There are very few times where I hope I’m wrong and the past 18 months have been one of those times. Unfortunately, so far I have been proven right. I am speaking about the economy and where it’s heading.
Here is a quick lesson on economic/political cultures. A free market/democratic culture is where private money builds businesses, private people can invest in those businesses and a private board of directors controls and directs the company. This occurs in a democracy. Government provides the necessities that the private sector cannot and creates laws for the protection of the people. Also, about 68 percent of the Gross National Product is driven by consumer spending, according to the College of Financial Planning.
Fascism is where private capital builds businesses, but a government intervenes with controlling the companies. Such as telling them what they can produce, how much they can pay their executives, firing executives (instead of a board of directors) and even whether or not they can stay in business. Also, consumer spending decreases as a percent of GNP and government spending increases its percentage.
Socialism is where government builds and controls all businesses. It controls everything and consumer spending becomes a very small percentage of GNP.
This is not a trick question. Where do you think we are heading right now? Tim Geithner, the treasury secretary, now has the power to decide which industries have an impact on the economy. He also is seeking the power to then decide which companies within those industries should continue and which should be shut down.
In the meantime, the economic figures being put out by Washington are very suspect as they appear to be at odds with the fundamentals. Personally, I cannot see how we will come out of this recession by the end of the year. There is rising unemployment. Soon interest rates will be rising (due to government spending), which will make mortgage rates increase. That will keep the housing market in a slump. And, continued government intervention in private industries will raise havoc with the stock market.
Here is what I am doing to help my clients the best I can. First, I do quite a bit of research to find unbiased sources of economic information to try to understand what is really happening.
Then, I search for companies that hopefully will not get noticed by Geithner. Companies that are privately owned, with good, long-term histories and great business plans. I am also taking advantage of parts of the bond market.
Corporate bonds may suffer a tremendous hit due to how the GM and Chrysler reorganizations were handled. They negated 200 some years of bankruptcy laws that put bond holders at the top of the list to receive their money. In this case, they were at the bottom of the food chain. This may make investors gun shy with buying corporate bonds, so I am staying away from them until the dust settles and we see if there is a fallout and/or if Geithner continues his Sherman’s March to the Sea.
My next word of caution is to flee to insurance products because of their guarantees. Their guarantees are made by the specific insurance company and this is one of the next industries that is in Geithner’s sights. Also, I have noticed that some of the sign on bonuses being offered are getting smaller and smaller. That indicates they are uncertain about being able to sustain the promised guarantees. Also, some of these products may lock away your money for up to 20 years unless you want to pay a very large surrender charge to get it out.
I’ve said before, there are ways to make money in this type of environment. This is a new era. You have to be able to think out of the box. You have to be prepared to make moves with little warning. You have to have a complete understanding of your investments. Finally, don’t blame your adviser if he or she is not as responsive as you think he or she should be. I’ve had some of the best training and continuing education that is available and none of it ever prepared anyone for what is going on now. We all are in uncharted territory. Again, I hope I am wrong but every day the news out of Washington is proving me right.
Tom Kubik, president of Kubik Financial Services, LLC in Bradenton, can be reached at (941) 795-5884 or by e-mail at firstname.lastname@example.org.