Friday, November 21, 2008

How Not to Be an Alarmist

A few years ago, in an attempt educate myself, I read a book on economics. It explained how various economies in developing nations had been ruined by the flight of capital. This flight occurred just when the countries had taken stern measures demanded by the International Monetary Fund (IMF) to streamline and strengthen their economies. But the result was capital flight that collapsed their recovery instead.

But the US didn’t have to worry about that happening. Our economy was so strong that speculators would never just sell and run as they did from countries in Asia and South America. We were the model of stability for the entire world. Well, guess what? It sure looks like that’s what is happening. Oh, we supposedly are getting support from Europe and Asia, whose stock markets and economies actually depend on ours in this era of globalism. But what we’re seeing now is less money in the market. That’s capital flight. Without capital, a capitalist society can’t operate. Hence our government’s various attempts to shore up the market. Which some people look on with horror as socialism.

I am not sure what’s so wrong about socialism. My whole life, I have seen Americans get rich via their own ingenuity and drive. Should they pay taxes on their profits? Sure, why not? I pay taxes on mine. Is it socialism to take our tax money and help educate and lift people out of poverty? If so, I don’t mind. It has always seemed like a good investment. The more other people have, the less they’ll want to steal what I’ve got. I never liked communism. It never seemed fair to reward the incompetent equally with the competent. But that’s a theory of leveling, and our tax system certainly leaves plenty of juice for those at the top, even if they do complain about their tax burdens bitterly. And of course capitalism has some communistic elements, because it rewards the incompetent, passive owners (stockholders) of companies through the hard work of the employees. But I’m not here to debate systems. What’s the point? Real life economic problems don’t get solved by the application of theoretical social systems unless there is a terrible price paid, usually in lost human freedom or in famine or war. Real problems get solved by attacking what is going wrong and fixing it. Can this be done with the problems facing America’s economy today? Yes. Will it? The jury’s out on that.

What we do know is that our country doesn’t want to fall into a depression, and many people are working very hard to stop that from happening. A continuing problem seems to be intransigence, though. People and organizations that stubbornly refuse to face the reality that the old deal is done, and a new deal has to happen. The numbers of banks interested in working out foreclosures is very small. Still. The numbers of banks holding second mortgages (home equity loans) on properties in danger of foreclosure that simply refuse to make any deals is way too high. I am not sure if it is the sheer complexity of the banking system that is causing this mess, or just stupidity and short-sightedness, but it’s pretty obvious that the foreclosure crisis is getting worse, not better. We have to solve this, because land is real. Money is not. Once we stabilize land values, the rest of our economy will calm down.

All the media people running around and squawking about the economy should chill. Our stock market runs on rumor, on chatter. Right now, faced with the doomsday scenarios about our big automobile companies, the stock market is miserable and many healthy companies have seen their stocks tank. It doesn’t make sense. It’s sheer fear. And possibly some speculators running away. The talking heads on television and their blog-and-website counterparts of the Internet all get a charge out of talking negatively about the economy. But now so many of them are freaked out about the stock market that I am somewhat freaked out myself. Sure, everything can fall apart. But will it? Should I take their doomsday talk seriously? They keep talking and talking. But that’s the problem. They’re observers; they aren’t directly involved in solving our country’s economic problems. Once I turned off the television, I realized that I don’t think everything is going to fall apart. Not with so many people trying to make sure it doesn’t.

But let’s take the worst case scenario for a second. For Brazil in the 1990s, or Japan, things went seriously downhill. There was inflation. And falling values to all sorts of capitalist property. It was a mess. But they’ve climbed up from that point. Maybe not back to where they had been in the money markets. But when I visited Japan a year ago, the place looked solvent. People dressed well. The stores were full of people buying expensive items. There were plenty of fish in the market. So even if the US completely screws up our money economy and our land economy, I have to believe that some day, we will recover. Why? Because we’ve got land, we’ve got resources, we’ve got a healthy, educated work force, and we’ve got drive. We also have the Internet and a lot of bright ideas. I say the future is going to be good. We just have to stop being so scared.

A decade ago, a lot of Americans indulged in millennial fears. But I was too busy to stockpile water and toilet paper for the coming of the apocalypse. Since then, we’ve had 9/11, and more fears, some of them justified but most of them not. And now this, the economic meltdown. Is it finally time to stock up on toilet paper and bottled water? Get more shells for the shotgun so we can live on deer meat? I don’t think so. This country isn’t falling apart any day soon. So let’s not freak out.

Tuesday, November 18, 2008

Getting Ready for a Depression

I read an interesting article in the Washington Post last month by Paul Farhi that claimed that the Great Depression did not happen in the instantaneous manner we’ve always been told. That the stock market actually improved after the crash and―a long-cherished image―stock brokers did not leap out of windows en masse. The scary part is that a couple of years down the line, the country did sink into a mess of 25% unemployment.

