Weakonomi¢s » investing

We Prefer Being Forced To Save

The Weakonomist — Wed, 08 Feb 2012 15:13:57 +0000

A new study says that a significant majority of people would be fine to have their employers temporarily increase the amount the employee contributes to retirement plans up to 10%. I would certainly fall into that category myself as most of you likely would too.

But isn’t that sad? Why don’t people just temporarily increase it themselves? Or permanently if they can afford it. I think most people with disposable incomes don’t have a problem paying for necessary expenses but they don’t want to put an extra dime into something that is mentally considered discretionary. If employers forcefully increase contribution amounts it would fall into that “necessary expense” category. I’m all for giving people the freedom of choice, but I think the automatic option when you start work is 10% going to retirement accounts.

It shouldn’t be the case that employers play any part in our savings. But even today some employers are the sole providers of retirement savings for their employees with pensions. That’s going the way of the dinosaur, but we’re still in a transition phase, which is what the 401k is all about. It’s possible in the future that employers won’t provide any benefits. But if they continue to do so it’s because the labor market demands it.

And as long as the labor market demands it, we should want those employers to help us make the best choices possible. It’s certainly clear that we aren’t good at making decisions on our own.

Making things easier

If you look at the current system for retirement plans out there, it’s clear not enough has been done to make things easy for the consumer. Most of the people working today at least grew up expecting a pension. The first generation of people that only knows 401ks and IRAs is only in the first shift of their careers. Everyone else (and many young people too) are daunted and confused by all the options available to them.

My employer has, in an attempt to make things easier, has made things harder. Going through the systems at work to check the information of my retirement account takes 5 minutes and at least 2 different log ins. Even after that I’m faced with a website that is difficult for even me to read. I can barely tell the difference between my 401k and the token pension based on the titles of the accounts. Nothing is customizable and nothing is easy to follow.

I used to think that idiots deserve what they get but in the last few years have started to fall in line of at least helping people make the proper decisions. For instance, I know nothing about healthcare and health insurance and would love for all of it to be easier for my monkey brain to make the right decisions. I’d rather not have to pay a stupid tax when it comes to health care.

Employers can do a number of things in addition to automatically enrolling employees and increasing their contributions amounts. They can make the websites easy to understand and be proactive about forcing the providers of the plans to make things less complicated. Even something so simple as having the retirement account website automatically bookmarked on work computers could go a long way.

Read: We Have Ways of Making You Save More (WSJ)

Image: 401K

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Pay Me To Borrow Money, From You

The Weakonomist — Mon, 06 Feb 2012 15:43:13 +0000

That’s what the US Department of Treasury may be telling investors in the near future. What that effectively means is that the rate the US pays to borrow money would be negative. Investors would be paying the US for the privilege to lend to them? How can this happen in a world where our debt was downgraded just last fall? Interest rates on US debt have done nothing but fall since the downgrade. An astute reader can see that this is counter-intuitive, after-all if your credit score fell from 750 to 700 you couldn’t expect to get the same rate on a loan could you? Could you?

Maybe you could. Because interest rates aren’t just driven on the likelihood of default, they are also dependent on the market. And while the US went from being “near perfect” to “perfect-ish”, the global bond market has been in turmoil. This means that the US is still considered the safest place in the world to park your money, and so rates have fallen. Just as a person with a 700 credit score today can get a better loan rate than someone with 750 a couple of years ago.

Rates have gotten so low they’ve actually been at zero percent recently and traded at a negative yield in the secondary market. The US Treasury may soon offer some short term Treasury bills with what’s called a negative coupon. When investors submit bids for the bills they might offer $101 for a bill worth $100. Under normal circumstances they might bid $99. In 4 weeks the US would give them $100 back in either circumstance. When investors are allowed to bid $101 for the a $100 bill, that is a negative return, or negative interest rate. The idea of investors paying for the privilege to lend money to the US is so weird the Treasury systems will have to be updated just to make it possible. But this is something that has already been happening in the secondary market for these bills and so by updating their systems, the Treasury would either have to borrow less or could perhaps consider taking the proceeds and putting it towards our national debt.

