Tuesday, February 24, 2009

Things are Bad, but the World is Not Ending...

With the S&P down another 3.5% yesterday to below its November 20th low of 752, and consumer confidence this morning announced to be at an all time low, the question must be asked: how bad is this economy and how much worse is it going to get? Unfortunately, as we are all painfully aware the answer is: it is pretty darn bad. Nevertheless, I truly don't believe that it is as bad as people make it out to be. The world is not coming to an end people. There are still companies out there that are making money, and while finding a new job is probably a nightmare, the vast majority of us are still employed. 

If you look carefully, you might even be able to discern some early signs of a pending recovery: Cisco has recently raised $4 billion in debt to finance some new acquisitions - it was able to do so because the the market for high quality corporate debt seems to be coming back to life. LIBOR rates have come down dramatically in recent months, signifying that banks are no longer afraid of lending to each other. Even though international trade is expected to shrink this year, the Baltic Dry Goods Shipping Index - an index showing the cost of shipping a range of raw materials, such as iron and grains, by ship - has been rebounding recently after taking a massive nose dive in late 2008, showing more demand for shipping services. Add to that the fact that governments around the world, including our own, have taken aggressive action to mitigate the worst of the downturn, to the tune of trillions of dollars. All of this stimulus is bound to have a... stimulating effect.

Yes, things are pretty awful and they are likely to get worse in the short term. However the world is not coming to an end. I believe that the stock market is pretty close to a bottom. It may decline another 10% or 20% from here, but in the big scheme of things I think that now is a great time to buy, and this is the strategy that we are pursuing via slow and regular monthly deposits into our investment portfolio (index funds all the way, baby). 

I think that there is some degree of downside irrationality going on. Just as the market can over do things on the way up, it looks to me like it is over doing things on the way down. The only question I have is whether the market will stay irrationally negative longer than we can stay solvent... I am betting that no.

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1 comment:

Grant Baldwin said...

The title says it all...

Sure things are rough right now and I know some people are dealing with some serious financial strains beyond their control, but the world isn't ending.

It will get better...thanks for the reminder.