Sara Whitman

DON'T PANIC... but we must make change

Filed By Sara Whitman | September 25, 2008 10:00 AM | comments

Filed in: Living
Tags: AIG, economic crisis, economic policy, financial advice, Goldman Sachs, JP Morgan, Morgan Stanley, US economy

I'm sorry I have not posted much the last few days. I've been up to my ears in financial documents, papers, calls, taking notes, and trying to learn as much as I can about the current situation.

Anyone with questions about how to invest their money or what to do now should consult a financial adviser. If you have money put away for your kids college tuition, or retirement, I cannot give you any advice as to where to put it.

But I can explain a little about what has been going on, and here it is...

We have over the last week, entered a new era in finance. In fact, a Senior VP at JP Morgan stated, it quite literally changed over night, from Sunday to Monday, with the announcement of Morgan Stanley and Goldman Sachs, a bell tolled and the investment banking industry died.

While markers have been on the horizon for some time- stagflation- a situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time- T bill rates at historic lows not seen since the 1930's, reverse return cures, over consumption, over valued dollar, no savings, high debt, and outrageous military spending- we seem to all be caught by surprise at this collapse.

This is not a time to spend more, as our esteemed president is urging us to do, but to realize that current price to earnings ratios have dropped to an average of 20. The historical average is 16 and in order to end the bear market we've been in since 2000, we will need to see them drop to mid to high single digits.

Simply put, that means there is still a long way to go.

While a traditional response is to move towards value managers, with P/E ratios continuing to decline, be very careful. It is going to be a fraught market- it will be heard to determine when is something undervalued and a great buy and when will it become worthless.

Like Lehman's. Bears Stearns. AIG. We're not talking about quirky little micro cap companies.

Some mega cap companies have money on the balance sheets and are using it to buy back stocks- Nike, HP, Microsoft all did this on Monday in response to the fed's bailout plan. This is an extremely defensive position.

The Fed has tried to come in and save the day with a proposed massive 700 billion loan repurchase program, whipped up over night, much like the decision to nationalize AIG was. The bailout creates more questions than it gives answers. Without getting into the nitty gritty, simply put it does not identify a pricing mechanism for the buy back. While its intention is to bring liquidity back to banks, it may in fact, accelerate losses in the very banks they are trying to help.

I'm not even going to discuss the absurd golden parachutes tucked into the bailout. The excuse is that the high level of management must be retained in the companies in order to keep them running- the same management team that in fact ran the them into the ground. As Rachel Maddow said, this is like asking a 7 year-old to watch over your 6 year-old and his mother lode of candy. When you get home, the 6 yr old has eaten it all, and the 7 yr old says, "You need more candy." (thanks Sue!)

Or telling Americans to go spend more.

It's dumb.

We have to recognize our economy and financial systems are in extreme distress. This is not a time to sit by and hope for the best. It is time to start saving money. Remember that? When you didn't use credit cards but actually saved money up to buy something you wanted? Paid cash?

This is a time to live simply. Going to Crate and Barrel to buy candles is not living simply. Neither is, as I explained to my son last night, having three pairs of Nike sneakers because you want them in different colors.

It's about making due with what you have and since most Americans are living in obscene amounts of debt from over consuming, you should all have enough stuff to last for a while. When credit card companies charge more than loan sharks, it's time to say enough.

Enough with the war. It has not paid for itself. There is no oil revenue coming into our coffers. We are not liberating anyone. All we have to show for our years of war are dead soldiers, continued chaos and an unstable government unwilling to stem the violence as long as they have someone else there to do it.

Enough with the constant barrage of bullshit coming from the White House trying to push through a financial package that will continue to emphasize consumer spending as an answer.

It isn't. Consumer savings, raised taxes- yes, I said raised taxes, end of military spending at the current unsustainable level, is the only way out.

We must make change.

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Sara, I appreciate your efforts in attempting to describe the situation in reasonably few words. Those of us who think we know a thing or two about the political/legislative situation are largely also pretty clueless (at least I am) concerning anything more than a superficial understanding of the economy and all of the interrelationships involved. I see you say, and I've heard others say, that consumption is excessive and that savings need to increase. But then I also hear that if folks stop spending at Starbucks for expensive cups of coffee, and put that money into their savings instead, Starbucks closes, its employees are on the street, don't by Nike shoes causing similar disruptions in that world,,,and so on endlessly. Meanwhile my money in savings seems to be sitting there in need of something stirring in the economy besides closing Starbucks and laid-off Nike employees to earn interest for me. So I'm not really clear on the tradeoffs between cutting consumption and increasing savings. Please help me if you can here.

Robert Ganshorn Robert Ganshorn | September 25, 2008 10:50 AM

You had me riveted until you said raised taxes :)

Americans must consume, we invented the SUV!

Smaller military, I mean no troops overseas, would be attractive. New weapons systems general? How about a slingshot and a bag of rocks? You have too many toys already! And who knows, if we are not overseas any more terrorists may stop hating us? If all foreign aid became "Humanitarian" rather than military (like to Israel the largest recipient) we may well stumble on to world peace.

Living simply, delightful, with less stuff you don't need as large a house (or closet) to put all your stuff in. (See George Carlin.) My elder brother and I shared a closet that was 40" wide.

