For the fourth time in two decades, most Americans are facing growing financial hardship due to another economic shock. In 2001 it was the Dotcom Bubble and 9/11. In 2008 it was the Housing Bubble. In 2020, we had the Covid pandemic and the ensuing lockdowns. Now in 2022, we’re starting to feel the side effects of the medicine we gave our economy during the lockdowns.
After economies all over the world were forced to shut down and trillions of dollars were packaged for relief as a solution, we’re seeing both supply-side and demand-side inflation. Interest rates have been hiked at the fastest rate in decades to combat sustained inflation, the stock and bond markets are in disarray, and everyone is predicting a 2023 recession (if we aren’t already in one).
While the cause is different from the last time, (and different from the time before that, too) the foundation of America’s household and corporate balance sheets are once more revealed to be built on shaky ground. Many professionals and billion-dollar companies have shown to be mere weeks away from complete financial insolvency during the pandemic. Relief packages for many industries were necessary to keep them from being completely washed out. Restaurants, most owned as small businesses, can’t expect to weather months-long periods of demand destruction or labor cost spikes unaided. However, massive corporations should be on a more stable footing.
Take for example the U.S. airline industry. Over the past decade, the major airlines have collectively used the vast majority of their free cash flow (96% as reported by Bloomberg) not to invest in new equipment, pay down debt, or even pad their balance sheet. Instead, they bought back their stock which has greatly enriched shareholders but left the airlines at the mercy of COVID-induced demand changes. The U.S. taxpayers were on the hook for bailouts due to corporate mismanagement and short-sighted financial governance. Too many corporations essentially live paycheck to paycheck.
Many factors converged during the pandemic to supercharge risky investing including, the lack of sports, quarantines, government relief checks, the internet, and more. Not to say that risky investing didn’t exist before, but never on the scale we have seen lately. 12-year-olds with a Robinhood account YOLOing into stocks live on TikTok wasn’t a normal thing a few years ago. Dave Portnoy of Barstool Sports picking ticker symbols out of a bag of Scrabble letters wasn’t watched and mirrored by millions of people prior to 2020. These activities are part of the public consciousness partly due to access and democratization, but also due to a lack of proper financial education. If you don’t know it's wrong, it can feel like a “1 secret trick” to suddenly getting wealthy. Investing and managing your finances prudently is boring. Trying to teach people the right way during a free money-fueled pandemic carnival is impossible because it doesn’t promise immediate upside.
As precarious as risky stock investing can be, the real dangers of stunted financial literacy come from the lowlifes who prey on people who just don’t know any better. The amount of fraud, scamming, and financial theft has skyrocketed in the past couple of years because of the amount of money sloshing around the world. When people have a lack of understanding, “too good to be true” doesn’t necessarily apply if it all seems like voodoo magic within some financial gobbledygook. When the inevitable downturn or rugpull happens, people can be ruined. The people that have access to advisors, professional advice, and other support are both least likely to lose and most likely to be able to financially survive. It is the people who can afford to lose the least, that end up losing most often.
While investors are not to blame here for being the victims of fraud or misinformation, they could know better if we dedicate ourselves, our schools, and our culture to financial literacy. The widespread lack of financial literacy means that people like Grant Cardone or Kim Kardashian can leverage their position as media darlings to push unsuitable or borderline illegal investments to unsuspecting individuals. “Gurus” the internet over can promise and promote ridiculous financial schemes to enrich themselves at the expense of others. Instagram is full of examples of savvy fraudsters taking advantage of naïve and hopeful people who are just trying to make some extra money. These “gurus” depend on the fact that their audience doesn’t have the knowledge to see through their real estate, day trading, or cryptocurrency schemes.