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Friday, September 19, 2008

Dumb Luck Investing Update

I blogged about the bailout a day before The Treasury and The Fed announced their “new plan”, which they devised as soon as they saw the blood in the streets and the hordes making a run on their stock accounts, money markets, banks accounts, 401Ks, 457Bs, etc. People were not happy with the assurances that “your money is safe” and they all were going to take what money remained back on home to feather their mattresses. We were inches away from a depression era financial system collapse, and that is no exaggeration.

Don’t believe one word of Washington’s claim about this bailout costing “hundreds of billions.” I stand by what I said in my blog entry, the price tag is trillions.

How much exotic toxic debt is out there? I refer you to a
February 2008 Steve Bonine blog entry. Credit swaps exist in the neighborhood of $45 trillion. How much debt will fail? Your guess will be closer than Washington’s guess, but “hundreds of billions” is a prayer.

To pay for this mess Washington will saddle trillions of dollars folks, not hundreds of billions, onto you, onto your children, and onto your grandchildren. Done correctly, the financial institutions that are being bailed would “pay to play” and Washington could actually make money. Washington has never failed to miss an opportunity to miss an opportunity, so I expect instead of making money, or breaking even, this will be the largest welfare program in the history of the world.

I give McCain and Palin a one in ten chance of successfully distancing themselves from this calamity. Deregulated and unregulated facets of our financial system once again proved human nature is dark and greedy, not to be trusted to do “the right thing.” I would like to see a return to some fundamentals, such as 20% down payments for homes, verified incomes, verified assets, and verified debt burdens. I have never been happy with the blurring of the lines between brokerages, banks, and insurance companies. Bring back some of the old standards.

At the closing lows of a couple days ago, the markets were down about 27% from their highs, and my portfolio was down to 6.72% from its high, mainly because of my increased exposure from buying the market on its way down. Obviously, there has been some recovery over the past two days, but I doubt the market will be heading polar north from here. If we revisit the market lows again in October, I will put another preset amount of cash into equities; otherwise, I am happy with my allocations. I am not happy with my tax dollars rewarding the bad behavior of highly educated people.

James A. Zachary Jr.

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