Some are calling it a “crisis of confidence”. Some say its a “liquidity crisis”. Or maybe it’s a “credit crisis”. Or a real estate crisis? A “mortgage meltdown”? A “market correction”? Or my personal favorite, “the worst economic crisis since the Great Depression”?
Even if we can’t agree on what to call it, can we agree on the cause of our latest national catastrophe? With every single economist, policy expert, and regulatory official apparently working on the problem, surely we’ve gotten to the bottom of it, right? Otherwise, how can we hope to fix it and prevent it from happening again?
Unfortunately, no. Some say the crisis is the result of deregulation. Others blame the devastation on “irresponsible sub-prime borrowers”. Then there’s the “aggressive lenders” camp. And the “hang the CEOs” crowd. Warren Buffet seems to think that derivatives deserve a large share of the blame. Or maybe it’s FASB’s accounting rules requiring mark-to-market treatment of hard to value assets? What about the credit rating agencies that rated anything they couldn’t understand “AAA”.?
I saw some talking heads on T.V. and they were sure that it’s Bush’s fault. Then a commercial came on and when I changed the channel it was the fault of House democrats like Barney Frank and Christopher Dodd. Changed it again and it was Bill Clinton’s or Alan Greenspan’s doing? And later that same evening, it was Hank Paulson, Ben Bernanke, and Chris Cox that should resign over their oh-so-obvious incompetence.
Well, let me just assure all of those involved… there are only three things that are obvious to me about the current crisis: One, no one seems to know what they’re talking about. Two, it is we, the taxpayers, that are going to pay for whatever has happened or will happen. And three, my house isn’t worth the paper it was printed on and my 401(k) is now a 201(k).
Other than that, there is NOTHING “obvious” about any of this, as far as America’s investors are concerned. Why did the market rally so strongly after its week of monumental decline? I know, some countries had an emergency meeting in Paris and came out smiling? Why did the market give back all of its gains a few days later? Let me guess… did someone important stop smiling? Rain in Botswana? Or are investors simply on drugs? Because that would actually explain a lot.
Then there’s the question of what investors “should” do amidst the wholesale destruction of their accumulated nest eggs. Hold tight. Don’t panic. Look for a rebound in Q3 of ’09? Pray for Obama to save the day? And who could forget CNN/Money’s sage wisdom on what investors can do to change their chances for a comfortable retirement: Save more, work longer, or… wait for it… save more and work longer. Brilliant! Thanks CNN!
I’ve studied the components of the current financial crisis in fairly significant detail and, although I can’t claim to know everything, I am certain that the following facts represent the truth of the matter:
1. The stock market is a risky and dangerous place to invest money. Period. Always has been, and always will be. In the last century, the DOW went from 66 to 11,497, which sounds like a lot until you do the math and realize that those numbers show compounded growth of just 5.3% a year. And, for those thinking that we’ll see the same kind of growth in this century, you’re forecasting that the DOW will reach two million by the year 2100.
2. We’ve been systematically deceived by Wall St. for so long we don’t even notice it anymore. The conventional wisdom, which says that as long as we diversify properly and hang in there for the long haul, our investments in the market will work out just fine… is puree unadulterated crap. Remember, big corporations have never been able to invest to consistently satisfy their future pension plan liabilities, so how the heck were we “we” as individuals supposed to have been able to do it?
We have bubbles every 7-8 years, at least. And, in case you wanted to know the definition of a “bull market,” it’s a temporary condition that tends to make investors feel like geniuses. The bubbles inflate and then go pop. And we spend the next so-many years trying to get the gum out of our collective hair. I’ve never even tried to calculate my average investment return over the last 20-30 years, and I’d bet that Wall St. prefers that I remain in the dark as to the outcome of such a calculation.
