The great US bail-out has passed, yet the pain continues. We are in recession now, and no amount of dollars, euros and pounds is going to stop it. Yet there is hope. Growth always follows recession.
Do home owners with mortgages feel bailed out? No.
Do home owners with no mortgages feel bailed out? No.
Do stock market investors feel bailed out? No.
Do Wall Street and City workers feel bailed out? No.
Does your job feel safer today than it did last week? No.
So who was actually bailed out by the US Government’s US$700 billion economic rescue package, passed by Congress on Friday?
In theory, we’re all bailed out, except we don’t know it or feel it yet.
Think back to the beginning of last week. Share prices were in freefall. Banks across the globe were in serious trouble, including our own HBOS (LSE: HBOS). Savers were seriously considering pulling their money out of banks and putting it under the mattress.
You Know It’s Bad When…
When it gets to that level of fear and panic, you know something bad is happening.
When you get people like 82 year-old former US Federal Reserve Chairman Alan Greenspan saying “This is a once in a half century, probably once in a century type of event”, you know something bad is happening.
When you get 78 year-old master investor Warren Buffett saying “…we were at the brink of something that would have made anything that's happened in financial history look pale”, you know something bad is happening.
This is not a bail out. US politicians of both parties, fearing for their own jobs at the forthcoming election, have stopped calling it a bail out.
It’s an economic rescue plan. It’s a TARP – Troubled Asset Relief Program.
As an aside, is it just me, but when I see TARP, I immediately think of TARDIS, the time machine and spacecraft in Doctor Who which can transport its occupants to any point in time and space?
Perhaps I will ask George Bush if he could transport my share portfolio back in time to about a year ago – then I’d truly feel bailed out!
It’s A Bail Out, But We Just Won’t See It
Back in the real world, the economic rescue plan will save us from the banking abyss, the place in hell where your money, your investments, your pension and your insurance policies, are not safe in any financial institution.
But, as we are seeing, it won’t bail us out.
It won’t necessarily stop share prices falling further, as witnessed by Friday’s more than 150 point fall in the Dow Jones Industrial Average, after Congress passed the bill.
It won’t necessarily mean house prices stop falling further – the Nationwide have just said UK house prices have fallen for an 11th consecutive month, dropping by 1.7% in September. Nationwide said the pace of house price falls had stabilised, but warned the next year or two would be "difficult".
It won’t necessarily stop the distress in some over-leveraged banks, as witnessed by the recent part-nationalisation of our own Bradford and Bingley (LSE: BB.) and the rescue of European banks like Benelux’s Fortis and Germany’s Hypo Real Estate.
It’s A Recession, Of Course
It definitely won’t stop a global recession.
Remember, the root cause of this financial crisis is house prices. People need a place to live. Many people prefer to own their own home, rather than rent.
Over the past few years, home ownership suddenly became more accessible…
- Low interest rates made the home owning dream more affordable.
- The willingness of banks to lend people large amounts of money relative to their salaries made the home owning dream possible.
- Some banks were willing to lend people 100% or even more(!!) of the purchase price of the house, making the home owning dream possible.
In that sort of environment, inevitably the prices of house prices went up. As that happened, people became afraid they’d miss out on ever owning their own home. TV programmes showed how ordinary people could become property developers as a second job. The result – house prices went even higher.
But low interest rates don’t last forever. Large mortgages still have to be repaid. Banks can and do tighten their lending procedures. House prices can go down as well as up.
Where To From Here?
So where do we go from here? We are in recession. It may last for 1 year. It may last for 2 years. It could even last for longer. Global economies have been built of debt for many years now. Sales of discretionary items like plasma TVs, new cars, iPods, stereo systems and the like will slump.
But we’ve known that for a while now.
As far as the stock market, I don’t know if we’ve reached the bottom. From time to time we will see huge rallies, amongst more panic selling.
My strategy is threefold…
1. Sit tight on my quality holdings – companies that operate in attractive industries, have high profit margins and little or preferably no debt.
2. Continue to dump any company that is more speculative, including those in poor industries with low profit margins.
3. Use the proceeds from sales plus adding new money into my favourite holdings over the next few weeks.
It’s not all doom and gloom. Economies and markets do recover. As far as I know, there has yet to be a period in time where growth hasn’t followed recession.
It will come. We just don’t know when.
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> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in HBOS.
