INVESTING: World’s response to woes likely to make them worse

Keywords Government

From one end of the world to the other, governments are drawing a blueprint. They’re doing exactly what you would expect given the recent fall in global equities. If the past is any indication, they’re going to make matters worse. That means the best way to make a bundle over the next 12 months might be to short-sell stocks-in other words, to bet against the market.

The current problems began in August when the subprime problem erupted onto the national scene. The Federal Reserve stepped in first by cutting interest rates. Next, we started hearing talk about government-assisted bailouts for homeowners who couldn’t afford their mortgage payments. After that, things went quiet for a while, as markets rallied for a few months. But it didn’t last long. In late December, China announced it was instituting price controls on most basic necessities due to inflation. All these things took place before stocks really dived.

Fast forward to the third week of January. By then, the Dow Jones industrial average was off nearly 20 percent from the October highs. With investors in a mini-panic, government leaders scrambled for ways to take the pain away. A $150 billion stimulus package is close to receiving approval in Washington. This package would send American citizens making less than $75,000 last year $600 each. Other stuff in the package, like increased write-downs on capital expenditures, actually makes sense. But free money from the Feds for only some people is a complete farce.

At the same time Congress is pushing ahead with bailouts and giveaways, some states are discussing raising taxes to fight revenue shortfalls. California is in a complete pickle, and if you see tax hikes there, you’ll start to see them in other states as well.

All these recent actions serve as a road map because we have seen them before. In the early 1970s, the United States was involved in a long, drawn-out war and energy costs were persistently higher than the previous decade’s prices. We responded in the worst possible way. Price controls, tax hikes and trade protectionism were enacted throughout our society.

In July 1973, the Dow Jones set an alltime high of 1,068. By October of that year, it had fallen 21 percent. That was followed by a rally that lifted the index nearly to its previous high. Then, for the next nine months, the market went straight down. The Dow fell more than 45 percent before bottoming out in late 1974. A complete wipeout.

A lack of faith in the free market is what causes recessions and bear markets to last far longer than they should. We are seeing the seeds of bad decision-making being planted that may create a redwood of a problem instead of merely a big bush. But the opportunities on the negative side of the market could remain powerful for months to come.



Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 829-5029 or at keenan@samexcapital.com.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets on
{{ count_down }}