The Simplified Investor

I know what you’re thinking - why invest in Apple when its stock price fell 18% today? But think literally about apples, which you’ll find in any outdoor fruit stand on the streets of New York. Today, our sadly ineffective government failed to pass its so-called “bailout” plan. The meaning is clear - our economy is going to get a whole lot worse before it gets better. People are going to be out of their jobs (some estimate as many as 6 million Americans will soon be unemployed) - so saddle up the push cart, hit the pavement, and get ready to earn a living one apple at a time.

September 29, 2008 Vote, U.S. House of Representatives

What happened today was historic, and the market knew it. $1.2 trillion was erased from the market value of American stocks as frightened investors fled for the safety of gold and government Treasury bonds. The Dow Jones Industrial Average fell 777 points, the largest one day decline since the index was first published in 1896. The S&P 500 fell almost 9%, a drop not seen in two decades. Meanwhile, Wachovia Bank was bought by Citigroup for $1 a share, making it just the latest financial institution to surrender in a fear-driven downward spiral that has crushed venerable institutions like Lehman Brothers, Merrill Lynch, and Washington Mutual in recent weeks.

So where does it end? Our country’s economic leaders, Paulson, Bernanke, Dodd and Bush, were hoping that today would bring a tourniquet to stop the bleeding. Bush worked the phones on Monday morning, calling undecided Republican congressmen to plead his case. But it didn’t work - 133 House Republicans voted against the bill, compared to just 65 in favor. They were joined by 95 Democrats who were afraid to pass a bill sure to be met with anger among their constituents. In Congress, just as in the markets, fear was the main factor impeding progress. With elections coming up in 36 days, it seems many members of the House interpret “public service” as “Save myself, F**K the public good!”

Do the people really understand what has happened here? The perception is that the the bailout plan will save just a few rich bankers, who should instead suffer for their mistakes. But that’s a pipe dream - the wealthy bankers who are running failed firms like Lehman Brothers surely don’t have all their eggs in their own company’s basket (unless they are very, very stupid). These guys will continue to enjoy comfort and an easy retirement - its regular Americans, many of whom cry out in opposition to a government bailout, who will suffer as their 401k plans bleed value, their family members lose their jobs, and economic growth stagnates.

The mistakes made in the mortgage market are certainly inexcusable, but the government’s bailout was never going to correct or condone that. It was going to buy failing assets for pennies on the dollar, and hold them until the market corrected itself. More specifically, until home prices that are in the toilet and sinking lower every day finally rebound. This might take months, or even years - but the government, with billions in tax revenues to stabilize its balance sheet, would never become insolvent no matter how bad the debt got. Not so for a private company. Even the biggest, baddest private companies like Goldman Sachs were shaken to their very core by this credit crisis. And more companies are sure to fall if the government fails to step in - and after today’s inaction, it seems very likely that it won’t.

So this may only be the beginning of a long, deep, economic slump. Banks won’t lend to each other, as demonstrated by the skyrocketing Libor rate that measures the cost of one bank borrowing from another. If banks won’t lend, businesses large and small can’t grow - and that means unemployment will continue to fall at a much steeper rate than the 105,000 jobs the economy shed in September ‘08. If businesses don’t grow, earnings won’t either - and that means stocks will keep slumping, investors won’t be happy, and the fundamentals of our economy will keep on hurting.

So if you like apples, and you’d be excited by a selling a few dollars of fruit to passersby on a sunny day, then by all means, write to your representative to commend him for his valiant stance against government tyranny. But if you value your job, and your retirement, then start thinking about the implications of another “no” vote later this week. It won’t be pretty.

Tags: Bail-out, Bailout, Credit Crunch, DJIA, Dow Jones, Economy, Federal Bail-out, Financial Crisis, Government, Investing, Stocks

This entry was posted on Monday, September 29th, 2008 at 5:50 pm and is filed under Banking, Economic Cycles, Financial Services, Pharmaceuticals, Retail, Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.