Bike Rides and Personal Finance
It was in the fall of 2008 and I was with one of those people that you just enjoyed being with while talking about household finances. Eric was a lively spirit. He was an entrepreneur who lived in the fast lane. We rode bikes together, and that was back in the day when if I wasn’t at my desk working, I was on my bike riding.
Eric and I would ride the farmlands of Cartersville, the mountains of Helen, and sometimes the City Roads of Roswell. Eric road fast bikes drove fast cars, talked fast, worked fast, thought fast, and dreamed fast.
While enjoying our bike ride on a beautiful fall day, Eric was asking me about my thoughts on a certain stock, one in which I particularly hated, but it was a popular stock and a past high-flyer. The stock was now getting rocked by the global economic meltdown and was down significantly. Eric didn’t just want to hold the stock longer, he wanted to buy even more of it. As he explained to me, “How could I miss? This is like guaranteed money!”
I struggled to convince Eric to invest otherwise or simply “do nothing” and just wait for the markets to shake out. It would still end up being months before the markets finally bottomed, and the corporate bankruptcies wouldn’t peak for a few more additional quarters. This particular company was loaded up with corporate debt at levels that were smothering and lacked enough liquidity to keep the basic business afloat.
But behind the scenes, Eric had a few problems. He was now divorced and being forced to support two households. His kids grew accustomed to a good lifestyle with miniature versions of the toys that Eric himself enjoyed with pride. His home was custom with unique interior features. His cars were German and customized. His clothes were flashy. His jewelry was shiny. His watches were large. This lifestyle took a lot of cash flow and that was one thing that Eric was now suffering from. His privately held business was being impacted by the recession. People just weren’t spending money like they used to. Yet he still had to make the rent payments on the business building and keep paying the employees.
What Eric thought he needed was a big score. He needed what he thought would be fast and easy money. That’s often what everybody thinks about when they enter the world of Wall Street and the stock market. They dream of that “easy and fast money.” The kind where you don’t have to do anything except watch your monthly statements roll in with ever increasing balances.
But there is a huge difference between paper wealth and money in the bank and what Eric thought is that if he could chase some paper wealth, he could envision turning that into money in the bank to keep his grand lifestyle going.
As Eric’s guide, I tried my hardest to put him on a path of robust wealth building living by solid principles of success. I tried to guide him against the use of debt in his lifestyle. I tried to get him to invest in quality companies at good prices, which meant that he had to sit around for a while if those opportunities didn’t present themselves for stretches of time.
One of Eric’s largest problems was that he wasn’t financially stable. He also wasn’t emotionally stable. His ego was always two steps ahead of himself. He wanted to be a success so badly not just for himself but to impress others. He always was trying to impress his family and friends.
Like all financial relationships, as an adviser and guide, I can’t make people do anything. I can only encourage them to use proven principles of success and to avoid the well-known pitfalls of personal finances. Each of us must make decisions for ourselves and our own households. It was no different working with Eric. These were decisions that he had to make for himself.
The Tech Bubble
The tech bubble of the late 1990s was a period like none other in financial markets. Sure, stock markets and economies have seen plenty of bubbles, but none quite like that of the tech bubble. What made this period so unique is that the valuations of stocks made no sense at all. The market was loaded with companies valued over a billion dollars that not only didn’t have any profits or corporate earnings, but many also didn’t even have revenues. But if they had any relation to a “.com” theme, then the future was going to be loaded with gold and diamonds because it was the birth of the internet, and certainly the internet was going to change humanity.
When the tech bubble finally peaked and came crashing down, the NASDAQ fell nearly 80% while the S&P 500 fell over 50%. Companies exploded, filed bankruptcy, employees were laid off, and the entire episode rippled through the economy. It was another instance where you could follow the popcorn trail of destruction through the entire chain of the economy starting with Wall Street.
Corporations were destroyed, banks were broken, communities were severed, and lives were destroyed. YAY Wall Street! You outdid yourself once again. It was a valuation bubble like no other.
The Debt Bubble
It was less than a decade later in the mid-2000s that another bubble formed in the global economy. This time on the heels of debt. As investors used leverage to buy houses, stocks and other investments, the debt levels finally reached a point where they were unsustainable.
Of course, big banks, Wall Street, and the government were all accomplices in crime together encouraging and offering anybody with a pulse to borrow money to “keep the economy rolling” (at least through another election cycle.) They blew the debt bubble to never seen before levels before it all exploded.
We all know what happened. The entire debt bubble finally blew itself to smithereens when there were simply no more individuals to borrow money and spend it on real estate while Wall Street firms created gambling instruments called derivative contracts so that they could bet with one another on the side. That peaked in October of 2007, and it wouldn’t be until March of 2009 until the financial markets bottomed out and started digging themselves out of the abyss.
