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Last weekend, Henry Paulson called a meeting at the US Treasury to be attended by the head of the nine largest banks. At the table were nine binders and inside were two pages. Every head had to sign that document before they left the room. In that document was a provision that each bank had to sell to the Treasury preferred non-voting shares totaling $125 billion dollars. They would all sign as a united front whether they needed the funds or not. The head of Wells Fargo balked at this intrusion of the government into the private sector in this manner. This would be expected from the head of a bank that had little exposure (prior to its buyout of Wachovia) to the derivatives market. But in the end, they all blinked, and signed. The same thing was occurring across the Atlantic in Europe. In the end, on Monday morning, it was reported that the banks in Europe and now the United States were part nationalized. This in turned began to loosen the credit market and the rates that the banks charge to other banks and large corporations began to fall. The grease to the gears was starting to work and on Monday, the markets reflected that realization posting record rises across the world. On Wednesday, the specter of worldwide depression retreated only to be replaced by the dim dawn of reality, and that was the fact commerce worldwide was slowing down. The largest gain ever in the Dow was followed by its fifth largest drop. People may never know how close we were to the end. That Monday, there was a possibility of a "silent" run on banks by large corporations that would have bankrupted the banks as they would not be able to cover all the withdrawals. So, chin up. All the fundamentals are getting worse but we can deal with that and have dealt with it before. However, we could not have dealt with losing most of our banks in one day. Last Monday we dodged a financial Armageddon.
What to do for the future?
I cannot give specific financial advice, but generally the steps that dieselenthusiast outlined are sound. You want to get out of any kind of debt as fast as possible. Look at the terms of the financial agreement for your credit cards. They reserve the right to raise the rates at any time with you having no recourse but arbitrage. Good luck. In the short to mid term cash will become more important and potentially the more you have the better. If you are investing for the long haul, it is better to be invested than not and remember that trying to market time on a consistent basis is a failed strategy and besides, everything is now on sale. If you do invest, be as diversified as possible including overseas. Tangible assets may be a good thing to have but bear in mind as we unwind this built up leverage things may possibly get cheaper. I've read something to the effect that "things bought on credit (cars, houses, etc.) will become cheaper, things bought without credit (food, entertainment, everyday goods) will become more expensive. Other than that, who knows? I plan to slow down. Become more aware. Learn a skill as the application can be used to gain capital or goods. Realize we are all in this together. Have fun...
Possible effects?
From the financial papers that I've read we are in the throes of history. We have already seen the disappearance of investment banks. They are all gone, some being around for over 150 years. We will lose about a third to a half of our hedge funds, between 700 and 1000 smaller banks, many companies of all types and sizes and many many jobs. We face a severe worldwide recession at least two years in length and we have piled on enough debt that it will take our grandchildren to pay it off. So far, with what we spent saving our way of life, we racked up debt to the tune of about $100,000k per household and we are not yet done with the bailouts (AIG needed another $38 billion added to the $80 billion we already gave them). The danger in all of this is that we have to find someone out there to buy four billion dollars of our debt per day. Someday, they may decide buying U.S. debt may not be such a good idea. Can they ever pay it back? The saving grace is that our dollar is still the currency of world commerce and that the idea of de-coupling (having the rest of the world de-couple from the U.S economy reducing exposure to any infection), in the short term, will not work. If we stop our nine trillion dollars of consumption per year, the two and a half trillion of the rest of the world cannot pick up the slack. We have to stop selling our debt to the world and start selling something that is produced. As an extreme example, Iceland owed in their malinvestments 14 times what they produced in GDP. Now, no one will accept their money. They essentially are bankrupt because they leveraged themselves too much. We will probably see this happening to other countries. Today Hungary asked the IMF for a loan to help them through their own woes. It will be a bad time but remember, change is opportunity. We are a great nation because we were based on an idea, not on any financial or military strength. That idea and ideal allowed us the freedom to think and solve problems in new ways. People around the world call it American Ingenuity. It's the very thing that got us in trouble with the "shadow economy" of derivatives, but it is also the very thing that will pull us out. That is our greatest capital but it depends on everyone playing their part.
Sorry for the long post. I just hoped to give some insight into what has been happening in the financial world.
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