Monday, September 22, 2008

Life in a Post-Bailout World

So bailouts are coming one after another. What a wonderful job being done by our representatives in Washington on this. Neither candidate has taken any sort of position on what to do. Senate Majority leader Harry Reid said it best with his classic quote "no one knows what to do." Quite true. I get the sense that they're basically handing the checkbook to Paulson saying "do what you have to do." I don't think anyone else knows what to do.

So what happens once the bailouts are done? Okay, we've "saved" the financial system. But was it a system worth saving? Its quite possible that these bailouts won't bring needed reform that is necessary. We might just be happy that we survived and move on.

But the truth is that we need change. But its not a matter of needing more regulation across the board. Banning short sales isn't the answer. That only prohibits markets from performing as they should. And quite truthfully, it can't stop stocks from declining further. If a company is doing poorly, it can be discounted heavily because there won't be buyers for the stock. Simple supply and demand. Bailouts are also a negative because they basically condone the behavior that got us into this mess. If management gets a company into a horrible position, they deserve to be fired. They deserve to have consequences. If I mismanage my small business, and take on way too much risk, and it backfires, its tough luck. When companies know that there is a backstop, they will take more and more risk, pushing the envelope. This will continue the pattern of bigger and bigger bubbles, and each popping causing bigger problems.

You can't be excited about investing in anything that depends on the strength of the dollar. The actions in the past week have given that a weak outlook. I'm a believer that commodities will bounce back a bit, and those have the best chance in a scenario like this. After that, I'd only look at deep value plays.

It could get tough here for awhile, and there's nothing wrong in sitting it out for a bit.

1 comment:

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