Kids should be put to work with chores you spend money to have others do. Work up a callous when you are painting the house, mowing the lawn, cleaning the eve troughs, washing windows, raking the leaves. Other kids will think your kids look cool and tough with callouses. "I don't care if your'e 13, ya want food, paint!" Younger children are excellent at floor cleaning. :)

If you are 10 you are old enough for a paper route and lawn mowing all Summer. Summer camp will just give them fancy ideas about keeping up with the children that don't have holes in their shoes.

Ya wanna take a trip? Let me show you the garage that needs to be cleaned.

The television, preset it to receive PBS, CNN, Nat Geographic, and the History channel only as it will encourage them not to want things they should not have. Throw away the Ipod, because after chores there is homework and no time for time wasting video games or music.

Buy second hand books to read instead of new ones.

Play used board games together.

Re use aluminum foil. (hey, it's great after you have ironed it)

Learn home repair, start with plumbing and graduate into electrical work. Remember not to do them at the same time. :)

Adopt a motto: "Sears for necessities, Target for fashion."

How popular would I be at your house supermom? :)
Shall I take over? I am sure your kids would just love me after the first few 911 calls.

Thanks for your posting, and remember, it is always darkest before it gets really crappy.

I'm totally with you on the change theme, Sara. I just changed my 401a asset allocation from 75% growth equities and 25% annuities/bonds to the reverse. If I switch the stuff I already bought, I've lost 10% of the value, so I'm hoping it goes back up and I'll switch then. Meanwhile, hold the foam.

first, jillian, I'm not sure that switch will help you. I think 50-50 is a better course. hedge your bets. growth, in the long run, will do better.

second, don, you bring up some great questions. the under-employed in this country are working at starbucks, mcdonalds, waiting tables... will they go under if we stop buying coffee at 4 bucks a pop? yes, some will. not all. but the reality of a consumer culture, as we are, is that it is unsustainable.

people will lose their jobs no matter what.

I am struck by the liberals tenancy to navel gaze. if we don't drink our fancy coffee, people will be out of work. not that the fact that there is a starbucks on every corner was never sustainable, but that it's our fault.

just like when we lose this election that ultimately is rigged, we will all look to ourselves and say, oh, we are so racist.


are we racist? sure. but that's not why we will lose.

and drinking homemade coffee will not mean we trashed the economy.

my wife said to me tonight, when the republicans cheat, they don't care. they walk away with a win and that is that.

Liberals, democrats, care. we trust. we believe.

and we will lose until we understand our opponents will not give up unless we fight back- and that fight may mean more than giving up coffee.

Robert Ganshorn Robert Ganshorn | September 26, 2008 3:43 AM

Sara and all,

I hope you did not mind my earlier comment, but I think that we all need to laugh and remember how well off we are. If we surrender to a "crisis" mentality we have let the Republicans have a win again. We must "take a lump" once in a while and move on.

The bailout is needed along with a revolution in government. I am glad it has happened now actually rather than six months into an Obama presidency. It is hardly the end of the world and a "Happy Warrior" lives to fight another day.

Oh and gold? Precious metals retard economic growth. Horded gold never turned a factory wheel, provided a dividend, or helped an economy grow. Buying gold when everyone else is buying gold? How do you know you are buying at a correct price? Buy gold when no one else wants to and you have made a wise decision for a small portion of assets. Bet on production of goods and services in companies that have an international record of growth and you will do well and have contributed to the world economy's growth.

Do you know that over two thirds of Warren Buffet's "Berkshire-Hathaway" fund once consisted of Coca Cola and Gillette?

Now, if you will excuse me, I have some aluminum foil to iron.

If this bailout is granted, the Dollar will be devalued by about 50%, i.e. $5 Dollar latte just became $10 latte.

This then leads to the very real possibility that the Chinese who have already started grumbling call in their T-Bills, thereby crippling the Dollar further, ergo $10 latte, just became $15 latte.

More importantly as this happens people's 401k's, Money-Markets, stocks, bonds, etc will also plummet in value thereby effectively wiping out savings.

Paper is worthless, my recommendation is to move into precious metal commodities.

At least for the next 10 years if the bailout passes. If the Republicans hold, the recession will not be pretty, but as the bad debt becomes liquidated, the economy will recover after about a year instead of a decade.

grr, did we learn nothing from the Great Depression?

Plowing under agricultural crops to keep food prices artificially high is to 1929

As Bilking taxpayers with defaulted mortgages to support housing prices and extend credit is to 2008

We may just get the chance to find out.

To quote my good friend Steph:

Fuck that noise. I'd like to opt out of this new Great Depression, please. I did nothing wrong. I'm not fucking around on Wall Street. I'm not taking out loans I can't pay back, or handing out loans I can't back. Why the fuck should this affect me? Let the shitheads responsible pay 700 billion dollars, or whatever made up number they're throwing around.


Robert Ganshorn Robert Ganshorn | September 27, 2008 5:56 AM

But Bil, who told you life was fair?

We must respond to the world around us in the best way we can. Sometimes that means unfair things happen. What gets me is hearing people cry that their investments are "only" worth what they were worth in 2002. Did anyone promise you sustained constant economic growth? I missed that meeting and I was around for the S&L bailout too.

Life is unfair. I like how that's the conclusion of this thread, which is too true.