Negative interest rates are not common, but you can effectively see them all around you. Think about your checking account. When you deposit money into a bank you are loaning it to them. They will pay you a small rate (if at all) for allowing them to borrow it. But then the bank slaps you with a couple of fees every month and even if you are getting interest the fees more than offset it. So you’re paying the bank for the privilege to lend them your money. Banks don’t see it this way because of all their overhead, but essentially that’s what you got.

Does it make you kind of wish banks would just get rid of fees and charge a negative interest rate? Part of me feels that way. Ditch all the fees, just charge 1% per year based on some kind of average balance. But that will never fly because each account has a basic fixed cost. If it costs $100 a year (it’s actually more) to keep a checking account going and they need $20k in balances to make that back then they aren’t going to charge wealthier customers for their business. They wouldn’t need to because they could make the money back elsewhere. People with balances below that line will just cost the bank money. So you’d end up with a segregated population that is divided by the people who pay for the privilege to lend the bank money and have access to their cash, and the people that are paid to have the same access.

Banks know that middle and lower-income demographics won’t respond well to that, so instead you have the al la cart menu fees which, while annoying, have the appearance of being fairer. Plus no consumer is going to park $50k in a place that pays -1%. So while the Treasury is looking forward to indulge in a little negative interest rate territory don’t expect to see it show up on your banking documents for a long time.

Read: Treasury may let investors pay to lend to U.S. government (Reuters)

Negative Bill Auction Yields Would Avoid ‘Grab-a-Thon’ (Bloomberg)

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When Does a Crisis Reach a Critical Phase or Become Multiple Crises?

The Weakonomist — Fri, 03 Feb 2012 15:45:56 +0000

The following is a guest post provided by Forex Traders. Views and opinions do not necessarily represent those of Weakonomics.com

The year of 2011 may go down in history as the year that never was. Our financial markets, despite a rollercoaster ride throughout much of the period, ended the year amazingly enough at roughly the same levels as where they started. The S&P 500 index concluded 2012 at 1,257, the same as a year ago. The Euro versus the Dollar was still at $1.30, a figure difficult to accept with all of the dour news pouring across the Atlantic, and the Yen remained strong in spite of a horrific earthquake and devastating tsunami.

It may be time to buckle your seatbelts or resort to taking a long-lasting sleeping potion. Most experts believe that we will see a repeat of 2011 right before our very eyes in 2012. Hopefully, we learned a few lessons along the way, but here is a brief recap of a few significant events that transpired over the past twelve months:

We learned to broaden our definition of the word “crisis”. The European debt crisis actually began to surface in November of 2009, and it is now entering its third year on the global stage. The word “crisis”, as a matter of fact, comes to us from the Greeks and is supposed to represent a situation that has reached a critical phase. Perhaps, things move more slowly in Europe or the “critical phase” keeps being delayed by political machinations, but the officials in the know are now telling us that the so-called crisis may last for years. It is hard to believe that a country with an economy no larger that that for Dallas-Ft. Worth could cause such a stir, but credit default swaps may be the “culprit” once again, this time on sovereign bond issues instead of toxic mortgages;
In Japan, we witnessed a true natural and national crisis occur back in March. For some of the hardest working people on the planet, an earthquake and a subsequent tsunami was the last thing anyone expected for a country still trying to recover from two decades of recession. Living on the “Rim of Fire” is far more risky than living in California, as “24/7” news cameras revealed. The national grid came to a screeching halt, export trade froze in its tracks, yet the Yen strengthened, even after several interventions by the Bank of Japan and other central banks. A weaker currency would bolster the rebuilding effort in progress;
On our shores, the Fed was successful in expanding the money supply by its buyback of $600 billion in securities with its quantitative easing program, dubbed “QE2” by the press. Banks were still hesitant to loan the funds to small businesses, stalling the modest recovery that began to take shape before June. What will make commercial banks focus on lending instead of transaction–based bonus compensation? Bring back “Glass-Steagall” was often heard in many corridors, but political gridlock blocked the debate on any new initiatives and resulted in a credit-rating downgrade, to boot;
We learned that uncertainty begets volatility in our financial markets. Equities, commodities, and currencies gyrated wildly during the year, yet the Euro and Yen maintained strong positions despite numerous shorting attempts by forex traders. The lesson was that, in a time of crisis, banks, companies, and individuals repatriate their private “stashes” of assets overseas for survival of the home front. These capital flows thwarted major forex hedge funds and retail traders alike, leaving both groups speechless and recording losses.

