Poof! There Goes My Retirement

Today I was chatting with a friend who has recently attained the age of sixty—when he planned to retire. Like tens of thousands of others, he has revised those plans. He’s not bitter—he enjoys what he does and, for him, retirement day is still in sight.
He did everything right. He paid off his house; he will have pensions from two different careers. It’s the investments—the ones he was planning to live on until Social Security and the pensions all kicked in—that are stopping him. He suggested it was like watching water draining from a tub over the past year.
“But,” he said to me, “I have one question I’d like to figure out the answer to. When the stock market falls several hundred points and they tell me a trillion dollars is lost, where did that money actually go?
“I mean,” he said, “if I have two apples and you take one away from me, I’ve clearly lost an apple—but I know exactly where it went. But where did half the value of my stocks GO? That’s what I want to know. Where does this lost money disappear to?”
I thought about it for awhile. It does seem to defy basic laws of physics to have vast quantities of cash (even if it is all electronic—just little blips on a computer chip) disappear from the known universe without a trace. There should, according to physics, be at least some residue—or some bottom feeder over in Asia who now has that trillion. But, no, it’s gone. Poof.
Those who deny the possibility of creation ex nihilo (from nothing) insist that I believe in demolition ad nihilo (to nothing). I jokingly suggested that perhaps my friend hadn’t watched enough science fiction; that there is a little gnome-like Yoda who waves both hands and things just disembody themselves right out of this universe. Blame Wall Street’s problems on the Force, of course.
Then I raised a second, more thought provoking question, perhaps the right thing to ask is not where did it go when it disappeared but did it ever really exist? This is far more philosophical than brokers and financiers ever care to get, but when we talk about a company’s market cap reaching so many billions, is all of that money real?
If it can disappear at the flick of a switch, was it ever really there? One really doesn’t want to think of the stock exchange as being some kind of magician’s cabinet with false sides and mirrors; when his assistant vanishes we know it’s a trick. What about the trillion that vanishes? Is that a trick too?
It’s not all that reassuring—as far as investing in the market goes—to make oneself accept that it is all because so many people stopped selling and buying product, and that companies spent through cash reserves to meet payroll and pay for raw materials until nothing was left (not even credit)—and that’s really why a company with a market cap of billions last year now sells like a penny stock.
The fellow left holding the hideously shrunken IRA is still left vaguely wondering where did the trillion (and my retirement) really go? (Dear Lord, imagine if they had managed to put Social Security into the market like they wanted to do! There are people for whom Social Security is all that is left in this ruin.)
BusinessWeek (12/15 issue) ran an article called “The Hidden Pension Threat”. Pension portfolios have been hit as hard as anyone else. A company whose pension was fully funded a year ago suddenly finds itself underfunded by millions upon millions due to the collapse in stock values.
This happens just as the 2006 Pension Protection Act kicks in with its requirement that pension plans must have enough funds on hand to cover present AND FUTURE obligations. The suddenly cash strapped companies (whose products have stopped selling) must now come up millions in cash to cover the Wall Street shortfall that hammered its pension plan.
Guess where that leads? The quickest way for any company to improve cash flow is to lay off bodies. And what, do you suppose, more layoffs will do for the stock market and retirees IRAs?
Just how much confidence do people have on future prospects on Main Street or Wall Street? On National Public Radio I heard a brief note this morning: For the first time ever the Government is issuing treasuries with a Zero interest rate. In other words, Uncle Sam will hold your money for you and give you back exactly what you put in. No interest, no income. People are desperate enough to buy these.
The horrifying thing about this situation is that it is not just that some arcane law of physics no longer applies—all those things Barron’s, the Wall Street Journal, and the financial advisors told us to do no longer apply.
Invest prudently – and you can be just as broke as the guy who didn’t invest at all. Revise the old clause in the will, “Being of sane and sound mind, I spent every penny before I died”. Have it read, “Being of sane and sound mind, I spent it all while it still had some value.”