Is the worst over?

A recent article by Robert Kiyosaki entitled Preparing for the Worst caught my eye.  After all, isn’t this sound financial advice for all of us?  That’s why we Fools have things like emergency funds.

The article, however, wasn’t about wills, life insurance, or anything like that (which is what I was expecting based on the title), but rather a list of reasons why Kiyosaki thinks that “The worst is yet to come” in the stock market.  Unfortunately, however, Kiyosaki doesn’t tell us how to go about preparing for it.

I’ll have to admit that while some of his reasoning as to why we may have more tough times ahead in the market (and I don’t profess to know one way or the other the way the market’s headed over the short or even intermediate term) seems plausible on the surface, I think he misses the mark in a few places.

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Government’s hand has been a very heavy one in the economy lately.  Everything from bailouts of companies like AIG and GM to the Cash for Clunkers program is evidence of this.  Maniplating the stock market?  I’m not so sure.  Manipulating the economy (which has an impact on the stock market)?  Absolutely.  I wish the manipulation were related only to the stock market and not to the economy as a whole, because I fear that the long-term ramififications of many of the government’s recent actions may place an unnecessary drag on the economy for a long time to come.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

While each of the above entities certainly had a hand in creating the mess, laying this problem solely at the feet of financial istitutions is a bit like blaming McDonald’s and Burger King for America’s growing obesity problem.  We gladly borrowed all that money and took out loans for all kinds of stuff despite a lot of good financial advice that’s readily available to us that urged us not to take on too much debt (you know, at places like this outfit I keep hearing about) just like we gladly and willingly wolf down Big Macs and Whoppers despite all of the information out there telling us we should be eating broccoli instead.

3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

That demographic changes will alter the economic landscape isn’t exactly new, but I’m not so sure that I follow this logic.  Yes, baby boomers had good earning power and spent money on lots of ‘stuff’ — but what are earnings?  After all, they’re something someone is willing to pay these boomers for their work — and while there are exceptions, each and every one of these boomers was hired, and paid, because his or her employer at least had the perception that the value of the work they were receiving was at least as great or greater than the value of the money they were paying.

If we are to fear the economic impact of retiring baby boomers, I think its the loss of their productivity, not the loss of their consumption, that we should be most concerned about.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

I agree that this is one of the greatest economic challenges that will be faced within the next generation.  No matter what one’s individual views are as to how to best handle this impending problem, I believe the decisions we ultimately make here will have a large impact on our economy and financial well-being for a very long time to come.  My only fault with Kiyosaki here is that he never gets to the “Preparing” part that was in the article’s title.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire.

I couldn’t disagree with Kiyosaki more.  Sure, lots of money flowing into and out of the market can sometimes cause some pretty big short-term changes in overall stock prices.  In the long-term, however, I firmly believe that stocks are ultimately valued by the amount of money they return (or are expected to return) to their shareholders.  Sure, short-term irrational ‘blips’, some lasting several years, can, do, and will happen — but 401(k) plans are most definately not a Ponzi scheme.

My differences from Kiyosaki aside, I do still like the title of the article.  After all, if nothing else, the recent housing and credit crisis, our struggling economy, and the looming pension, Medicare, Social Security, and other obligations faced by private companies and the government alike tell us that we should, indeed, do our best to be financially prepared for tough times — whenever and however they should strike.

As far as what to do to prepare, well, there are some blue tabs at the top of your screen right now that, if you click on them, have a lot of information and ideas as to how to go about doing exactly that.


Russell (a.k.a. TMFEldrehad)