My last column referenced the line from the Wizard of Oz to pay attention to that man behind the curtain. It was a warning to pay attention to the smoke and mirrors Congress was feeding us about their plans to deal with the economy. A few weeks ago, Fox News took the same approach. Yes, my arm is sore from patting myself on my back for my brilliance.
Since then, we have had the nationalization of the major banks and financial services companies. We now own 80 percent of AIG and soon we will be nationalizing General Motors. The Treasury secretary is seeking unprecedented powers to determine which industries are crucial to the economy. He wants to then determine which companies should be allowed to survive and which should just go ahead and close.
The government now wants to control executive pay, fire CEOs they feel aren’t doing their job, re-write private contracts made with independent contractors, control bonuses and other wage controls. I have said before that the mixing of politics with economics often leads to disaster. s I understand economics, the nationalization of a company and/or industry erodes the freedom of a free market economy.
As a financial planner, this has created a very challenging time when it comes to advising clients. Besides the normal problems created by a recession, now comes the thrill of trying to figure out which industries and which companies will be the next target of the Treasury department.
There is also a growing movement in Congress to embrace the idea of one international currency. The United Nations wants to create an Economic Council similar to the Security Council to replace the G20, the International Monetary Fund and the World Bank as the primary leader in determining economic policies for all countries. We all know how well the UN Security Council is doing with North Korea.
We may also witness what is known as a bear market spike. This has happened two or three times before in our history. This is where during a recession the stock market makes a major rally. In our times it would be something like the Dow spiking up to 9,000 or maybe even 10,000. Then with little warning, there is a very fast and precipitous fall. Some pundits predict the fall could be as low as the Dow dropping to 5,000.
It may not look like it, but I am truly an optimist. I have always felt that in the face of diversity there are also opportunities. Einstein said as much, too, although I don’t have his exact quote in front of me. Some people did make money during the Great Depression (and not just the bootleggers). So how do you do it?
To start, look for companies that are either held in a favorable light by the administration, or privately held companies that aren’t standing in line for government bailouts. In my opinion, any company that is involved with developing alternative energy sources or companies that are considered “green” should be viewed as champions.
There is the potential that there could be a green bubble just like the dot com bubble, so you will have to do some research. There are existing companies which have started going green all on their own. An example is S.C. Johnson. There are some mutual funds that have always dealt with socially responsible companies. Some have taken this approach since 1976. General Electric is the largest producer of wind turbines.
There will also be start-up companies that enter this arena. You need to be sure that they have a solid business plan and a pro-forma that anticipates profitability. That was the downfall of many of the dot coms. Many did not have a business plan and upon further review, it was found there was no way they would ever be profitable.
There are insurance products that offer guarantees. Again, do your research. Make sure you know that any insurance product is a contract between you and the insurance company. Make sure you understand if there are surrender charges should you need to get your money out. Most importantly, the guarantee is made by the insurance company. You need to look at the economic viability of the insurance company. If the company goes belly-up, so does the guarantee. AIG is not the only one out there having financial difficulties.
There are other companies and programs, but they carry higher suitability standards, usually are illiquid, are considered to be a higher risk and may be open only to accredited investors. These companies should be discussed with your advisor as they are more complicated and may not be right for your personal financial goals.
My point is that you have two choices. You can sit back and let economic conditions roll over you and dictate your future. Or you can be proactive and seek out opportunities that will help you continue to achieve your financial goals.
We may see a turn around by the end of the year as the Federal Reserve chairman stated recently. We could also see the sun rise in the South tomorrow.
Tom Kubik, is President of Kubik Financial Services, LLC in Bradenton.