good.

2. Your friend, with all due respect, is just some yutz off the street like we are. What, with all due respect, does he know and vice versa? Why would you ever listen to anyone who came to you with a claim like this? (Okay, because he's your friend so you're willing to hear him out, but I'm pretty sure it's as unfeasible as it sounds.)

3. Why would you believe someone who promises massive returns? They exist, but only if you take the kind of massive risk that's for experts. Or gamblers. Not some yutz off the street. And even then you probably wouldn't get them.

4. What does he mean by "the economy"? Does he mean the stock market? The housing market? What?

5. If the economy crashes, what makes you think that wouldn't be accompanied by hyperinflation meaning that your gains would be, not worthless, but possibly rapidly reduced to less than you invested, and the next day to pocket change? Land speculation has fuelled the present crash, and was a major contributing factor to hyperinflation in the Weimar Republic, so if "the economy" "crashes" short of a canned-goods-and-ammo destruction of the monetary system, you'd still have to consider that the money you did have might count for less.

6. I gather that those who hung onto their stocks throughout the Depression ultimately didn't suffer much if any loss, possibly because they understood what they were doing.
posted by tel3path at 10:59 AM on June 21, 2012 [1 favorite]

To help you understand what he's proposing, I'll make this analogy. Imagine your friend proposes this "surefire" scheme to make lots of money: "we'll go to Las Vegas and place $1000 on the green zero on a roulette table; the zero is sure to come up real soon now, and then we'll make a ton of money". It's placing leveraged bets on speculative events. Some things may be more likely than others given what we know, but the problem is that in order to get high returns you must take a lot of leveraged risk which depends on the kind of precision that is just not possible to forecast. Nobel-prize winning economists devising rigorous mathematical algorithms working according to formulas that are so famous that they are named after them, have attempted to take advantage of little random-directional eddies in a specific-direction stream, and they still came a cropper. Is your friend going to do better? It's gambling, pure and simple.
posted by VikingSword at 11:26 AM on June 21, 2012

99% of your comments have me flummoxed but the general gist of things appears to be that my friend is in fact deluded. I had to ask here though since he is SO convinced it will work. This video seems to be one of his main sources of inspiration

My main question to him (provided everything else was all present and correct) was the same as some of you guys have pointed out: if the economy goes pop, will money actually be worth anything anymore. His reply was something along the lines of "ah well you cant be sure of anything but if it does come off youd be better off with a ton of money"

I now have a dilemma however, do I show him this thread or keep my head down and carry on :D
posted by aqueousdan at 11:41 AM on June 21, 2012

The performance of leveraged ETFs over time is path dependent.

If you don't understand what that means, you need to stop and think about what you're buying before you go down this road. LETFs are the radial arm saws of the investment world: they're handy, sure, but if you don't know what you're doing you can easily and suddenly end up in a world of hurt and wondering what the hell happened.

Even if you are right about the Russell 1000 crashing, if it doesn't happen within a particular timeframe, you could still lose big. And I don't believe for a second that anyone knows when, or if, the economy is going to crash. There were people holding leveraged-short ETFs back in 2008 who managed to lose money. Take a very close look at the chart on that page -- even if the market were going down in general, a few quick spikes in the wrong direction could wipe out your gains.

In general, trying to time the market is nearly always a terrible idea unless you have access to information that is not available to most market participants, which I doubt your friend does. Honestly, it sounds like s/he just discovered short LETFs and, combined with a preexisting belief about an oncoming crash, has gotten a very dangerous idea in his/her head. I would urge you not to
posted by Kadin2048 at 11:41 AM on June 21, 2012 [2 favorites]

Also please note I dont have even close to £1000 spare to throw at anything let alone an investment like this (sadly).
posted by aqueousdan at 11:45 AM on June 21, 2012

"Market crash" and "global meltdown" are not synonyms. That dude in the video is talking about leveraging market fluctuations in ways that would require a functioning market and banking system, and an economy with a fairly stable inflation rate, to be useful. He's talking about gaming the extremes of normal market variations, not about becoming Scrooge McDuck while there are bread riots in the streets.
posted by Sidhedevil at 12:26 PM on June 21, 2012

Keep in mind that the historical trend for the stock market (even with down periods) is up. That means this ETF will very probably lose money over the long term. There is a possibility of short term profit, but unless you're able to time the market (which is almost impossible) stay far, far away.
posted by blue_beetle at 1:05 PM on June 21, 2012 [1 favorite]

No no no no no. Do not do this.

A 3X short ETF which is rebalanced daily is never the right vehicle to use if you want to take a bearish position on the markets over anything longer than a few days. Even if you are right and the markets tank in a month or two you will probably still lose all your money. If you don't understand why, then you shouldn't be investing in this kind of leveraged product at all, and your friend is a fool if he's investing on this basis.

