The economic crisis and the bailout are confusing. What should I do with my 401(k)? Is my savings at risk? Is it time to put my money under the mattress?

Dock Treece and his son, Dock “Dock2” Treece, visited Toledo Free Press on Oct. 15 to answer these questions and more.

Dock2 recently joined his father’s business, Treece Investment Advisory Corp., as an investment adviser. The 21-year-old graduated from the University of Miami in Florida with a bachelor’s in business administration with a focus in finance.

Dock Treece and "Dock2" Treece

Toledo Free Press: Is money safe in the bank?

Dock Treece: I would say yes, and here is the reason. Part of this bailout process was that the government decided to guarantee bank deposits up to $250,000; they also guaranteed all the bank debt, and the latest thing I heard is they are going to guarantee all bank deposits.

Dock 2: I would disagree on the banks. I think there might be a couple of small failures, nothing like Lehman or J.P. Morgan, but things like Integrity in Atlanta and similar-sized banks, you might see a couple of more, I would think. But to your average Joe-Schmo on the street, $250,000 in guaranteed deposits is more than enough.

TFP: Where is your money not safe?

DT: The market is going to be volatile and it’s not that I think your money is unsafe, I think there is going to be a huge amount of volatility. Now, Dock and I disagree over whether or not the market is to the bottom. I happen to believe we are very near the bottom if not already there. He is inclined to believe we are going to go lower before we make a bottom. So, we have a disagreement there. I will use my 30 years of experience to trump his technical ability, but the volatility is going to be in the market.

But if I would have to say one place that I feel the average person has a risk of loss — it’s not a risk of losing money — it’s a risk of losing purchasing power. Because what I see the treasury and the Fed doing over a long period of time is very inflationary so people who seek safety may find themselves not earning enough to keep ahead of inflation.

DT2: My contention is that I think the days of playing the stock market are over. You can’t do today what people did in the late 90s with the tech bubble. … While we may or may not be at or past the bottom, the next five years are going to be rough. It is not going to be a straight shot back to the top. I would give your readers the same advice I have been trying to get my dad to give clients and anyone who talks with me. People need to make a decision and say, “For the next five years, I am going to ride it out or get out.” If you are going to need a substantial portion of your assets in the next five years, the stock market may not be the place for it.

TFP: What should a person do about his or her 401(k) and pension?

DT: Whatever gives them ability to sleep at night. A person has to be able to accept the volatility or the risk of what they are investing in and still sleep well. If where your money is invested is causing you to lose sleep, then you need to do something different. … Typically, what causes people to be very scared is when they have no plan of action. They don’t know what to expect; they have no plan of action so they are living in the moment, and the moment can be very scary.

DT2: I completely agree. The only thing I would add is that shopping for an investment adviser is like shopping for an investment … If you can’t tolerate your adviser’s strategy, shop around.

TFP: What if you are about to retire? What should you do right now?

DT: Being near retirement is no different than anybody else. You still have to keep your eye to the long term. People retiring today, if they are retiring in their mid-to-early 60s, are looking at living 30 years on their retirement income. To make short-term decisions based on money that you aren’t going to need for 25 or 30 years is not a good plan of action, in my opinion. You still have to have your eye on the long ball. You might want to take the money you are going to need for the next few years and put it where it is not volatile in CDs or short-term treasuries or something else, so you don’t have that volatility in that money you are gong to need short term. As Dock said, if you look five years out, we are going to be looking at a different world and you are going to have to prepare for that because you are going to live through it. That is one of things that I had to tell some people who have walked in and said, “I really want to retire.” I have had to say to them, “That is really not in your best interest.”

DT2: It sounds like you are trying to find, as we often refer to as, “a permanent solution for a temporary problem.” This market will recover, so it doesn’t matter what kind of situation someone is in. They need to approach these circumstances for what they are and know that they will be temporary. It may take some time for the market to work through them, but eventually it will. There is no point in someone, just because they are near retirement, to say, “That’s it, I am done with the market; I am never buying another stock, bond, mutual fund. I am putting my money in CDs and letting it sit there until I die.”

TFP: Who is to blame for the collapse on Wall Street?

