When our first book, America’s Bubble Economy, came out in 2006 (the book proposal was actually submitted 18 months earlier), we were right and almost everyone else was wrong. We don’t say this to brag. We say it because it’s important for understanding why you should bother to pay attention to us now.

America’s Bubble Economy (John Wiley & Sons, 2006) accurately predicted the popping of the real estate bubble, the collapse of the private debt bubble, the fall of the stock market bubble, the decline of consumer spending, and the widespread pain all this would inflict on the rest of our vulnerable, multibubble economy. We also predicted the eventual bursting of the dollar bubble and the government debt bubble, which are still to come. Of course, back in 2006, our predictions were largely ignored. Two years later, they started coming true: the housing, private debt, and stock bubbles fell dramatically, causing the global financial crisis in late 2008.

How did we see it coming? Certainly not by looking only at current conditions, which, at the time we wrote the first book, still looked pretty darn good. In fact, real estate prices in 2006 were close to their record highs. And with home values high and credit flowing, American consumers were still happily tapping into their home equity and credit cards to buy all manner of consumer products, from designer diapers to flat-screen TVs, importing goods from around the world, and boosting the economies of many nations. Businesses and banks appeared to be in good shape (very few banks were even close to failing), unemployment was relatively low, and Wall Street was still on an upward climb toward its record closing high (Dow 14,164) a year later on October 9, 2007.

With so much seemingly going so well back in 2006, how could we have been so sure that the housing bubble would pop, private credit would start drying up and or that the stock market would fall?

Our accurate predictions were not a matter of blind luck, nor were they merely a case of perpetual bearish thinking finally having its gloomy day. In 2006, we were able to correctly call the fall of the U.S. housing bubble and its many consequences because we were able to see a fundamental underlying pattern that others were—and still are—missing.

In this pattern, we saw bubbles. Lots of them. We saw six big economic bubbles linked together and holding up one another, all supporting a seemingly prosperous U.S. economy. And we also saw that each conjoined bubble was leaning heavily on the others, each poised to potentially pull the others down if any one of these economic bubbles were to someday pop.

Why would they ever pop? We knew they would eventually pop because we saw that the evolving economic facts on the ground did not justify the volume or height of the bubbles; therefore, we knew they would have to burst sooner or later. In the next chapter, we will tell you more about these six big economic bubbles (the first four have already begun to burst and the other two will shortly) and how we knew they were bubbles. For now, the point is that economic bubbles, by nature, do not stay afloat forever. Sooner or later, economic reality, like gravity, eventually kicks in, and bubbles do fall. After they burst, they never are able to reinflate fully and lift off again. In time, new bubbles may grow, but old popped bubbles generally do not take off again. When the party is over, it’s over.

Most people, even most “experts,” find it much easier to recognize a bubble (like the Internet bubble of the 1990s) after it pops. It is a lot harder to see a bubble before it bursts, and much harder still to see an entire multiple-bubble economy before it bursts. A single, not-yet-popped bubble can look a lot like real asset growth, and a collection of several not-yet-popped bubbles can look a whole lot like real economic prosperity.

We wrote our first book, America’s Bubble Economy, in 2006 because, based on our unique analysis of the evolving economy, the facts on the ground did not support the bubbles in the sky. By that we mean high-flying asset growth that is not firmly pinned to real underlying economic drivers is not sustainable. For example, real estate prices are typically driven higher by a growing population (increasing demand) and the growing incomes of home buyers (increasing ability to buy). When populations increase and incomes increase, home prices also increase. However, if you see home prices increasing, let’s say, twice as fast as incomes, then that could mean something unsustainable is happening to the value of real estate. Why? Because home prices that high are not sustainable without a similar rise in the ability of buyers to keep paying those prices.

Asset bubbles are not always bad. On the way up, they can lift part or all of an economy and spur future economic growth. This certainly was the case with the housing bubble. On the way down, however, they can cause real problems. In fact, the bigger the bubble, the harder the fall.

America’s Bubble Economy identified several economic bubbles that were once part of a seemingly virtuous upward spiral that first lifted and supported the U.S. economy over many decades, and are now part of a vicious downward spiral that will inevitably harm the U.S. and world economies as these sagging, co-linked bubbles weigh heavily on each other and ultimately burst.

