I don't listen to Dave Ramsey's radio show nearly as much as I used to. But one evening a week ago I happened to catch a bit of it while driving in my car. The segment I caught made me smack my steering wheel in disgust.

Guess what? It had nothing to do with a caller paying Stupid Tax.

The following snippet is what set me off. It's one of Dave's self-voiced commercials; in this case, he's touting his investment ELPs (Endorsed Local Providers):



And then some more audio ballyhoo urging listeners to contact an ELP to learn "how all this investing stuff works."

Okay, guys. Are you ready? 'Cause here comes my rant.

Dave & Mutual Fund Returns

I very much appreciate Dave's contributions to the world of personal finance, at least when it comes to the basic stuff. His Baby Steps plan, as well as his noteworthy Total Money Makeover are my go-to references for folks who ask where to start.

However, Dave loves to talk about "10 or 12 percent annual returns" from "good growth-stock mutual funds" over time. His listeners and readers who have little or no exposure to other market viewpoints will likely take this as gospel, and fall in line with whatever urgings radiate from Dave's Tennessee headquarters.

In my opinion, consistent market returns of anywhere near that mark are going to be MIA for a long, long period of time.

As in decades.

If you're just now getting in the market for the first time, congrats. I guess.

However, if you're one of the unlucky folks who poured big bucks into the markets in 2000 and/or 2006-2007, the makeover your money is getting ain't nearly so pretty.

It's All About Debt

You'd think that a guy like Dave — who understands the horrible impact of debt on American households better than anyone — would grasp the overriding investment picture here: Namingly, that what "economic growth" we've had since the early 2000s has been built almost entirely by debt.

Yes, we've seen growth. And we've also seen debt layered on top of debt layered on top of more debt.

For some economists, this credit-growth situation reaches all the way back to the early 1980s. It then kicked into overdrive sometime the late 1990s. And then did so again in the early 2000s.

Maybe they're right. Maybe they're not.

In any case, now it's all blown up in our face. The piper, as they say, has his hand out. His lederhosen are riding up, and he's grumpy.

Suffice to say that payback is expected.

Look: We had a monstrous stock bubble go pop back in 2000 and 2001. That wasn't pleasant; however, it was necessary. Upside economic excesses must, at some point, balance out to the downside.

It is my contention that that bubble was never allowed to truly deflate. We then followed it up with a housing bubble of enormously larger proportion — and more dire consequence. Our innate fear of recessions and no-growth economic periods — as well as the tragic happenings of 2001 — meant that easy-money policies would be kept in place far too long, fighting a battle in which we'd have been better off giving up some ground.

We could have taken our medicine in the early 2000s, but did not.

Stock bubbles are yucky, sure, but housing bubbles? They're far more pervasive, and far more economically damaging when they go sploosh. It isn't so much about the houses, really, but about the debt behind them.

Because scary-huge amounts of it are required make a housing bubble go.

When banks and outside investors start taking (and/or hiding!) the multiples-of-$100k-per-home losses on the hundreds of thousands of properties they own ... well, that's a crapton of capital going, going, gone.

Balance sheets crater. Investors scramble for cover. Consumers yank in on the spending reins.

Banks, investment houses, retailers, and millions of consumers are introduced to insolvency. Politicians and regulatory agencies start looking for more ways to allow number-fudging. (Erase mark-to-market, anyone?)

What's that you say? The banks and funds were leveraged at 10 or 12 or 30 (or higher) to 1, so the losses became exponential?

And that when you count the potential losses on fancy derivatives and default swaps as companies and pensions and securities detonate, and commercial real estate starts to falter, the financial carnage gets even worse?

Oh.

Well, never mind. I'm sure the economy (and the markets) will rebound strongly anyway.

I mean, all we have to do is take the losses off the banks' balance sheets and move them to another part of the banks' balance sheets.

What — that might not work?

Okay. How about this: Take the banks' losses off their balance sheets entirely and dump them onto the taxpayer. (But make sure the taxpayer doesn't find how deep the hole is until years later. That's key.)

Genius. A recipe for economic success.

With the taxpayer (read: consumer) as Bagholder of First Resort, and with tax rates on an inevitable upward curve — remember that piper above? — I'm sure new market highs will be here any day now.

Or not.

Friends, the bad debt has got to be absorbed by someone. There are multi-trillions in losses here.

Someone is going to take them.

For years.

(Somebody find us another bubble. And quick.)

Markets and Pricing

I don't know if we've seen the bottom already ... or if we'll not see it until 2012 or later.

What I do know is that the price a stock or market was trading at in 2007 has zero bearing on what it's worth now. Or on what it'll be worth next year. Or the year after that.

In my world, for Dave to talk about buying a "good fund that's down fifty percent in value today" and that by doing so "you're basically buying shares at half price" is financial retardation of the highest order.

Bet he was saying similar stuff back in 2003, too.

Look: What value that stock or fund fell from means absolutely nothing. Well, except that you have a lot of underwater investors who'll be looking to get out on the way up.

Where it goes from here, however, means everything.

So you got lucky and missed out on that first fifty-percent loss. Fantastic. As long as this is the bottom, you're golden.

Same thing applied to those (formerly) lucky 2003 "We caught the bottom!" investors.

Then "six years later" happened. The papering-over of bad debts with more and bigger debts, all in the name of "growth" ... it sort of blew up in our face, didn't it?

Oops.

So answer this: From a macro standpoint, are we approaching this crisis any differently?

I would answer NO. Econonomic and political leaders are espousing "loosened credit" and "stimulus spending" as our salvations at every turn.

The road we're on scares me.

No, actually, it terrifies me.

In the midst of all this, I'd say I'm surprised that Dave's taking the investing stance he is. Except that I'm not.

So Why Does Dave Tout This?

Because he is, as poker parlance might assert, now "all in."

He's talked up these "10 or 12 percent annual returns" from "good mutual funds" ever since I first heard him, and Ramsey can't back off now. He's committed, and his listeners (er, believers) are committed — even though recent market performance points to stiff losses for all but the longest of long-term fund investors.

And even the long-term guys — think Boomers here — whose asset and risk allocation was, uh, less than optimal?

They're now finding that long-term buy-and-hold maybe only works when you're fortunate enough to retire well ahead of a deflationary debt collapse.

With the S&P 500 index sitting at levels which match the lows of twelve years prior, well, that's a lot of underwater 401(k)s, pensions, and everything else.

Of course Dave is exhorting folks to get in the market. He now has to do so — in order to try and save face.

For most investors, I imagine, those touted double-digit returns haven't come from any of their 2003 stock-fund investments. Or their 2002 fund investments. Or their 2001 fund investments. Or ...

Well, you get the picture. We'll see how this goes.

As a guy who's been almost entirely in cash since January 2008, I'm torn. I'm torn like you can't imagine.

What's holding me back? At "half off," why haven't I started dipping back in the market?

Because I don't think taking an already debt-loaded society and piling on more debt is the answer.

Apparently, I'm the only guy alive who thinks this way.

Labels: Dave Ramsey, Investing