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Quantifying incompetence

I can understand why most Americans do not want to look at their financial statements. If you take the time as I did yesterday, it is scary. I do not have all the numbers for my household yet but a year ago, our net worth was around $938,000. Today our net worth is about $771,000. That means in just one year about eighteen percent of our wealth has vanished.

Our real net worth is probably lower. How much is our house really worth? I will not know unless I actually sell it, so I go with our county’s assessed value, which was done before the sub-prime mess fully exploded. There are no bright spots in my portfolio. Our T. Rowe Price New Era fund is worth just 52% of what we paid for it. If this is what our “new era” will look like, it does not sound hopeful. This fund was supposed to be used for our daughter’s college education. We are drawing on other funds for now but unless stocks turn around dramatically over the next few years, we will have lost money set aside for her education, despite investing consistently for fifteen years. It suggests that we would have been much better off putting the money in a mattress.

Our other funds show a similar but less dramatic story. I can only hope that since most of our investments are for the long term that they will actually turn out to be investments rather than places to throw away our good money. Perhaps Michael Moore had it right all along: keep your money in government insured accounts only. Granted, the money may not grow that much, but at least it is unlikely to disappear when you need it.

A year ago, my personal financial adviser forecast that there would be a significant economic upturn toward the end of 2008. This was based on reading and listening to other people he respects. He was proven wrong of course. I cannot hold it against him. Even Warren Buffet lost money in 2008. This was a year when no matter what financial strategy you chose, unless you invested solely in bonds, you were going to lose money. The Washington Post today crunched the numbers and put the total loss on Wall Street during 2008 at $6.9 trillion. How much money is that? Consider that the federal government spent about $2.9 trillion in fiscal year 2008. In one year our investments, and consequently our national net worth, dropped by more than the federal government spends every two years. Gone. Poof.

Despite his prediction a year ago, my personal financial adviser is optimistic for 2009. “We are now convinced that the stock market has either hit its low, or is very close to it,” he tells me in his latest newsletter. He may have something this time. One measure, the Dow Jones Industrial Average, shows signs of bottoming out. It slipped briefly below 8000 and has floated between 8000 and 9000 for a while now. If we have hit a bottom in the stock market then now is the time wise investors should be purchasing stocks. Of course, there is no way to know. With all due respect to my financial adviser, anyone who tells you they do know for sure is bluffing. We will only know in hindsight when the bottom occurred.

Unless you need money from your investments right away, the current value of your investments should not matter too much. What is more important is whether you retain your job and lifestyle. One thing we have noticed in our family is that many information technology jobs have become commoditized. This is not good news for someone like my wife, who lost her full time job on an IT Help Desk in 2004. She was making close to $50K a year. Her job was outsourced to someone who did the same work for a lot less money and who conveniently was not on “staff”. She now has a part time job doing similar work but took a substantial pay cut to get the job. As for benefits, the doctor’s office she works for has little in the way of a 401-K other than a general profit sharing plan. Unfortunately, the money they contribute toward it would not let you live on dog food in retirement. I am more fortunate but even in the software and systems development area where earn my living, many people are hurting. The bottom line is that our standard of living was hurt too and our income (adjusted for inflation) is down substantially from the start of the Bush Administration.

Perhaps this explains why three out of four Americans are glad to see President Bush leave office in nineteen more days. Bush has been saying in interviews that he will be judged by history as a far wiser president than we give him credit for now. I would suspect him of sniffing glue but I think hitting the bottle is more likely. I am confident that historians will not be kind, for reasons I outlined here, but which you already understand.

Our falling net worth is a meaningful measure of the price of incompetence and of the failure of government to, well, govern. It is not as if we were doing stupid or risky things. Rather, our government was doing stupid and risky things by placing inordinate faith in a free market and by actively reducing its oversight role. Frankly though in this economy I feel lucky. $166K of my family’s worth may have vanished in the last year, but we are both gainfully employed and we have maintained our standard of living.

Like most Americans, I feel that January 20th cannot come soon enough. I admire Barack Obama for having the audacity to believe that he can move us out of the national wreckage of these last eight years. When the dung is piled this high, it is hard to see daylight. While I hope my financial adviser is right, my intuition tells me that the dung is much higher than we think. I suspect it will be quite a while before we see the sun. Good luck, President Obama. You will need not just exceptional competence but extraordinary luck if our country is to successfully emerge from the wreckage of the Bush Administration.