Taking Stock — Part Two

by Inya Ivkovic, MA

In September 2008, it became very clear that stock markets and credit crisis mesh just about as well as oil and water. It also became clear that the two are either on an extreme collision course, after which the world as we know it would cease to exist, or their inability to coexist would result in the development of an aggressively malignant mass that is threatening us with an endlessly miserable existence. Sadly, six months later, the long-term equilibrium between stocks, credit, commodities and currencies remains elusive.

I cannot say that the government isn’t trying its hardest to prevent the crash. It just bothers me that it is doing very little to remove that growing, cancerous tissue that has reached critical mass and that, if not cut out now and cut out fast, is likely to make us regret not just crashing and burning and getting it over with. The government’s new tools intended to fight the crisis, such as the Public-Private Investment Program and the Term Asset-Backed Securities Loan Facility, are bringing only temporary relief. What is truly worrisome are the costs of those programs to future generations, considering their alarming growth rates.

Another theme from 2008 that I’d like to forget about, but which refused to go away during the first quarter of 2009, is the pension panic. As just another sign of how desperate the government has become, it allowed Americans at the beginning of the year to withdraw funds from their pension plans without taxing them. But that proved to be nothing more than another evanescent solution.

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As for the pension plans, unfortunately many of them seemed to have had a lobotomy last year along with many other financial pillars. Case in point, the Pension Benefit Guaranty Corporation, a pension plan insurer covering about 44 million Americans, recently revealed that, just before the market crashed in 2008, it abandoned its conservative investment strategy and dumped about $64.0 billion in speculative investments. Anyone care to speculate how many of those billions of dollars are still there?

Also, does anyone still remember the ridicule endured by buy-and- hold investors? While cheap money reigned, while stocks soared, while commodities were on steroids and while house shopping was the American favorite pastime, alpha seekers wrote a long and demeaning epitaph for the buy-and-hold strategy.

Today, converts abound, looking for all those babies thrown out with the bathwater. Deeply discounted, yet value opportunities among small- and mid-cap stocks are bound to resurface, as are value investors. Recent trends indicate that investors are more interested in earnings and stability than in cheap assets, regardless of the price tag. Companies that emerge from this mess with little debt or none at all, and with healthy balance sheets and trustworthy management are going to get their day in the sun.

Finally, if we learned nothing else from last year, understanding that making money is a privilege, not a right, should be enough. What we are going through is not just any plain-vanilla recession. And it certainly isn’t going to be over anytime soon. It will take time to flush all those years of unhindered greed, poor corporate governance, misguided public policy, and short-term thinking out of the global financial systems.

The socioeconomic ripple effects are going to be felt for years. The creation of phantom wealth and unbridled consumption has also suspended reality, during which time the debt bubble could reach epic proportions. Unwinding it will require patience and fiscal responsibility to the point of being frugal on all levels, from personal to corporate to governmental. It sure is scary for all of us living through the mother of all recessions. But the decisions we make today will not impact only us. They will affect future generations and where they stand in the world. Any society is a sum of its parts and the lesser the score of the sum, the lesser the chances for the parts to reach their full potential.