Rational Advisor

Here’s a great question that was sent to an advisor

Q What happens next if the Dow and TSX reach 5000 to 5500, which I see as a strong possibility? Is this depression territory? I feel the markets are on a downward spiral that is very difficult to put a stop to. There is a total loss of confidence in the US and global money markets. As well it now seems that Citibank will be the next institution to fail and probably ask the Fed for a bailout- comments! Where, when do all these bailouts stop? When is the time the Fed cannot put any more money into the system for bailouts- When do they run out of money?

A The basic question is what if it gets worse? The fact that many believe that it will get much worse, is actually a good sign. Markets tend to make the greatest fool out of people, so that when a consensus is made as to a particularly direction, something comes out of the woodworks to change the direction. When Oil was at $147 a barrel, most of the public believed it would head up to $200 (including a pillock at CIBC economics department who was shouting in all the papers for $200 and beyond). So, when the consensus is for the markets to head much lower, the surprise could be a much rosier picture. The surprise could be government initiatives actually working, the surprise could be understanding that 6% unemployment means 94% employment.

We seem to have moved from old news to “new” news. The old news being Iraq, and the “new” news being the markets. And to keep themselves busy journalists have swamped this area with coverage on TV, radio and paper. It’s everywhere, so people that don’t understand panic and sell, thereby furthering the cause of pessimism.

yes, there is a slowdown, but it’s not in everything - try to stop taking your heart pills, and see what a slowdown means.

This is NOT the 1929 depression, we do not have 25% unemployment, 5,000 banks have not closed, the US has not stopped producing. The US is still the largest consumer in the world, and other countries need it to remain that way. Their not stupid to let the US collapse.

We’ll get through this, with more regulations, with better fundamentals, and with better run companies that take less dumb risks, and with a new US president, that’s trying to do an FDR, Kennedy and a Clinton all in one.

So, will the TSX go down to 5,000 - don’t really know, all I do know is that our portfolios hold Government Bonds and global large cap companies - not the TSX. We don’t hold as much resources as the TSX does, so we won’t be doing what the TSX does. Yes, we will also go down, and that’s because irrational people panic, but we’ll be on the other side buying attractive companies that will still be around in five years - and much stronger.

When will the bailouts finish - the banks really don’t want them to finish, because it’s a source of cheap financing so that they can lend out at a higher rate and make a bigger profit. Otherwise, they’d have to rely on our deposits. However, the bailouts will end, once the banks show increases in revenues and earnings, and stop their game playing with write downs.

When does the US Fed run out of money - they can technically never run out of money, because they have a printing press. However, they will be reluctant to go that route, instead they’ll borrow more from China and other countries that need to sell their goods to the US. So to keep the US consumer alive, capital will be provided.

For sure this is a tough environment, equities and portfolios have gone through the wringer. The issue is that good companies with excellent profits and revenues have been sold off indiscriminately. Sanity will arrive as it always does. I only wish it would hurry, so that people can get back to their regular lives, and the papers can cover some other news item – like Michael, Madonna, Britney or Paris

I’ll go back to my two favorite economists - Adam Smith and Hyman Minsky (google them)