Unless you live in a hole, you are fully aware that if you were planning to take retirement in the next five years you might as well scuttle those plans. Every day the stock market drops…and the government finds more ways to print more money / give more dollars away to prop-up the economy.
Isn’t it funny, though, that in the last two weeks we really have not heard any news about gas prices. The real newsworthy item on that front is the fact that gas prices have steadily FALLEN as the market has. Just this evening in my neighborhood, prices were at $2.93 per gallon. Keep in mind that just a month ago most had come to terms with what we thought was the reality that we would never see prices below $3 per gallon again.
So what would you rather have? Low gas prices or a healthy economy? I think it is pretty funny how the country has turned its wrath from oil executives to Wall Street executives almost overnight.
So, in celebration of losing literally tens of thousands of retirement dollars personally, I will share my thoughts on the current crisis.
1. Politicians seeking approval poll numbers are of no help: Forget to which side of the aisle you lean…there is enough blame on both sides to make us all want to vote independent. I think we should all wretch, though, as both sides shout their diatribe of blame. From what I read / hear / watch (and I am a news hound…at least two newspapers front-to-back daily with news throughout the day), neither side has yet to offer a real solution. I do think it is comical, though, that the “fix” which was “bipartisan” has resulted in even a larger drop in the stock market than when there was no “fix.”
2. This “crash” is not a precursor to another depression: Only today did the current “crash” enter the top ten of all time. In fact, the “Black Tuesday” crash of 1929 only ranks fourth in all time crashes. During those dark days that essentially serve as the left-hand bookend of the Great Depression, the market lost 47.9% of its value in just 71 days. The WORST drop of all time came between 1930 and 1932 over a period of 813 days. During that period, the market lost 86% of its total value. In fact, by the end of 1932 the DJIA hit 41.22 (in our recent history, this number…granted, inflation has its place here…has been hovering in the 10,000-11,000 level).
Assume you invested $1,000 on September 3, 1929. By the end of 1932, your investment would have been worth just over $108…an 86% loss. Full recovery of your loss would not have come until 1954…some 22 years later.
Just for a frame of reference, our current situation is as follows. As of today, the DJIA has fallen to 8,579 – a drop of 39.5%. This puts our current “crisis” at number 10 on the top ten crashes of all time, just today nudging out the crash of 2000-2002 when the market dropped 37.8% (accelerated in 2001 due to 9.11).
Now, here are some differences…
Remember that in the Great Depression, the money supply dropped by roughly a third and we created higher tariffs on imported goods – neither of which seem to be happening at this point. In fact, just yesterday there was a coordinated effort among central banks in multiple countries to manage money supply as well as interest rates. These measures can help stave off true “depression,” but there is a balance needed to ensure we don’t create a tsunami economy and have to deal with accelerated inflation down the line.
OK…enough of the history lesson.
3. As much as the world hates us, AMERICA STILL MATTERS: We are everyone’s favorite place to hate. Travel the world a bit and you sense a growing dislike of America. Many in other countries think we are arrogant and extravagant – and to a degree some of that is probably deserved. However, let me be clear…when our economy tanks, the world tanks. That is just how it is (even though many in our country and most around the world do not want to admit it). In this case, it took only ten days from the rumble of Lehman Brothers showing stress fractures to the world economy going in the hole. From Germany to London, banks are having to be bailed-out. There is a global ripple effect, but America is still the pebble that causes it. So, regardless of your weltanshaung, the proof is in the facts of the last two weeks: AMERICA MATTERS and is still the world’s economic superpower.
4. Not everyone should own a house: Much of our economic tornado has been fueled by the creativity of predatory lending predicated on the false assumption of “the right of home ownership.” Both presidential candidates have used this phrase, and I couldn’t disagree more with the notion.
Everyone has a right to own a home if they can afford it. However, there is this mistaken notion that buried within our constitutional rights is a right to own a home – regardless of your qualification. This idea is not a right – it is the notion of entitlement. You can see, though, how mortgage lenders used this as a selling tactic and as the catalyst to be as creative as possible. Not qualified? No problem. Bad credit? No problem.
Fundamentally, we are in this spot because those who were not credit-worthy were given credit. We have a system of mortgage lending that shuffles new mortgages into the money market so quickly that lenders are seeing their pathway to quick profits being loan origination fees. The problem with that approach as a viable business practice is that you must do tremendous volume to make those origination fees add up to anything. Thus the drive to write as many loans as possible. “Rate too high because your credit isn’t good enough? How about we put you into a 3% ARM for three years that jumps to 9%. After you build-up a payment history over 2+ years, you can simply refinance and avoid that 9% rate.” Yes…there really are loans like that out there. Is it any wonder we are seeing what we are seeing?
5. Remember – this has been seen before: Oh – maybe not as a mortgage lending meltdown, but try this on for size: “Now there was a famine in Egypt…” or other such cycles of history from the Bible. There have always been periods of economic crisis – even bigger than what we are currently facing. Here’s the deal…people are still calmly buying groceries even though they are more expensive. We have yet to endure seven years of famine or other such biblical tragedy. This will pass, and the market will return. My only lament at this point is that I do not have enough spare cash laying around to buy. If I had it, I would bore into an index mutual fund faster than I eat a Krispy Kreme “Hot Now” sample.
These are just my thoughts. You are welcome to disagree – just don’t be ugly about it. I called this one back in January, and my guess at this point is that the market will not slow the loss cycle until at least late October or early November (if then). Even if it does, there is no telling what will happen post-election. I do know this, though: as long as there is a stock market, it will go back up.
I’m going to count some change now and see what I can invest. It’s a fire sale out there and I’d love to buy!
-MH