We have been making this point as clear as we can in multiple books. After publishing America’s Bubble Economy in 2006, we released Aftershock in 2009; Aftershock, Second Edition, in 2011; The Aftershock Investor in 2012; The Aftershock Investor, Second Edition, in 2013; Aftershock, Third Edition, in 2014; and now, we offer you this updated and revised fourth edition of Aftershock.

The six big bubbles we have been warning about include the real estate bubble, stock market bubble, private debt bubble, discretionary spending bubble, dollar bubble, and government debt bubble. Despite how well the economy appeared to be doing in 2006, we predicted it would be only two or three years before America’s multiple bubbles would begin to decline and eventually even burst.

And that is just what happened.

By the third quarter of 2008, home prices and sales had fallen significantly, mortgage defaults and home foreclosures were skyrocketing, commercial and investment banks were going under, unemployment was rising, and the stock market bubble had fallen from its peak of 14,164 in October 2007 to under 7,000 on the Dow Jones Industrial Average (DJIA) not much more than a year later.

Unlike any other moment in our history, there is something fundamentally different going on this time. Even people who pay no attention to the stock market or the latest economic news say they can just feel it in their gut. Experts keep saying we are in a recovery, but something feels different this time.

The difference that many of us feel but few can define is this: We are not in a typical “down market cycle” this time, awaiting an inevitable “up cycle.” The difference this time is that we are in an evolving multibubble economy. Falling bubbles cannot be reinflated by an “up cycle.” With so many linked bubbles now vulnerable, the impact of their combined future fall will be far more dangerous than any downturn or recession we’ve experienced in the past. Unlike in a healthy economy, in this falling multibubble economy, the usual strategies for returning to our previous prosperity no longer apply. We have, in fact, entered new territory.

In Phase 1 of this multibubble pop, the real estate, credit, and stock market bubbles started to fall, bringing on the global financial crisis of 2008. We say “started to fall” because there is still much more falling to come, not only for the real estate bubble but for the rest of the co-linked multibubble economy, including the stock market bubble and others (see the next chapter for details).

Next, in Phase 2, comes the Aftershock. Just when most people think the worst is behind us, we are about to experience the cascading fall of several co-linked bursting bubbles that will rock our nation’s economy to its core and send deep and destructive financial shock waves around the globe. The fall of the housing, credit, consumer spending, and stock bubbles significantly weakened the world economy. But the coming Aftershock will be far more dangerous. Despite massive efforts by the federal government and the Federal Reserve to hold up the falling bubbles with borrowing and unprecedented money printing, the fall of a multibubble economy can be (and is being) delayed, but it cannot be held up forever (or even much longer). Rather than the U.S. economy’s recovering fully, as many “experts” want you to believe, we see serious, groundbreaking new troubles ahead. In fact, the worst is yet to come.

That’s the bad news. The good news is the worst is yet to come (with emphasis on the word yet). There is still time for individuals and businesses to cover their assets and even find ways to profit in the multibubble pop and Aftershock.

But first you have to see it coming.

Because Our Earlier Books Were Right, Now You Can Be Right, Too

Most people think the economy is in a recovery and will only improve from here. Unfortunately, this just isn’t true. We can tell you what you want to hear, or we can help you enormously by showing you how to prepare and protect yourself while you still can, and find opportunities to profit during the dramatically changing times ahead. We may not give you news you like, but it will definitely be news you can do something about.

Now is not the time to look for someone to cheer you up. Now is the time to get it right because you won’t care in five years if someone cheered you up today. What you will care about is that you made the right financial decisions. It matters more now than ever before that you get it right today. Please remember this important point as you go through the rest of the book: It is bad news for your personal economy only if you don’t do anything about it.

And you can do something about it. You can actively and correctly manage your investments and protect your assets now, before it’s too late, and you can begin to position yourself to cash in on some really big profit opportunities in the longer term. This is a tricky time and it will only get trickier, which is why we want to help you come through each stage of the coming Aftershock (before, during, and after) in the best shape possible.

Later in the book, we will give you some practical advice for protection and profits. Much more detail about how to invest in this challenging and evolving economy can be found in our recent book, The Aftershock Investor, Second Edition (Wiley, 2013).

