Friday, July 19, 2013

You are in the Wrong Neighborhood

Yeah yeah people are financially illiterate in this country.  That theme has been beaten half dead Rodney King style, but that got me thinking: a lot of emphasis has been put on educating the masses, but nobody has explored the meta of financial illiteracy.  Maybe, just maybe learning to be financially literate after a certain level is asking the common man to learn the Navajo language.  Should it really be this hard?  Why is it this hard?  And how can we make it George Bush's fault?

Supposedly, personal finance is very easy.  You find out how much money you make, you find out how much money you spend.  If you have money left over, you save it.  If you don't, you have made a huge mistake.  Either increase the former or decrease the latter until you have mastered it.  If you are already lost, then the rest of the post doesn't apply to you.  I will gladly pay higher taxes to subsidize your poor knowledge in assets and liabilities and cash flows.

But after this point, it gets murky.  So you have savings, but what do you do with it?  Saving it in the purest sense of the word is out of the question.  Putting cash in the mattress looked cool in the movies (so did fedoras lol), but it's guaranteed to lose value due to inflation.  So to preserve purchasing power of your savings, you have to invest it.  But for the past few years, even the usual hangout spots for savers has been firebombed Dresden style.  CDs are yielding peanuts and even long term treasuries have interest rates right near the rate of inflation.

So what you got are savers who are desperate for the same risk free 3-7% nominal returns that CDs and treasuries used to provide and what do these crackheads jonesing for yield do when their primary dealer Ben tells them no more?  They had to go looking for substitutes.  The only game in town giving the possibility of those returns are stocks.  Frankly, this is a recipe for disaster.  First, you have bright eyed bushy tailed savers used to CDs and government bonds suddenly catapulted into the Roman Coliseum.  Second, they come in and bid up the safe sectors like consumer staples and utilities, which are supposed to underperform bull markets, but since the savers telegraphed their intentions, the rest of the markets bought into the craze as well.  In fact utilities already got hammered pretty well, but when the next bear market rolls around, don't be surprised if the supposedly safe sectors are the ones shellacked the most.  That will be the visual representation of savers wandering over to where the speculators play.