It would still be a few more years until carnage stopped while things again trickled through the chain links of the economy. Corporations went bust, banks went bust, real estate developers went bust, and individuals went bust.
YAY Wall Street! You outdid yourself once again. It was a debt bubble like no other.
The Solution To A Global Debt Hangover
Once things started exploding in the global financial markets, the situation looked bleak. The entire system was so close to collapse. Banks were folding. People lost their jobs. Corporations that employed thousands were now gone in what seemed like the snap of the fingers.
That left an interesting question, how does one solve a monster debt crisis?
The answer that governments, Wall Street, and central bankers came up with was apparently more debt. That was what the powers at be decided on. Thou shall obey. To all…”We have good news! Interest rates will just keep falling to zero (and below). If we could all just borrow and spend, we can grow our way out of our debt crisis.” So, it was spoken. So, it was to be done. The instructions and encouragement were clear, “Borrow and spend. Borrow and spend.” If we could all borrow and spend, everything will be alright.
Dumb and Dumber
In hindsight, it’s pretty easy to see how dumb the entire tech bubble was of the late 1990s. To value companies that had no earnings or profits at sky high levels was breaking the biggest rule of investing. It was a dumb idea that most people accepted as a good idea. Why? There appeared to be easy and fast money to be made. Who doesn’t like easy and fast money when you don’t have to work for it? You simply watch those monthly investment statements roll in month after month with ever increasing balances. The dream is to convert that paper wealth to cash in the bank. Then life will be grand, and your financial problems can disappear.
In turn, it’s pretty easy to see how much dumber the debt bubble was of the mid 2000s. Lending money in massive amounts to anybody who could breathe who had no chance of ever paying it back seemed like a really good idea to banks, Wall Street, and the supportive government who wanted that economy to sizzle before the next elections.
Things ended in the same chain of events. Banks went bust, corporations filed bankruptcy, employees were laid off and lost their jobs, and individual households were destroyed.
We Learn Mostly Nothing
There is an old philosophy statement on humanity which is,
“The only thing we learn from history is that humans ignore history…”
If we thought the valuation bubble of the late 1990s was a dumb idea and the debt bubble of the mid 2000s was an even dumber idea, how should one describe the current double whammy of a valuation bubble and a debt bubble that presents itself in the financial markets today?
The Dark Facts
Global debt is now projected to be greater than $255 trillion by the end of 2019. US National Debt just surpassed $23 trillion while running huge deficits that will soon be consistently clocking $1 trillion annually. This at a time when supposedly, the “economy is fine and unemployment is at record lows.”
We crashed the global economy in 2007 because of too much toxic debt. But that debt was small potatoes to the record levels of debt that continue to climb. US corporate debt is now approaching $10 trillion, and if we add in small and medium sized businesses not listed on stock exchanges, it adds another $5.5 trillion. This is 52% bigger from the last peak. So just US corporate debt is $15.5 trillion or 74% of US GDP.
To make matters worse, much of this corporate debt is either rated as junk debt or a single notch above junk rated. When the next recession hits, much of this debt will drop down into junk status. Globally, the problem is much worse. Total global corporate debt is now a $47.5 trillion debt timebomb. It is estimated that over $19 trillion (40% of the total global corporate debt) would be impossible to service if there was a downturn half as serious as that of a decade ago. The IMF has already started sounding the alarms (which is ironic because they have been one of the biggest supporters of low interest rates and massive lending.)
US Household Debt
Recently the New York Fed released data showing that total household debt in the US reached its all-time quarterly high yet again at the end of the 3rd quarter of 2019 at $13.952 trillion. It gets worse;
- Mortgage debt has climbed to record highs of $9.437 trillion.
- Home equity loans are $396 billion.
- Personal loans are now the fastest growing debt category in the US consumer sector, growing 11% annually. The balances now exceed $300 billion.
- Outstanding automobile loans are now a record $1.189.8 trillion while the average price of a new car reaches an all-time high. The average car note is now 72 months (6 years), with many auto loans extending terms up to 84 months (7 years), guaranteeing that most of the buyers will have negative equity for the entire ownership experience of their vehicle.
- Nearly 11% of student loan debt is 90+ days delinquent or in default, which is amazing since there is $1.638.7 trillion in outstanding student loan debt. Apparently, kids are having a hard time paying off $100,000 in student loans while making sandwiches, serving coffee, or driving for Uber as their career begins?
