Yet this term “collapse” is used with abandon by very mediocre (not that you are…but most economic journalists are) journalists with little understanding of its meaning. Weimar Germany was an “economic collapse”. The things we take for granted – walking out and buying food and clothes – was NOT possible in Weimar Germany.

Today’s relatively harsh (though in the standard 64 years since WWII, it’s pretty average) recession, has caused people to FEAR recession rather than embrace it. Recessions are NOT BROKEN ECONOMIES. No matter what the politicians (most of whom are monumentally stupid) say, the economy is actually quite good. Evidence of this is clear – both Bush and McCain said this during the election, and suddenly Obama is saying it (after cynically telling Bush and McCain they were wrong during the election). While politicians are monumentally stupid, blind squirrels do find nuts from time to time…and it seems that here, they did.

The key to understanding recessions is to recognize that we all go through phases in our lives which require pullback and retrenchment. The government tries to shield us from this, economically, through deficit spending and manipulation of markets. This, of course, is unsound economics and causes boom and bust cycles which may moderate for a time (1982-2007) but eventually the dam has to break (2008).
Since we operate from a sound financial policy in our daily lives (save 10% of gross, use 25-30% for home/apartment payments, invest whatever is left over after paying other bills), we recognize that any alterations in our patterns will require us to “make up” later for shortfalls we incur today. On a macroeconomic level, this is a recession. Thus, it is not a “COLLAPSE”, it’s an alteration of policies to make up for what we missed out on earlier.

The current deficit spending by our government to “fix” the “collapse” may have good short term benefits. The long term aspects, however, are foreboding. If this is a “collapse”, we should be wary of what could happen in 3-5 years. There are several scenarios, and none are as rosy as this administration is painting (4% growth every year for 10 years?).
It would behoove our readers to carve out a very smart, conservative financial plan that conserves asset and capital at every corner, and maximizes USEFUL government tax breaks wherever possible (a tax break on home equity loans is NOT useful if it’s used to go on vacation, this is Weimar Germany borrowing). Savings of up to 15% would not be too much, either. Now is not a time for excessive investing. That time will come…but it is not now, unless you have spare cash on hand. (I’m a fan of taking advantage of today’s low stock prices – but you have to have a long time horizon to appreciate the value. We are going to go back down again.)

But my point, in saying all this, is that we are still CAPABLE of doing these things. Which means the economy is actually quite healthy, and not in collapse. The collapse is in asset prices – some of which were merely paper gains. I have checked my returns on my 401(k), and despite the market hitting 12 year lows recently, I had reinvested all dividends and I was only at a 7 year low! That’s bad – but not as bad as I was being told I was doing….which goes to show you how out to lunch people are.

We are told each week that unemployment has “hit a new record” for request for benefits. In pure numbers, that’s true. But compared to 1979, or 1982, we’re nowhere near records on a percentage basis. And percentages are the important thing here. Journalists tend to focus on the numbers that allow them to generate “outrage” or “sensation”. These two emotions are much more interesting than “complacency”. Which, if we review historical percentages, we have every reason to be complacent. This is, so far, not a horrible recession. It hasn’t matched the worst of the 1970’s at all. They SAY it will, and it may. But even if it does, it’s not “the worst we’ve faced since the Great Depression” – another common political sound bite.

I hope that in future commentary, we can reduce the hyperbole and increase the knowledge. This is the only way to imbue confidence, hope, and trust. And transparency. It’s a shame our administration hasn’t realized this.

People laughed at me, in 1992, when I purchased this. The question was “why? you can earn more by getting term, and investing the difference.” Possibly true, though by this point in time the difference would be quite close in valuation. One carries high risk, the other almost none.
A friend who did this, and mocked me, is currently in dire straits. He never locked in his gains and some of his investments have underperformed dramatically in the last 2 market pullbacks.

Here’s a simple question which I see silly people give the wrong answer to all the time:
If you have a guaranteed gain of 10% in 2 weeks, or a high risk investment gain which could provide 50% or 95% (5% loss) in 2 weeks, which is the better investment?
Most people (until recently) would’ve said the 50% gain. Today, that is being rethought.
A follow up question – how do you divide your investment dollars, if you have $2,000, in these 2?
Many people still say 75% in the 50% investment. This is not wrong, but it’s also not wise. 1/2, at best, and probably 75% in the 10% guaranteed is better. Sure, there is opportunity lost, but it’s a guarantee…and opportunity lost is no real loss at all.

Finally, if you have 2 investments which move in directly opposite proportion – a 100% gain in one will yield a 50% loss in the other – how do you invest your $2,000?
A little math will show that you invest 50% in each, which will guarantee a maximized gain.
This final rule is one reason hedge funds do so well….

There will be over-reaction, and the “rules” will be changed for some people. But fundamentally, the “rules” are the “rules”. Investing is a money game and the goal is to get the most money. Some people learned that they don’t know how to calculate risk very well. I promise you that many will flee to “safety” which will basically lock them in to a low return situation while giving others the opportunity to make the big returns.

Money Magazine is out to lunch…or HAS BEEN, I should say. The rules have not changed. I have followed all these rules, which were taught to me ages ago. The “leverage economy” was one I continually accepted as “an idea that works for now”. But I always recommended against it to friends. Those who ignored my advice are on a very slippery slope today (most are hoping for a taxpayer bailout of some kind…but they are not AIG).

I am angry at magazines like Money that suggest the rules have changed. The problem is the rules “changed” a long time ago, but really didn’t. Magazines like Money just SAID they did in order to keep up with the cowboys on Wall Street. So we believed them. They were irresponsible.

The John Stewart/James Cramer joke comes to mind because Stewart’s criticism of Cramer was accurate (Stewart is wrong on most things, but not this). Cramer’s approach to investing and money was and is very bad. He is a freewheeling guy, and when you have as much money as him, it’s easy to be that way. His advice is good for someone with $1mm stashed safely and another $1mm to play with. But for people who are relying on their meager savings and income to meet their goals, and have their 401(k) as a their safety net, Cramer is a very poor person to rely on for advice. Suze Orman, someone I detest for my own reasons, is much better with the everyday advice.

My savings and investment philosophy has always been very basic. I read a book called “The Richest Man in Babylon” when I was very young, and I have passed it on to my kids. It is a great book with basic ideas on how to get ahead in the world financially. It is not 100% correct in concept for sophisticated money managers, but the everyday person, it’s 90% correct in its approach.

Money magazine is late to the game by about 20 years, I’m afraid. They simply were on the bandwagon for a long time and I never understood why. At the end of the day, while people will blame Congress, Bush, Clinton, Madoff, AIG and a myriad of others for this mess, the real cause is US.

Pogo was right when he said “I have met the enemy and he is us.” We simply hate to admit we are responsible for our own problems. But we are when we invest irresponsibly and save poorly. When we listen to men who CAN leverage out to 3 times their assets, while we are less capable of doing so, we put ourselves at risk. Then we blame the people we listen to…

These people are responsible to give good advice. But they should also explain WHY they are capable of doing the things they do and WHY things change as your asset base grows.

Money is like Quantum Physics. At very small levels, weird things happen and happen quickly. Probability alters the likelyhood of certain events in a grand fashion. But as quarks form subatomic particles, and these become atoms, the rules change dramatically. Eventually atoms form large scale material and Newtonian Physics kicks in…

MORE of anything means the rules change. This is true in Physics AND in Finance. But nobody ever discusses why this is true.