Before we go on, we should take a moment to assure you that we are neither bulls nor bears. We are not gold bugs, stock boosters or detractors, currency pushers, or doom-and-gloom crusaders. We have no particular political ideology to endorse and no dogmatic future to promote. We are simply intensely interested in patterns—big, evolving changes over broad sweeps of time. And because we look for patterns, we are willing to see them—often where others do not.

At the time we wrote America’s Bubble Economy, we saw, and still continue to see, some patterns in the U.S. and world economies that others are missing. We see these patterns, in part because we are very good at analyzing the larger picture. In fact, co-author David Wiedemer has developed a fascinating new “Theory of Economic Evolution” (introduced briefly in Chapter 8 of the first edition of Aftershock, although not repeated in this updated fourth edition of the book) that helps explain and even predicts large economic patterns that most people simply don’t see.

But there’s more to it than that. We can see things happening in the economy right now that many others do not because, at this particular moment in history, it’s very hard for most people—even most experts—to face what is actually going on. The U.S. economy has been such a strong and prosperous powerhouse for so long, it’s difficult to imagine anything else. When there is so much at stake, it’s hard to face reality and oh so easy to stay in denial.

Our goal is not to convince you of anything you wouldn’t conclude for yourself, if you had the right facts, based on objective science and logical analysis. Most people don’t get the right facts because most financial analysis today is based on preconceived ideas about a hoped-for positive outcome. People want analysis that says the economy will improve in the future, not get worse. So they look for ways to create that analysis, drawing on outdated ideas like repeating “market cycles,” to support their case. Such is human nature. We all naturally prefer a future that is better than the past, and luckily for many Americans, that is what we have enjoyed.

Not so this time.

Again, just to be clear, we are not intrinsically pessimistic, either by personality or by policy. We’re just calling it as we see it. Wouldn’t you really rather face the truth?

At a presentation about America’s Bubble Economy to one of the nation’s largest law firms in 2008, co-author Robert Wiedemer said he wished people would treat economists and financial analysts as doctors rather than people trying to cheer you up. What if you had pneumonia and all your doctor did was slap you on the back and say, “Don’t worry about it. Take two aspirin, and you’ll be fine in a couple of days.” Instead, wouldn’t you prefer the most honest diagnosis and best treatment possible? But when it comes to the health of the economy, most people want only good news. Even in the face of some very damning economic facts, people still want convincing analysis of why the economy is about to turn around and get better soon. The vast majority of financial analysts and economists are simply responding to the market. That’s what people want, and that’s what they get.

Despite this universal desire for good news, and despite the fact that the housing and stock markets were both near their peaks in 2006, our first book did remarkably well. In fact, America’s Bubble Economy was discussed in articles in Barron’s, Reuters, Bottom Line, and the Associated Press. The book was also selected as one of the 30 best business books of 2006 by Kiplinger’s. And co-author Robert Wiedemer was invited to speak before the New York Hedge Fund Roundtable, the World Bank, and on CNBC’s popular morning show Squawk Box. So, clearly, people are interested in unbiased financial analysis, even when that analysis says there are fundamental problems in the economy that won’t be resolved easily or soon.

Then, with the release of Aftershock in late 2009, support for our analysis and predictions grew considerably. Dozens of newspapers, magazines, radio broadcasts, and television programs have featured and quoted from the book and interviewed co-author Bob Wiedemer, including the New York Times, Financial Times, Wall Street Journal, Associated Press, CNBC, Fox Business News, and many more. Aftershock, Second Edition, published in 2011, hit the New York Times Best Sellers list. Yet even within this supportive audience, and even among our most devoted fans, there is still a wish for optimism, a deep-down feeling that the future couldn’t possibly be as bad as we say. We understand that. All we can offer is realism, based on facts and logical analysis. In the end, that is what’s best for all of us.

Although much of what we predicted has come true, much that we forecasted in our books hasn’t happened yet because most of the impact of the multibubble collapse is still to come. This is good news because it means you still have time to prepare.

Didn’t Other Bearish Analysts Get It Right, Too?

