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.

 

Bailouts, Bankruptcies and Bloated Blather

Well, it's been quite a week in the money world. Bailouts, bankruptcies and bloated blather dominated the news. The talking heads on cable went wild on the subject, while each of the presidential candidates were especially inane in their varying pronouncements during the week.

Even though the seeds of today's crisis may have been sown well before they took over the reigns of government, who would have thought that a Republican administration would turn our financial system into one that emulates France? The details are still being worked out, but the rough estimate is that the overall government commitment to staunch the bleeding for awhile is approximately $1 Trillion (yup, that's Trillion with a capital T). And I say for "awhile" because no one really knows the full extent of the cost that will ultimately be incurred. History suggests that the amount the government will commit will probably rise substantially.

The basic cause of the financial meltdown that almost occurred this week was a lack of trust. Namely, trust that if I did a transaction with you, you would be around to honor your part of the bargain. In this environment, sane people (and organizations) simply stop doing business with the untrusted party. If nobody trusts anyone, all transactions cease. In the financial world, that's called Armageddon.

The lack of trust all fundamentally stems from the home mortgage debacle, in which scads of money was loaned to people who, put simply and crudely, just couldn't pay it back. Whether it's the creative capitalists on Wall Street who packaged the mortgages into ever more arcane securities sold around the world to organizations stretching for higher yields; or the unscrupulous mortgage banks and brokers who pushed money on hapless people who suddenly and unquestioning were able to live in homes valued at more than their wildest dreams; or the crazy accountants who demanded that the banks holding the mortgage-backed securities value them at unreasonably low prices; or the credit rating agencies who suddenly woke up to discover that their AAA ratings were just a tad overblown; or the government regulators who had no clue what to regulate; or lobbyists who somehow forced the government to bend over in an unseemly manner; or any other organization I've neglected to mention who had the slightest participation in creating the real estate bubble, the problem is real and darn serious.

So, at this point, it seems to me that Treasury Secretary Paulson and Fed Chairman Bernake, flying blind and having properly scared the pants off of the President and the leaders of Congress, are proposing some sensible actions selected from a steaming pile of rather unsavory options. Where and how it will end, no one knows. In this environment, the conventional wisdom still applies: just stay diversified. It's likely, given the strength of the US economy, that this will work out the best through the various ups and downs that are sure to follow.

By the way, it's really interesting that, even in today's highly sophisticated society, most financial transactions still take place based on just trusting the other person's voice (or mouse click) in the transaction. That's the way business has been done since money was invented (except for the mouse click part).