Paper Wealth And Monthly Statements
In the meantime, investors yet again rejoice at the end of each month, chasing that fast and easy money delivered by Wall Street. How could they not like the gains of the past few years of insanity? It’s easy to recognize how dumb 1999 was in hindsight when valuations were completely detached from corporate earnings. But we know humans aren’t fond of history.
The current darlings of Wall Street are the same type of disruptive tech companies of the late 1990s. We have the stocks of companies that are valued in the billions, the tens of billions, or even the hundreds of billions that have never made any earnings at all over their corporate lives. Netflix, Uber, Peloton, Tesla, Pinterest…the list is long. These companies lose billions and billions of dollars each year, yet their stocks climb as if it was 1999 all over again.
The more products or services they sell, the more they lose. How do they fund themselves? They do it with the help of Wall Street by issuing more shares or borrowing more money.
What To Do
We know that valuation bubbles and chains of debt are catastrophic in economic recessions. Corporations go bust, banks get hit, people lose their jobs, governments run even bigger deficits, liquidity dries up, households go bankrupt, and investment valuations crater.
But that is also when investments go on sale.
We never know exactly when things will finally explode. We didn’t know during the tech bubble, and we didn’t know when the explosion would finally kick in which resulted in the global economic meltdown that began in October of 2007. We only know the after-effects of destruction.
It’s imperative that each of us protect ourselves and our households. If you aren’t aggressively reducing your use of personal debt, you are making yourself extra vulnerable to financial hardship. Strive to eliminate personal debt to make your household as stable and as robust as possible to weather the next economic storm that is approaching. Never use debt for luxury spending. Don’t issue personal guarantees. Build adequate reserves to keep yourself afloat should your income be impacted during the next portion of the economic cycle.
Invest in the sky-high valuations in the stock market at your own risk. Understand that when things finally blow, they blow quickly and without mercy. There is no way of knowing when things will finally break. That can only be seen in hindsight. I hear all the time from investors who tell me, “I know things are risky, but I’ll get out as soon as valuations get crazy, or things start to look shaky.” For those, I remind them that you and millions of others will be rushing for the exit doors at the same time while the theatre burns, and you are breathing in black smoke.
Some investors believe that they will sell once valuations reach an insane level. But valuations have already reached those levels. So, if they haven’t sold by now, I find it unlikely that they are going to exit at all before the rollover finally sets in.
What Ever Happened To My Friend Eric?
I no longer ride my bike with my friend Eric while trying to give him financial advice. Why? Unfortunately, Eric committed suicide in February of 2009 one month before the stock market bottomed out in March of 2009. The stock that he was trying to convince me to invest in eventually fell 98% from its all time high and never recovered in price.
His kids no longer have a father. He no longer rides fast bikes, drives fast German cars, wears shiny jewelry, or eats fancy foods. His entrepreneurial business is no longer around. I haven’t even heard anybody mention his name or his memories in almost a decade. It’s like he never existed.
In wealth building, the winner isn’t the one who had the most paper wealth at the top of the cycle. It’s about who is left standing long-term and who is healthy enough to enjoy the fruits of their labors later in life.
As for me, I’m coming up on my 28th year of working in accounting and finance. In many ways, I can’t believe it. I’ve gone through many economic cycles, two market crashes, and have seen countless households make bad financial decisions.
I’ve learned about the perils of debt. I’ve learned about the dangers of investing in stocks with crazy valuations that seem to defy logic. I’ve seen large amounts of wealth destroyed in very short periods of time. I’ve seen how quickly our mental, emotional, and physical health can deteriorate when things go wrong. I’ve seen sunshine and I’ve seen the rain. I’ll never say, “I’ve seen everything.” The world continues to amaze me. Wall Street continues to amaze me.
But if there is one thing I come back to over and over again as I come up on this 28th year of my career, it’s that generally speaking when it comes to money, investing, and personal finances, “We learn mostly nothing…”
Don’t be that person who ignores history. We can’t control Wall Street, the economy, interest rates, politics, stock valuations, or bubbles. I can only encourage you to make good decisions for yourself using proven principles of success.
Strive to control your time. Strive to control your location. Work to become financially robust and secure. Live a healthy life. Maintain good and loving relationships. Live with the proven principles of financial success. I include them at the very end of every email that I send out.
Proven principles of wealth accumulation;
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Make a substantial living.
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Live below your means and control spending.
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Save consistently. Make savings a priority by paying yourself first.
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Eliminate debt.
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Always keep adequate and liquid emergency funds.
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Invest prudently over a lifetime. Get rich quick schemes are the dreams of fools.
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Use proper risk management in all areas of your life.
Now is the time to start working on 2020 goals and objectives. Let’s attack the New Year.