Jimmy Knuckles sez you ain't paid up this week...

August 17, 2005 11:27 AM

My less-than-stellar economic senses tell me that a big economic downturn is around the corner. Other than opening a collections agency, is there any way to profit from it?

I admit that I'm not the sharpest economic tack, but I see warning signs (or outright problems) all around. I have neighbors mortgaged to the hilt, friends taking home equity loans to make ends meet, a glut of houses on an overpriced market, weakening dollar, rising fuel prices, interest rate increases, the war-machine rolling on...

My gut tells me that things are going to be headed downward, but for the life of me, I can't figure out a way to make this into an economic opportunity. The only things I can come up with are the basest ideas: collection agency, liquor store, pimp, etc.

Is there anyway to handle the downturn in a way that leaves me with some self-respect?

ObSelf: $0 credit card debt, 1 car payment @ ~$6k left, $130k, 12 years left on a five year old house w/15 yr fixed @ 5.25. Steady job, good skills, a little bit of savings. I'm pretty sure I can ride it out with few problems.

posted by unixrat to Work & Money (40 answers total)

Go to law school and study bankruptcy law.

You could also go to mortuary school. People will always die no matter what the economy does.
posted by Pollomacho at 11:31 AM on August 17, 2005

$130k your salary? I'd invest in stocks of certain products... namely credit card companies, beer companies, and eBay.
posted by letterneversent at 11:32 AM on August 17, 2005

Someone at some point is going to make a whole shload of money off alternative or new energy sources, primarily for transport.

I mean, either that or it's back to horses. In which case I think a new job is the least of your worries.

I do think we're actually finally heading towards a "panic" point in terms of gas prices.
posted by selfnoise at 11:39 AM on August 17, 2005

I'll share my plans/views:

A) Do everything possible to eliminate or lock interest rates on variable interest rate debt. Rates are going up.

B) Hold off on any big-ticket purchases, most especially a house right now. In many areas, renting is much cheaper that owning. If I owned a house I'd even consider selling it immediately and renting.

C) If you have investments, try to gauge their exposure to Mortgage Backed Securities (MBS) and reduce it wherever possible. I would not want to be a stock owner in a bank that was holding lots of MBS's when the defaults start. I'm afraid that MBS are pervasive though and it may be difficult to assess exactly who will be burned when they start to fall apart.

D) Invest in gold/precious metals. If interest rates and energy prices shoot up *AND* the Fed responds by printing more money then precious metals may rise steeply. I'm not quite sure how an individual does this directly outside of buying gold bricks though. May have to be through a mutual fund.

E)Potomac Short Real Estate FundNot open yet, but I'm on their waiting list

F) Bet against/short Private Mortgage Insurance (PMI) issuers. I was actually on my way here to post a question to find out who the biggest PMI issuers in the US are.

G) I'm mulling over opening up an electronics/appliance repair/pawn shop as a side job. When the credit squeeze starts lots of people will be looking to cash in their non-titled assets to keep making the payments on their house/car. People will also probably be more inclined to get things fixed as opposed to buying new ones.
posted by de void at 11:43 AM on August 17, 2005

In re fuel panic: How about whatever company makes those gas tank replacement lids that you can lock in place?
posted by PinkStainlessTail at 11:47 AM on August 17, 2005

letterneversent writes "eBay."

Regardless of whether the economy heads south companies that rely on cheap shipping like eBay are in for a world of future hurt as oil prices continue to rise. Walmart's stock price is already starting to feel it.
posted by Mitheral at 11:49 AM on August 17, 2005

Mitheral, this will be offset by increasing numbers of debt-ridden people selling and buying from eBay. eBay should do even better in an economic downturn, imo.
posted by letterneversent at 11:50 AM on August 17, 2005

Instead of opening a collection agency, you could invest in public companies that buy and collect bad debt. Companies include CCRT (mostly buys sub-prime credit card portfolios), AACC, ECPG, NCOG (mostly services, but has a subsidiary that buys bad debt portfolios), ASFI. Also, a company called Credit Acceptance is particularly good at sub-prime auto originations and they are traded under the ticker CACC, but it seems to have been moved to the pink slips. That company makes a ton of money and they'll do even better if the economy tanks.

I'm sure a lot of people would have some moral objections to all the above companies. In fact, quick Google searches bring up a ton of complaints about aggresive collection techniques.

I don't invest in any of the above.
posted by mullacc at 11:51 AM on August 17, 2005

In many areas, renting is much cheaper that owning.

In what areas, exactly? Because from all accounts I've read and heard, it's still a great time to buy (if you can afford it). The real estate market is still red hot and given a two year projection at this same pace, even if the market crashes at the end, you'll have inevitably broken even.

DC is a great example. And a place where real estate will not *pop*, but deflate at best. Jobs are being created like crazy out there and considering the large volume of public jobs (jobs that won't be downsized), there isn't a liklihood of people defaulting on their mortgages.

