Several months ago, I decided it was time to get off my duff and improve my fitness level. But by doing what?
Running? Too boring as far as I’m concerned.
Rowing? Not really practical for me.
But biking? That was right up my alley. I figured it was relatively easy to get started. I certainly enjoyed doing it as a kid. And I could cover a lot more distance than I’d ever do on my own two feet, something that dealt with the boredom objection. So I started to ride.
Why am I telling you this? Because what began as an occasional hobby has turned into something else entirely.
Indeed, I’ve dedicated a heck of a lot of time, money, and training to getting myself ready for the longest ride of my life this spring. Along the way, I’ve also learned (or relearned) quite a few lessons — lessons that dovetail quite nicely with what’s happening in the financial markets.
And I’d like to share three of them with you today.
Lesson #1: There’s no such
thing as a free lunch …
The ride I’m doing this April is no Tour de France. But it won’t be easy, either. It’s a full “metric century” — 100 kilometers, or roughly 62 miles. I spent some time on MapQuest figuring out just how far that is from my front door, and I was a little intimidated by the results.
But with the proper training and the right attitude, I realized it wasn’t an insurmountable goal. As long as I was willing to dedicate myself to the task, and put the required time and effort into it, I figured I could pull it off.
And that brings me to my first investment lesson — one that investors, regulators, policymakers, and others have seemingly forgotten. There’s no such thing as a free lunch.
If the new President is right, America will soon have more unemployed workers than during The Great Depression.
Already, even for those who DO have a job, wage freezes and outright PAY CUTS are spreading like wildfire.
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Just think back to the wake of the dot-com bust. Rather than let the economy experience a cleansing recession to make up for the mal-investment in technology, the Federal Reserve shifted into overdrive. It slashed interest rates to the bone — screwing savers and making money essentially free to spur spending.
The Fed believed its “free” money approach to the economy was best. It believed it could have a free lunch — an exuberant bubble in stocks and tech spending with no corresponding painful bust. But that wasn’t the case. Instead, the Fed’s policies helped cause the biggest housing bubble (and subsequent pop) in U.S. history.
Or how about all the financial engineering foisted on the markets by Wall Street firms in recent years? They sliced, diced, and re-sliced countless subprime mortgages, corporate takeover loans, and commercial real estate debts. They packaged, bought, and sold hundreds of billions of dollars in debts and derivatives.
Investors bought it hook, line and sinker, too. They figured they could get the free lunch of higher yields and lower risk — even though that makes no economic or market sense. Today, those very same securities are causing hundreds of billions of dollars in losses around the world, and contributing to the largest bank failures in history.
Now, Washington would STILL have you believe that it can provide a “free lunch” solution. It’ll dole out gigantic heapings of economic stimulus, while racking up the biggest, most out-of-control budget deficits we’ve ever seen! Then to fund those deficits, it’ll just borrow enormous amounts of money.
$1 trillion? $1.5 trillion? $2 trillion? More? Nobody knows for sure how many bills, notes, and bonds the Treasury is going to sell. Nobody knows just how big this mountain of debt that we’re burying our children, grandchildren, and great-grandchildren under will get.
And as I mentioned in my January 9, Money and Markets column, almost nobody in Washington seems to care.
|There’s no such thing as a free lunch … not in cycling … not in the financial markets.|
It would be madness for me to take the “free lunch” approach to my bike ride — to show up at the starting line having done no training … with no water bottles attached to my frame … and no helmet on my head.
Yet Washington and Wall Street have yet to learn the simple lesson that there’s no free lunch.
I hope that changes. And I suspect that by the time this recession is over, it will have done so.
Lesson #2: Some assistance is fine.
Bailing out anyone and everyone is not.
Like many longer rides, this one will feature “SAG” wagons. They’re vehicles that offer assistance to riders who bust a chain, blow a tire, or otherwise need some assistance along the way.
The idea isn’t to just let unprepared bikers who get a little winded hop on board, ride to the finish line, and say they completed the race. The idea is to offer limited assistance — help get them back on their bikes and let them finish the race on their own, if they can.
But Washington doesn’t seem to understand the difference between offering some assistance to those who deserve it — and bailing out anyone and everyone, including those who should fail. With the exception of Lehman Brothers, the Treasury Department and the Fed have been dropping money out of helicopters to virtually all comers in an effort to kick the can down the road.
Fannie Mae. Freddie Mac. AIG. Citigroup. General Motors. Chrysler. The student loan market. The mortgage lenders. The commercial real estate industry. They’re all getting liquidity handouts, capital injections, or other forms of direct and indirect support. States, municipalities, insurers, and auto suppliers are also lining up for their share of the bailout pie.
In a publicity-grabbing event, the adult entertainment industry even suggested recently that Uncle Sam throw $5 billion in TARP money its way. The request is absurd on its face. You want to believe the government will say “No.” But these days, you never know!
Just like with the SAG wagons, limited aid to borrowers buried under excessive mortgage debt makes sense …
Boosting FDIC funding so the agency can take over more failed banks, making insured depositors whole in the process, makes sense …
Even targeted and timely stimulus — if done right — can prove worthwhile.
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But these days, we’re going far beyond that. We’re just printing money out of thin air … borrowing trillions more … and propping up failed industries and institutions. It seems like the politicians and policymakers in Washington want everyone to cross the finish line, whether they deserve to or not.
That doesn’t make a single ounce of sense to me. And I doubt it does to you, either.
Lesson #3: If you really want to achieve your goals, you
have to be willing to invest, save, and study up
When I first decided to get into cycling, I didn’t just put the most expensive bike I could find on my charge card and head out the door. I started out gradually. I used my old, beat-up mountain bike — and I saved my money in the meantime to buy something better in case I ended up sticking with biking.
I also spent time researching how to be a safe rider. Turns out you have to learn the right hand signals. You need to understand how to safely navigate in traffic. You also should learn proper maintenance tips to keep your bike in proper working order — and how to change out an inner tube in case you’re miles from home and you run over a nail!
Bottom line: I studied. I saved up. I invested time and money in order to achieve my goal. That should make it all the more rewarding when I cross the finish line.
But the policymakers and businessmen in Washington, on Wall Street, and throughout corporate America want us to believe that we can skip all this hard work …
Want to own a home? They told us: “No problem! You don’t need to spend any time learning about interest rates or mortgages. You don’t need to bother saving any money. We’ll approve you for a 100% loan for $500,000 in a few minutes. And forget about paying for any principal — that’s so old-fashioned! Just get an interest-only loan.”
Want to buy that big-ticket item? “Don’t worry about delaying your gratification by coming up with a budget and sticking to it so you can pay cash. Just borrow the money! Put it on your credit card. Or better yet, your house.”
Want to invest millions of dollars in pools of risky debt? “Don’t worry about doing any research or due diligence. The ratings agencies say it’s AAA. Just buy it!”
|Hopefully, President Obama and his team will take these three lessons to heart.|
Want to retire comfortably in your golden years? “Don’t worry about saving as much as possible, squirreling away your pennies, nickels, and dimes. Just sit back and watch as your stocks and your house go up in value!”
But the truth should be abundantly clear by now. If you want to reach a personal or financial goal, there is no shortcut for hard work, saving, and investing toward that end.
I’ve spent the past several months learning and relearning these three lessons — and I think I’m a better person for it. Hopefully our policymakers … and mainstream investors … will take them to heart, too. I believe we’ll all be better off if that happens.
Until next time,
P.S. Be sure to check out my blog for regular updates on the housing market, interest rates, mortgages, and the economy. Just click here.
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