The "D" Word

Well, the Dow was down 500 points today, the insurance giant, AIG, is looking for a $50 billion bridge loan, the venerable Wall Street firm of Merrill Lynch, under pressure, sold out to BOA for the measley price of $50 billion, Lehman Brothers entered Chapter 11 and this on the heels of Freddie Mac and Fannie Mae being seized by the government. Though crude oil broke below $100 a barrel, the two hurricanes, Gustav and Ike have paralyzed the 50% of our refining capacity which is located on the Gulf Coast and this is sending gasoline prices soaring.

One saving grace heretofore was the weakened U. S. Dollar. Now that Europe seems to be slipping into recession, even that conduit for sales of our products seems threatened. Is there a history buff in the house? Does anyone remember what happened in 1928 and 1929. The Wall Street meltdown, compounded by 10% margins offered for stock and bond purchases at every neighborhood bank and unrestrained short-selling, sent the market into a crash. Coupled with a troubled, recessionary economy among our trading partners at that time, we entered the Great Depression. Though margin requirements are now 50% and other regulatory agencies are in place to prevent helter-skelter short-selling, things look ominously similar today.

In my short 56 years, I have never seen so many signs of trouble in our financial markets. I spent 10 years in the trenches with a Wall Street firm, so I feel I have some insight into this. I hate doomsayers but I am very, very concerned. If the Dollar is the international safe haven & U. S. Treasuries do not continue being bought, primarily by foreign investors, there will not be enough money generated for the treasury to sustain government spending. Without government spending, I fear, we will not be able to make it out of this current spiral. Whatever one thinks of FDR's public works programs and federal intervention into the financial markets, his leadership and WWII brought us out of the Great Depression. Without a World War, we can only count on effective leadership over the next 5 or 10 years to shepherd us through this crises. Deep down, I don't give a tinker's damn who is elected if we can only approach this intelligently and with vision.

What's most problematic is that 2/3 of our nation's GDP is based on the consumer. Right now, nobody's buying. The reality is, getting out of debt is probably the single most intelligent decision one could make to prepare for a prolonged, deep recession (or "D"). In my humble opinion? Stay in cash, except for your long term investments and if the Fed is going to stand pat on key rates, or even lower the rates later this year, it's probably not time to invest in fixed income investments, like Bonds. Blue Chip stocks are O. K., but only the old reliables like G. E., Coca Cola and those companies that will survive even a "D". Otherwise, get out of debt and preserve your cash. Real Estate might not recover for a long time. That party, as they say, for now, is over.