Surviving the Financial Nuclear Winter 36 comments
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Everyone has an opinion, yet nobody knows anything (myself included) about what the future holds for the U.S. economy, the global economy and the true depth of the impact of the financial markets crisis. We all know that what happens on Wall Street eventually hits the real economy, and the data bear this out - rapidly rising jobless claims, weaker consumer sentiment, poor business sentiment, sharply lower housing prices, etc.
And higher levels of unemployment, coupled with falling real asset prices, means that consumption, by definition, must fall. Falling consumption will hurt most companies, durables companies worse than non-durables, luxury retailers worse than supermarket chains and health care providers, etc. And none of this says anything about the consumers' access to credit, which will likely be crimped for the foreseeable future. What this means for stock prices, and whether enough bad news is already reflected in current stock prices, is up for debate.
The question many are asking, my friend Fred included, is: Should we buy either single stocks or the broad market now, because the recent plunge has made certain companies and/or market indices cheap? And my response is: For most people, this is the wrong question. Because if there is one thing I do know, nobody can predict the future.
To survive what could be a multi-year recession, a nuclear winter of sorts, people at all levels of the wealth spectrum need to get the big things right. And what, exactly, are those things?
- Liquidity: Do you have at least a few years' worth of ready cash, in case the job is lost or prices of key household items unexpectedly skyrocket?
- Volatility: Can you live with your financial profile, understanding that the worst of the economic downturn might still lie ahead?
- Stability: Do you have expenses coming up in the intermediate term that could materially impact your financial picture, should the recession last longer than anyone expects, e.g., tuition expenses, new car, loan amortization payments, etc.?
If you are very wealthy, very liquid and have mad money to trade, then go for it. Otherwise, don't take a view on the current environment. Notwithstanding TARP, the new plans to buy commercial paper from issuers, and the actions taken by European leaders to prop up their ailing financial sector, we could be in for several years of weak economic conditions, as the excesses of the first eight years of this decade are painfully unwound. What the U.S. Government bail-out means for the dollar is also highly uncertain, as it would be logical for the dollar to plummet as the Treasury prints money to pay for the bank rescue, the war in Iraq, and everything else. But with Europe on the decline and Asia getting smashed, the dollar may hold up better than anyone could have expected - myself included - only a few months ago.
I am not saying to sell all your equities. Not at all. But I am suggesting that the lion's share of most households' time should be spent answering the three questions I've listed above, and not on whether Google is a buy at $350. Because while the answer might be yes, you'd be missing the forest for the trees.
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This article has 36 comments:
Living within your means and saving as much as you can is always a good plan.
"Invest for the long term" is fraught with potential danger if not applied prudently. Those who bought stocks in mid-1929 had to wait until the late 1940s to break even.
Application of SmartStop's advice is probably a good idea too. Avoid big losses whenever possible and remember that losses can show up in unexpected places. WaMu bondholders probably thought that they were 'safe' but they wound up losing every cent they invested thanks to the FDIC not being able to wait a week to see if a bailout would pass.
But hey, JPM needed more depositors and branches for their new retail banking operation, so tough doo-doo on them.
Nobody is going to watch out for your money like you will. If you ignore that responsibility, you will have no one but yourself to blame for the consequences.
"Everyone has an opinion, yet nobody knows anything (myself included) about what the future holds for the U.S. economy"
The problem, of course, is that you follow it up with information that contradicts your basic premise.
Nobody does know what the future holds. Everyone from Princeton University professors to Nobel Prize winning economists know what is on the other side of the abyss when (some say if) we crawl out of it.
There is one absolute certainty, based on what's already occurred, the economic landscape globally will be altered significantly, perhaps forever. What that landscape will look like from the perspective of investing is anyones' guess.
Nobody knows. As I heard Bernanke's crackling voice full of fear this afternoon, it became apparent that he doesn't even know where we are headed. Models that we should have been at "bottom" days ago have been shattered.
If anybody here or on CNBC, CNN, the WSJ, etc. try to tell you differently, they are selling you investments in pure BS. It's the only thing that's been trading up recently.
