9.29.2008

survival of the fittest

the proposed $700 billion bailout plan by negotiated by u.s. congressional leaders was voted down today in the house of representatives. this resulted in a panic sell off with the tsx dropping 840 points and dow jones falling over 777 points. these were the biggest single day losses since the tech crash and 9/11 respectively.

the bailout plan was supposed to be a government package to buy bad loans from bank books, thus freeing up liquidity. it was thought that the bad loans were essentially clogging up the lending of new money. essentially, the u.s. tax payer was supposed to eat the bad loans.

personally, i am glad the bailout plan did not get passed. is my portfolio suffering from it? definitely. i’m down about 25% from the beginning of 2007, and i’m probably going to go down further after today’s raping of the markets.

why am i glad? because I think wall street has to learn some tough lessons. unfortunately, the little man gets hurt also. the bail out would have helped my portfolio, but only briefly. it's like putting a band aid over broken bones. however, what you’ll see is a stronger market when it comes back. and it will come back. we just don’t know when. it’s all about survival of the fittest. only the well capitalized, well organized, well managed and well positioned companies will survive, and really, that’s how it should be when it comes to capitalism.

in 2008, there has been a great push by the u.s. government to nationalize parts of the financial system. what the government is doing is not saving bear stearns or AIG; what it’s doing is protecting the system. the government picks and chooses who it wants to bail out. bear stearns, yes. AIG, yes. lehman brothers, no. it all depends on how much of the system is tied up with the company. the more intertwined (in this case, the more collateralized debt swaps on the books), the better the chances of a government hand out. the problems today stem from systemic problems and bad decisions; the system is sick and needs to change, and the only way things will change is if there is financial ruin. the reality is, wall street has the rest of the country by the throat, so the government has no choice but to save these companies. it’s socialism without all the benefits of socialism. (eg: national bail outs, but no national health care.)

what you’ve seen in the past few months is financial history. four of the top five investment firms are no longer what they were, or just no longer. bear stearns: dead. lehman brothers: bankrupt. merrill lynch: takeover by bank of america. morgan stanley: in negotiations. goldman sachs is the only one still standing. but for how long? these institutions have are just that: institutions. they’ve been around for a very, very long time and they’ve been doing business a certain way. as the years went by, with increased de-regulation, there just seemed to be no accountability, especially since everybody was winning. greed was the mother of all, the engine of capitalism; and ironically, it’s greed that may ultimately undo capitalism.

it is entirely possible that years from now, people will look back at 2008 as the passing of the guard, financially speaking. the united states used to be the big manufacturer. now they’ve shipped their manufacturing overseas. after that, the only thing the united states made was money. money with money. now they messed that up. of course the markets will recover, and of course more money will be made, but everything has changed. all the manufacturing is in china and india. all the money is in the middle east as well as the oil. just like how the british passed the mantle to the united states after world war 2, the united states is passing it off to asia and the middle east. you can look out east for the new super powers. that’s where all the money is, and that’s where all the power will lie.

now i’m not saying this is the definitive start to the decline of the american empire – in truth, it probably started years ago. what i’m saying is that the only thing the united states has that seems untouchable at this point is its popular culture. not much to go on, i know, but 2008 isn’t over yet, and 2009 ushers in a new president. or an old one. obama may be the inexperienced one, but he’s better capable of understanding the nuances of the economy and markets than mccain. mccain, on the other hand, admitted to not knowing much about economics. his position on deregulation has helped fuel fire to this eventual melt down. yes, he's a p.o.w., but getting tortured and surviving doesn't make you a good decision maker, or an informed decision maker. if you were basing your vote strictly on the economy, the choice seems clear.

i suspect a revised bailout will be forthcoming, after the politicians have had a chance to seriously consider other proposals, which will only work to sustain the hemorraging, not fix it. in the meantime, my personal options are to sit tight, stick with my guns, and when the times is right (eg: market bottoms out), it's time to buy more, because right now, investors are selling quality to shore up their losses, so there's an irrational sell off of quality stocks. after all, the best time to buy a name brand, is when it's on sale.

here is what the people thought about the bail out: