New Horizons Await

Given the year and a half of economic and market turmoil we find ourselves still forced to endure, the horizon is a good place to look for stability, wealth, and recovery. But this is not new news--even the most basic investor knows that 'investing,' as a rule, is putting your money somewhere profitable over a fairly long duration. This philosophy is incontestable, and I certainly agree. However, in recent months, a mixture of constant bombardment of terrible economic news, the plummeting stock market, layoffs, and pay cuts, has created a situation in which nearly everyone is highly attuned to every bit of worrisome news that pops up on the television news ticker. It is obvious we are foraging through unprecedented times: the Dow completes an entire week of 200-point swings or larger (thought to be impossible years ago), oil rocketed up to a new peak of $147 per barrel and now sits below $40 (thought to be impossible mere months ago), and investors wildly overreact both positively and negatively to any inkling of earnings data, often in ways that escape all the logic we, as thoughtful, rational, common-sense-driven people, have ever learned pertaining to the stock market. Evidently, day trading is out of the question as well, since nobody can predict the next 4% free-fall. How, then, is one expected to profit in this day and age, when the stock market--the epitome of public sentiment--is less rational than a tantrum-prone toddler?

One strategy is, at this point, completely out of our hands. The headlines that dominate the daily news these days are all debating the governmental bailout plan. The word ‘bailout’ in itself represents more than a simple catch-phrase to describe a loan given to a company in distress. Companies in general shouldn’t need to be bailed out unless they have already made mistakes grievous enough to threaten the health of separate industries, forcing a rescue operation. Thus, companies with healthy, proper practices would not require a bailout, since they should be the model of a respectable business operation. Needless to say, both the struggling financial company and the latter company are both suffering greatly in this financial mess, though only one deserves it. I don’t associate fully with either Republican or Democratic ideals, but I firmly believe that the basis of market stability is economics’ amazing ability to equalize and compensate. Clearing out businesses that failed, operated improperly, or disappoint consumers is a process that makes way for new companies that have learned from these mistakes and seize creative opportunities to become more successful and efficient than their predecessors. This is the definition of progress.

However, the government has strongly decided that this natural system has not functioned at all well enough, and threw its weight behind a bailout plan. Though this may not have been the wisest action, especially in retrospect, we must realize its implications and intentions. The original plan allotted $250 billion to be spent purchasing bank stock, thereby contributing to the capital available to banks in order to balance out their lending practices. Purchasing equity would give the government some handhold on bank operations, and improve both lending and efficiency. Pitched this way, it sounds like a reasonable plan, and if there must be a bailout, I see few better options. Unfortunately, these guidelines promptly faded away, and over $500 billion in taxpayer money has been spent, literally handed over to banks, in cash. As anybody could have predicted, that money is long gone, buried in a bank vault or converted to compensation and bonuses, corporate jets, or executive trips to Las Vegas. In this moment, we must be very careful; totaling up all proposals for saving the financial industry yields almost $1.5 trillion. Our country already has a national deficit of $10.7 trillion, and a higher deficit today equals higher taxes in the future. If it's going to be nearly 1/6 of our country's current deficit, let’s hope this round of the bailout works.

In the meantime, oil and energy prices are pushed down to artificial lows, sure to spike again at the faintest whiff of economic recovery or increased demand. The technology sector, which historically documents a fairly low cost of operation, will likely be a front-runner in the race out of the recession pit. Given that stocks perk up around six months before the general economy, I expect to see slow improvement through mid 2009, though I doubt we’ll keep seeing the leaps and bounds that have been tolerated in the past year. This page will be updated Mondays, Wednesdays, and Fridays, and I look forward to discussing financial strategies and current economic news with you.