CNBC is a major problem - too many long-only managers who have to stay in the market talking their declining books. I love being an individual investor, not having to play that stupid game.
We have a long way to go, but once people start going to jail for this the public will start feeling better.
One question: If theses banks, etc.. lost billions of dollars, where did all the $$$ go?
As a working professional decades away from retirement, I want all these bogus assets priced correctly so that uncertainty of true "value" is minimized.
I'm already well prepared for a serious recession and am more concerned with the long term "honest market" rather than the bull$hit we've Ben Fed.
Now back it all up with a central bank. Smell economic disaster?
Look for a continued big moves down in EU stock prices. Worse will be bank share prices. By Friday several EU banks will taken over by thier goverments and the smaller ones will go bust.
I used to .... now I only have 6 months.
I sold out just before the financial Armeggedon happened, and am now 92.5% cash.
I have no clue when it'll be time to get back in. In the meantime, I'm getting a little bit of interest, and getting a great return just by not losing.
I got lucky with the timing of my sale; if I'd really been able to predict what was going to happen, I would have shorted everything in sight!
Its not going to be pretty when the short-sale ban expires!
Hundreds of stocks are now at the "stupid level". Those who go out now and sell everything they own and borrow to the hilt will prevail with breathtaking returns over the long run. Take the chance... don't follow the panic herd.
As it is implemented (let's hope that the Treasury will move quickly) ,the impact of the stimulus will be obvious and effective.
In the meantime ,the FED should get ahead of the curve and ease aggressively(50bps -100bps)with or without the coordination from the other Central Banks.
Yes,the dollar is getting stronger and will maintain that directional trend because of the massive global inflows(flight to quality),in recognition of the reaction time from the Treasury ,the FED ,and the Congress in addressing the economic/monetary dislocation.
Europe ,Emerging market countries and Asia still have a difficult time facing the real issues.
These mega dollar inflows will shortly find their way into the dollar denominated assets contributing to the economic/monetary rebound.
Multi year recession ?not likely. By the Christmas time we should have economic/monetary stability.By the second half of 2005 we should have 5% GDP expansion.
On June 3 ,2005 in an interview with Mark Gilbert (Bloomberg-London),I have said" All of the economic forces point to a dramatic slowdown ahead which will turn into a serious recession,with almost no tools left to abort that possibility".
Back then the universe was in awe of the great economic expansion.
Now that the investors are under the influence of cerebral paralysis ,I believe that the worst is over and the critical issues are being addressed effectively.
Other economic zones are heading for an Armageddon(economic),b... that will help the dollar and our economy(assets)-flight to quality.
Liquidating equties now to raise the cash? In an incremental time the rebound will be convincing.
Let's wait for tomorrow to read another fairy tale so that the investors could become more paranoid.
I heard you the first time.
a bunch of blithering idiots here.
After 9/11 they said the world would never be the same again. Yet, as we've seen, it's been just more of the same. (Oh no, am I quoting Obama?) So when people say that the world would never be the same again after this financial crises.... phew. I'm not worried. In a couple years, people will be saying, what financial crises? The world will not be the same tomorrow as it was yesterday. We'll have a recessions for a few years. But we've had recessions before. This recession will be slightly different than recessions before, but it's still just a recession.
Second, I am sick and tired of people saying how everything is oh-so-cheap these days. Yeah, cheap in a fake economy that we had, and that's like saying all those dot coms that went bust were cheap in early 2001. We've had insane multiples and it's going to be A WHILE (decades) before we have those multiples again. Multiples are like leverage. All based on confidence. "Trust me. One day." Trust is gone. For a while. It's gonna have to be earned from scratch.
So enough with the "everything is so cheap now." No, everything is priced about right now. We have to go down another 10% on the Dow before things become cheap.
I probably will raise some cash soon from my shrunken equity positions, but won't be terribly surprised later if that turns out to have been an ideal entry point for new buyers.
The last month or so has taught me to be a little more humble about my opinions, and I suspect that I am not alone in that.
I'd like to share a response to an issue someone raised directly on my blog to this post.
