More on Oil Prices

Back in June, I referred to a WSJ article that pointed out the silver lining in high oil prices: consumers willing to pay a premium for more expensive vehicles such as hybrids that helped to offset the ongoing expense of $4 gasoline. If you can trim your fill-up costs by 30% over the life of the vehicle, you may be willing to pay a premium, upfront or over a few years of loan payments. (Unless you’re the type of person who budgets car payments in perpetuity, trading in every 24-36 months to drive the new hotness, in which case hybrids make zero financial sense. Of course, if you fall into this category, your gilded goose is cooked anyway; it’s increasingly unlikely you’ll get the 0% financing or lease deals that have sustained your auto choices up to 2008, the year of the auto industry collective aneurism.)

What a difference in four short months. Oil prices have plummeted, and even in my state, which apparently is among the more expensive places to buy gas, prices at the pump are way down (my last fill-up was under $3/gallon for 88 octane). Our family has a small surplus in our transportation budget, since we planned on $4 gasoline for the 800 miles I drive every month to get to and from work.

Today I offer a link to an article in contrast to the WSJ link I put up last June: The Motley Fool has a nice analysis of what the drop in oil means for the economy, at least in the immediate future. It’s good stuff, likely to be overlooked as we collectively fixate on the percentage drops in our retirement portfolios, but its effects are real, both on the pocketbook and the trade deficit.

Too bad it won’t last.

I don’t think anyone can predict where we’re headed in the equities and commodities markets, and that includes oil. That being said, there are some fundamental principles to remember: Energy consumption per capita is increasing . So is the capita; people keep having babies, especially in certain parts of the world. Those kids will have dramatically longer lifespans, educational opportunities, income, and commensurate energy needs compared to their parents’ generation. So the long-term need for energy is not going to diminish, short of some apocalyptic event (which the prudent among us plan for, but of course are unable to predict). We may be in a brief trough of energy demand, but it will pop back up once the credit markets have a chance to thaw and home inventories drain.

As for me, I’m planning on making it to 2011 in my current commute pattern. By then the local transit authority is planning on opening a light rail line on our side of the valley, and I can afford to drive the 3 miles to the station even if gas is $10 a gallon. In the original computer game Civilization (circa 1991), players got a fairly decent bonus for building mass transit systems in cities. Let’s hope that our local officials are big fans of the game, and keep the funding coming.

Then you got the flows*

Air flows, that is. All around my office. (Not that I’m complaining; I’m glad to have a job, and glad to finally be in my office as opposed to Cubicle A1, which was really just a corner of a conference room with one of those cubicle panels bolted to the wall; in case you were wondering, a 5 foot cube panel doesn’t block the sound from the conference room, even a little. But I digress.)

My building was probably constructed around the time I was born. It has that 70’s vibe: brown-tinted windows on the ground floor, narrow corridors, flickering fluorescent lights (think the early scenes of “Joe vs. the Volcano”), and, of course, terribly inefficient climate control. To wit: the building is always freezing. The other morning, I walked in at 6:35 and passed the air conditioning compressor merrily whirring along. Never mind that there was frost on the door handle; discounting the report from the radio that said it was 37 degrees downtown, and that you can always shave a few degrees from that for where we are. So why on earth would we need the air conditioning running?

When it was inaugurated, most of the second floor of our building wing was open space. In the intervening decades, they’ve carved that space up a number of different ways, but never rejiggered the HVAC properly to match the rooms. So the thermostat for our wing sits on the opposite side of the building through three of four walls. But why would even those people want their air conditioner running when it is barely above freezing outside? Well… they’re in the kitchen. The kitchen that fries up countless servings of grease-laden bacon, sausage and eggs every morning to feed the IT horde. This is followed by a hearty selection of lunch items, one of which is always “from the grill”. I’ve craned my neck into the kitchen a few times to see if I can spot the thermostat, but I haven’t located it yet; from the way the cold air blows in my office, I wouldn’t be surprised to learn that the thermostat is located inside the vent hood for the grill.

But that’s only half the airflow story. Like everyone else in this part of the building, I employ an electric space heater to counter the ever present artificial draft. I also have a large picture window in my office, which produces its own natural draft (it looks over the parking lot and the fenced lot beyond, which is currently packed with earth-moving equipment in various stages of decomposition). So I have the cold air coming down and the warm air coming up. And I’m in the middle, enjoying a nice lukewarm swirling breeze; I try to imagine it as the type of ocean breeze you’d get sitting on a beach as a cool front moves in from the Pacific, but I usually fail.

