March 16, 2008

What Can Be Done To Help The Current Economic Condition

I have been saying for some time that the essentials that the government should be doing are: 1) instead of allowing companies to trade-in their mortgage related securities for Treasuries, guaranty a percentage of any "bundle's" (mortgage securities are bundled up into a variety of different instruments, but the form shouldn't matter) value - say 80%. This will: a) immediately start up the market for them to start trading again; b) it will put in a floor for the value of the securities; c) reduce the amount of write-offs that the holder's of the securities will need to make; and most importantly, d) allow the MARKET to work through this mess instead of having the government guaranty EVERYTHING on a piece meal basis. 2) Immediately cut the corporate tax rate from 35% to 25%. Ignore the populist rhetoric about this allowing the rich to get richer - it's wrong! We are in a global economy and the US tax rates are uncompetitive compared to the other major world powers - and several of them are socialistic and communistic. Lowering the corporate tax rates will: a) immediately strengthen the US dollar; b) jump-start our economy - this will allow corporations to: i) increase employees pay; ii) reduce product costs; and iii) increase capital investment; and c) be non-inflationary. Lowering interest rates has weakened the US dollar and is going to put us in a time of stagflation - where we have the economy weakening, but prices going up; 3) make permanent the Bush tax cuts that are due to expire. Increasing taxes now will absolutely put our economy in the crapper - for years; and 4) reduce government spending - the American people need to grow tired of the government always working on only one side of the tax and spend equation. Enough with dickering with tax policies, cut spending. There is absolutely no additional governmental program that is needed. Our problem IS that we have too many government programs now, that are little more than social experimentation. Let the politicians feed their egos and pander for votes some other way. I am tired of them constantly trying to interfere in my life. They are, and always have been the problem, never a solution. And for some new politician to come around and act like they will make things different makes me want to vomit.

I've been asked if I'm making any money in the current environment. My wife and my 401(k)'s are in all cash - every bit of them, and they are up 1 - 1.5%. My trading account is about 2/3 in cash and the rest I've been buying, shorting and what have you. My best purchase was gold and silver. Anyway, this market has been so volatile, both ways, that my investment account is flat - 0%. It just proves what I've said all along - in a bear market, both longs and shorts get killed. Were it not for the gold and silver, I'd be significantly down - probably 4 - 5%. Of course, this is a lot better than the broad market year-to-date averages - S&P (12.27%), Nasdaq Composite (16.58%), and Russell 2000 (13.46%). When we emerge from this, you are going to be in such better shape than those people not as fortunate to have went to cash. This is an example of when 20% for them will be 25% for you. Let me explain - you are Investor A and another party is Investor B. You both had $100,000 at the beginning of November 2007 before we went to cash. You have kept your $100,000 intact, but Investor B has lost 20% and now only has $80,000. Let's say that this is the end of the bear market, now and over this next year, the market goes up 20%. Investor B will get 20% on his $80,000 or $16,000 for a total of $96,000. You will get 20% on your $100,000 or $20,000 for a total of $120,000. You have made the equivalent of an extra 5% on your money ($20,000 compared to $16,000) because you were smart enough to get out of the way of the bear. And it just keeps being more lucrative for you as time goes on, because you kept your investment intact while everyone else got a big bite taken out of their money.


Anonymous said...

I get the overall point you are making, but there is something about the percentage returns example that is a little confusing.

Dave K. said...

The point is that by not losing money you retain your entire capital base to earn money on when we emerge from the bear market. Since you have a bigger base to earn money on, everything else being equal, it is equivalent to making a higher investment return % on a depleted capital base.