The issue: "I think the viewpoint here is of the very affluent. Sure, everyone should sit on several years of cash because the market could continue to plummet. This is a bit circular. Similarly, if everyone ran a grocery store, we wouldn't have to worry about food supplies. The real question is how to allocate resources, and this is basically saying "stash your cash if you are really affluent."
My response: "...point taken, but the points are directionally similar regardless of how much money you have. The points are (1) conserve cash; (2) have an asset allocation you can psychologically live with during difficult, volatile times; and (3) being forward-looking in your financial planning to factor this into your cash conservation and asset allocation decisions. Is this elitist, and only applicable to the affluent? I don't think so. From an asset allocation standpoint, if you have little cushion and a portfolio of stocks outside of an IRA or 401k, then I'd see them to build a cash cushion. If you are fortunate enough to have 2+ years of cash, then I'd suggest your asset allocation outside of your cushion could be in other asset types like stocks. But if you have less than two years of cash, then I personally can't see why an individual would hold a long stock portfolio outside of a retirement account. Hopefully this gives you the specificity you were looking for."
I hope you find this helpful.
Roger
Many multi-million dollar bullion delivery accounts were established and over $138,000,000 dollars were transferred from banks into gold and silver. The average Joe has figured that he needs precious metals and has been over 2/3rds of the firms business.
The amount of metal being shipped is taxing the USPS Registered Mail system and is proof that we are in an American financial crisis!
This information is not to solicit gold sales but to inform the public that it is a reality that billions of dollars went into metals in just 5 weeks. All our banks will fail if this continues!
To Gabe Borenstein: Flight to quality? You are referring to the US dollar as quality, or are you being sarcastic? I don't think anyone would call the US dollar quality right now. The only thing the Fed knows how to do is print money and devalue the dollar. The crisis is being addressed effectively? What planet are you on? We pass this $850 billion bailout bill which has no more effect at loosening credit than the trillion already thrown at it, the Fed sees this and starts the printing press further devaluing the dollar, and you want us out of foreign markets and into this market and US dollars? I guess you are entitled to your opinion, but I think you have it about as perfectly opposite of the reality as you possibly could.
To Nikola: I'm with you on the everything is so cheap talk. I think with the economic problems we are facing, the crap on balance sheets that is being valued as something, the government trying to prop up housing that needs to be devalued to more true reflections of value, we may be only approaching fair value on the market as a whole. However, when markets/economies are bad and the outlook is gloomy stocks and markets tend to trade below fair value quite a bit. In my opinion, the market will be trading well below fair value minus 10% before there is any meaningful uptrend. If the government and Fed continue as they have recently, we have a LOT more than two years before people will have forgotten this. Right now it looks alot more like mid-1929, like Smarty_pants above said.
There is much pain ahead for a very large percentage of the US population. Due to unforeseen things that happened to my family with really bad timing (around 911 and right after the tech crash), I could be in that group. No we didnt lose a penny in tech stocks or buy unaffordable, overvalued housing with loose credit. We did have a tragedy that cost us our home, my business and all our assets.
It's the people like us, that recently had misfortune, and have spent the last 4-5 years trying to work our way out of that misfortune that are in pretty dire staits now. Buying into this market, when our government and the Fed are making the same kind of mistakes that made the depression a Great Depression I don't believe is a great idea. I'm in agreement that the companies (THAT SURVIVE) may not break even on their current share price for a VERY long time.
Until our leaders and yes, the people too, accept the causes of this chaos, and we become a nation of savers and producers again, I really don't see things improving meaningfully.
Roger has made a good point that after survival is taken care of, and we have lots of spare money, then proceed to trade by all means.
As I've said... The only stock that is rising each day is BS.
Quote:
Roy P.
Oct 08 12:03 AM
nobody knows anything, yet nobody can just keep his mouth shut....
a bunch of blithering idiots here.
How do you know they haven't failed already? Would you expect Bush, the Fed or Treasury to tell you?
For the rest of us mere mortals who wish we were clairvoyant and try to figure out whether our portfolios will ever go black again, a few years of cash is quite an interesting idea!