Hope you paid attention in 2011 – the “record” is stuck in “repeat” and still playing!

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Kiplinger, Mutual Funds, and Monkeys

The Weakonomist — Tue, 17 Jan 2012 14:30:17 +0000

I’d almost forgotten about how much I loathe the personal finance magazine and site Kiplingers (see here and here). Should you not be familiar with the publication, Kiplingers publishes many articles which I find to be lazy and in some cases, irresponsible. A lot of people subscribe to the site and magazine and probably think the advice is good and properly vetted.

But the problem is that couldn’t be further from the truth. The Editor in Chief is a career journalist who was born into money. The Executive Editor is also a career journalist. That doesn’t matter too much, they surely know what good content is. But to say they know what responsible content is, especially in the space of personal finance, is an aberration.

The Kiplinger 25 is a list of actively managed mutual funds published by the magazine every year. For all intents and purposes, it’s their recommendation of the funds you should be invested in. The Executive Editor published an article at the beginning of the year summarizing the performance of their list in 2011. In general, he seemed quite pleased with the performance of the mutual funds they picked. The table below summarizes the performance.

Nothing to sneeze at, nothing to brag about. But there’s one glaring omission from this table. And I’d expect you to perhaps not notice it, but Kiplinger should.

The magazine publishes this list each year in an issue that doesn’t arrive until the end of March. So 2011 performance matters not since you’re already 3 months off. For the website’s sake, I’ve created a chart showing the returns of these funds against a simple S&P 500 index from April to 2011 last year.

Hmmm, I wonder why they didn’t track performance from the time of publication? Certainly doesn’t make them look as good. And to say nothing of the fact that the simple S&P 500 index fund has about 20% of the fees as Kiplinger’s worst performer. If you want crappy performance and lots of fees, the Kip 25 is the place to go.

Kiplinger could admit they should have measured performance from publication date, but that doesn’t account for the performance of funds that were added or subtracted from the list last year. So let’s look at them.

One was added: BBTEX. As you can see, it handily kicked the butt of a simple index fund. I can’t knock it, even after adjusting for risk and fees, it beats the standard low maintenance benchmark. There are perhaps critiques worth investigating, but I’ll let Kip have a win here.

What about the removed funds? There were two: SLASX and FAIRX. I’ll save you the math, but they just removed two funds that were under performing already. But since you would have bought them from the prior year list you’d already have lost some of the money. The simple index fund outperformed SLASX by 1% and FAIRX by 7% from 2011 before Kiplinger told you to dump them. This doesn’t take away from the fact that these funds blew for the whole year and you would have been right to sell, but it makes them look less omniscient.

If you want, ignore everything before this paragraph.

And for the sake of argument let’s just throw out everything I said and make this as easy as possible to understand. Even by the magazine’s own flawed metrics only 6 out of 13 funds outperformed my simple index fund for the full year (VFINX was up 0.2%). Using the estimated time of publication that number drops to 4 out of 13. Statistically speaking, a monkey should be able to do better than that.

But no one should have to do that. The dirty truth about investing in the 21st century is quite simple. And if you’re a reader of independent personal finance blogs, you already know it. Don’t buy actively managed mutual funds. Track records don’t matter, they were in the past. Active funds are expensive for you and your money. Index funds are dirt cheap, and don’t try to do anything but track an index. If you want diversification, you should be looking for indexes in different classes, but specific funds. But you can’t beat the market year over year. Neither can Kilinger’s list.

Finally, the last time I wrote an article against Kiplinger one of their editors called me out for being a short term oriented investor. Full disclosure: I own three mutual funds (VITPX, VFINX, and VFWIX). I own one stock, about $100 in a former employer that I bought on a whim and am too lazy to sell. I have long term horizons on my investments (with >99% held in retirement accounts) and have never changed fund holdings unless something I own is no longer offered.

