Where are you investing?

September 25, 2008 | me

[yefragetuwrabrumuy]

I believe that this will be a unique and severe downturn. Its most striking feature will be a collapse in credit, at the international, national, corporate and personal level. (Just today, the Chinese banking regulator has directed that Chinese banks will no longer make interbank loans to US banks. There is uncertainty that the US can continue to meet its long term t-bill obligations as well.)

For this reason, it is probably not a good idea to invest in anything right now, with the least worrisome being tax free long term municipal bonds. Liquidity is king, and the wiser corporations are building up enormous pools of idle money.

But even liquidity has its risks. The FDIC is asking for an immediate injection of $170B to insure it has the funds to repay bank savings accounts up to $100,000. However, the pressure of the crisis means that the FDIC can no longer guarantee beyond doubt that it will be able to return these funds in a timely manner, when faced with the failure of 50 or more banks.

On top of this, there is a strong potential of a major run on paper currency, in that the Bureau of Engraving and Printing, which is at 100% production, only provides about 5% paper currency to back our virtual currency.

The credit card companies may be forced to discontinue offering credit as well, invalidating cards. In turn, this may also force the banks to discontinue bank checking, facing a deluge of overdrafts, or retailers may decide to refuse bank checks.

This will leave only debit cards and cash for ordinary commerce.

The bottom line recommendations are first, that if you have more than $20,000 in a savings bank, you should withdraw it immediately. It would not be unreasonable to keep between $3,000-$5,000 in cash in a secure location in your home.

Significant assets at a stable brokerage should be accessible through a brokerage issued debit card. Any margin, credit, or leveraged purchases should be completed as soon as possible. Set a bottom limit to stocks as a “stop-loss”, so that you will not be completely wiped out.

A first level market collapse was projected just before the AIG bailout, in which the DOW would have dropped to 8300. The cash infusion limited it to about -500. Structurally speaking, a practical floor for the DOW is now about 3000.

If you have any automatic withdrawl accounts attached to your savings, now would be a good time to review them, as well as safety deposit boxes.

Insurance companies are at risk as well, so policies should be reviewed, especially in your case malpractice insurance.

[dragnet2]

Where are you investing?

Not Wall Street.

I'd rather juggle flaming chain saws.