Monday, January 26, 2009

The Fog

The Fog (courtesy apple.com)
...the week after a new president's inauguration, the deadly fog has rolled in and absolutely everyone dreads what lurks on the other side of it, without being able to discern the path through it. For example, the "bail-out fatigue" being reported suggests that congress may just call a halt to money-shoveling. Where would that leave Mr. Obama's urgent call for "stimulus?" Not to mention further TARP injections for redecorating bank offices...

-Jim Kunstler

I find myself mostly in agreement with Jim Kunstler at the moment when he characterizes the current economic situation as being obscured by a "deadly fog." That is part of the reason postings have slowed here. We know there is a bear in the woods. We know he is hungry. We also know that bear market rallies will be fierce and will fool many into believing the worst is behind us, when in reality, the tough times have barely begun. We need a map through this fog - a way of framing the inflationista argument versus the deflationista argument.

Of course, we do have a map of sorts - socionomics and Elliott Wave Theory. And while I find those models useful in "macro" types of planning, the fact remains that these are just maps - and we must always recall that "the map is not the territory." Had you been following this map for the last decade, you would have a significant amount of your capital in safe assets, would have dodged the collapse of the DJIA from 14,000 and would be in better shape than 99% of the world's citizens right now.

The problem is, these maps will tell you the general features, but in summary. As the crisis built up, this was not a big issue. The dominant social mood was positive. Capital formation, stock trading, property rights, etc. were protected and encouraged. There was no fog obscuring the scenery - you could steer your ship off this map with no issues - other than the disdain and mockery of those wedded to the old and dying paradigm.

This is changing. A fog has rolled in. We know which direction things are headed, but now the tools we would have used in the past to protect ourselves (i.e. selling stocks short, paying down debt, investing in the few companies left with solid earnings, etc.) are not as reliable and could actually backfire.

The maps won't tell you exactly which damn fool plan the federales will implement and when - and that could be the difference between some sort of nest egg or capital left in your hands and being a day late and that same capital or cash being confiscated.

  • Will there be another ban on short-selling, removing this tool for protecting your assets?
  • Will the federal government step in and shovel money into a debt-laden, poorly run company, keeping it afloat and saturating the market, punishing the well-run companies that didn't get a bailout?
  • Will the federales follow the lead of Argentina and seize retirement assets held in IRA and 401(k) plans and block your ability to withdraw that capital from those accounts?
  • Will the stress on the house-selling markets become so great that property rights laws are radically altered - allowing things like squatting to occur on a property that you may have wanted to purchase in foreclosure or via a tax sale?
  • What opaque financial derivative will blow up next? What will the blowback be?

Action Items

This doesn't mean the future is unknowable. It does mean you have to pay attention to what is being debated in Washington, D.C. You have to find a map you like and follow it. I prefer the one presented in Conquer the Crash, but there are others. A map gives you some sort of guidance, even though you may have to change plans to fit the circumstances. The control (or, illusion of control) implied by a plan, however flawed that plan may be, can help focus the mind - especially if it a tested and proven one.

There is a storm raging. I can't tell you which trees will fall where. Keep your eyes open and your powder dry.

Best of luck.

4 comments:

Helskel said...

good post... bad font

;-)

Flagg707 said...

D'oh!

Just curious Helskel - what browser are you using?

Helskel said...

firefox...


It wasn't illegible, just small and made more difficult when combined with the italics.

but no worries, mate!

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