I’m told that I ain’t seen nothin’ yet, that October is pretty tame compared to January. One guy kept a thermometer at his desk last winter and charted the number of times the temperature dipped below fifty; quite a few ticks on that chart. Nice. So folks crank up their space heaters. Every once in a while, I’m told, the combined load pops a circuit or two and we all go dark. I’m considering bringing in some of those handwarmers that you snap to activate, and strapping them to my wrists to work throughout the day. That, and a big old fireman’s ax to store behind the door, in case the space heaters start an electrical fire that blocks my way to the stairs and I have to chop my way out.

*If you don’t recognize the line that titles this post, bring up this youtube link or google "Bubb Rubb".

Some observations of the economic crisis

Or, rather, some observations on the media’s coverage. For good or ill, I always have a browser up during the day to track the markets and news, and I listen to news radio on both sides of my commute. So here’s what I’ve noticed:

Dejected Traders. Someone’s gunning for a photography Pulitzer, trying to find the stock trader showing the most angst. Common poses include the one-handed eye-rub (pictured; photo from www.talkingproud.us), the exasperated heavenward glance, and head in hands on the desk. Are these people—either the traders or their assiduous photo-documentarians—for real? Why is this news? If it is, I fully expect to see photos of anguished ditch-diggers, farmers, massage therapists and IT managers in similar depressed stances when they encounter trouble at work (perhaps a nice spread of some angry Working Americans).

Working Americans. You didn’t hear this one very often prior to last month, but suddenly, “Working Americans” are coming out of the woodwork. They’re a swing voting bloc. They’re “the heart of America”, and, let’s not forget, they’re angry, so incredibly angry. I know there’s a sizeable portion of the population that is not employed, but the rest of us are not some homogenized blob of rage. Last I checked there was a wide range of income, opinion, outlook and political persuasion at my office, and neither my industry nor my town is known for much diversity. Journalists have a responsibility to use (or define) accurate terms when referring to slices of the population, so they should be clear. Rhetoric-laced campaign dispatches are heavy on stereotypes, and when the media uses the same terms, it shows laziness, ineptitude, or both.

Irritating Campaign Advisors. I know, this is news of the tautological—what do we really expect? But the economic teams from both presidential campaigns are driving me up the wall. To pick just one example, there’s the practice of continuous repetition of the candidates’ full names in every sentence. “Barack Obama will put $500 in every Working American’s pocket. That’s what Barack Obama will do. You can trust that Barack Obama will do what’s best for the American People, because Barack Obama has the vision to lead us out of this crisis.” (Newsflash: 1. It’s okay to use a pronoun every once in a while; give it a try sometime, and 2. Unless you say something incredibly stupid or controversial, you are not important enough to be quoted outside of the interview, so there will be no confusion about a remark taken out of context; really.)

Pandering and Finger-pointing. Again, what can we really expect? I imagine many NPR listeners are just waiting for the journalists to sock it to the conservative Wall Street types who agree to appear on their programs. “But don’t you think that this past month has been a vindication for those who have said all along that trickle-down economics is a flawed concept?” This has to be journalistic objectivity at its finest. Or perhaps it’s this one: “Should Obama have clamped down on Fannie and Freddie, instead of looking the other way, so that we wouldn’t be in this mess?” Yes, blame the guy who first came into office after the high-rise house of cards was already constructed, because he was too clueless to stop the renovation of the penthouse. There’s plenty of blame to go around.

I expect this nonsense to continue for some time to come, but that doesn’t mean I have to like it. In a way I feel a lot like the guy pictured at the top of the post, with the DJIA down again today over 700 points. At least when I rub my eyes wearily, the paparazzi aren’t there to preserve it for posterity.

Don't Panic

"In many of the more relaxed civilizations on the Outer Eastern Rim of the Galaxy, the 'Hitchiker's Guide' has already supplanted the great 'Encyclopedia Galactica' as the standard repository of all knowledge and wisdom, for though it has many omissions and contains much that is apocryphal, or at least wildly inaccurate, it scores over the older, more pedestrian work in two important respects. First, it is slightly cheaper; and second, it has the words 'DON'T PANIC' inscribed in large friendly letters on its cover."
--Douglas Adams, The Hitchhiker’s Guide to the Galaxy

I claim no originality in quoting Douglas Adams in reference to the current financial crisis, but then, not everyone reads the same sites I do, and you might have missed it. I think the message is a good one: financial decisions made in a mindset of panic are reactive, emotionally charged, and fraught with danger. (I thought of adding some more dire descriptions, but you get the idea.) The markets are ugly right now, and apt to get uglier regardless of the outcome of any bailout plan. But that doesn’t justify a rush to convert your entire retirement plan to Treasurys. So what to do about it?