Someone I know is about to lose his job. (Citicorp has just announced it is laying off 50,000+ people.) He has a nonworking wife whose own career never got started because they had two children, both of whom are still very young. If he can find a new job at a comparable salary, nothing has to change. If he can’t, but his wife can finally start the career for which she trained, some things will change but life should be all right. But what if neither of them can find a job that replaces his current salary? Or what if it takes a year or even two years before that job is found? Or what if they both have to work because each has to accept a very low salary? Everything about their life will have to change. The kids will have to go into daycare. The family might lose their house before they get enough replacement income. They might have to move to an area where there are more opportunities for both of them. Or where a relative can perform free child care. And more.

Thus job loss per se isn’t the only situation we have to fear in the coming months and years of finally-admitted recession and possible depression. Taking a big hit financially and changes in our living arrangements are very likely, too. The better we prepare ourselves for those possibilities, the easier it will be to accept necessary changes.

What we all need right now is an emergency game plan, one that is flexible enough to accommodate several possible situations. The plan should be based on the amount of living expenses we have in savings. Sure, Citicorp will probably pay severance. But some companies that have filed for bankruptcy have not, so be cautious about counting on severance as a significant part of your carrying costs before finding a new job. And unemployment compensation almost never pays enough to replace a good income.

The emergency game plan should be a timetable keyed the to the amount of our rainy day savings. In the past, personal finance experts urged us to keep three to six months of living expenses in savings. Suze Orman is now telling people to have eight months or more in savings. She’s a smart woman. She’s assuming it will take longer than before to find another job. Let’s say for argument’s sake that we have eight months of expenses in savings. And it takes a year to find a new job. We’d be in big trouble.

The plan should be based on the money we have, not on our hopes for regaining income. The timing of our actions also has to be based on the money we have or can access, perhaps by cutting expenses, but also by adding a night job, or getting another family member back to work, or by selling big items such as a second car or a tricked out racing bike.

Here’s a sample game plan based on having eight months of living expenses in rainy day savings:

• Month One: Job loss, followed by immediate efforts to obtain a similar level of employment with no change in location. Cut down on daily expenses. Postpone all big ticket expenses.
• Month Two: Drastic permanent cuts in family plans for vacations, presents, large future expenses such as private schools. Explore local housing market and consider selling current house. Month Three: Widen the job search to other states and other kinds of work locally. Check out housing costs and lifestyle indicators in other states, and lower-cost housing locally. Find a real estate agent.
• Month four: Weigh alternatives of lower salary locally coupled with local move, or relocating to another state. Sell and donate excess possessions. Ready home for sale.
• Month five: Hold yard sales to eliminate all excess possessions and empty any storage. Put house up for sale.
• Month six: Hold open houses. Find a potential new home and interview movers.
• Month seven: Pack. Lower price of house by 15%.
• Month eight: Start new job. Close on house and move.

Sounds draconian, doesn’t it? But this plan assumes some key positives, such as that you will find a job by the time your money runs out, and that it will only take you three to four months to sell your home. It also assumes you’re selling in the high season for home sales, which may not be your situation. And you’re only lowering your price by 15% after 90 days, which in some markets may not be enough to get the house sold.

Is the only answer to unemployment to pack up and leave? No. We could add into the timetable:

• Month One: Sign up for courses geared to give you additional expertise or qualify you for a new career path. Register for state unemployment assistance in resume writing, network, interviewing, and more.
• Month Two: Network with classmates and professors to enhance employment leads.
• Month Three: Rearrange family living patterns to allow a nonworking spouse to work, or a teenager to get a part-time job or a scholarship.
• Month Four: Join local associations related to your field of expertise and arrange to be a speaker before the group. Teach adult education classes in your field of expertise. Network.
• Month Five: Rent out a room. If it won’t lower unemployment compensation benefits, get a bridge job as a night watchman, weekend pizza deliverer, store stocker, etc.
• Month Six: Sell excess possessions on eBay. Volunteer, and network as you do.
• Month Seven: Sell the second car. Take and teach more courses, and repeat all the networking steps.
• Month Eight: Start new job. Re-start rainy day savings.

Some people would also recommend cracking open a 401(k) in a desperate measure to keep funding your pre-unemployment life, but your retirement savings should remain untouched. You’re going to need every penny of your retirement savings later in life, when you’re likely to be even more desperate than you are today. Unless you have good reason to believe that you will be hired within a few months (for instance, when a new fiscal year budget opens up some jobs), there usually is little point in emptying your pockets only to delay the inevitable. If you’re not going to find another good job, or one in this area, and you can’t get another family member to pick up enough of your lost income, and you can’t create some other income-producing scenario such as renting a room or selling your garage full of classic cars one at a time, you should seriously consider downsizing your life.

