Rational Advisor

Here’s my response to some very good questions

Thanks for your questions, they are good and important ones

Here are the main points you made

1) those who were warning us about the depth of this crisis many months ago have been shown to be correct — these include economists like Paul Krugman (recent Nobel Prize winner), financier George Soros, and bonds manager Bill Gross at Pimco. indicate that we are just at the beginning of the beginning of the crisis.

these are credible investors and commentators on the markets.

a) You have Nobel prize winning economist in Paul Krugman (while I’m at Nobel Prize winning economists, let me remind you of the two Nobel prize winners that ran Long Term Capital http://en.wikipedia.org/wiki/Long-Term_Capital_Management). Krugman’s specialty is trade, and yes, trade does have an impact on global economy. But our managers are investing in companies that are there to make a profit. A company will do, much like we would do, anything to survive, they will adjust to economic events, they will increase or decrease pricing. They will make a profit, or die, or be taken over.

b) George Soros, most famous for his currency call,a and the running of the Quantum Fund. George is a speculator demanding to not be a speculator.

http://www.pkarchive.org/trade/soros.html. He’s realized that the times for speculating is over - something we’ve been saying for a while as well. True investors are not speculators.

Soros’ 2008 book, The New Paradigm for Financial Markets, describes a “super bubble” that has built up over the past 25 years and is now ready to collapse. This is the third in a series of books he’s written that have predicted disaster. As he states:

I have a record of crying wolf…. I did it first in The Alchemy of Finance (in 1987), then in The Crisis of Global Capitalism (in 1998) and now in this book. So it’s three books predicting disaster. (After) the boy cried wolf three times . . . the wolf really came.[18]

He ascribes his own success to being able to recognize when his predictions are wrong.

I’m only rich because I know when I’m wrong… I basically have survived by recognizing my mistakes. I very often used to get backaches due to the fact that I was wrong. Whenever you are wrong you have to fight or [take] flight. When [I] make the decision, the backache goes away.

http://en.wikipedia.org/wiki/George_Soros

What George is asking of us, is to be cautious - less speculative. Not to stop investing.

c) Bill Gross, One of the world’s best Bond Managers. Please note, I am always a fan of including Bonds in an investment. I am in agreement with Bill’s thoughts to be concerned about government mishandling and liquidity issues. He’s also not saying to stop investing, just to be careful, and also include Bonds.

He’s also been impacted although mildly in this storm.

Being negative on the markets, and credit markets really does Help Bill Gross, as it makes people run towards Fixed Income.

2) We now hear reports that the Credit Default Swaps cover close to 70 trillion of questionable debt. The total sum of the bad debt is about 53 trillion.

This may well be true, but why stop at $53 Trillon, why not make it $106 Trillion, and then we can say that the world will come to a stop! Because of debt. Please realize that even though there’s a lot of debt out there, there are businesses that run on no-or-low debt. And their are products that no matter what happens you will continue to use - Shaving cream, tooth paste, soap etc. Even if the whole capitalist system is destroyed, we’ll till need to take a shower! In short, business will continue to run and people will continue to spend on the necessities.

3) We should completely get out of the stock markets. The amount of deleveraging that will have to go on in the next few years will be staggering. Even if no more homes are foreclosed, the amount of bad mortgage debt presently sits at about $18 trillion.

yes, you can go completely out of equities - you can buy Bonds, and this may well be a good choice. However, I still think that there is a need for products made by companies, not products made by Bonds.

4) given the most recent numbers that have come to light, do we give new credence to George Soros and those like him? Where is there a voice to counter Soros, other than fund company economists and managers who have an interest in promoting that nobody bail out?

People like George soros, Krugman and Gross, do have a place in the world, and we should listen to them. They allow us to have a balanced view.

There are many voices to counter these people, and they are voting with their actions - one such voice is Warren Buffett, who ended up doing a whole bunch of purchases, and by the way, he doesn’t need to promote anything.

5) In short, I need to have more confidence, and I need more information.

There will never be enough information to share . The only piece of help I Can give you is to think about all the worst times since WW!! and how often we have been told that it is going to be miserable and yet we stumble through it

I have two favorite economists that I have absolute belief in

1) Adam Smith http://en.wikipedia.org/wiki/Invisible_hand, Adam says people come together in times of trouble to repair things for the better good

2) Hyman Minsky http://en.wikipedia.org/wiki/Hyman_Minsky, Hyman says - reversion to the mean, things go much higher and lower than people expect, then come back to a rising mean.