You are! This will be a short post - because the explanation of what is happening to the economy of late (2008), is that you, me, us, we are ruining it. Yep - its us. Not the government. Not the war (although that cost is ridiculous)... And not evil corporate America (although they are made of us - so they are at fault by default).
There are three key things that everyone will agree are messed up right now - The Value of The Stock Markets, The Housing Market/Mortgage Industry, and Gas Prices. When those three things are bad simultaneously - panic ensues. So what the hell is going on?
Gas Prices
The price of gas is a game. It is controlled by supply and demand - oh - and greed. There is a huge demand for gasoline for vehicles all over the world. We consume about 150 billion gallons of gas a year. Thats alot. So demand is high, and when demand is high (as we all know from our economics education - or earlier blog) prices go higher. However, prices move around so randomly it seems, that one has to wonder - what else affects those prices.
(from tonto.eia.doe.gov)
- Crude Oil: The cost of crude oil as a share of the retail price varies over time and among regions of the country. In August 2008, refiners paid an average of about $116 per barrel of crude oil, which accounted for about 73% of the national average retail price of a gallon of regular grade gasoline.
- Distribution & Marketing: Distribution, marketing, and retail dealer costs and profits were the next largest part of the retail price of gasoline in August 2008, accounting for 10% of the retail price of regular gasoline.
- Taxes: Federal, State, and local government taxes (not including county and local taxes) accounted for about 11% of the national average retail price of regular gasoline in August 2008. Federal excise taxes were 18.4 cents per gallon and State excise taxes averaged 21.5 cents per gallon.
- Refining: Refining costs and profits accounted for the remaining roughly 6% of the national average retail price of regular gasoline in August 2008.
So - as you see - its more than just how much oil costs! Alot has to do with how much profit the oil companies want. And how much pain they think the public can stand. Prices will rise until the demand drops (when there is too much pain at the pump), then they will drop until demand rises (although the price is usually now higher than the start price). Then remain there for some time. Profits will increase for the oil companies. Prices will be up, but not as much as at the peak. People will accept the new - kinda high - prices.
Mortgage Disaster
This is completely and totally all our faults. Those of us who brokered mortgages, those of us who got mortgages, and those of us who invested in mortgages. All of us - and I will tell you why. America lives beyond its means across the board. We think we are entitled to the best, the biggest, the shiniest, the newest everything. Whatever we see on TV - real or not - we must have. We love opulence. We have no understanding of credit whatsoever. Very few people have any meaningful knowledge of finance at all. We play in a world we have no knowledge of - and we get ourselves in trouble.
First - whatever you buy on credit you do not own. Plain and simple! If you owe money on a thing - you do not own it - it is not yours - it can be taken away. The reason you used credit to purchase something in the first place was because you cannot afford it. Thats right! You cannot afford half of the things you have. If you could - you would have bought it outright. But we accept that risk for a house and automobile.
Second - every person out there who asked the question to themselves or their mortgage brokers - "Can I really afford this?" - knew - down inside - they could not! But, the convincing of the broker, and your emotions about the house, had you make a non-financial based decision. and it was wrong.
Third - the mortgage brokers (the you and me folks who happen to do that for their job) absolutely knew they were using "funky" financial products (schemes) to allow people to borrow far more than they could afford to pay back - for houses that were too expensive already - so that they could make bigger commissions. They knew it - and so did you. Don't say you didnt! You know that several thousand dollar commission the broker was making - it was disclosed in the paperwork - well if you had to write him or her a personal check for that amount - you wouldn't have! But because the amount was "rolled" into the overall loan amount - it suddenly became ok. It was ok I guess for you to pay thousands and thousands of dollars to a mortgage broker who spent maybe a couple hours doing paperwork for you? I guess so.
