Tuesday, March 10, 2009

Alphabet Soup Spells Blah

I'm getting lost. There's old programs like the FDIC insurance program to protect bank depositors. There's the new Obama Stimulus Package. And then there's TARP, TALF, EIEIO (no, wait, that's a song from kindergarten), along with seemingly dozens of other new catchy-named programs emanating from the nation's capital. All are intended to reverse the economy from its current downward death spiral.
Yesterday, Warren Buffett was pontificating on CNBC that the economy had "fallen off a cliff" but would eventually recover. Well, duh ... yeah, even Jimmy Buffett could have said that.
There's universal agreement that the stock market is a leading economic indicator. It almost always starts its recovery six months prior to economic upturns. So the question that I would have liked Warren to answer is "When will the recovery take place?". Once we know that magic date, a monkey could throw darts at the stock market listings and pick winners, just as long as he tosses those darts six months earlier.
An old stock market adage is: "They don't ring a bell at the bottom (or top)". This is really too bad; it would make things a whole lot easier. As I write this, the stock market has just rallied for the first time in weeks. Is this the bottom or just a "dead cat bounce"? Who knows? Check back in several years and we'll be able to figure it out.
So what's the average investor to do? Just listen to the experts and when you think that enough of them agree on a common course of action, immediately do the opposite.
Failing that sure-fire piece of advice, it seems to me that the Obama Administration and Congress can help jump-start the economy and the stock market with one simple action above all others. Reduce or eliminate the taxes on dividends and long term capital gains. This single action will pump huge amounts of cash into start-ups and the stock market, revitalizing the economy and creating jobs.  Obama is scaring the bejesus out of potential investors worldwide because he's talking about raising these taxes instead of lowering them.
One other thing. It might be a good idea to hold gold or some other hard assets in your portfolio. While I know that the current concern is deflation, at some point, the massive creation of money is going to set off a jumbo-sized round of inflation.
No! I don't have any idea when that magic date will occur. I sure wish I did.


Greenleaf said...

I just wanted to make one comment on the AIG issue which seems to be at the center of public rage these days, and for good reason. My comment is not really about AIG though.

I have noticed that some other firms, such as Goldman Sachs, have said they want to pay back the TARP money so as to not have to restrict executive pay. They thus seem to be acting as if they did not really need the bailout. Well, first of all, seems that they did, so any entity pretending not to have needed the money could arguably be subject to pay restrictions even after TARP money is paid back (in my opinion). And second, all of the firms who were paid by AIG with TARP money AIG received really received additional TARP money indirectly. It is as if the TARP money was really injected into the financial system through AIG. Had the government not stepped in and given these monies to AIG, such firms as Goldman would have taken big losses on transactions that would have bounced! I kind of can't believe I haven't heard this comment in the financial press. Maybe I just missed it.

Incontrovertible said...

Your analysis of the TARP funds funneling through AIG to Goldman Sachs, et
al, is correct. The fact that they want to pay the money back is nothing but
good, IMHO.

When you think about the huge amount of money AIG owed these firms, you can
see how the whole monetary system would have frozen up without government
action. No firm in their right mind would trust any other counterparty going

Letting Lehman go kaput was a real mistake. But then letting AIG go as well could have spelled the end of the financial system.