Do you see how the longer you remain unemployed, the more you have to change your life? If you can find a new job in three months, you won’t have to sell your house or ask your spouse to work. If it takes you six months to find a job, maybe the income hit you have already taken makes selling your house and moving locally the smart thing to do. If it takes a year to find a new job, maybe you have already maxed out your credit cards paying day-to-day expenses, and your house is in danger of foreclosure, and you have to move hundreds of miles to take the only job you got offered. But what is the alternative? Santa Claus isn’t delivering great new employment opportunities in his sleigh, and winning the lottery isn’t happening, so you will have to take action.

Recognize which way the wind is blowing. If your area of employment has taken a big hit locally and there are thousands of people with your skills suddenly out of work, it may be sensible to plan moving to an area where there is less competition. You can find this out by asking job interviewers how many applications they received. If they received thousands, you know you’re up against it. Still, you got the interview, so maybe you will win out. I’m not advocating giving up hope. But I want you to have a plan.

Saturday, November 15, 2008

Stock Market Morass

When Dylan Ratigan of CNBC’s Fast Money jokingly suggested new names for the daily stock market show he hosts, including “Where the Heck is My Money?” his producer, John Molloy, evidently was not amused. Gallows humor is not proper for a serious finance program, I guess.

But I was amused, because in this market, a nonprofessional investor such as myself is utterly confused and likely to be asking exactly that question. I mean, what’s going on? Why have stocks in solid companies fallen dramatically when there is nothing wrong with those companies? I did finally look at my 401(k) statement, and somehow my fund manager(s) had lost money on bonds. How the heck do you lose money on bonds?

I don’t know. I don’t understand the stock market, except to know that it has always been a money market run by male gossips. Dignified by its association with big profits, but basically, a silly game of telephone. Still, as long as my future and the futures of millions of Americans weren’t likely to be monumentally messed up by their trading shenanigans, I didn’t care. But I kept away from actively trading myself because I knew I was ignorant.

Now, more and more, I am hearing that it is up to me to educate myself deeply in the stock market’s doings, and eventually to seize active control of my retirement savings and do trades myself. Even day trade, for gosh sakes. Buy stuff at 3:30 PM, just after all the hedge fund managers dump their stocks and everything takes a dip. Or something like that. That freaks me out. Not only is it far more involvement than I personally want with a market fueled by rumor and false expectations, but it’s a lot of hard work. And I’ve got other things to do with my life, other work to do.

But more than one of the endless talk shows about money that I have watched in the past month have begun promulgating the idea that the era of “buy and hold” is over. That we all stand to lose our retirement money if we don’t become active traders. Great. First they force us (or was it lure us?) into the stock market via 401(k)s and lots of dire talk about how ordinary savings can never match inflation. And now they’re pointing out that anyone who bought and held as I did from 2001 to 2008 made no money at all even before this latest cataclysm. So what am I doing in the stock market? As Dylan Ratigan said, “Where the heck is my money?”

It’s sad, really. During the tech boom in the 1990s, we saw people around us becoming wealthy overnight. We all wanted to get in on the action, and some of us did. The ones who took their profits and sold out, and then put that money into something secure (and I do wonder what that would have been) managed to keep their wealth. Meanwhile, others saw their shares of tech stocks become worthless. I remember older guys at my office showing me their 401(k) statements in 2001, telling me how they’d lost a third of their value. At that point I didn’t even have a 401(k), so I had scant sympathy for them. I figured they had time to recoup. And anyway, they were way ahead of me. But that was before Enron and WorldComm and other disasters, which also slashed at people’s retirement savings. Finally, the market started climbing again. Things got better. The funds of my fledgling 401(k) were showing a steady profit, and my retirement savings were compounding at last. And here we are again. That same scenario, just a different cause. Where the heck is my money?

Most people with 401(k)s do not want to become stock market traders. All we want is a sure thing. And the stock market has no sure things anymore. The insiders themselves say so. Then what am I doing in the market at all? I lost money on bonds, for heaven’s sake. How inept can these professional fund managers be? My 401(k) was supposed to be my escalator, my personal hedge against inflation. It’s not going to be after all. I’ll have to depend on Social Security for income growth. Meanwhile, my pitiful little IRA CDs at the bank are still intact and have been compounding interest all this while. Are they keeping up with inflation? Do I care? At least they haven’t lost a third of their value twice, or filled me with false hope.

The stock market always seemed silly to me. Now it seems both silly and dangerous, and to my mind that equals stupid. The only question that remains is whether I should stay in the market for another seven years, hoping that I can eventually sell my stock for the original dollar amount I invested in 2001. Pitiful.