NorCalSavant

We have all accepted for some time now that we are undergoing tough economic times. But how bad is it going to be before there is light at the end of the tunnel? And, how do we manage personal finances in the meanwhile?

Lately, the news seems to be about one bad metric after another. There has been bad news on all fronts – the nation’s labor market, housing market, manufacturing sector and consumer spending.

Private sector U.S. employers announced job cuts totaling 250,000 in November, 25% more than a consensus of economist projections and at twice the rate from a year ago. Financial firms led other industries in the number of jobs lost.

The housing market continues to deteriorate. Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, warned last month that there could be as many as 4.5 million foreclosures affecting mortgages and mortgage-backed securities, house prices, and the housing industry in general.

Manufacturing activity dropped to its lowest point in 26 years. U.S. Steel is going to idle three plants in coming weeks.

Consumer spending accounts for about 71 percent of American economic activity. Consumers cut spending by 1 percent in October, the biggest drop since the last recession in 2001. The real hourly worker compensation adjusted for inflation fell 2.4% suggesting that the consumers may pull back even more in the fourth quarter. The Reuters/University of Michigan final index of consumer sentiment dropped to 55.3 in November, the lowest level since 1980.

On Monday, the National Bureau of Economic Research, a private, non-profit research organization, widely acknowledged as the purveyor of official word on recessions, confirmed that we have been in a recession since December 2007. That means we have been in a recession for a year already.

Where is the Bottom

The 2001 recession lasted only from March through November of that year. The longest recessions in the last century following World War II lasted 16 months during 1980-81 and 1973-75. Assuming the most optimistic scenario, the economy will not be out of doldrums before spring when the new economic stimulus package would have had a chance to boost economic activity. It means that at best this recession is already expected to be as long as the longest post World War II recessions. It could easily be the longest and the deepest recession following the Depression of 1929-33. I am really concerned that it could be as bad as the historic Depression.

There is a huge concern that the rescue plan being administered by Treasury Secretary Hank Paulson is woefully inadequate to take care of toxic assets that the banks are saddled with. According to one estimate the total distressed mortgage backed securities with banks and other financial institutions amount to about 2.8 trillion dollars. In any case, Hank Paulson has worked only on the credit squeeze so far. He has not done anything to help with mortgage adjustment for individual borrowers, something that will help both the credit squeeze and the economic revival.

Tom Friedman, the celebrated columnist, says we could be in for a recession much longer and deeper than we are anticipating. He said the current crisis is characterized by four things – big leverage, globalization, extreme complexity, and local start in America. The banks and financial institutions were very heavily leveraged as we got into this crisis. In other words the potential liabilities were much bigger than underlying assets with the banks. When the liabilities came calling with rising foreclosures, all hell broke loose. In other words, it is going to be an economic hellhole the like of which we haven’t seen before partly because of the unprecedented leverage.

With globalization, risky financial instruments originating in the Wall Street were widely circulated and have caused problems everywhere from Asia to Europe to South America.  The newfangled financial instruments that ultimately led to this current crisis were extremely complex to easily understand and work with for even seasoned experts making them easy fodder for misuse and abuse.

Finally, this crisis began locally right here in U.S. and spread worldwide unlike other financial crises of the past which began in Asia, South America or new economies like Russia in Europe, and could be contained by the robustness of the US economy. Given this very different nature of the current crisis, I agree with him in that it could be a very severe economic downturn.

Personal Finances

Managing personal finances in this economic environment calls for caution and prudence. It is important to do all we can to maintain personal income. To the extent it is possible, it is important to hang on to a job. Now is not the time to resign from an existing job without first lining up another job, if you could find one at all. It is also important to keep expenses down, that is not to splurge on holiday gifts for example, because there could be an involuntary parting of ways at work. Ironically, what is good here for personal finances is not good for economy on the whole.

Managing and investing savings calls for more than the usual caution. High-yield savings accounts and CDs are the safest bets right now with little downside risk. Stocks seem to be a good value compared to their historic highs, but they could be better value tomorrow. However, that only becomes clear in hindsight. It is impossible to time the market. Warren Buffett, the Oracle of Omaha, bought Goldman Sachs stock in September only to see it drop by more than half. I am sure that eventually his stock pick will do well given his talent. If you can park your money away for a year and more, you should not try to time the market and very carefully consider an investment in selected equities.

If you had to pick one or some, what stock(s) would you invest in right now and why?  Or, would you rather just not invest in stock market right now?  Please explain.

P.S. – Hope you had a wonderful Thanksgiving celebration with friends and family.  I had a great time with my friends and family.

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