Any leveraged product which is rebalanced daily is there so that market professionals can use them to take very short term positions on the market, perhaps in order to hedge other positions they've taken on elsewhere. Fleecing gullible retail investors is a nice sideline.
posted by pharm at 1:25 PM on June 21, 2012 [2 favorites]

Check out what happened to a similar product (TVIX) for a case study on the many incomprehensible ways that leveraged ETFs can burn you.
posted by diogenes at 1:30 PM on June 21, 2012

aqueousdan: "This video seems to be one of his main sources of inspiration"

Christ. Just walk away slowly & don't engage your friend on this. If you want to educate yourself about the structure of the financial system and the state of the markets, the best way to do so is probably to start reading FTAlphaVille and just follow the daily links. You'll find a few posts on the character in that BBC video there if you search for his name in the tags.
posted by pharm at 1:32 PM on June 21, 2012

If the economy goes pop, will money actually be worth anything anymore. His reply was something along the lines of "ah well you cant be sure of anything but if it does come off youd be better off with a ton of money"

If the economy takes a big nose-dive it would likely be deflationary in the short term, i.e. the price of houses, oil, commodities, will all go down due to lack of demand. Gold might still go up, due to fear of future monetary inflation. Maybe a more likely disaster scenario--if there were a massive financial melt-down--is your brokerage going under water, ah la mf global, and you not being able to close your position and get money out of your account.
posted by Golden Eternity at 3:07 PM on June 21, 2012

If the world economy collapses, money, gold, investments - none of it will be worth anything. People will be needing essentials - food, shelter, clothing, water - and they'll barter for it. What good would a bar of gold do when someone is starving? What good does a full bank account do if money is worthless?

If you *really* want to prepare for a meltdown, buy some long-lasting food rations, some portable generators, some gasoline, and some weapons. That's the only logical thing I can think of.
posted by tacodave at 3:59 PM on June 21, 2012

Oh good lord. That video!

No, you should not put all of the money you have into an investment that you do not fully understand as a speculative bet. Not unless you are fully and honestly 100% okay with losing all of that money.

Listen, that guy in the video? Guys like him are a dime a dozen and I could give you a ton more links if you're interested. He's maybe a touch more hysterical than some of them but I've seen worse. Maybe the Eurozone will "blow up", maybe not. The point is, no one and I mean NO ONE can predict what is going to happen in the near future, though lots of people take a stab at it. The very best thing you can do is really spend some time to educate yourself so you can make an informed decision on who are reliable and trustworthy sources to draw your information from, But for my money, there are a million more people out there who are more sensible and more qualified to talk on the issue than this guy. The Telegraph has a little write up on him.

Regardless of who Alessio Rastani is, this is not a good idea. Not because you don't fully understand the investment you're looking at (and I'm not faulting you for that, leveraged investments which use things such as futures contracts and swaps are difficult to understand for most people), but it doesn't sound like you really have the money to lose. If you are genuinely worried about losing your money, you would be safer putting it in a bank account (up to £85,000 in deposits is covered by the government) or in a National Savings & Investments product (100% secure, backed by HM Treasury). In the extremely unlikely event that the UK government is unable to make good on these guarantees, then any other investment you would have been in will also be bust and losing your invested money is probably going to be the least of your problems. I'm going to go out on a limb and say that this is not going to happen, despite all the doomsayers.

If you want to make money (as opposed to just preserving capital), then the savings accounts and government securities won't be of much help, but then we're getting into the whole "risk vs. return" thing and no one should be going into investments that they do not fully understand backwards and forwards unless they are 100% prepared to lose all of their money. Only you know enough about your situation to be able to determine if this particular investment is appropriate for you. But based on the reasons you gave, I would say it's not.
posted by triggerfinger at 6:06 PM on June 21, 2012

Also, I should point out that the guy in the video says himself that anyone can make money in a downturn if they know what they're doing. And I agree with that, but the kind of strategies one would use to do this are pretty high level stuff. I would absolutely show your friend this thread. I am a huge advocate for people educating themselves on matters of finance and I'm in general not a huge fan of the hot stock tipsters that they media loves so much, but I especially don't like the ones like this guy who get people all wound up with fear. He's like the Glenn Beck of finance commentary. Yes, the world and especially the Eurozone is facing a lot of serious problems but the doom and gloom and hysteria doesn't help anyone make rational decisions about their financial future. And this guy has said himself that he thrives on the volatility and panic, so, grain of salt and all that.

The FT as mentioned above is a great resource for following finance, but I know that it may seem dense and incomprehensible to some people, depending upon your level of knowledge. I know I push it all the time in MeFi, but I think the articles on Investopedia are a fantastic resource to start to learn about finance at all levels of knowledge, from total beginners to people taking advanced finance examinations. There are literally hundreds and maybe thousands of articles by finance professionals on there, all of which are level headed and pretty understandable.
posted by triggerfinger at 6:20 PM on June 21, 2012

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