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Explanation Of Today’s Economy And Stock Market In Easy-To-Understand Language

21 November 2008 5 Comments

If you flip on TV to try and see what the heck is happening with your job, your company or your 401(k), you probably hear terms like derivatives, toxic assets, de-coupling, etc.  After a few minutes of the ridiculous financial jargon, you say, “Screw it” and turn off the TV.  The reality is that the current situation, the current crisis can be much easier explained.  Since we aim to help 20-somethings, who for the most part are new investors and new workers/employees, this is the perfect audience for such an article.

Why Are Stocks Crashing?

What we are witnessing is a complete sell off in assets across the board due to a slowing global economy.  Right now, there are no safe investments.  The only way you would have made money is by staying in cash or by shorting the market these last few months.

Many describe the economic environment as a massive de-leveraging in every area of the economy.  Basically, there were very high levels of leverage or debt used to invest or bet on overvalued assets.  This can describe massive banks loaning money to people who can’t pay it back or it can describe individuals buying homes for twice what they could end up affording.  The insane amount of debt that piled up at every level ending up crashing down as the losses accumulated.  The result?  Corporations going under (or taken over by government), individuals going backrupt, homes being foreclosed and trillions of lost wealth.

This situation has been building for years as Americans continued to finance their high levels of consumption with easy money such as home equity or credit cards.  Corporations in their insatiable thirst for growth and earnings continued to make riskier and riskier bets that eventually collapsed.  When the losses became paramount, individuals and corporations around the country were left with depreciating assets and high levels of debt.

The stock market simply reflects these economic conditions, namely massive losses for many of the largest corporations (specifically financial institutions).  WIth consumers cutting back big time since they are broke, our economy grinds to a halt since consumptions makes up a majority of our GDP.  Simply put, our economy is in shambles, and it’s not likely to improve any time soon.  What is even worse, we might be at the beginning of this recession/depression.

The reality is that there are great companies out there with great fundamentals (Apple), but in this kind of market, fundamentals are irrelevant.  Stocks are going lower when the market goes lower.  Target the companies poised to outperform long term and you might find some bargains.

Does Real Estate Have Anything To Do With This?

Real estate was simply the catalyst that brought this over-consumption and over-leveraging mentality to an end.  The real estate bubble was caused by more people than ever taken out massive loans to buy bigger and more expensive homes.  This was completely unsustainable and the market crashed.  The result was a huge loss in wealth, declining asset values and extraordinary amounts of debt.  This was instrumental in bringing the phony bull market to an end.

What Should I Do?

The most important thing you can do right now is to keep your job.  Work hard, take on more responsibility, do whatever it takes to keep your job.  Sustaining your income is of extreme importance, especially as more and more layoffs happen around the country in every industry.  Unemployment is likely to get worse, and some people who I trust, think it might get way worse.  Again, keep your job.  I cannot overstate the importance of this.

Also, take a hard look at how you are managing your money.  You might need to cut some significant expenses in your life.  If you need to sell your house and rent for a while, do it.  Times might get hard for a while.  It is imperative that you put away as much money as you can for a while.  What if you knew you were going to get laid off in one year or even six months?  How would you prepare?  Take these actions assuming you will lose your job next year.

For 20-somethings in college or just starting out in the work force, the good news is that if you work for a big company, you are very cheap labor.  You are not likely to lose your job as much as someone making twice your salary.  Work hard and most importantly, do not buy into the over consumption mentality that goes us into this situation currently.  Be smart, be frugal, and save money.

What’s Next…

I believe there is a very likely chance that we are just starting this time of economic hardship in our country.  There are two severe crises that are likely to happen in next.  Both of which will be disastrous for our economy.  If you prepare, however, you can survive these crises and even profit from them.  If I’m wrong you’ll be fine.  If I’m right, and you didn’t prepare, you could get whiped out.  My next article will get into these potential major crashes that are likely to be evident as early as 2009.

5 Comments »

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