Two of my relatives have now seen their properties rise 40-60% in the past three years. Considering those capital gains, even if suddenly all real estate drops by 50% (which is unprecedented), they're still ahead.
posted by SeizeTheDay at 11:52 AM on August 17, 2005

When will people figure out that credit cards are only useful if you have financial discipline? 90% of people do not need the temptation.
posted by letterneversent at 11:52 AM on August 17, 2005

I'd agree that Ebay may come out ahead as the Home-Equity Loan financed shopping spree at Best Buy turns into the leftover-paycheck-funds financed, long and drawn out bargain search at Ebay.
posted by de void at 11:53 AM on August 17, 2005

"Two of my relatives have now seen their properties rise 40-60% in the past three years. Considering those capital gains, even if suddenly all real estate drops by 50% (which is unprecedented), they're still ahead."

Does it not seem unusual to anyone that people are seeing these increases? Contrary to popular conception, there is not a real limit to housing supplies. Builders are steadily increasing supply, more people are buying second and third properties as investment vehicles, and people are spending more of their income on houses than they should. All of this creates fundamental instability in the market and therefore valuations.
posted by letterneversent at 11:57 AM on August 17, 2005

Seizetheday:

Just about everywhere that has experienced a tremendous rise in home prices:

Speculators Push Rents Down

Agreed that 3-4 years ago was an ideal time to buy a house, but for the people who aren't selling now and moving to cheaper areas, what exactly has the appreciation gained them? If they wanted to move to a bigger/better house in their area, the price to upgrade has moved up also. It's only a paper gain until they sell.
posted by de void at 12:02 PM on August 17, 2005

The poster clearly implied that he or she is not interested in investing in real estate.
posted by malp at 12:04 PM on August 17, 2005

Response by poster: The poster clearly implied that he or she is not interested in investing in real estate.

Right-o. I see most real estate as on the bubble. 40-60% appreciation simply cannot be sustained. Demand may have been high due to extremely low interest rates, but speculation has driven the prices into the stratosphere. I don't see people being able to afford those prices with the coming of higher interest rates.

Higher gas rates makes longer commuting painful and I see outer suburbs taking a hit as people stop the outward migration, especially in the Twin Cities metro area (where I am).
posted by unixrat at 12:12 PM on August 17, 2005

I wanted to point out that besides collection agencies, liquor stores (may Dad has made a great living owning one for 25 years), etc., there is gambling.

Btw, my town is doing great. Steady but not too fast rise in housing values, increase in jobs, lot of stable growth. Of course we're an oil & gas town & just brought in a new casino & horse race track. There is a shortage of people willing to work the low wage jobs - at WalMart & Home Depot for example.
posted by LadyBonita at 12:12 PM on August 17, 2005

Supposedly, bearish people are going long on gold and oil, if that's any help at all.

I think oil is going to come down soon.
posted by joseppi7 at 12:14 PM on August 17, 2005

A meta-answer: Many people have lost a great deal of money by trying to invest in something they don't understand. Things are more complex than they appear and often already reflect a pessimistic future. Currency speculation is the poster-child of this, but it seems like you could easily wander down this path as well.
posted by smackfu at 1:25 PM on August 17, 2005

Report on NPR this morning reflected on the fact that gas prices are not affecting demand whatsoever. Gas buying is inelastic up to a point, but we aren't even approaching the point where people curtail their buying and begin carpooling, taking vacations closer to home, etc. Clearly the market can bear the high fuel prices at present. The report compared prices during the gas shortages of the early 80s to prices today; adjusted to appear in today's dollars, gas prices were well over $3/gallon then.
posted by Miko at 1:30 PM on August 17, 2005

This is a crazy, whacky, tin-foil hat idea, but you could explore ways to prepare for The Long Emergency we may be facing if peak oil becomes a reality. Assuming the Doomsday scenarios are true, energy-efficient housing with "off the grid" electricity supplies, located in areas of the country with abundant fresh water and good soil, would be extremely valuable. It's a huge, out-there investment idea, but it could pay off big if some of the more dire predictions come true. I know one person who's already preparng to build his cabin in the woods, just in case.
posted by junkbox at 1:30 PM on August 17, 2005

Gas buying is inelastic up to a point, but we aren't even approaching the point where people curtail their buying and begin carpooling,

That's simply wrong, at least where I live. From yesterday's San Francisco Chronicle:

"Gas prices pump up carpools, Commuters flock to shared rides"
posted by _sirmissalot_ at 1:34 PM on August 17, 2005

DC is a great example.

My apartment complex in NW DC is about to go condo, and if we would foolishly decide to buy the apartment we currently rent our monthly payment would go up almost 45% (an increase of over $1,000/month). And that's with an interest-only mortgage and all sorts of other creative financing plans they're trying to con us with.