If Kiplinger thinks I have a short term horizon when tracking them, it’s only because they change their holdings every year and I just don’t have the time to track their entire portfolio of recommendations through time. Happy to do it, but no one is going to pay me to. But I sleep easy knowing I don’t get paid to give terrible advice and hide it in well-edited content.

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You know I rocked my 2011 predictions

The Weakonomist — Thu, 05 Jan 2012 14:57:24 +0000

If your humble blogger had the time, he would create a database the documents all the outrageous calls people make. Pundits predicting stock market results, economists calling for some kind of statistic, or any idiot that the traditional media calls up can actually shape opinion. But that doesn’t mean they are qualified, or accurate. I’d track every one of them and call them out for their irresponsible actions.

That being said, I’d still make my predictions. Because it’s fun. If for some reason people started thinking I was qualified to make predictions, I’d have to stop. This time last year I made some predictions for 2011. Let’s see how I did. Note: the table looks big but there’s a lot of white space.

2011 Prediction	Details	What I got wrong	What I got right
Gold	In 2010 I called for a gold bubble, WRONG. In 2011 I said we’d figure out if there was a bubble or not. I will concede there is not a gold bubble. The normal price of gold is what it is right now. That said, I still wouldn’t invest in gold.	N/A	N/A
Oil	“I don’t think we’ll see oil go above $130, but I can definitely see oil over $100 again settling around that price point the way 2010 played with $85 oil. Likewise, $3.50 gas will be back.”	Nothing	We saw oil over $100 a barrel last year, but nowhere close to $130. Gas prices aren’t at $3.50 right now, but close enough.
Savings	A year ago the savings rate was 5.3%. My call was that economic recovery would have consumers dipping into savings and the rate would fall to the 3-4% range.	Nothing	November of 2011 was the most recent report as of this writing. The savings rate: 3.5%
Employment	An ugly number for years and difficult to predict. Especially now with so many people permanently leaving the workforce.	I was too optimistic and said 8% would be reasonable, we only just now got to 8.6%	Did make the call the rate wouldn’t fall much, saying 7.5% was impossible
Stock Market	Predictions are no fun without making a call on stocks	Small cap stocks would outperform large ones. Quite the opposite.	I did estimate a PE for the S&P 500 to fall from 23 to below 20. It fell to that mark and below in late summer and settled around 21 in December. PE for S&P 500 source.
Sarah Palin	No comment	I said she’d run.	But clarified she’d only do it to stay relevant. She was able to do this anyway with the SuperPAC. Had I known such a thing existed I might have phrased my prediction differently.
Municipal Bonds	This is what local governments use to raise money. At the beginning of last year people were worried there might be a crisis here.	Called stocks to outperform bonds. Called it wrong.	There would be no crisis, partially wishful thinking on my part.
Interest Rates	We all know they wouldn’t go up, a bit surprising they actually went down. Unless you consider increased demand for American debt which once again seems to be the most stable in the world.	Nothing	Fed would keep rates low, and the rates everyone pays would stay low. I didn’t predict an actual range but also didn’t predict them to fall. Rates won’t move until inflation does.
Inflation	People were still worrying about this. I said there was nothing to worry about.	Nothing	Inflation remained within reasonable parameters.
Europe	2010 was a rough year for Europe, I expected the worse to be over but that the Euro as a currency would be called into question.	Definitely still had a crisis. Still ongoing.	Worry remains for Europe. I said stress and strains would create doubt over the Euro as a currency and that was spot on. Also said that would result in the Dollar strengthening against the Euro. At the beginning of the year a dollar bought about 0.75 Euro. Now it buys 0.77. Not quite a rally but study a chart and you’ll see it.
Surprises	There will be some kind of surprise that no one expected	Nothing	Too hard to make a specific call. Arab Spring counts though.

Not too bad if I say so myself. Keep in mind this is all in good fun. Whether I’m accurate or not doesn’t matter. You should trust my predictions as much as a presidential candidate’s promises.

