Back before money, barter was both intuitive and honest. The fundamental point, lost once money and many financial tools came along, was simple. You cannot trade unless you have something to give up in exchange.
We lose track of that fundamental when money, credit and investments enter the picture. Monthly billings to a credit card become nearly invisible. The connection to time and skill and capital are lost.
Debit and credit cards disconnect our intuition. Cards are not money and we lose track. Money is not something tangible that you own or a service you can provide and are willing to trade. Cards and money mean you lose insight two ways.
I have a real estate broker tell me that people do not really think about the price of a house when they buy it, they think about the monthly payment and how that fits into their cash flow. Essentially, they buy the monthly payment and get the house as part of the deal.
That has risk.
Few have considered what happens to the monthly payment when the rates return to something more normal. Whatever normal means.
To assume the rates will stay as they are assumes that investors will be willing to take negligible returns indefinitely. Investors may be crazy sometimes, but they are not stupid. No one will give up something today for the nearly same something years in the future. They do it now because of uncertainty in the world. That makes you wonder how smart it is for others to take on significant obligations.
Bonds and bank deposits look safer now. Return of capital matters more than return on capital. That never lasts. The great reversal from bonds to equity investments could happen any time.
We are in transition between a financial world that was somewhat opaque but based on simple ideas, to one that is based on complexity and financially engineered structures. No one understood Collateralized Debt Obligations (CDO) in 2008.
Strangely, they behaved differently than the engineers expected. Like new airplanes can misbehave, except no one hired a test pilot to check them out before production and sale.
People inherently mistrust complexity, probably because they have been burned before. The simple fact is that financial products must make sense. If you cannot see the sense, the providers may have wished that to happen. A warning.
Warren Buffett does not invest in high tech companies because he claims not to understand their business plans and markets. Unlike Mr. Buffett, many of us invest in the marketing story not the substance. That can be very costly.
As Dilbert recently said, “Marketing is only legal because it doesn’t work most of the time.” Try not to be part of the “some of the time” when it does work. Be sure you know what you get for the money that represents your efforts and skill.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.