Is It Time To Lose Faith?

Spending almost every waking portion of my day studying the financial markets, it is almost impossible not to be in a state of complete depression. I honestly can’t remember the last time I saw any positive news reported, even on a local news channel. I can’t even imagine how this looks to a person that isn’t part of the financial community. They must think the entire world is completely out of its mind. My biggest concern is that no one, not even the “experts,” is predicting a turnaround any time soon. Some say that this is the sign of the “true bottom,” but as we become accustomed to hopelessness we could be looking at the exception to the rule.

At this point in time, I would say a majority of Americans have no idea what is going to lead us out of this gigantic mess. Contrary to what either side of the aisle or Wall Street says, we are encountering a total vacuum when we talk about leadership steering us out of this potential depression. Every single solution that is brought to the table makes me feel like I am living in 1909 Leningrad, not the United States (and that is with all due respect to what I’m sure is a great city). The new mortgage plan for instance is basically forcing Americans who have paid off their own mortgages to pay down the principle for those who are unable to manage their own lives.

That being said, as grim as the picture is (without sugarcoating), I do not believe that this is the end of the world, or that the end is in the near future. Time and again America has overcome hardships, and it is time for people to start putting things into perspective before the media makes us feel like our only option is to jump off of the top of a building. During the Great Depression Americans were worried about putting food on the table, not whether or not they will be able to get a new flat screen television at Wal-Mart (WMT). Today, our relative “poor” are no longer consuming past their means, not worried about whether or not their family will starve. Unemployment could reach levels much higher than the current mid-seven percent, but at least we won’t be looking at 25% unemployment like during the Great Depression.

There are key steps being taken by businesses and consumers alike to re-align our economy, and set us back on course for economic growth. Businesses are becoming more “lean,” and that amazing co-worker, whom no one seems to know what he or she does during the day, has recently been released. On the other side of the equation, consumers will be the ones to lead us out of this recession, and will keep us from falling into a similar problem in the future. No one can argue that we have been spending beyond our means. I think many people confuse the deficit with our spending problem, but the real problem is who owes the debt. If an individual has income and the ability to pay off their loans, debt is not inherently a bad thing. The problem arises as job loss causes defaults to rise, which isn’t new news. The real question is what will people do in order to improve themselves for the future; but the discussion of education in this country is for a completely different article.

The last major concern that I have regarding a comeback in the equity markets is debt, but not in the sense that you may be imagining. I am talking about corporate debt, and the possibility that debt may become the new “sexy” equity. I know we all are not like Warren Buffett, most of us couldn’t be further from, but lets take a minute to analyze his actions. As of his last filing, Buffett has been selling equity stakes in companies and buying up debt.   Most of this new debt Buffet is buying have guaranteed 10% coupons. I understand that this type of deal is not available to the ordinary individual investor, but the ordinary individual investor may be able to obtain returns of 4%, 5%, 6%, 7% etc. in the debt markets. If your 401K, IRA, and other savings were destroyed and you are starting again from ground zero, would you trust some of the crooks that are running this country? Would you take the risk of owning equities which contain several variables, or would you own debt for which the only thing you have to worry about is whether or not the company will exist when your debt matures? I’m no genius, but the second analysis sounds more logical considering the returns are much more stable and predictable. I’m not trying to cause a panic, but I believe we are more likely to see a debt bubble before we see another equity bubble.

Obviously, many questions remain, and I believe answers will only come with time. We need to see new accounting rules, shareholder and management interests re-aligned, better ethics and judgment, and about 400 other things. The good news is that for the most part we have defined the problem, and are realizing what we are up against.

Disclosure: The mutual fund the author is associated with is long WMT. The author is currently short Barack Obama, Timothy Geithner, Christopher Dodd, Nancy Pelosi, Barney Frank, the Repbulicans, the Democrats, the Congress, the Senate, NBC, ABC, CNN, CSPAN, FOX, the Stimulus, the Securities and Exchange Commision, the Federal Deposit Insurance Commision but is long the American Spirit and People.

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