What the #@$% is going on?

Unless you live under a rock (check out this Geico commercial referencing under-rock living if you haven’t seen it), you have picked up the message that volatile markets and bumbling economies have again captured the global consciousness.  If you looked at the headlines any of the last several days, you may very well have concluded that the sky is falling and the financial crisis of 2008 is returning.  A great article in the Wall Street Journal explained “Why This Crisis Differs From the 2008 Version,” but that still leaves us with the nagging question, “What the #@$% IS going on?”  (I’m not promoting profanity, only acknowledging that times like these have a tendency to inspire it.)

Strangely, the majority of the talking heads on television render their contrary opinions on what’s going to happen in the future—tomorrow, next week or next month—spending very little time educating us on what the underlying reasons are for our current crisis.  In the spirit of the Freakonomics team, who, in a recent podcast demonstrated “Why we are so bad at predicting the future,” I’ll avoid attempts at prognostication and seek instead to explain what IS and what ISN’T going on in the global economy at present, followed by a couple suggested action steps:

Debt ceiling?  S&P downgrade?

The big news of the last few weeks has been debate over the debt ceiling and the seemingly corresponding S&P downgrade of the United States government.  The market has been expecting this downgrade, regardless of what happened with the debt ceiling, for quite some time now—it wasn’t a surprise.  Besides, S&P’s ineptitude regarding the accuracy of their ratings, most notably demonstrated by their maintenance of top ratings on the junk that helped cause our financial collapse in 2008, has justifiably rendered their guidance nearly impotent.  It was suggested that if the debt ceiling was not raised, the U.S. would not be able to pay its bills for the first time in history and that could lead to a financial collapse.  Well, the debt ceiling WAS lifted, but the market responded by crashing.  How do we explain that?  The problem we’re experiencing now has little to do with the debt ceiling, but a lot to do with debt, in general.

So what is happening?

The U.S. certainly has its own debt problems to contend with, but while the U.S. media got narcissistically wrapped up in our own debt ceiling and S&P downgrade, it obscured the more imminent problem—major European countries threatening default.  We’ve all heard about the financial troubles of Greece, Ireland and Iceland—each of which required financial assistance to stay afloat—but following those three countries are Italy and Spain.  They’re much bigger economies, and their failure may not be sustained by the European Union (EU) and the International Monetary Fund (IMF).  And just within the last couple days, one of the stronger European countries’ banks, France, is sending warning signs pointing to another potential crisis there.

Deja vu?  (Not really)

In the Great Depression, we basically allowed the natural free-market system to run its course.  That resulted in the pain of 25% unemployment and a stock market decline of over 90%. The silver lining, however, was that after the economy recovered from its sickness, we got back on the path towards financial health and prosperity.  This time around, the government took unprecedented action to keep us from experiencing Depression-like immediate pain, but many suggest they just deferred the problem and that we’ll be dealing with it for many years into the future.

So the United States and other countries around the world started “printing money” to create growth in their economies, in the hope that increased money supply would pull us out of a recession headed towards depression.  But while it can’t (yet) be said that the U.S. is again dipping back into a recession (the dreaded “double dip”), some major European countries are headed quickly in that direction, and that contagion could spread around the world.  Again.  Governments have already started responded with measures similar to those utilized in the 2008/2009 financial crisis; doing whatever they can to create monetary liquidity they hope will spur growth.  This could result in a boost for economies and markets in the coming weeks and months, but it’s certainly no guarantee.

So, what can you do?

You shouldn’t make wholesale buying or selling decisions in your investments based on what a market does in a day or a week, but this current calamity should prompt you to return to your portfolio and take a long, hard look at what you own and why.  Whether you are a strict buy-and-hold asset allocator or an active investor, your strategy must recognize and contend with the possibility of times like these.  You—and your financial advisor—must be accountable to articulate why you own what you own and how you intend to react depending on further developments in this scary story.  I’m not recommending you buy, sell or “stay the course;” I’m recommending you educate yourself and then act accordingly, not out of impulse.  There is no bliss in ignorance.

*This post will also be featured on TheStreet.com.

5 thoughts on “What the #@$% is going on?

  1. Great post, Tim. For years, I did not understand the serious threat that debt can pose to an individual, a business, or a government. After struggling through my own bouts with debt and seeing the impact it’s had on others across the globe, I get it now. There is no question that debt multiplies risk in any situation. I’ve also come to realize that significant debt is not only an indication of risk, but also of denial, impatience, and immaturity. This applies to households and governments alike. I have a general understanding of the serious macro issues we are facing at the moment, but I believe that ultimately we must solve this problem beginning with our own personal balance sheets. Private victories precede public victories.

    • Nick, thanks so much for your thoughts. Believe it or not, there are many who disagree with us, suggesting that the game is so completely different that institutional and government debt should NOT be handled similarly to personal debt. I do realize there are many different dynamics that come into play on the larger scale, but I refuse to believe that “living below your means” is any worse a strategy for institutions and governments than it is everyday people.

  2. Great article, Tim. It’s a shame that it isn’t on the front page of the Wall Street Journal or on Fox News, instead of the ” Bill Hemmers” of the industry spreading “doom and gloom” across the nation each morning. In they’re “rush” to sensationalize what’s actually happening, using the “FACTS” as we get them. Having been an investor since 1967 I’ve been through more of the “ups and downs” then I can count and still haven’t experienced the end of the world, financially. God help us when there’s a real catastrophy, how will that be reported.
    Keep Up The Good Work !

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