I saw the movie “Jaws” when I was 12, and was too scared to go in the ocean until I was 30. I saw the movie “Wall St.” when I was almost 30, and I’ve been losing so much money to the market sharks ever since that now I can’t even afford to vacation in a locale where I might be eaten by a real shark. Our penchant for investing in the market only started in the mid-1980s as a result of defined contribution plans and IRAs. Since that time we’ve seen the number of mutual funds go from hundreds to tens of thousands, each with its own advertising budget. And, as we might have expected, we’ve been deceived.
The truth is, that as we approach retirement age, the average return of the S&P 500 over the last 40 years is about as useful a number as the appraised value of our homes back in 2005.
3. The current crisis wasn’t caused by any one thing. It wasn’t caused by any two things either. Or any three, for that matter. Our current meltdown is the result of the convergence of multiple factors. The list starts with a post-dot-com bubble insatiable demand for real estate. People wanted to buy, and investors wanted to lend. After all, a house couldn’t fall to zero like our shares in E-Toys, or Pets.com, right? Then there’s the impact of complicated derivatives, known by acronyms like MBS and CDO. Rating agencies couldn’t figure them out, so they slapped AAA ratings on them and shipped them off to investors, many of whom were not permitted to hold anything but AAA grade securities.
Aggressive lenders (which is another word for “lenders”) went out and did their job of competing for loans. And people did their job by wanting to buy homes. The Fed did their best to yo-yo the interest rates, as its governors vacillated between fears of inflation and recession. Not to be outdone, FASB weighed in with FAS 157 and 159, causing the quarterly write down of untold billions, and the Bush administration maintained the status quo of denying that there was a problem beyond what the free market would soon resolve. Of course, everyone leveraged themselves to the hilt, and Paulson and Bernanke waited until the last possible moment to do their Chicken Little imitation. Well, very nicely done one and all! Cracker jack work!
4. There are 78 million baby boomers theoretically retiring in the next 20 years. I’m not sure, but I think something like 650 of them are financially prepared for their retirement years, and most of those 650 only made it as a result of receiving an inheritance. Still, our financial advisers, or “helpers” as Mr. Buffet refers to them, continue to spew out the lines they memorized in 1987, they continue to quote historic average returns, while telling us about past performance’s relationship to future results. Even more amazing is that we continue to listen like Kindergarten kids at story time.
Why are we here? Let’s be honest. As an investor, you know why we’re here, and whether you know the details or not really doesn’t matter. You’ve seen what the markets do and what they don’t. You didn’t see anything coming and you have little idea what you’re talking about most of the time. You didn’t buy Cisco Systems at $6 a share in 1996, and you didn’t sell when it hit $86. You’re no “Wizard of Wall St.” and you’re not much of a real estate tycoon either. You’re just a regular person who’s trying to do the best you can to accumulate enough money to retire someday, and still be able to afford prescription drugs and the occasional vacation to visit the grand-kids.
We need to stop kidding ourselves. We’re the first generation to even attempt retiring with defined contribution plans and stock market investments. It’s never been done before, so why should we believe that it’s even possible. It’s not, by the way. Think I’m wrong?
Try the following exercise for yourself: Start with a hypothetical balance of $1 million. Pick a starting year… say 2000, or 1990, or whenever you’d like. Then pretend that you invested the entire amount in the S&P 500 and see what happens when you withdraw 5% a year (or $50,000) from that account. It’s easy. You can find the annual return figures for the S&P 500 online. Just deduct $50,000 each year, and add whatever the S&P 500 returned each year. See how long (or short) your money lasts. If you start in 2000 and go to today, you’ll have about $365,000 left. Then imagine doing this at 65 years old and living until age 90.
I’m no genius, but I’m positive that running out of money at 83, and living until 93, would be… let’s just say “less than ideal” and leave it at that.
So, why don’t we do something about our situation? Change our ridiculous behavior. Start saving more, spending less? Why that’s an easy question to answer: We can’t… not now… maybe when the market comes back. Don’t want to miss the “bounce” don’t you know!
Well, alrighty then… all I can say is: “Hit me. And bring me another cocktail. Viva Lasfriggen’ Vegas!”