While most of the financial news seems to be bad news, remember that falling prices will at some point create great bargains. The question is, will you have any money left to take advantage of them when they arrive?
First, get out of the stock market if you have not already done so! Prices will go much lower. We are going through a once in a life-time change. Americans have been on a long-term spending binge that will become a long-term saving binge. The tendency to spend discretionary income is transforming into a desire to save discretionary income.
Do you want proof? Sales of beer, wine, and liquor fell 9.3% in the fourth quarter of 2008, a rate four times higher than the decline in overall consumer spending. That is by far the biggest decline in the fifty years the government has tracked such spending.
More proof? Consider gambling. I do not have the actual revenue figures, but the stocks of so-called “gaming” companies are headed for the tank as people stay away from casinos in droves, as Yogi Berra might have described it.
Choose your Bee! Ben Bernanke this week announced that the recession should end later this year and that the economy will begin to recover in 2010. Do you believe him? Listen to what Steve Ballmer the President of Microsoft Corporation said on a conference call on January 23rd,
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions… The economy is resetting to a lower level of business and consumer spending that’s based largely on the reduced leverage in the economy.” (Emphasis added.)
You can believe Ben Bernanke who has spent his entire career in academia and working in and around central banks, or you can believe Steve Ballmer who has spent years running the world’s most successful company at producing and selling software to both consumers and businesses. Who do you think has his finger on the pulse of real people?
Still not convinced? The Liscio Report, which tracks sales tax receipts of state and local governments, recently revealed some of the weakest month-over-month reports of the last 35 years. And new car sales, at 31.1 per 1000 people in January is even lower than when it reached 36.1 in 1970 during a two month UAW strike against General Motors!
The only safe places for your money are short-term U.S. Treasury securities and insured bank deposits. The Bear Market that began early in 2000 will go on for months or possibly for years. Having cash is what will allow you to sleep at night and to be in a position to take advantage of the bargains when they appear.
The hallmark of a secular Bear Market is not so much falling prices, as it is falling price to earning ratios. PE ratios have begun falling, but only a little bit because earnings have fallen about as fast as prices, so by this measure the Bear Market has only just begun.
If you have the courage to sell stocks short or to buy “short” ETF’s that go up when stocks go down, do so. Otherwise keep your money safe for now. Major gains will come to those who can spot the bottoms in various assets and have cash to buy them at the right time.
Real estate bubbles around the world have generally taken three to six years to fully deflate. We are not yet at the bottom. S&P/Case Shiller® reported today that in most cities, prices are still higher today than they were in 2000. Only in Detroit are they actually lower.
Following the stock market Crash of 1929, prices fell all the way until 1932 when a five year period of great volatility began. Many people who were not wiped out in the crash lost their shirts during the very volatile years that followed. The Dow Industrials first crossed the 1000 mark in 1968 but then fell back and did not exceed it decisively until nearly fourteen years later in 1982. That was the last secular Bear Market in the U.S. We are due for another one.
Be patient! Let prices come to you. Unless we get huge inflation, the Dow will not go back to 14,000 for many years. This really is good news! For those people who have the discipline to get out of debt and build cash, great opportunities will be presented.
Even better news! Stuff is just stuff. A bad economy is mostly a state of mind. Stuff can make you rich but it can’t make you happy. Look for opportunities because times like these do create opportunities, and that is Good News!