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Flyover States and MFing Global

The Weakonomist — Thu, 15 Dec 2011 15:21:04 +0000

There are some elements of finance that even I struggle with. For example, how can you draw a line from a wheat farmer in Nebraska to a bankrupt brokerage in New-York City? Maybe that connection is easy, but why is the farmer’s money missing just because the farmer’s brokerage company went bankrupt? And why are the funds belonging to the wheat farmer in Saskatchewan just fine?

If a bank goes under then technically speaking a customer’s assets should be just fine. Maybe the bank no longer has the resources to manage your money, but your money should still be find, be it investments or cash. These assets would be transferred to another institution.

But with dedicated brokerages there are some different rules (mind you these rules may apply elsewhere too). Brokers can engage in their own financial transactions and MF Global had done just that. They bought European debt. You know how that went. So they lost a bunch of money. But part of the deal with their bets on debt requires posting collateral (because they borrowed money to buy the debt). That collateral can come from customer funds. So if you are a farmer and post collateral to make trades in wheat futures, MF Global can use your collateral as their own. One would question the logic behind this, and many have. This is why there are limits on how much of this can be done, and it is against the law to use Canadian funds to do it.

American and British funds are fair game, which is why the Nebraskan wheat farmer can’t seem to get his money back. That money is missing because even with the rules on posting collateral as collateral, MF Global may have simply broken the rules to make its own trades. So why is MF Global in such a mess? If you aren’t following there are two problems. The first is they made bad bets with their own money, the second is they may have broken the rules with posting customer money as collateral for those bets. If you want to know more about this read up on the Shadow banking system, repurchase agreements, and rehypothecation.

Now all you east coast and west coast people who don’t work on Wall Street may wonder why some wheat farmers have anything to do with a broker you’ve never even heard of. Look at it this way, imagine you averaged $75,000 a year in income over the last 10 years. But some years you made $15k and other years $150k. You had absolutely no control over what it would be. If someone offered you the chance to guarantee your income in advance for a small fee, would you take it?

Of course you would. Essentially this is one service a broker like MF Global offers. Farmers take advantage of it to smooth out the price of their product. Everything from corn to pork can be as volatile in price as a stock, so farmers don’t want to stress about how much their wheat will be worth once it’s grown. They use brokers like MF Global to engage in contracts that lock in prices ahead of time. MF Global takes a small fee, and may also collect collateral if prices aren’t paid up front. This is the collateral that ends up getting used in the rehypothecation (you haven’t looked it up yet?).

I hope people in the middle-states aren’t offended by my headline, but it helps draw attention to the idea that the global economy is truly global. A small town farmer’s money very easily got tied up in the European debt crisis and with a firm that is doing no favors for Wall Street’s reputation for recklessness.

MF Global’s bankruptcy is the largest since Lehman Brothers back in 2008. Thankfully this seems to be an isolated incident and not a domino. Hopefully new rules will be put in place to prevent such reckless behavior, should it be determined rules would have actually prevented this.

Image: mrpbps

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The Media Cycle And Insider Tranding In DC

The Weakonomist — Mon, 14 Nov 2011 14:10:57 +0000

The media was abuzz on Monday about this whole Congress getting to trade on insider information thing. 60 Minutes had a segment devoted to their investigation that ran on Sunday night. It is most definitely worth a watch. If you don’t want to watch it, here’s the skinny.

Insider trading is basically investing using information that isn’t public. It’s against the law and is what Martha Stewart when to jail for. But it’s not against the law for anyone in Congress to do it, and they have access to tons of insider info.

Imagine you’re a big dog in Congress. It’s the fall of 2008, the stock market is teetering and may crash at any time. The Secretary of the Treasury and Chairman of the Federal Reserve brief you on the conversations they’ve been having with banks. They tell you that in a couple of days they’re going to announce earth-shattering news that will likely crash the markets. This is not information normal citizens have and they can’t trade on it. But you go out and sell all the bank stocks you own, and maybe even take on a few investments that will profit from the ensuing crash.