Continuing to rent sounds like the smart option for us by far. Yes there are always jobs in DC, but salaries have not kept up with housing prices (for most federal employees, at least), and something's got to give pretty soon.
posted by arco at 1:37 PM on August 17, 2005

"Invest in gold/precious metals. If interest rates and energy prices shoot up *AND* the Fed responds by printing more money then precious metals may rise steeply. I'm not quite sure how an individual does this directly outside of buying gold bricks though. May have to be through a mutual fund."

Well, I think the Fed has already been expanding the money supply a little *too* much, and have been purchasing Gold & Sliver as cash flow allows. Most of my Gold is bullion, held in physical form by Fidelity. There are problems associated with physical ownership (fees, etc) but you could purchase Gold via an Exchange Traded Fund (aka ETF, similar in some ways to a mutual fund), GLD.

Like most investments, don't put in any more money than you can stand to lose. Always think worst case. Even precious metals are not NOT a sure thing.
posted by Mutant at 1:38 PM on August 17, 2005

I'd second the "start a career in bankruptcy" advice. I'm not sure if you need to be a lawyer for that; most of the people I know in this field are in fact accountants. The trick is that they get paid first when handling cases :-)
posted by clevershark at 1:45 PM on August 17, 2005

Wait, my math was wrong... If we were to buy our current apartment at the offered price, our monthly payment [rent vs. mortgage] would increase by 58%, not 45%. We would be paying over $1,000 more to "buy" our apartment in DC (with an interest-only mortgage) than we currently do to rent it.
posted by arco at 1:47 PM on August 17, 2005

Another thing -- when interest rates start rising you'll see more and more houses being repossessed by banks from victims of these adjustable rate mortgages that seemed like such a good idea at the time. If you have a big enough nest egg, use it to buy repossessed properties for cheap with the intention of selling them for higher prices once the market picks up again. This does, however, require some patience.
posted by clevershark at 1:48 PM on August 17, 2005

energy-efficient housing with "off the grid" electricity supplies, located in areas of the country with abundant fresh water and good soil, would be extremely valuable. It's a huge, out-there investment idea, but it could pay off big if some of the more dire predictions come true.

That's not investment advice but end of the world predictions people have been making forever.

You don't know what you're doing, get an advisor and tell him you want to go bearish. I think going bearish for the long term is stupid, especially gold. There's a lot of gold on earth (we're mining it like crazy) and putting faith in it as some kind of currency is a bad idea. Gold has a tendency to yo-yo.

I've noticed that telecom and backbone industries tend to go through R&D and investment cycles during recession times. If you can find a construction company that focuses on infrastructure improvements invest in them.

I thought about shorting WalMart after the gases prices hit over $60 remembering that WalMart focuses a large, large part of their strategy on the ability to maintain inventories at stores with their large fleets. Unfortunately everyone caught on really quick and the stock, in my opinion, has equalized. That's as bearish as I get, shorting a stock I see going down quickly.

Try buying into those Canadian oil shale companies if they haven't already skyrocketed. I remember reading a study recently stating they became profitable to pump/mine/extract crude from when prices hit $50 a barrel. Canada is the middle east of oil shale (not as profitable as light crude, but still a lot there). These stocks might already be going through the roof, I haven't checked them yet.

Keep also in mind that current sentiment doesn't seem to be peak oil, as we can also extract oil from coal and we are the Saudia Arabia of coal, but refinery shortages and current shortages with our *current* supplies. At worst several large companies that own the coal/shales/alternative methods and refineries don't see how bad the middle east situation is and we are on our butts for a year or so.

Look at oil prices as not an indicator of doom but of economic prosperity. We've based our whole economy on oil and it runs so efficiently we need more. More oil mo' money. I would go so far as to say that the currenty high oil prices demonstrate the absolute efficiency of our current system, no bloat or waste.

If you want to be bearish on anything go for the Chinese auto industry. The recently wealthy are pushing these high prices up and my guess is that a large portion of the newly rich won't be able to afford it as easily as our stronger economy can.

The makers of hybrid batteries might be a good bet if prices stay < $2.50 across the midwest.br>
I know a lot of bears but I prefer to invest bullish even in an impending bear market (does that even make sense?). My point being you can invest in a lot of things and not depend on the economy to fail.
posted by geoff. at 1:48 PM on August 17, 2005

You might try the Vice Fund. If the future is as gloomy as you predict, people will still find ways to buy ciggies and booze....
posted by spilon at 1:49 PM on August 17, 2005

er, that should be "$1000 more per month to 'buy'..." I'll stop derailing the thread now.
posted by arco at 1:49 PM on August 17, 2005

Wait, my math was wrong... If we were to buy our current apartment at the offered price, our monthly payment [rent vs. mortgage] would increase by 58%, not 45%. We would be paying over $1,000 more to "buy" our apartment in DC (with an interest-only mortgage) than we currently do to rent it.

