Wednesday, March 11, 2009


Its been over 5 quarters since the economy started its downward journey. A novice investor, I chose to invest my money at a very wrong time - Jan 2008. Having seen 50% of my direct stock investments evaporate, I have been following the market very closely. Economy rules the conversation whether it be TV or online forums or coffee shops. Last week, when I called my parents in India, even my grandmother struck a 2 minute conversation with me about the economy. She is 70 and she doesn't watch TV nor read newspaper! Although I have had strong feelings about the situation, I realized that I have not dedicated a single blog towards this Mega Disaster. So here it goes....

Growing up in India, I learnt the value of saving money. My dad rented our apartment for 39 years, and only on retiring did he use his lifelong savings to buy a house. People used the same philosophy to buy cars - save enough money and then pay in full. The concept of buying a house with only 10% down payment (or sometimes even less!) was thus very alien to me when I landed in US. Similarly, when I moved to LA, I got a big shock when I saw everyone in the city driving BMW & Mercedes. I thought people here are very rich, and without doubt they are definitely the richest in this country, but I soon found out that many just lived beyond their means. For $399 a month it was not difficult to lease a 3 series BMW. Why bother saving and buying, when you can finance and lease?

I found this credit driven economy fascinating. You could easily live 10 times richer than you would normally live, by borrowing. You can buy flat screen TVs, laptops, houses, cars, everything other than your family with borrowed money. You can use multiple credit cards and have a credit limit of $40,000 a month when you earn $4,000 a month! As the country's deficit continued to increase China, Germany and the rest of the world bought US bonds and financed this scheme. Surprisingly, this scheme worked very well. There were Harvard grad MBA's on wall street designing really complex models and keeping the economy steaming ahead. People kept getting richer and corporations kept making record profits. For the first 9 months last year, ExxonMobil made a net profit in excess of $1,500 per second!

The events of past year have left many questioning whether this was the greatest Ponzi scheme ever. Were people in this country really rich or were they were just made to believe so? I will leave the fine economists at various Ivy league schools to ponder over this conundrum. The recession has definitely showed that US economy rules the world and the world is definitely more closely connected than we imagine. Think it this way - A regression model devised by few high IQ individuals in Wall St caused such upheavals that even my 70 year old grandma sitting 10,000 miles away is concerned for me. But for now, the pain is real, the job loss, the loss of 401 K wealth, foreclosures etc is terrible. With recovery not foreseen in 2009, I hope early 2010 gets better news. 2008 has definitely been a historic year and when we are old, we all can reflect on the events and pass fiscal wisdom to our grandkids.

This is a historic year for US in other ways too. The country is now commanded by a resolute leader, one of finest orators amongst contemporary politicians and someone who easily has the potential to become the greatest president of all time. President Obama's great ideas in the field of Energy, Education, Healthcare and Foreign policy stands in stark contrast to the previous administrations single pronged agenda of bombing all Islam nations. This country has only a short date of 8 years with this President, and unfortunately this tottering economy is threatening to consume most of it.


ss said...

When it comes to investing, for once I m glad my laziness and procastination paid off.. :)

totti said...

Fine economists at IVY leagues??? don't you have to know them before calling them Fine?? dog..did you watch the latest SP episode..the COON was amazing :)..please turn off word verification..pleasse....:)