How does the bailout change my outlook on investing in the next year? Not much. Kirk on Reasons Unbeknowst asked this question in the post The Most Predictable Meltdown in History:
Would you rather get punched in the nose hard once or would you prefer a good slap in the face every morning for a year?
As I write this post it looks like our lawmakers are going to pass a bailout plan. In other words, they have decided we will be getting a good slap in the face every morning. Kicking the can forward and passing the debt forward to some future date. Is this the right move? In a post earlier this week, Jim and myself listed how the smart guys in the room are lining up on this issue.
- Mish is opposed.
- Karl Denninger is opposed.
- John Mauldin is in favor.
I’ve learned a lot about markets and finance from these three. These are my main economic mentors for the past year and they don’t agree. Mauldin thinks we crash if don’t get the bailout. Denninger thinks we crash if don’t add transparency immediately. Both men are highly experienced traders and it is possible they are both right.
The end result may be that half the investors lose faith in the markets when their side doesn’t prevail. That may enough to cause a crash. Half want immediate honesty. The other half wants massive amounts of cash immediately.
The Sovereign Speculator sums up the state of the market brilliantly in the post Credit markets iced over. Put your head between your knees.
If the fundamentals were not so horrible and stock prices not so high (with earnings falling off a cliff, real PEs are in the stratosphere and dividend yields are pathetic), this would be a promising time to go long, at least for a trade. As is, that would be Russian Roulette, because it would be hard to imagine a market more primed to absolutely crash than this one.
My quick scorecard looks like this:
- Lack of trust in US markets.
- Real PEs way too high given the slowdown in the economy.
- Tax revenues declining.
- Unemployment rising.
- Home prices still too high given tighter lending standards and huge inventories.
- Bans on stock shorting makes a crash scenario much more likely. (EX: China down 65% in 3 months)
The bailout may provide a little bounce, but it won’t hold. The deleveraging of the largest credit expansion in history will continue. My target for the S&P 500 was 1000. Now I’m lowering it to 900. If your 401K is in equities, either move your money to fixed income or get ready for a punch in the nose.
Even though I’m a long-term bull on America, I can’t help but to think of this line from the Crowded House song Chocolate Cake when I see all the bailouts.
Now the excess of fat on your American bones
Will cushion the impact as you sink like a stone