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The End of a Tumultuous Year

31 December 2008 Jose D. Roncal www.financialspeculation.com

31 December 2008

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Jose D. Roncal

www.financialspeculation.com

As we start the New Year, it’s time to glance in the rear view mirror and rejoice that 2008 is behind us. It was a tumultuous year during which nearly every aspect of the global economy took a beating—from stocks and bonds to every other financial instrument on the major indexes. Hardly any industries or businesses were spared.

The financial chaos leapt the boundaries of both country and class. It didn’t care if you were uber-wealthy or a hard-working blue collar worker. After a six-year bull run that brought shareholder gains of nearly $7 trillion, the U.S. markets watched those gains evaporate.
 
These far-reaching losses punctuate one of the main themes of our book, “The Big Gamble: Are You Investing or Speculating?” The point being that no investment is 100% safe—never has been, never will be.  

And now, even though we’re eager to accelerate into a New Year, we can’t ignore that we’re still hitched to a trailer load of problems—problems Wall Street wants Washington to solve.

A flight to “safety” now underway

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In the worst market plunge since 1931, the Dow lost 33.8% of its value in a mere twelve months. This time even the blue chips were hit—some of the biggest losers for the year were General Motors, down 84.7% and American Express, off by 64.5%.

The Standard & Poor’s 500 index sank 39.5% —the worst nosedive since 1937. In fact, with the exception of Wal-Mart and McDonalds, every one of the 30 Dow Jones Industrial stocks suffered a loss of at least 10%.
 
In response, investors are snapping up US Treasuries, treating them as a safe harbor where their cash can weather the financial storm. This flight to T-bills is taking place in spite of the fact that the Feds have escalated deficits by using our tax dollars to bail out banks, insurance companies and now car makers. What are we getting in return for our investment in US Treasuries?  Zero percent. Zilch. Nada.  But hopefully we’ll at least get our original investment back.  Hopefully.

Since Lehman Brothers tanked back in September, the markets have gone through wild gyrations. We’ve counted 18 separate days on which the S&P vacillated as much as 5%. Over the last 53 years, there were only 17 days that showed such erratic movement, according to analysts who’ve kept track.
 
Another theme in our book stresses the importance of busting myths and questioning long-held assumptions about investing. One cornerstone of investing has been the concept of diversification.  We’ve always been taught that it’s risky to put all our eggs in one basket, and safer to diversify.  But, as we mentioned above, no industry sector has escaped the ravages of this crisis. Perhaps it is safest to remember that, just as a rising tide lifts all boats, a low tide can strand them all.

But it wasn’t just the U.S. that got hit. Stocks in the so-called BRIC economies—Brazil, Russia, India and China, fell between 55% and 72%.  We’d had great confidence in these countries to lead the boom in stocks, but alas they were pulled into the maelstrom along with the rest of the gobal economy.  
 
In October, the IMF estimated that bank and investor losses in loans and securities would be in the neighborhood of $1.4 trillion—a loss of only 6 percent. But that might turn out to be overly optimistic. Financial institutions around the world have already booked $1 trillion in write downs.
 
What will it take to pull out of this tailspin?

Many economists look to the Fed and the Treasury to re-energize lending activity, by lowering mortgage rates and making a market in bonds backed by auto loans, credit cards and small businesses. That may not be enough.  Here are three real-world issues that need to be addressed in order to turn the situation around.

 

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1.      Restore lender confidence.  Even a near-zero fed funds rate has done little to loosen the purse strings at skittish banks when it comes to interbank, business and consumer lending. Most banks have retreated to arch-conservative lending policies, and that’s not likely to change until the structure and value of mortgage-backed securities, derivatives and other exotic securities can be properly understood — or taken off their balance sheets. Such instruments were responsible for undermining investor confidence, and rocking the very foundations of Wall Street, but they will not simply go away. That leaves regulators and lawmakers with a big challenge: Dealing with complex financial instruments in a way that eliminates the uncertainty and restores lenders’ confidence.

 

2.      An Obama stimulus package.  The Obama administration’s proposed $1 trillion stimulus package includes putting an estimated 3 million people to work rebuilding the nation’s infrastructure and developing robust green energy technology. If Mr. Obama can live up to his promise and make this happen (a big if, considering partisan politicking over the pricetag) it will help revive our economy, albeit not overnight. Look for the rebuilding process to take at least two years.

 

3.      A rebound in consumer confidence. Consumers have been sucker punched again and again. First by losses in housing values, then by losses in equities, savings and retirement accounts. Now unemployment is spiking nationwide; nearly everyone knows someone who’s been kicked to the curb. Before consumers venture into the housing market, or even hit the retail stores again, we’ll need to see a significant turn-around in consumer confidence. That’s likely to hinge on what takes place during the first 100 days of the Obama administration.

It’s clear that we have a lot of work ahead of us, and even with Tumultuous 2008 now in the past, we are still not out of the woods.  It helps to remember though, that since the Great Depression ended there have been 12 recessions, and we have lived, learned and loved through all of them.  To me, that gives extra meaning to the phrase, “Happy New Year!”

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About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents

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