Some Numerology For You

So, quite a few people have asked me what I think of the economy and/or the bailout package approved by Congress last week. I seriously doubt these friends have asked with the hopes of getting my opinion; rather, I think they were partly worried about the economy and partly just politely making conversation. One of the instances happened while I was in the hair salon, getting my hair cut, just for background reference.

I do think the vast majority of Americans are worried these days, and rightfully so. They aren't getting the best of information from the MSM, but they are hearing words like Great Depression, financial crisis, and disaster all being bandied about.

I finally had a chance to see one of Paul Solman's business segments on the Newshour on PBS this evening, not too long after the WSJ profiled his ways of making difficult economics issues easy to understand in layman's terms. Tonight's segment delved into credit default swaps, and in order to keep people interested, Solman used clips from classic cartoons (Bugs Bunny, Mr. Magoo, etc.) as references. The video is here, and it's well worth the time to watch it.

One of the key numbers that Solman points out several times in his segment is $62,000,000,000,000 -- that's 62 TRILLION dollars! -- the amount of money banks, hedge funds, and insurance companies like AIG had tied up in these credit default swaps, which were supposed to act like insurance against a company going bankrupt. That number ($62T) is more than four times the annual GDP of the entire US, which is a very big number all on its own. The gross amounts of money lost on these phony insurance contracts is a very big reason why we're in such dire straits today, economy-wise.

This news comes just one day after the Dow fell below the psychologically significant 10,000 barrier, as well. On the day yesterday, the Dow fell an intraday record 800 points (never done before! Black Monday in 1989 was a whopping 508 point drop!) before rebounding some to finish down just 369.88 pts, but below that 10,000 barrier at 9955.5 Today, the Dow fell another 508 pts to finish the day at 9447.

Sure, many people are probably saying, "All the news media reports is what the Dow is doing, but why should I care, I invest in the S&P 500 Index?" The S&P 500 finished today at 996, somewhat off from its peak of 1576 or so set... hmmm... just last October! That was an intraday level on 10/11/07, to be exact.

And yet, many investment advisors still adhere to strange belief systems I tend to lump together with fans of numerology. Yes, those numerologists were probably going crazy with the recent OJ Simpson guilty verdict, delivered 13 years to the day after he was found not guilty of murder, that took the jurors 13 hours of deliberations, that came 13 months after the robbery took place, the verdict was delivered on 10/3 and 10+3 = 13, etc., etc. Who knows? But many investment advisors have their own internal benchmarks for buying and selling shares of stock, and many times, they peg when to jump in or out of stocks to the performance of the Dow. You might have heard this before: When the Dow hits X, it's a great time to buy because it'll keep going up from there! Or the converse: The Dow won't stay below X for long because that means it's a good value! Or any number of arguments along those lines.

I've never felt comfortable with advisors who talk in those terms, which is probably why I continue to invest my own money. The real reason is to keep my costs as low as possible, but I tend to think I can educate myself and come to the same conclusions as the investment advisors I trust. Those are the guys (like at Vanguard) who say to invest in low-cost index funds, spread out the risk through diversification, and don't worry about market swings, just keep dollar-cost averaging into the same index funds for the long haul. Why pay someone else for what is, after all, common sense?

I might not get rich quick this way, but I know I can sleep well at night, no matter what the markets are doing. I'm obviously not in any sort of hedge fund, didn't have any assets with AIG, and really didn't care about what the investment bankers were doing with their money. Sadly, their bad debt credit default swap SNAFUs are threatening the overall stability of our economy, and we really don't want to see more large banks going under. I do feel for everyday Americans, those Main Street types who are getting no mortgage or credit card debt relief from the $700 Billion bailout package, and for the honest, hard-working bankers and mortgage lenders who practiced sound lending practices during the time when the others (like Countryside) were going nuts. No one is helping them out, either.