Not really. Back in 2006, there was a small group of more bearish financial analysts and economists who correctly predicted some slices of the problems. We say hats off to them for having the courage and insight to make what they felt were honest, if not popular, appraisals of the economy. It takes guts to yell “fire” when so few people believe you because they can’t even smell the smoke.

However, there are times when smart people make the right predictions for the wrong reasons, or for incomplete reasons, and that makes them less likely to be right again in the future. In this case, there are important differences between our way of thinking and the typical “bear” analysis, which we think you ought to know about. For one thing, a lot of bear analysis tends to be apocalyptic in tone and predictions, sometimes going so far as to call for drastic survivalist measures, such as growing your own food. Unlike these true doom-and-gloomers, we see nothing of the kind occurring.

Another important difference is that so much bear analysis seems to carry moralistic overtones, implying that, individually and collectively, we have somehow sinned by borrowing too much money, and we will eventually have to pay a hefty price for our immoral ways. We certainly disagree that borrowing money is morally wrong. In fact, depending on the circumstances, borrowing money can be the best course of action for an individual, a business, or a government. Without the leveraging power of credit, it’s very difficult to start a business, go to medical school, build a bridge, or lift an economy.

Borrowing is not intrinsically “wrong.” The real issue here is that some debts are a lot smarter than others. For example, borrowing money to go to college for four years en route to a lucrative career is smart. Borrowing the same amount to spend four years at Disney World is not. (More on “smart” versus “dumb” debt in the next chapter.) For now, the point is that borrowing money, in and of itself, is not the biggest problem—stupidity is. Other bearish analysts who complain about too much borrowing tend to miss this vital distinction entirely.

An even more important difference between our predictions and other bearish analyses is that they tend to ignore the bigger picture of our multibubble economy. Even the most realistic bearish thinkers fail to see all the bubbles in today’s economy, and they certainly miss the critically important interactions between them. Instead, if they mention any bubbles at all, they often focus on one singular bubble—like consumer debt, the housing bubble, or the growing federal debt. They are right to point out that all is not well, but they generally don’t connect the dots from their single complaint to the larger multibubble economy. More important, they don’t see how the co-linked bubbles interact or will eventually pull the economy down.

Honestly, if all we had was a consumer debt or housing bubble, our economy could get past it fairly unscathed. Unfortunately, our multibubble problem is much bigger than one or two of its parts. As we discuss in more detail in the next chapter, these bubbles worked together in a seemingly virtuous upward spiral to lift the economy up in the longest economic expansion in U.S. history, and these linked bubbles will work together in a vicious downward spiral to pop our multibubble economy and bring on the global Aftershock.

Partly because this was a massive multibubble pop, a full economic rebound has not occurred. Yes, the stock market recovered due to massive money printing, and that has helped spur more consumer spending and there has been a rebound in home prices. But in terms of the economy, not asset prices, the economy, and people’s incomes, aren’t exactly booming.

Multibubble economies certainly cannot stay afloat forever. There are real forces that push economies up and real forces that push economies down. These forces are not static, like repeating market cycles, but evolve over time. Based on our science-backed analysis of the evolving economy, which is neither bullish nor bearish, but simply realistic, the U.S. economy is in the middle of a long-term fundamental change. It is evolving, not merely cycling back and forth between expansion and contraction.

Therefore, the multibubble economy will not automatically turn around and go back up again in the next few years. The idea that the economy is evolving, not merely expanding and contracting and expanding again, is a key difference between us and other bearish analysts; and it is certainly a huge difference between us and the bullish “experts.”

Another reason that many “experts” did not (and still don’t) see what is really occurring in the economy is that they don’t fully understand the short-term power of the federal government to make it look as if we are having a recovery when we are not. They see a financial crisis in late 2008, and then they see the short-term positive impact of massive federal government borrowing and money printing on the stock market, helping to create a big stock rally, and from there the experts conclude that the economy is getting back on track.

It isn’t.

How the “Experts” Got It So Wrong

We enjoyed an article in the January 12, 2009, issue of BusinessWeek magazine so much that we thought we’d include some of it for you here. What follow are observations and predictions about the economy in 2008 by well-known and highly trained financial professionals, writers, investors, and economists. It is interesting to note that, in the course of our research for this book, we kept a file of predictions and observations that well-known analysts, investors, and economists make.

