Financial Reality Check

The Common Strategy

Practically from the moment time we first entered grade school, we have been told by our teachers and parents that we must attend school so we can get an education, so we can get hired at a safe, secure good job, to enable us to buy a nice home to build a family, and then we can start investing for retirement. 

But is this really the best advice to give to young kids? What can we learn from history?

Well, for example, if you were invested in the markets in 2007 and lived through the stock market crash and the Great Recession of 2008-09, then you likely know what it is like to watch your portfolio shrink by upwards of 56% in 6 months, with daily drops of 10% on some days. Obviously, if this kind of portfolio decimation occurs late in life or while in retirement, it can be devastating and perhaps impossible to recover from in tiem to save your retirement lifestyle that you planned all your life.

Here are some facts you should know.

Starting at the beginning of the new Millennium, and shortly after the tragic events of 9/11, in an effort to stimulate the stock market and home ownership, US government policy and the Federal Reserve stimulated the economy by lowering interest rates and setting policies that allowed for easy home ownership with no money down and very low teaser interest rates. The policy at that time was to encourage every family who wanted one, to get into the home ownership game.

The problem was the easy money policy, lax regulations and oversight, and outright corrupt mortgage lending practices got many financially illiterate borrowers into mortgages and homes that they could not afford. At that time, if you could fog a mirror you could get a mortgage. Fake income statements, deceptive lending practices, and vulture capitalism became commonplace as thousands of real estate seminars taught people how to buy real estate with no money down, with no no job, no credit, for the sole purpose of flipping it for a profit to the next buyer in the seemingly non-stop rising real estate market. NINJA loans, (no income, no job or assets) became the norm as the thought was that nothing could go wrong in the housing market.

However, the extremely low teaser interest rates that were offered at the beginning of the mortgage in 2001-04, began to reset at much higher rates in 2005-08. Once the rates reset, borrowers were suddenly finding their mortgage payments doubling or tripling overnight. These once AAA-rated mortgages, which had been transformed into financial instruments called Mortgage Backed Securities (MBS’s) and Collateralized Debt Obligations (CDO’s), and which were fractionally bundled into investment products called derivatives only to make their way into millions of retirement savings accounts, pension plans, and mutual funds around the world, all began to fail in 2006. When millions of these subprime mortgages started to default enmass in 2007-08, there was a sudden panic on Wall Street as the banks and fund owners realized that the underlying investments were no longer secured by AA and AAA mortgages. The result was a mass simultaneous failing of residential mortgages which precipitated a worldwide economic debt crisis that nearly caused a total meltdown of the international banking system.

As a result of this stock market crash of 2009, many companies lost value, laid off employees, and went out of business which further compounded the problem because these laid off employees, who did have solid mortgages, could no longer pay their mortgages. As businesses small and large began to fail, the commercial real estate market took a big hit. Shopping malls and office towers experienced major losses in revenue, and they are now starting to have trouble paying their bills and property taxes. Since many pension funds and retirement programs own commercial real estate and strip malls in their portfolios, we are now witnessing widespread failures of those types of complexes which will have a massive impact on people’s pension funds and retirement accounts worldwide. These commercial foreclosures are just beginning to impact the market 10 years after the main event. Since the commercial real estate market is so much larger than the residential marketplace, a failure here could have far worse implications for the economy than the great recession of 2008-09.