Analytical Wealth

A couple of weeks ago I came across a Facebook group that seeks to mitigate if not nullify the recession through the power of positive thought, a few days ago I came across another  that seeks to spread the word that "The recession is over", and encourages people to go back out and spend, participate in the economy, ignore the negative media, etc.

Lest you think I'm just picking on my Chums on Facebook, there is evidence of similar pronouncements in the media along the lines of "the worse is over", 2009 is going to be a good year, etc.

On the flip side there are people who are effectively saying that we should all convert our money to gold, stockpile food and ammunition and hide in a cabin in Montana.

I don't bring any of this up to make fun of either side, but to say this instead:

We should all recognize that a decline in confidence rarely happens in a vacuum, many consumers aren't pulling back because they're just scared to spend, many are pulling back because they don't have HELOCs to depend on, their credit cards are maxed out, their ARM has reset, etc.

At the same time other consumers are pulling back on their spending because it's a perfectly logical thing to do in an economy like this, from a microeconomic perspective the smartest thing to do is to focus on paying down debt and accumulating savings when the economy is slowing down. While I'm sure that many people will argue that cutting back on spending is hurting the economy, the fact remains that none of these folks are going to pay the bills of the thrifty if the latter group finds itself out of a job or facing a major economic shock.

Banks are scared to lend because they now realize that many of the "sure thing" mortgage securities (and other instruments) they have on their books are anything but, not to mention their escalating losses from both consumer and corporate lending. Additionally they're having to face the reality of being overleveraged and undercapitalized, a nasty 1-2 punch that is forcing them to pull back.

However despite the points made above the economy will in fact recover once the problems named above (and many others) run their course, however an economic recovery won't be function of positivity or negativity (in of themselves) but a function of how well we address the root cause problems the economy is facing. In fact you could almost argue that you have to be positive and negative at the same time, negative in that you are brutally honest in your recognition of the economy's problems, and positive in terms of how you apply yourself towards fixing the problem. Still if you don't admit that anything is wrong you can't resolve anything.

So in 2009 I would advise people to err on the side of caution when making financial decisions, investments, etc, confront the reality of the situation(s) they're facing and above all else remain objective. There is no sense picking either side (optimist or pessimist) because it could lead you towards bending the facts to meet your pre-arrived conclusion(s). The best approach is to be brutally honest with whatever situation, investment, decision, etc, you're facing and err towards the conservative side.

This is the time to be making plans on how you would manage your finances, investments, business, etc, in the event of a major economic shock, the economy getting markedly worse, etc, if nothing happens you're no worse for wear, if things do get worse than at least you're prepared for it.  On the flip side it's also the time to identify the companies that are holding up well (all things considered) despite the down economy, see if the downturn has created any new opportunities, etc, etc.

You're not going to truly suffer if you put off a discretionary purchase until things get better, and you should be thinking in terms of not gambling with/losing your investment cash as opposed to being afraid of missing out on a 10 bagger. Personally I'd rather play things safe and hit .400 with a bunch of doubles, then hit .200 with a couple of grand slams.

Still if you never get the bat off your shoulder you won't hit .100 let alone .400.

There is no easy or quick fix for this economy and it's not a function of confidence, it's a function of failed policies, bad regulations, bad decisions, irresponsibility (by politicians, consumers and corporations) and widespread systemic issues. It's going to take time, patience and an objective approach to turn things around.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.