This isn’t just a hypothetical, it really happened. And there are other stories, including sketchy investments from Nancy Pelosi and John Boehner that would possibly put you and I in jail, but it just makes them richer. The 60 Minutes segment shows how it would be illegal for a company to pay off a member of Congress with cash, but you might be able to by giving them access to your stock for cheap.

The outrage is justified, and I want to do my part to make sure people know about it and stay pissed off enough about it to demand that insider trading be outlawed for everyone.

That’s why I told you about it 6 months ago. I applaud 60 Minutes for their journalism and production value, but original they are not. Academics have been studying this for years. And this story has cropped up in the media before. The color 60 Minutes added was in digging up real examples of the insider trading.

I honestly hope that people get pissed off enough about this to demand real change. Our elected officials are paid more than enough to live comfortably, and many are already financially fit when they run in the first place. Further still, others work as lobbyests or get good private sector jobs after leaving Congress. They don’t need special benefits to help them get rich while in office. Not only is it ethically questionable for anyone to act in the way some of our elected officials have, it’s downright hypocritical that they can while others go to jail.

Whether anyone actually engages in such an activity is irrelevant. It should be outlawed regardless. So get mad, stay mad, and demand something be done about this. Occupy Wall Street, Tea Party, I’m looking at you. Don’t let this slip out of the headlines for another few years while this crap continues.

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Occupy Wall Street Signs You Probably Won’t See

The Weakonomist — Fri, 04 Nov 2011 14:28:52 +0000

“In college, I smoked a lot of pot. I still smoke a lot of pot”

“Math was too hard”

“My sense of entitlement comes from my parents giving me trophies even for losing”

“I have an engineering degree, am willing to live anywhere, and can’t find a job”

“I was dumb enough to believe I could afford a mortgage that was 60% of my income”

“Having my children hold up signs they don’t understand is a good idea”

“Because government was part of the problem, we should definitely want them to fix it with more government”

“Thank you Obama for taking student loans under the ownership of the government but still making it impossible to bankrupt them”

“I’m here for the camaraderie”

“I voted for the incumbent in the last election”

“Screw universities for overpaying administrators and jacking up tuition”

“Five years ago I was perfectly fine with Wall Street greed, now that the people that caused the crisis are gone I’m REALLY pissed”

“Corporations suck, except the ones that make coffee, Macbooks, Twitter, cover us in the media, and make food readily available”

“If the economy was better I wouldn’t be here”

“Obama wasted a trillion dollars on a stimulus that didn’t work”

“I have no money and no job and there’s nothing I could have done differently”

“My time would be better spent volunteering somewhere”

“I’m going to Europe for the stable economy and free healthcare”

“I don’t know how to change a tire, or program software, or harvest crops”

I think Occupy Wall Street is a great movement. It’s awesome so many people are finally pissed off enough to demand the attention to get something solved. They aren’t waiting for politicians. Many understand that capitalism is a good thing, it’s just gotten a little misguided lately. But what bothers me, at least based on the media coverage, is that there has been very little personal responsibility taken. Fingers are point outward, not inward. Free speech is great, but one of the primary themes on Weakonomics has always been people making poor decisions. There was a series of poor decisions made by almost everyone over more than a decade. I support change, I support this movement, and I support anyone who admits to making a mistake and saying they’ve learned from it.

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We Could Have Paid Off The National Debt By Now

The Weakonomist — Fri, 21 Oct 2011 14:44:28 +0000

Believe it or not, not too long ago our government actually thought we would have the national debt paid off. When Clinton was preparing to leave office some of his officials and economists were looking at the possibility of having the national debt paid off by 2012. And they were worried about it.

NPR’s Planet Money obtained the report thanks to the Freedom of Information Act. In the report, which was never published and doesn’t even seem to have made its way up to the president, economists discuss why the national debt could be retired, and what that might mean for the country, and the world.

Back in 2000, the government was running a surplus. A surplus means the government makes more money than it needs. The extra could be used to settle our national debt, which was the expectation of the economists making the report. That is but one of a few options though as it assumes the same tax rates. Cutting tax rates would have dramatically increased the amount of time it takes to pay off the debt, or taken us further in debt (the Bush tax cuts were one of many factors that made this entire situation never come to life). But for the sake of argument, let’s assume that the national debt could have been paid off by now. Why is that scary?

