I'm sorry I have not posted much the last few days. I've been up to my ears in financial documents, papers, calls, taking notes, and trying to learn as much as I can about the current situation.
Anyone with questions about how to invest their money or what to do now should consult a financial adviser. If you have money put away for your kids college tuition, or retirement, I cannot give you any advice as to where to put it.
But I can explain a little about what has been going on, and here it is...
We have over the last week, entered a new era in finance. In fact, a Senior VP at JP Morgan stated, it quite literally changed over night, from Sunday to Monday, with the announcement of Morgan Stanley and Goldman Sachs, a bell tolled and the investment banking industry died.
While markers have been on the horizon for some time- stagflation- a situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time- T bill rates at historic lows not seen since the 1930's, reverse return cures, over consumption, over valued dollar, no savings, high debt, and outrageous military spending- we seem to all be caught by surprise at this collapse.
This is not a time to spend more, as our esteemed president is urging us to do, but to realize that current price to earnings ratios have dropped to an average of 20. The historical average is 16 and in order to end the bear market we've been in since 2000, we will need to see them drop to mid to high single digits.
Simply put, that means there is still a long way to go.
While a traditional response is to move towards value managers, with P/E ratios continuing to decline, be very careful. It is going to be a fraught market- it will be heard to determine when is something undervalued and a great buy and when will it become worthless.
Like Lehman's. Bears Stearns. AIG. We're not talking about quirky little micro cap companies.
Some mega cap companies have money on the balance sheets and are using it to buy back stocks- Nike, HP, Microsoft all did this on Monday in response to the fed's bailout plan. This is an extremely defensive position.
The Fed has tried to come in and save the day with a proposed massive 700 billion loan repurchase program, whipped up over night, much like the decision to nationalize AIG was. The bailout creates more questions than it gives answers. Without getting into the nitty gritty, simply put it does not identify a pricing mechanism for the buy back. While its intention is to bring liquidity back to banks, it may in fact, accelerate losses in the very banks they are trying to help.
I'm not even going to discuss the absurd golden parachutes tucked into the bailout. The excuse is that the high level of management must be retained in the companies in order to keep them running- the same management team that in fact ran the them into the ground. As Rachel Maddow said, this is like asking a 7 year-old to watch over your 6 year-old and his mother lode of candy. When you get home, the 6 yr old has eaten it all, and the 7 yr old says, "You need more candy." (thanks Sue!)
Or telling Americans to go spend more.
We have to recognize our economy and financial systems are in extreme distress. This is not a time to sit by and hope for the best. It is time to start saving money. Remember that? When you didn't use credit cards but actually saved money up to buy something you wanted? Paid cash?
This is a time to live simply. Going to Crate and Barrel to buy candles is not living simply. Neither is, as I explained to my son last night, having three pairs of Nike sneakers because you want them in different colors.
It's about making due with what you have and since most Americans are living in obscene amounts of debt from over consuming, you should all have enough stuff to last for a while. When credit card companies charge more than loan sharks, it's time to say enough.
Enough with the war. It has not paid for itself. There is no oil revenue coming into our coffers. We are not liberating anyone. All we have to show for our years of war are dead soldiers, continued chaos and an unstable government unwilling to stem the violence as long as they have someone else there to do it.
Enough with the constant barrage of bullshit coming from the White House trying to push through a financial package that will continue to emphasize consumer spending as an answer.
It isn't. Consumer savings, raised taxes- yes, I said raised taxes, end of military spending at the current unsustainable level, is the only way out.
We must make change.