In reviewing the file for this section of the book, we noticed that it is very hard to find anyone who will predict economic movements beyond a year. Hence, it limits just how wrong they can be. It also makes it very hard to compare our long-term predictions that were made in October 2006 with anyone else’s predictions, since so few people in 2006 made predictions for 2008 or 2009. That we can show the accuracy of our long-term predictions against others’ short-term predictions, which are much easier to make, shows the power of our financial and economic analyses in understanding the economy. For most investors, long-term predictions are really the most important because most investors are investing for the long term, whether it be for capital appreciation, capital preservation, or for retirement. Financial analysis has to be accurate long term to really be valuable.

Here are the statements of interest from the January 12, 2009, issue of BusinessWeek:

Stock Market

• “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” Richard Band, editor, Profitable Investing Letter, March 27, 2008.
• What actually happened: At the time of Band’s comment, the Dow Jones industrial average was at 12,300. By December 2008 it was at 8,500.

AIG

• AIG “could have huge gains in the second quarter.” Bijan Moazami, distinguished analyst, Friedman, Billings, Ramsey, May 9, 2008.
• What actually happened: AIG lost $5 billion in the second quarter 2008 and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it going.

Mortgages

• “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under. … I think they are in good shape going forward.” Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008.
• What actually happened: Within two months of Rep. Frank’s comments, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

GDP Growth

• “I’m not an economist but I do believe that we’re growing.” President George W. Bush, in a July 15, 2008, press conference.
• What actually happened: GDP shrank at a 0.5 percent annual rate in the July–September quarter. On December 1, the National Bureau of Economic Research declared that a recession had begun in December 2007.

Banks

• “I think Bob Steel’s the one guy I trust to turn this bank around, which is why I’ve told you on weakness to buy Wachovia.” Jim Cramer, CNBC commentator, March 11, 2008.
• What actually happened: Within two weeks of Cramer’s comment, Wachovia came within hours of failure as depositors fled. Steel eventually agreed to a takeover by Wells Fargo. Wachovia shares lost half their value from September 15 to December 29, 2008.

Homes

• “Existing-Home Sales to Trend Up in 2008.” From the headline of a National Association of Realtors press release, December 9, 2007.
• What actually happened: NAR said November 2008 sales were running at an annual rate of 4.5 million—down 11 percent from a year earlier—in the worst housing slump since the Depression.

Oil

• “I think you’ll see [oil prices at] $150 a barrel by the end of the year.” T. Boone Pickens, one of the wealthiest and most respected oilmen today, June 20, 2008.
• What actually happened: Oil was then around $135 a barrel. By late December it was below $40.

Banks

• “I expect there will be some failures. … I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.” Ben Bernanke, Federal Reserve chairman, February 28, 2008.
• What actually happened: In September 2008, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

Bernard Madoff

• “In today’s regulatory environment, it’s virtually impossible to violate rules.” Famous last words from Bernard Madoff, money manager, October 20, 2007.
• What actually happened: About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.

Predictions from Ben Bernanke and Henry Paulson—We Trust These Officials with Our Economy

Former Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson unfortunately made an incredible team for wrong forecasts. With the performance shown here, you have to wonder why they were ever given so much credibility.

• March 28, 2007—Bernanke: “At this juncture … the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
• March 30, 2007—Dow Jones @ 12,354.
• April 20, 2007—Paulson: “I don’t see [subprime mortgage market troubles] imposing a serious problem. I think it’s going to be largely contained.” … “All the signs I look at” show “the housing market is at or near the bottom.”
• July 12, 2007—Paulson: “This is far and away the strongest global economy I’ve seen in my business lifetime.”
• August 1, 2007—Paulson: “I see the underlying economy as being very healthy.”
• October 15, 2007—Bernanke: “It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.”
• February 28, 2008—Paulson: “I’m seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street.”
• May 7, 2008—Paulson: “The worst is likely to be behind us.”
• June 9, 2008—Bernanke: “Despite a recent spike in the nation’s unemployment rate, the danger that the economy has fallen into a ‘substantial downturn’ appears to have waned.”
• July 16, 2008—Bernanke: “[Freddie and Fannie] … will make it through the storm” …“[are] … in no danger of failing” … “… adequately capitalized.”
• July 31, 2008—Dow Jones @ 11,378
• August 10, 2008—Paulson: “We have no plans to insert money into either of those two institutions” [Fannie Mae and Freddie Mac].
• September 8, 2008—Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated $1 trillion to $1.5 trillion. Over $5 trillion is added to the nation’s balance sheet.

