"We experience moments absolutely free from worry. These brief respites are called panic."
- Cullen Hightower
(Caveat: I am not a financial whiz, nor adviser. I do have a plethora of financial websites, blogs and TV shows that I watch and generally consider myself pretty knowledgeable in the markets. It's always important to do your own research and "due diligence".)
Ok, this whole financial "meltdown" is driving most people including the talking heads and pundits into a tizzy so I figured I might as well throw my hat into the ring and give you my thoughts.
First, there is no doubt in my mind that we are in a recession, and possibly even a deflationary recession, which is probably the most painful kind of recession there is. Second, the US hasn't experienced this kind of financial crisis since 1929. However, the USA has a much better plan to handle the "step down" recession model that most experts think will happen. (think of stairs going down. We will see large drops over time and then flat. Then another downward trend, then flat again. Eventually it will be flat for a while and then trend back up)
Remember that The Baby Boomers and Generation X and Y haven't experienced a deep recession like we will see in the next 24 months. I don't think we'll slide into a depression (Unemployment in the neighborhood of 20-25%) but it is possible, but unlikely.
Predictions:
Over the next 24 months the market will proceed in a step down deflation lowering overall market value. Personally, I believe the DOW will drop to the 7000-8000 mark. I doubt it will go much lower than that.
House prices will continue to fall (median house price) another 20-30%.
As credit tightens up, unemployment will dramatically increase. Current unemployment is around 6.1%. I foresee this to increase to 10-15% (last seen in the 80's recession) over the next 24 months. Getting loans for just about anything will be difficult.
Prices will fall as consumers tighten their belts (consumers provide 2/3 of economic growth in USA). As this happens, companies, unable to raise prices, will trim their company's payrolls increasing unemployment. (Inflation could be a problem, but I really have my doubts that this will happen.)
Gold will rally probably breaking the 1000 ceiling. Oil will continue to drop and stabilize around 60-80 dollars a barrel. Other commodity prices will fall dramatically (Steel, Copper, Grain, Corn, etc).
Companies in Power, Infrastructure, Environmental, Alternative Energy, discount stores, etc will do well over the next 24 months.
Companies in Defense, financial, airlines, travel, luxury goods, "mall stores", etc will not do well over the next 24 months.
Taxes will increase. The writing is on the wall here.
Barak Obama will win the election. (I think we all pretty much see this happening whether you support him or not)
So what am I doing?
First, is to limit spending and build cash reserves. You need to calculate your bills over a 6-12 month span and have that cash sitting in a money market account (FDIC insured). I just moved my money market accounts to ING Direct.
If you have cash to invest and have "fully funded" cash reserves, I would follow my DRIPS plan and invest in KO, MO, GE. Buffet is doing the same, so I must be on to something here.
If the company you work for is not in the fields that I mentioned above that I think will do well, polish up that resume. Start networking with sites like Linkedin. Interestingly enough the best time to go back to school full time is during a recession as well. The key to finding a new job is network NOT Dice, Monster, etc. Now is the time to be noticed in the company you work for. Good employees are very expensive for companies to replace, make sure you are one of them.
Trim spending and get a budget.
Continue to FULLY fund your 401k program. Even with the losses with company match, you are still doing well. With the tax incentives and "buying low" mentality, it's still a good choice. You could move your money around if you want, but I am sticking to my long term plan and not messing much with my fund choices.
Get out of debt. In a perfect world, you wouldn't have any debt, but with most of us, we have a house, cars, etc we have to pay for. Ideally, 1 house note and 1 car note should be your only debt obligations. Get rid of credit card debt.
Remember that this is just a period in time. Don't panic and sell everything (as Jim Cramer suggested). Stay calm and remember that you're in this for the long haul.
The days of making 20% returns in a year are over. As you see with my predictions of a curve, it steps down and flattens before going back up.
Well, that's all I can think of at the moment. Again, getting your cash reserves up and getting out of debt are most important. I think most of these stocks are really battered down. I am even thinking of taking a small amount of cash and buying FRE, FNM while it is so low and holding it for a few years.
Michael, looking at his mint.com summary, out.
Leave a comment