Modern finance and economics rely on a couple of very simple ideas. One of them is that US government debt is the closest thing to a risk free investment as possible. US debt has and will continue to be (at least in the short term) the safest investment out there. Everything from banks to grandmothers to communists invest in government debt. Interest rates are set based on what rates the government is paying. Even our Social Security system relies on government debt being safe. What happens if there’s no government debt?

The short answer is that we would find a new “safest place for our money”. Maybe it’s Japanese or European bonds. If that became the case the US would actually lose economic influence in the world because no one is relying on them. But what happens even after all that we’re still running a surplus, what then? The government could save money for a rainy day, but where would they park it? Remember the Chinese are saving money for a rainy day and it’s parked with the US. Would the government invest in the stock market? That sounds like a good idea…

There’s no denying at least that this would be a good problem to have, especially compared to what we have today. Republicans talk of a balanced budget amendment, which may not be a bad idea. And one can make the argument that the current economic system blows. But we all fear the unknown, and with no risk free investment out there we’d be staring in the face of the unknown.

Read: What if we paid off the debt? The secret government report. (Planet Money)

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Stock Market Schizo

The Weakonomist — Wed, 05 Oct 2011 14:58:17 +0000

We need to talk about what’s been going on in the stock market. Most day to day moves in the market are inconsequential and not worth noting. But the market is down about 11% this year and the chart below showing just yesterday’s performance is indicative of the unusual activity we’ve been seeing.

If you aren’t familiar with the way stocks perform on a given day, it isn’t normal for it to start off in an extreme negative, climb into positive territory, dip and climb again, and then start to crash towards the last hour of the day, only to spike an insane amount in the last few minutes. This isn’t normal, even by stock market standards. Even by the last couple of years standards.

The last time stocks acted in this way were in the times leading up to our crash in 2008 and the eventual bottom of the market in the first part of 2009. I won’t bore you with specifics, but most of the banks that are still around today are trading at prices like they did this time in 2008.

Essentially what that means to investors is they have very little faith that the banks are worth what they say they are. For some it’s because they are at risk of being sued into oblivion, for others it may be their exposure to the problems in Europe. But investors in banks, and the markets as a whole, are scared.

When investors were scared in 2008, they invested in oil. The assumption was that oil would be a great place to hide while stocks sorted out their problems. Surely countries like China would continue to experience high demand, this $150 oil was justified. That quickly fell apart for a number of reasons. But we now know China isn’t safe from the global financial mess, and oil isn’t the haven it once was. The same can be said for gold.

Where else can people hide their money? Fixed income investments are always safe. But interest rates are so low they offer very little in terms of return. Add to that a Congress with either an alcohol problem or a social disorder and the returns on bonds just aren’t worth the risk. There just really aren’t that many places where one can keep their money these days.

We’re at one of those junctures in time that can define the next decade. Much like the early 1930s looked good and then fell into depression, we’re looking at that as a possible future. Don’t mistake that for an omen. Just note that we’re not out of this mess, not by a long shot.

To be honest, I’m a bit scared for the future of our economy. But the fear may be all it is. Remember that. At the beginning of the year I really expected things had turned around. I’m not sure if it was the end Quantitative Easing, Europe’s incessant need to get headlines, or just a lack of anything else to talk about, but no one can stop obsessing about the economy. At the end of the year we might be looking good again. But in the short term, fear rules.

This isn’t a call for government intervention. If anything has been proved in the last few years, it’s that the market really does need to sort itself out. Government assistance may occur, but it’s only going to shift minor details of the greater story. That’s pretty clear to me now. This is going to take time. Don’t change your lifestyle if you’re already smart with your money. Try to ignore the headlines and just focus on yourself. Let’s all just hope the election cycle will by full of lots of entertainment. We need a distraction.

Depressing enough for you? Check out some cute cats and dogs and brighten your day. You’ll forget about this post in minutes. I already have!

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