You Can't Solve the World's Problems with Your Portfolio

Lots of chatter here and there about problems with Fannie (FNM) and Freddie (FRE) or, more correctly, an escalation of problems and a question of solvency.

I have to believe that the fear exceeds the reality; that is my starting point going in. Of course I could be wrong, and in the context of managing client portfolios, being right, or wrong, it doesn't really matter.

For now it makes sense to be defensively postured (as I've been writing) and if things get worse I would add more defense as opposed to sell some offense (offense as defined by the stocks held).

To the topic at hand, an outright failure at Fannie, Freddie or both would greatly increase the chance that "normal bear market" turns out to be wrong. In the WSJ article linked to above, there is a mention of increasing the loan limits for the GSEs. I remember when that happened I had the feeling that this was not a good thing (I did not write about it, so no credibility on that point).

There is now plenty of opinion out there that says the GSEs are de facto insolvent. Of course Jimmy Rogers has been saying this, essentially, for many years now.

Were they to fail, and here I'm not sure what that would mean (shareholder equity goes to zero, the gubment bails out the debt one way or another, loan creation is further impeded, as one of many possible scenarios?) I would expect financials to take another big tumble, the dollar to take a big tumble, then one way or another the dollar would have to be defended (wouldn't it?) which would lead to higher rates.

Of course I have been wrong (or early?) about interest rates for a while; I thought they would have started to normalize a long time ago. If the Fed were to raise their rate but the market, fearing slowdown, kept the rest of the curve low, then the dollar would have problems. The Bernanke Fed has done a couple out-of-the-box things, so maybe it could pull another rabbit out of its hat in that scenario.

I don't know how right or wrong any of this will be, and again, it does not matter. Keeping things very simple, if there is call to be defensive I would be defensive. The details of why there is a call to be defensive are less important.

These sorts of things of course matter to the country and society but you can't solve the world's problems with your portfolio. Protecting of assets is paramount.

Comments

[MarvinMBA:]

We as a country are going thru what I call Economic Dislocations. These are mathematically called discontinuities and convential linear thinking no longer applies. We might be closer to Depression than a recovery from Recession and a transient analysis of whats been going on with the financial sector and many economic indicators could support this view.

2008 Jul 10 01:38 PM

[Larry House:]

I just dont't get this author. You say it doesn't matter in handling other people's money if you are right or wrong? It sure would matter to me! By the way, being early is deadly in this market. I know. Your second paragraph is a real gem of double speak.

2008 Jul 10 02:39 PM

[razorfangius:]

Given the title, I was expecting this piece to be about the fad for wind and solar stocks and the 'choosing by liking' heuristic ...

2008 Jul 10 03:08 PM

[Jason Rines...:]

Was expecting someone else to get it that we as investors may have to fund responsible candidates outside of the RNC or DNC ivory tower sponsorship crowd. That is investing outside of our portfolio. Wishy washy on where we go from here is called 'I DONT HAVE A SOLUTION TO OFFER'. I am hedging my bets beyond a portfolio, it's called bullion, food supply, water and ammo. IF and I say IF the dollar and entire U.S. financial system collapses, looters who had it good for many years will not be too friendly. Best to hope for the best and prepare for the worst.

2008 Jul 10 04:01 PM

[Roger Nusbaum:]

Larry H, I've had clients long SDS and with a cash level for many months (check the archives). what matters is knowing the market was in trouble not being the guy who ends up correctly quantifying the crisis.

razorfangius, SA editors choose the titles.

2008 Jul 10 10:33 PM

[Roger Nusbaum:]

make that HIGH cash level

2008 Jul 10 10:34 PM

[theoilyboy:]

How could anybody be in anything but double short EFT's now like SKF or SRS? Why is it so hard to believe that things are going to get bad before they get better? There is so much trash to clean up.

2008 Jul 11 12:00 AM