Those are two questions I imagine are on every investor’s mind this morning. Investing this year has been like white water rafting. And there can be no doubt that we’ve now hit the big rapids.
The House of Representatives last night voted 228 to 205 against the proposed financial market bail-out. This, of course, is bad news for investors everywhere. It will put further downwards pressure on share prices.
In a second I’ll look at how we at The Fleet Street Letter are responding to the current crisis. But first — just what the heck’s going on with this bail-out bill?
I talked yesterday about consumption. About how western economies borrowed against future income. That future has now arrived... it’s time to pay back. There’s a lot I could say about this — for today, I’ll restrain myself to just two observations:
- Some of today’s wealth was consumed yesterday. It was used to buy up assets like houses and stocks, pushing up their prices. The numbers quoted next to those assets are now getting smaller, because the debt has come in.
What’s getting bigger? Government deficits. National debt. The state is trying to stop the numbers falling. It is borrowing against the next time period because most investors and consumers no longer can. - No one likes paying back his debts. If a debtor can wriggle off the hook, he probably will. Democrats in Congress are appalled that homeowners who can not afford to own homes face losing those homes they can’t afford. There is also revulsion at a proposal that appears to use public money to dress Wall Street’s wounds.
Republicans are outraged that the taxpayer is picking up the tab. They want an insurance policy whereby the banks pay for future losses if the assets the state buys go bad.
That, in crude terms, is the split. There are alternative proposals floating around, such as using the money to recapitalise banks directly (as opposed to buying up their bad debt). In such an atmosphere as this, there are some who will latch onto these alternatives (they want to wriggle off the hook, remember...). This, I believe, has contributed to the impasse.
The stakes are very high. US markets suffered their biggest one day fall since 1987 yesterday. The markets are plagued by the "What if?" question: What if the rescue plan stalls again?
Here’s the thing, though. Even if it does get passed, this bill won’t get us off the hook. There is still a huge financial deleveraging that needs to take place. A bail-out may calm frayed nerves, but it won’t re-write what happened in the years of excess.
Legislators are trying to fight history. It’s a fight they’re doomed to lose.
So, how should you respond to this crisis? An air of panic hangs in the air, but this is a time when keeping a cool head is imperative.
In my capacity as editor of The Fleet Street Letter I sent readers a special update this morning. I’ve reproduced the key elements below, so you can see how we’re approaching this key moment in financial history.
The cool-headed response to the crisis
Our three-pronged approach is as follows:
- Keep an eye out for stocks with genuine long-term potential that are trading at bargain prices
- Invest in assets other than stocks
- Don’t forget cash
Share prices are falling right now because of weak market fundamentals. Not because of weak stock fundamentals. We have seen companies this year report impressive results only to see their shares fall anyway.
Buy assets other than stocks
Non stock assets are the second plank of our approach. In August we recommended an investment that offers a way to hedge against both stocks and the British pound. So far this investment is holding its value (see below to find out more about this investment).
We are currently researching another hedging investment — one that offers not only upside potential but capital protection too. I will have more details on that in the coming weeks.
You may want to consider traditional hedges, too. I mentioned two yesterday — government bonds and physical gold. Today is an appropriate time to mention them again.
The key point here is the importance of having a balanced portfolio. If, for example, only half your money is in stocks, then you’re only half as spooked by current events as a fellow who holds stocks and stocks alone.
Don’t forget cash
There’s a lot to be said for holding cash in the short run. There may be stocks you have absolute faith in, and are willing to stick with. But if you have doubts — and if your circumstances permit — do not be afraid to cash out. Be ruthless, even if it means taking a loss.
Only back those you’re happy to stick with for the long haul. If you’re not in a position to do so — perhaps you may need the funds soon, or you’d simply prefer to do without the stress — you may find it’s better to cash out and keep your powder dry for when the market looks more promising.
That is our three-pronged approach. I can’t promise you that the markets will rebound tomorrow and we’ll embark on another bull run. You wouldn’t believe me if I did.
What I can promise is that we will continue to approach this crisis in a cool-headed manner, using time-tested investment philosophies to guide us. We’ve hit the rapids, and our investment mettle will be tested further. It is at times like these that solid principles come into their own.
[Ed note: click here for more information about The Fleet Street Letter — including how you can get details of the important hedge investment we recently recommended.]
Until next time
Ben Traynor
Editor
Fleet Street Daily
The Daily Reckoning — Correcting a mammoth deception
Is our "Crash Alert" flag still on the mast? Yes it is...
"Stocks dive on bail-out rejection," says the headline on today’s Financial Times.
"Panic grips world’s markets," says The Guardian.
"Staring into the abyss," shouts the Daily Telegraph.
"Sell! Sell! Sell!" was the advice from the Independent.
Writers had an easy time of it this morning as world stock markets had their worst day since Morgan Stanley began following them 38 years ago. The headlines practically wrote themselves. The MSCI was down 6%.
You can read the Daily Reckoning in full here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
