Last week I warned that passage of the bailout bill by congress would lead to “financial death by a thousand cuts.” I was wrong. Two and one half business days after the bill passed, the folks who understand the predicament came to realize that the recent $700 billion (plus $100 billion in pork) law will do little (even if the bureaucrats ever get around to publishing the rules and acting) to solve the underlying issues and have driven the Dow down by more than1,000 points causing the financial equivalent of a chainsaw massacre.
The natural conflict between fear and greed is heightened in times of turmoil and these market conditions certainly qualify. The smart money does not panic and is probably out of the stock market anyway with stop-loss orders taking them out before the catastrophic losses occurred. Anyone who is still in stocks and, to a lesser extent, bonds would probably be well advised to hang in there until this mess is inevitably and eventually resolved. Remember, the only time the price of something is important is when there is a need to sell.
Unfortunately, there is no short-term fix for the problems that took years to build regardless of how much money is thrown into the mix. Our nation’s budget will be further constrained as tax receipts from business profits, capital gains, and wages fall dramatically. Government spending has never been reduced in peacetime so the lower tax collections will lead, inexorably, to a huge increase in the national debt. It really doesn’t matter who is elected in November; neither Senator Obama’s plan to redistribute income nor Senator McCain’s goal of reducing taxes will ever become a reality because of this newly bloated national debt that must, at some time, be paid for with increased tax rates for nearly everyone.
What to do now?
Anyone in the unenviable position of having cash should consider buying…when the market has shown that it has bottomed. Those who get in too early trying to time an exact bottom won’t because NO ONE can time the market successfully over time. Just like playing the slots in Vegas, the more you play the market timing game the more likely you are to lose.
Even if you don’t have cash, this is also a great time to think about other types of investing like acquiring a house or a business, always keeping in mind that patience is a virtue. Over the next year many real estate and small business assets will be available by simply taking over payments or assuming a lease. Real fortunes will be made from assets acquired over the next two years if you do your homework, find true values, and pay a price that works for you.
Brian Smith has owned and operated businesses in a variety of fields for more than 30 years. He retired at the age of 50, a self-made multi-millionaire but still consults on general business issues “when the spirit moves him” at a day rate of $6,000.00.