Where We Have Been Wrong

In the first three editions of Aftershock, we admitted that there is one area in which we have been wrong before, and likely we will be wrong again. Now in this fourth edition of the book, we have to repeat that admission again.

Timing exactly when each bubble will pop and the Aftershock will begin has been and remains nearly impossible to accurately predict. For example, in the first Aftershock book we said the coming Aftershock could begin as early as 2011. In the second edition of Aftershock, we revised that to 2013. But since we wrote the last book, the U.S. government has intervened massively to delay the coming economic collapse. For example, they enormously increased their borrowing, bailed out many of our largest financial institutions, bailed out our auto companies, gave significant tax credits to home buyers, put less pressure on banks to foreclose on defaulted mortgages, and began a program of massive money printing—all of which helped temporarily support the sagging multibubble economy and delayed the inevitable fall ahead. (All this economic stimulus, by the way, is only going to make matters worse later, by putting more pressure on the debt and dollar bubbles, as you will see in Chapters 3 through 6.)

In addition to huge government stimuli of various kinds, there is possibly some degree of manipulation of the markets for the purposes of keeping investors’ psychology from turning too negative (for more on this, please see the Appendix). Keeping the group psychology as positive as possible for as long as possible is vital to keeping the party going and the bubble economy afloat. Government stimuli, market manipulation, and group denial are working together to delay the inevitable, for now. Ultimately, none of these are sustainable, but they do work well enough in the shorter term.

Timing is always tricky when making any forecast, but if you know what to look for, the overall trends of each phase are predictable, even if the exact moments when specific triggers that will activate them are not. That’s why we try to give general time ranges for our ideas about future events, and we attempt to link these to other signs and events, rather than trying to predict specific dates. Knowing the overall trend is absolutely essential. If you know winter is coming, you can prepare yourself without knowing exactly when and where the first snowflake will fall. However, if you are expecting spring, that first winter storm is really going to hit you hard.

An old stock market saying is “the trend is your friend.” We say “the trend is your best way to defend” against the dangers of trying to time the Aftershock. If you know the general trend, your asset protection and investment timing will, on average, be fine (see Chapters 9 through 11). Even if the trend seems to go against you for a while, if you follow a fundamental trend that you know may take years to play out, you will do fine. This type of fundamental, long-term trend thinking is key for success during each stage of the falling bubbles and their Aftershock.

Within an overall trend, there will be moments, or trigger points, when dramatic shifts occur. For example, in the fall of 2008, the stock market dropped more than 20 percent within a few weeks of Lehman Brothers going bankrupt. Predicting the occurrence or the timing of that kind of specific event is essentially impossible. What we did predict with complete accuracy was the overall trend of an overvalued stock market bubble poised for a fall.

Specific trigger points are so hard to predict because their activation usually involves a high psychological component, and try as we might, the timing of human psychology is not especially predictable. For example, if you objectively analyzed the Internet stock bubble prior to its fall, you’d know that it was bound to pop at some point, but you’d be hard-pressed to know precisely when and specifically what would kick it off. Even today, well after the fact, it is hard to figure out exactly what triggered the pop of the dot-com bubble in March 2000. Was it the collapse of MicroStrategy’s stock price due to the restatement of earnings forced on it by PricewaterhouseCoopers in March? That’s a good guess, but not necessarily correct. Other people have their own guesses, but in talking to many investment bankers and venture capitalists, we have found no unified identification of the actual trigger point, even though they are experts in this area, and this was a major economic event that affected each of them quite personally. All we know with certainty is that we had a bubble in Internet-related stock prices, and in March 2000 investor psychology dramatically changed.