Just wondering if your calculation includes the tax deduction? It still may not make things palatable, but the tax benefits are a big part of home ownership.
posted by jalexei at 1:59 PM on August 17, 2005

jalexei--

The $1000 increase is the monthly payment (inlcuding condo fees), but even if the tax deduction is taken into account--using the figures supplied by the sellers--the "equivalent monthly rent payment" goes up by about $500.
posted by arco at 2:05 PM on August 17, 2005

The median home price in San Francisco Bay Area is $643,000 (the median in San Francisco is $800,000), so it's cheaper here to rent than buy.

Speaking of gas prices, it's 5 cents per gallon in Iraq.
posted by kirkaracha at 2:08 PM on August 17, 2005

That's not investment advice but end of the world predictions people have been making forever.

Indeed, but the hard truth is that in uncertain times, people will believe (and buy) anything to assuage their fears. Somebody out there made boatloads of cash selling bunkers to Y2K refugees; just because Y2K turned out to be a big joke doesn't make their money any less green.

Peak Oil is going to get more and more press over the next few years; anyone who figures out what will appeal to people terrified of peak oil fallout (off the grid power sources, their own water and food supply, whatever) develops it and sells could make a tidy profit, whether the Doomsday scenarios come true or not.
posted by junkbox at 2:11 PM on August 17, 2005

We went house shopping two weeks ago in Seattle, where we're about to move. We discovered that we could rent a very nice 3-bedroom house (with yard, garage, etc) in a great neighborhood for about $1,400-$1,700. Those same houses are selling for about $450K and up right now, which would equal a monthly cost of at least double if not more (including taxes, insurance, etc.)--much more if you firgure on doing repairs or renovations. So we're renting and sleeping much better since we decided to do so.
posted by _sirmissalot_ at 2:18 PM on August 17, 2005

letterneversent writes "Mitheral, this will be offset by increasing numbers of debt-ridden people selling and buying from eBay."

Should be interesting see which way it goes. Americans have been living in a market flush with cheap shipping, ground shipping especially. That market is going to tighten considerably as oil prices rise. Re: eBay It's really noticeable from here in Canada, the fixed additional expense of getting an ebay purchase across the border (especially if the seller insists on shipping FedEX/UPS) is a serious drag on how much Canadians bid on lower priced items.

Besides, who is going to buy all the stuff being put up for sale?
posted by Mitheral at 2:51 PM on August 17, 2005

Generally speaking, when the stock market declines, the bond market advances. Therefore, the best time to move money from stocks to bonds is the day before the bubble bursts. That said, there are always some stocks advancing, even if it is against the market or indecies. There are others that are stable even in the worst of times and still pay dividends.

Before taking specific advice from anyone, ask yourself if they are rich. If they are, find out where the money came from. If it's from clients, run; if it's from private investing, follow.
posted by kc0dxh at 6:23 PM on August 17, 2005

...just because Y2K turned out to be a big joke doesn't make their money any less green.

Y2K doom was prevented, it wasn't a big joke.
posted by jikel_morten at 7:52 PM on August 17, 2005

Buy The Intelligent Investor, by Ben Graham (w/notes by Jason Zweig). In "value investing," the basic idea is to find and invest in high-quality stocks which can be bought BELOW their underlying value. Believe it or not, there are always some out there.

Value investing is how Warren Buffett made his billions, and seems to be the only "guaranteed" way to make money in stocks. It's unglamorous and requires a lot of patience and research, which is why most people don't do it (and don't make money in stocks).
posted by ZenMasterThis at 6:48 AM on August 18, 2005

The City of Niagara Falls is already having a lot of financial trouble, so it's probably pretty easy to get a good deal in that town, and yet it has the wonder of, naturally, Niagara Falls, and lots of people are going to want to travel cheaply when the next downturn comes. So:

Start a low-cost vacation resort near Niagara Falls. Minimum frills, small rooms, maybe just free cheap whisky and note paper in every room. It's entrancing at night, so maybe a free shuttle bus to the brink at midnight. Possible advertising copy: "The dizzying heights... the thrillingly low railings... the long drop... the swirling, swallowing waters below..."

The resort for people who can no longer afford expensive vacations and who are desperate to get away from it all.
posted by pracowity at 8:06 AM on August 18, 2005

Two of my relatives have now seen their properties rise 40-60% in the past three years. Considering those capital gains, even if suddenly all real estate drops by 50% (which is unprecedented), they're still ahead.

100 K + 60% = 160K
160 K - 50% = 80 K
Thats still a 20% drop in value - you need a 100% gain to counteract a 50% drop
posted by Lanark at 10:04 AM on August 18, 2005