Fourth - you knew you couldn't afford that house! How did you know? How should you have known? Because you didnt go for a straight fixed rate mortgage. You went for something that would allow you to pay less than you were supposed to - like a balloon mortgage, like an interest only mortgage, like a first and second mortgage, like a variable rate mortgage. You knew! But you just had to have the house! You knew that even though your combined household income was $150,000 - that you shouldnt buy a $400,000 house. But you did. You knew you couldn't afford the house on one salary if your partner lost his or her job. You knew that if rates went up you couldnt afford the monthly payments. You knew if the prices in the housing market went down that you would owe more than the house was worth, and if you had to sell - you would lose money and be in horrible debt - but you bought it anyhow. All the time - the broker telling you it would going to be ok - and you listened.
The Stock Market
There is nothing wrong with the stock market or stocks. The only thing wrong - again - is us. People control the value of the stock market. The stock market - as I have mentioned repeatedly in previous posts - is not a mathematical entity - it is a social entity. The value of the market is based on peoples emotions and actions - not on the actual value of things - that is why it is called a market. It is a place of barter where people decide from day to day what something is worth to them. So the value of the stock market is set by us - normal people who interact with other normal people in that marketplace.
Fear is what is happening to the market as I write this. Fear and ignorance. Fear that you will lose money - and ignorance in the fact that most people who invest in stocks and other instruments in the stock market have no idea what they are doing - or even about the fundamentals of the stock market.
People right now are acting like a school of fish. As soon as a few head in a direction - all the other fish rush in that direction. There is no reason other than everyone else is doing it. That is a social reaction - not a financial one.
Here is what is real. If you own 500 shares of a company stock or mutual fund - and the market turns sour, and the value of those shares go down - ABSOLUTELY NOTHING HAPPENS! Yes read that again - nothing happens. You still have 500 shares. Nobody takes them. You dont have less of anything! The current value of those shares - IF you were to sell them for some reason - would yield you less cash than when the market value was higher. But only if you sell them. If you leave them in your account and do nothing - NOTHING HAPPENS. "But the value of my retirement account went down by 40% - I must sell or I will lose more money!" NO - YOU ARENT LOSING ANYTHING. You dont have money in your retirement account! Read that again - YOU DO NOT HAVE ANY MONEY IN YOUR RETIREMENT ACCOUNT IF YOU HAVE STOCKS OR MUTUAL FUNDS OR BONDS!!!!!!! What you have in your retirement account are stocks, mutual funds and bonds. You used money to buy those things - hoping that the value would increase over time. You gave up your money along time ago when you bought those instruments. You now have assets. That was your choice. If you wanted cash money in your account - you shouldnt have bought stocks, bonds, and mutual funds. When you buy those instruments, you do so gambling that the value will increase over time, and BY THE TIME OF RETIREMENT, the value will be more than you paid.
So if you were one of the millions who have no real knowledge of how the stock market works, and you reacted in panic to reduction in value of your retirement account, and sold stocks or bonds or mutual funds for cash - then you LOST potential value and probably real cash value, AND you were one of the fish in that school - that school that reacted in a panic and by their actions, caused the values on the stock market to sink even more. Yes - it was you!!!
That, my friends, is what is happening to the economy right now. My suggestion - CHILL THE EFF OUT FOLKS. Gas prices will do what they always do. Don't rush out and sell your truck and buy a hybrid - you will lose money in the long run with those transactions. Gas prices will always fluctuate. Don't get yourself into a mortgage mess. Only buy what you can afford. Guess what - most of us arent going to be able to live in a McMansion! Thats really ok - I wont judge you. Get a grip on reality and live within your means! Remember that any financial situation that seems too good to be true - is. And lastly - if you aren't about to retire next week or next year - dont panic and sell off your assets in the market. That is just stupid. As a matter of fact - buy more at lower prices. That is the financial deal you look for in every other part of your life - right? You look for things at are under priced and on sale. Well - here you go - there are alot of financial assets out there on sale at bargain prices - buy up! If you are retiring, or are retired - also dont panic. Be very careful of what mix you have in your portfolio. Watch the market closely - but dont sell off your hard earned assets at bargain prices for the "safety" of cash. The market will rebound - it always does.
Listen folks - everything would be ok if you would all STOP KICKING YOUR OWN ASSES!