Keeping the Faith
In our case, we have at least 30 years until retirement, so we really aren’t adjusting our investment strategy in light of current events. Our active 401K is still set to a drop the lion’s share of contributions into a set of no-load index mutual funds. (What this means is that these funds don’t charge sales commissions, just a small maintenance fee; they can do this because the fund is balanced by computer to hold portions of the companies that make up some of the major US and International stock indexes, so there isn’t some brilliant manager being paid millions to move our money in and out of stocks.)

We believe that the companies that comprise the major stock indexes are fundamentally sound. There is likely to be a period of slower growth, since the finance companies in these index funds will no longer be able to borrow so aggressively to swing their earnings, but the industries overall will continue to grow, and the indexes will track that. Unless there is a dramatic calamity that fundamentally alters the way the industrialized world does business, stocks will continue to go up over time. And if there is a dramatic calamity, say, something that devalues the dollar like a 1932 Deutschmark, the 1.5% we get by parking our retirement in a money market account will only result in a few more dollars in the wheelbarrow we cart down to the soup kitchen to pay for dinner.

Diversifying
So, we will keep chugging along with our index funds and hope the 2040 market is better than the 2008 market. I imagine folks like our parents and other boomer types are somewhat more concerned, enduring the equity haircut but lacking the long horizon to grow it back. My heart goes out to people like the widow profiled in the WSJ who had over 50% of her retirement income from Wachovia Bank dividends. We saw this with those at Enron too, who lost their entire retirement, and also those whose portfolios leaned too heavily toward the tech sector pre-2001. I saw one article asserting that the current crisis had shown that diversification as an investment strategy had failed, since everyone is losing. I think they miss the point. You don’t account for the possibility of 700 billion dollars in bad debt weighing down the economy without taking a system-wide shock. No business I’m aware of can function without borrowing. To paraphrase Churchill, diversification is the worst investment strategy, except for all the others that have been tried. We’ve settled on indexing (along with other allocations) as a low-maintenance, hands-off way to diversify our stock holdings, but there are many other ways to keep your portfolio diverse. If you don’t have a head for this kind of stuff, call your 401K administrator and ask to be enrolled in a preset mix of funds determined by your retirement date. They cost a little bit more but they will save you in the long run, since the guys running the funds will automatically balance your holdings as you get closer to retirement. Then if there’s another doozey market swoon like the current one right before you retire, hopefully most of your holdings will be in bonds rather than stocks.

Playing Defense

Stanley and Danko’s excellent Millionaire Next Door throws a nice sports metaphor into the world of personal finance. They write that people spend a lot of time focusing on offense, that is, bringing in as much money as possible, while neglecting defense, that is, controlling expenses. I’ve seen a few chicken-little articles this week highlighting the uncertain economic times and recommending, among other things:

• Canceling cable television

• Brown-bagging lunch at work

• Eating out less

• Buying generic groceries and health/beauty items

I wrote about implementing some of these practices last year as our adoption expenses loomed and we were in the wonderful world of dual housing payments. Now that we’re back to one housing payment, we see no reason to change any of the frugal habits we evolved to survive Great Financial Squeeze of 2007. (We did blow a fair amount at a recent dinner to a local seafood joint, but it was our first dinner out, sans one year-old, since April, so we felt entitled.) Consumption will rise to match (or exceed) income unless we fight it, one dollar at a time. The best way to play defense is to track expenses religiously, then run down and cross off anything that does not provide lasting value. I don’t mean to imply that anything not made of cast iron should be discarded. Vacations, dinners out, and flowers for the wife most certainly provide lasting value. It’s the battery-powered lawn gnomes and all that other good stuff you hadn’t planned on buying, yet somehow makes it to the Costco register, that needs to be chased down and eliminated.

In the Hitchhiker’s Guide, the protagonist sees the Earth being destroyed to make way for an intergalactic bypass. We clearly aren’t at that point yet, though the news pundits at times do sound like they’re spouting Vogon poetry; you just wish they’d shut up. Hopefully you’ll remember not to panic, even if you didn’t bring your towel.