DT: I don’t know if there is one entity that you can blame, but the cause of the problem was a credit crisis. We are experiencing in this country a credit crisis of unbelievable proportions. The amount of debt carried by individuals, companies and the government just became so huge that it couldn’t go on any longer. You had banks making loans to people that their cash flow wouldn’t support the loans. I mean, how do you ever expect a guy to pay his mortgage if going in his cash flow won’t support the payment? So, what we had, and I use the past tense, was a major credit crisis. But when you analyze debt, there are only three things you can do with it. You can pay it off; you can default, or the government can put it on its balance sheet and inflate it away over time.  This entire bailout was designed to move all of that bad debt — whether it was bad mortgage debt, credit card debt — auto loans, bank debt, they are moving it all under the balance sheet of the federal government and over time, the government is going to inflate it away. That is why I say that people who are not protecting themselves against inflation are going to regret it down the road.

TFP: Explain “inflate it away.”

DT: Let me give you an example of inflation. When I was in high school, I used to buy a Baby Ruth candy bar. I paid a nickel for that candy bar. Today, that candy bar is probably close to a dollar. What’s happened? That candy bar is the exact same weight, has the same amount of caramel, has the same amount of chocolate and has the same number of peanuts in it. The only thing they did was take out a little cardboard bottom that used to be in it because now it’s just in a single wrapper. So, what has changed? The value of the nickel? The nickel has no value anymore.

TFP: Are better times ahead and when?

DT: Absolutely. I don’t know when. Thirty years in this business tells me that things constantly change. We have been through some pretty serious times before; we will go through them again. While these seem very bad, they are actually equivalent to what we went through in 1973, 1974. There have been about 10 or 12 panics in the last 150 years in the stock market.

All of them have stopped their decline, somewhere between the 40 and 50 percent range. The only one that went over 50 was in 1932, where we were down to 53 percent. This market decline at its worst was down 43 or 44 percent. Most of them last anywhere from one year to about two years. We are 12 months into it this month because last week was the one-year anniversary that the market started down. So this one is a lot closer to the end than most people think they are, in my opinion. But I guess you could say, it is always darkest right before dawn.

TFP: What would have happened if we didn’t do the bailout?

DT: It would have been a mess … massive defaults across the board, and you would have had bank failures that you couldn’t even imagine. You would have been back in the middle of the 1930s.

DT2: It would have been the 1930s, but several times the scale. The 1930s didn’t have complex instruments like we have today. Something that has not even been addressed with this whole bailout issue is the derivatives market.

TFP: Will this economic crisis be the deciding factor in the November election?

DT: I don’t think it makes any difference. Well, let’s put it this way; it may cause someone to vote for one person or another, but in my opinion, neither of the people running have enough financial intelligence to balance their own checkbook. And so I don’t think it makes any difference which of them is elected from the standpoint of this economic crisis, but what will probably make a major difference is who they choose to surround themselves with, and if they surround themselves with some smart people who know what they are doing, I think we will come out on the other side just fine. If  they surround themselves with some idiots, it could drag out longer than it should.

DT2: If the average voter goes along your thinking, then most of them probably want to vote for Barack Obama. Why? Because he surrounded himself with the people who know exactly how to get us out of this crisis because they are the ones who put us in it. Two of three economic advisers are former CEOs for Fannie Mae and Freddie Mac. That fact is not widely known as it should be, and if anything is a deciding factor in the election, I would think that a lot of people would be interested in that fact.

TFP: What lessons should we take away from this and how should we proceed with our money in the future?

DT: I think probably the biggest lesson the average investor should take in is that Wall Street is not a one-way street. That you are going to have corrections, you are going to have major corrections like the one we are in now, and if you think you are going to buy anything and it’s a free ride forever … then you are seriously misleading yourselves about what happens in the investment world.

DT2: The average American, way more than average, probably 95 percent of Americans have been living way, way, way beyond their means for way, way, way too long. We have one of the lowest savings rates in the world in this country. We borrow for absolutely everything. We borrow for everyday purchases with credit card, and I think that it is not something that policy in Washington can change. It is something that American people need to get through their heads.

DT: That is probably far more important than most people understand. People today have tried to borrow their way into prosperity; you cannot borrow your way into prosperity; you can only save and invest your way into prosperity.

www.TreeceInvestments.com

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