When thinking about how bubbles in general tend to burst, it’s interesting to note that during the fall of the Internet bubble, the Nasdaq didn’t just collapse and go straight down. Over the course of nine months, it fell and recovered, at one point rising not too far from its peak, before its eventual final fall. Even right in the middle of the dot-com crash, most people didn’t see it. In fact, the mantra among investors at the time was that we were simply moving away from a business-to-consumer model toward a business-to-business model, and then to an infrastructure play. The infrastructure play begat the rise of the fiber-optic companies in the summer of 2000, most notably JDS Uniphase, before it, too, collapsed. Ultimately, Nasdaq would rise and fall again many times, until it had fallen 75 percent from its all-time high of over 5,000 in early 2000, finally hitting its intraday low point of 1,108 in October 2002.

The moral of the story is that it’s hard to predict specific triggers before they happen. Even after the fact, it can be hard to understand the timing of specific events. Why did investors change their psychology in March 2000 instead of in August 1999? After March 2000, why did people think that infrastructure was the next big thing? Did they just want to keep the old Internet boom alive, or were they really sold on infrastructure? Most investor decision making turned out to be based on psychology, not real analysis of the underlying trends. Eventually, all the stocks in the infrastructure play collapsed. Even wishful thinking can’t grow a bubble forever.

So when people challenge us to tell them exactly when each phase of the Aftershock will begin, we don’t take the bait. All we can say with certainty is that the transitions from each phase to the next will involve triggering events, the timing of which will be as hard to predict as the popping of the Internet bubble.

We do know that trends can take years to assert themselves fully, and along the way, long-term trends can be temporarily delayed, even briefly reversed, by a countering short-term trend. For example, the long-term trend of a falling stock market bubble was temporarily delayed by the short-term trend of the rise of the private equity company buyout bubble. With easy credit at very low interest rates, private equity and hedge funds raised enormous amounts of money and went on a company buying spree the likes of which we’ve never seen. Total merger and acquisition transaction values went from $441 billion in 2002 to $1.4 trillion in 2006 and $1.3 trillion in 2007, according to Mergerstat. This, plus generally good investor psychology, drove stock prices higher, helping to boom the Dow to 14,164 in 2007. Of course, it also made the stock market bubble much bigger and therefore much more vulnerable to the credit crunch, caused by the fall of the housing bubble and the private debt bubble (see Chapter 3).

In another example, the potential full negative impact of the collapse in home prices on the economy and stock market in 2008 was blunted, or at least delayed, by the short-term trend of lenders making much riskier loans in 2006. Historically, in July 2005, home prices stopped going up in many places or slowed their growth dramatically. They weren’t falling, but they weren’t rising rapidly anymore, thus setting the stage for the subprime and adjustable-rate mortgage collapse. Lenders’ willingness to participate in riskier home loans in 2006 and early 2007 to some extent slowed the fall of the housing bubble and delayed its impact on the economy and the stock market for a while. In our first book, we couldn’t give the exact timing of the housing bubble fall because it was hard for us to predict just how crazy lenders would get. We did know they could not keep it up forever, and in fact they didn’t. Lenders pulled back on their risky loans very dramatically in 2007, triggering an even bigger collapse in real estate prices.

Thus, our 2006 prediction of the long-term trend of falling housing and stock market prices began to emerge with a vengeance by the end of 2007 and early 2008. And if it were not for emergency measures by the Federal Reserve to print massive amounts of money combined with a massive increase in government borrowing, which were unprecedented, the stock market would have fallen much farther. But the dramatic government intervention only served to temporarily blunt (not stop) the effects of the underlying fundamental trend. In time, these trends will also include a major Aftershock that few others are anticipating: the bursting of the dollar and government debt bubbles.

When will that happen? As of this writing in early 2015, we believe the conditions necessary to bring on the multibubble pop and Aftershock (namely, a shift toward negative investor psychology, coupled with rising inflation and rising interest rates) will likely begin in the next two to four years. As we will explain in more detail later, it all depends on a change in investor psychology.

So while precise timing is very tricky because there are always so many intervening, complex factors, our predictions regarding the overall trend are well intact and still on track.

Love us or hate us, the fact is we got it right before, while others got it wrong. And, unfortunately, we will be right again, for the very same reasons. As Paul Farrell, senior columnist for Dow Jones MarketWatch, said about our first book in February 2008, “America’s Bubble Economy’s prediction, though ignored, was accurate.”