Friday, October 24, 2008

Is Your Money Safe?

After watching in level-headed horror as the Dow has lost almost 40% of its weight over the past three weeks and reading/watching various analyses of what's going on, I've found myself watching CNBC for the past half hour or so hoping to find some more fine-grained analysis. I will give CNBC a shout out for following through on a better analysis than CNN, Paulson, and our political candidates. However, there is a continuing sense of sensationalizing look how bad --- Inc is doing. All your portfolio is belong to Pooh Bear Market. At the same time, there's another thread of we'll hit the bottom and everything is going to bounce day. What does all of this mean for the common person? What about the market in the short and long term?

Dude: Your portfolio is probably out as much as 15-30% depending on your exposure to risk. You probably should re-think retiring within the next five years unless you have an inventive investor working for you.
That old pension system is looking pretty good right now too, huh? Too bad no one offers it anymore after it sank the American Car. Of course, the government's pension safety net is doing alright since it's only purpose is to make money for pensions, not cars. Anyway, young dude - get ready to tighten your belt and prepare to start throwing more of your money into the market. It will bounce back, but prudence means you should wait a while to see who's going to fold and what they'll bring down with them. Poor dude - if you're in the job market, you should be looking to get out. You're about to be laid off. Start looking for education opportunities so you can live off student loans, increase your human capital, and graduate when the markets start to bounce back. Home-owners: If it's not your primary home, sell now before home prices get any lower, take the loss, and start looking to reinvest in markets when they start coming back; if it is your primary home don't sell if you can make payments, home prices will come back though no one knows how long it will take; if you can't float the payments, you have no choice but to take the hit and downgrade to a cheaper home. If you're in trouble with the bank, all I can say is good luck working that out.

Short-term Markets: Wall Street will hit a bottom, bounce back a bit, but will probably stay there for a good while as this liquidity crunch starts tossing fragile companies off the cliff. Volatility is about to be the name of the game. Right now it's systematic cutting losses. The general atmosphere will remain aloof as investors will worry over who will lose in this financial shortfall and will probably jump sky high when bad news hits vulnerable companies (some of them very big - i.e. GM, Ford). We will see more big names fall. This speculation over who will collapse, be taken over, or dismantled will drive the volatility keeping the market under-valued and under-capitalized. The length and depth of this volatility will really depend on the "fundamentals of the market." It will be the best test of McCain's temporarily infamous, but important claim. This is a good time to start getting back in through diversification as the market begins to bounce back. The global market is solid. Certain developing/emerging markets are solid and could be some of the biggest winners if they can find a way to raise capital in these tight times for the first world. As for mainstreet, things are going to look a lot different in the realm of local business as their credit and underlying consumer squeeze that preempted the housing crisis and will continue with recession cuts off any source of money. National chains will survive at a better rate. Retail and service sectors will do the worst.

Long Range: I refuse to put a schedule on the market, but over the next ten years, this recession will reorganize the economy. I think the most significant change will be the growing reorganization of capital oversees as some institutions in emerging economies will thrive in this capital shortage. Furthermore, as first world companies fall or get dismembered, companies in emerging markets will fill the gaps. More chinese computers! Less American-European-Asian Tigers centrality in the world system. Americans - start looking on the past century as the American Golden Age. It may well be over before my lifetime and total national wealth will decrease as a proportion of total global wealth. While this seems inevitable, the U.S will retain predominance, but it will continue to decrease until a global equilibrium is met. None of this is inevitable, but seems like the likely trend. Ultimately, we begin looking for the next recession - the next sector that will bring down the system for another reorganization. Hint: look out for what's too big for its britches, what's too expensive, what's too plentiful?

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