Monday, October 17, 2011

On May 25, 2010 I wrote the following:

It’s all Greek to me

In a past column I discussed the crisis in Greece as a proxy for a wider problem in the world economy.  Current headlines bear out this prediction.  The point I was trying to make is that there is nothing unique about the Greek financial situation. We now see the Spanish Banks are in play soon to be followed by the Italians and Portuguese. The second point I believe bears repeating is that the same situation exists in the United States in re municipal finance.
The bond markets are skittish because 2008 has proven that we cannot know how and where the crisis will manifest itself. From January 2007 through the fall of 2008 the talking heads on TV assured us the “crises” was over about 18 times until finally they threw in the towel and declared things would be bad forever.

Currently money is flowing into short US Treasury bonds as a “safety” trade and there is selling pressure on the stock market.  What is an investor to do?

1.       Accept reality: the country is in a serious recession and even though there are some signs of life it is going to take time until the problem is solved and sustainable economic growth can resume.

2.       Understand that not everything about a recession is bad. The country has financial problems that need to addressed like run away employee benefits in the public sector, complete lack of regulatory oversight, no viable risk management on Wall Street and wasteful government spending at all levels. The country is ready to attack these issues in a real manner.  It will be difficult but necessary.

3.       Don’t Panic: Not every company or household experiences an economic downturn the same way or at the same time. There are investment opportunities created as companies respond to the economic challenges facing them.

4.       The US economy is a powerful force that continually reinvents itself. Look at the major companies which did not exist thirty years age (Dell, Microsoft, Google etc) and realize that there are opportunities every day.

5.       Take your time; the economic slowdown gives the investor more time to research investments and makes a rational decision, the smart investor will use it.

I do not mean to suggest that the economic pain is over. Many households and businesses are going through an extremely difficult time and it is going to be a while before it ends. Capitalism is a harsh system because the creation and destruction of enterprises does not happen in a vacuum and the impact on the people involved can serious. The smart investor will understand the current downturn is ongoing, significant and creates opportunity, all part of the economic cycle of capitalism.

Still valid 1 1/2 years later

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