Thursday, March 26, 2009

Back To The Future

Over the last several months I have been repeatedly asked by friends and clients when the economy,the stock market, and life in general will get back to normal.

I tell them that we are getting back to normal every day. The challenge is that none of us knows exactly what the new normal will look like. One thing is for sure--it will bear little resemblance to the life that many of us have become used to over the last 20 years.

I vaguely remember what normal looked like 40 or 50 years ago. You worked until you either died or had enough money saved up to support yourself and your family for the rest of your life. If you worked for a company long enough, you got a fixed pension along with your social security when you retired and that, along with your savings, was pretty much it.

The assumption was that you would spend your savings down and you hoped you would have enough to maintain a lifestyle that was not too much worse than when you were actually working and earning money.

When you bought a house, you planned to live in it for a very long time. You put 25 to 40 percent down and paid off the mortgage as fast as you could. If you were lucky, you were able to sell it for about what you paid for it. After all, it was new when you bought it and you had worn it out over all those years. People didn't have huge debts because no one would lend you enough money to get into trouble and what would you spend all that money on anyway?

That is not the scenario that most people have in mind when they ask when things will get back to normal. Most of them are talking about the expectations we developed during the last 20 years which seem less and less normal by the minute.

In recent years, millions of people worked until they had enough money to retire. That often occurred during their fifties and occasionally even sooner. They would then get a second home in a warm place that was generally much more expensive and larger than the home they had raised their families in for years. They could afford it because their first homes had skyrocketed in value during the 80's and 90's.

They would travel, visit and entertain friends and family, eat out often, ski, cruise and play golf, and buy more expensive stuff than they did when they were working. And in spite of it all, their net worth kept going up and up anyway since the value of their homes and investments were rising faster than they could spend the money. Keep in mind, I'm not talking about the super-rich who have always lived this way. I'm talking about millions of "normal" people.

Between 1981 and 2001, the Dow Jones Average went from 800 to 14,000--an increase of more than 1500 percent in 20 years. Millions of people benefited since they--not their employers--now directly controlled the investment of their 401-K, profit sharing, and retirement plans.

Real estate values skyrocketed. In the Sunbelt states, average people could buy land, homes, and condos with very low down payments and flip them for a huge profit after a year or two and sometimes even sooner.

During the tech bubble in the stock market 10 years ago, I remember telling a client that "we live in a time where no level of irresponsibility is going unrewarded." To a great extent that line describes what we came to view as "normal" over the last 20 years.

When the stock market stopped going up eight years ago, people were able to keep spending more and more using home equity loans and a seemingly unlimited supply of credit cards to make up the difference. They built up mountains of debt, but it seemed responsible because their assets, on paper, kept increasing in value.

Until they didn't.

So here we are. Now millions of normal people are deep in debt and/or have no more piggy banks to shake or equity in their homes or investment accounts to draw on. The credit card companies have suddenly pulled in the reins as well.

It is easy and popular to blame the villains of Wall Street and Washington for the mess we're in and they certainly played a large role in creating and deepening the current economic mess. But deep down, most of us know that the dramatic changes in our own behavior and expectations were a huge factor as well.

The good news is even though the economy hasn't bottomed it appears that the stock market has stabilized and the credit markets have started to thaw. We are getting back to normal.

And although it may not be as much fun as the more recent version, the new normal will probably (and hopefully) look more like the normal of my youth than the unsustainable glory days of the last 20 years. We now realize that while that might have been enjoyable--it was never normal.


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