Who’s to blame for the “crisis”?

I see this particular question asked quite a lot lately. I also see lots of different answers depending on the political leanings of the person answering. Among the culprits I’ve heard offered up are the President, the Fed, the consumer, the banks, Wall Street, China, the Congress, OPEC, the terrorists, and so on. But I’m starting to think that who’s to blame is not the right question to ask.

It seems to me that who’s to blame doesn’t change the situation. Sure it may make us feel better to be able to place blame and punish someone, and probably even just as importantly to say that it wasn’t our fault, but the problem will still exist regardless of who started it. And punishing someone now doesn’t prevent someone else from causing the problem in the future. A better solution would be to never give anyone the power to put us, the individual, in the situation again.

We can’t save the entire world from getting in this situation again, but we can take responsibility for ourselves and provide our own protection. And once we’ve made sure we’re secure, we might even be able to profit from future “crises”.

The “crisis”

I put “crisis” in quotes because it really hasn’t affected me, so I have trouble calling it a “crisis”. But then again, perhaps that’s because I’ve already done most of the things I’m about to suggest doing.

As I understand it, the problem is that our economy is stalling and people are losing faith in the economy. In response, the people are spending less, businesses are cutting back on payrolls and other expenses, banks are afraid to lend money, investors are taking their money out of the market and waiting on the sidelines, and the currency is being inflated to try to jumpstart the economy again. So in general there is less spending and the people and businesses that were depending on that spending are feeling some pain from that.

People spending less

If people cut back on their spending, then it reduces the income of the businesses that were getting that spending. But it also causes the people to get a bit grumpy about the lowering of their standard of living. People only cut back on their spending if they can’t afford to spend what they normally do. So one way to avoid this problem is to preemptively cut our own spending, and just spend less to begin with. I’ve mentioned a few times how our spending levels don’t really affect our happiness, so a lower spending level is going to leave you just as happy as you were at the higher one.

Businesses cutting back

If businesses are cutting back, it is possible that we could lose our jobs. But then it’s always possible that we could be fired or let go. A slowing economy is not the only reason that a company cuts back. So it would be prudent to always be prepared for an interruption in income. The standard suggestion of 3-6 months of expenses (not income) as an emergency fund will take care of this. And in dire situations, you could even fall back on your retirement savings. Any amount of time you take out of your retirement now will only add that time on to the end.

Banks not lending

If banks aren’t lending, then the fear is that people won’t be able to buy the things they need and businesses won’t be able to make payroll. Perhaps it’s my ignorance, but why are businesses depending on loans to make payroll? I would think a business would want to be more secure than that. Like perhaps having enough cash on hand to pay its payroll, ideally cash acquired from sales of its product. So from a business perspective, I would suggest weaning the business off of revolving credit and just paying the expenses from the income. It may make for a tight month, but after that first month, the payroll loans shouldn’t be needed any more, and all payments can be made from the income.

From a consumer perspective, I don’t see much of a problem. Perhaps a bank won’t make a loan on a house, or an education, but if that’s the case, then take the hint and wait a little bit to make that purchase. In the mean time, save up some money so you won’t have to borrow as much. If the loan is for a car, then I’ve already stated my thoughts on that. A loan is just a quicker way to get the thing that you want, while paying more for it. It’s always possible to just save up the money for the house or education and avoid the loans entirely.

Investors pulling out

If investors are pulling their money out of the market and waiting on the sidelines, that means that they expect to put that money back to work eventually. We can take the opportunity to buy the stocks at good prices with built in demand waiting on the sides for things to settle down.

My suggestions above have all been of the idea that we should take the initiative to keep our living standards as even as possible by not spending to our limits and keeping some reserves for rainy days. Not too long ago, and along the same lines, I realized I could plan a retirement that I could achieve solely through saving. Meaning I don’t need any investment gains to get there, so any investment gains I do make just get me there faster.

The effect this has had is that my investing style has become very risk averse. I’m only interested if I can severely limit my downside and have an unlimited upside. This is what I’ve been advocating with the No Lose Stocks strategy. And this is the same kind of investing that I advocate here.

As a quick example of the usefulness of this strategy, take a look back at the HNZ purchase that I mentioned a few articles ago. I bought the stock at $51.38, along with a Put option with a strike price of $60. The current price of HNZ is $41.58, a roughly 20% drop from the purchase price. And at one point on Friday, the price dropped to $38.43, a 25% drop from the purchase price. If I didn’t have the put I would have sold out by now and lost 20% to 25%, but I do have the put. So I’m able to just sit back and see what happens without any real worry.

Currency inflation

If the currency is being inflated, then the dollar savings that people already have are going to be worth less in the future. Many of the people who say this “crisis” is the fault of the Fed also blame this on our lack of a gold backed or commodity backed dollar. What I realized recently is that we individuals actually have the option to back our “dollar” with whatever asset we want.

For example, if you want a gold backed dollar, all you have to do is buy gold with your dollars. Then when you want to buy something, you sell a little gold, take the dollars and buy the thing. We actually do something very similar to this when using credit cards in foreign countries. Our home currency is converted to the local currency at the time of purchase. I don’t actually see any reason that specialty credit cards couldn’t provide this service in a wide range of commodities. But even if they don’t we can implement it manually just by converting all of our dollars into whatever asset we prefer to hold our wealth in.

This is the one area where I haven’t yet taken my own advice, but I’m in the process of remedying that. And the asset I’m planning to hold the dollars in is stocks, or more specifically No Lose Stocks, and possibly some long shot calls and puts. I used to make a distinction between my savings and my investments, but now that I can invest without losing money, I don’t see any reason to continue the distinction.

Conclusion

The “crisis” may be a problem for some people, but for those people who are prepared it’s a non-event, or even a possible chance to get some new assets at distress sale prices. So be prepared for “crises” and the problems turn into opportunities.

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2 thoughts on “Who’s to blame for the “crisis”?”

  1. Will you address the phenomenon of stock price retraction on ex-dividend dates? A lot of studies (e.g. see "Investments" by William F. Sharpe, p. 155, 1978 Prentice Hall) suggest that you can't 'buy' dividends because when you quickly go to sell the stocks ex-dividend, the stock prices have retracted by approximately the same amount. It seems that markets which are largely efficient won't allow 'easy money' to be captured (at least in any statistically significant quantity). I would like to hear your opinion. I like your website.

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  2. Glad to hear you like the website.

    My opinion is that dividend capture doesn’t work in the long run. My reasoning is that an “investor” may grab a few dividends successfully, but eventually that investor will most likely get stuck with a stock that drops for some reason other than the dividend, and takes all the profits they made from the previous dividend captures and more.

    For my personal investing, I don’t do dividend capture. I only do the No Lose Stocks, and Long Shot Options (with my core capital) from the website. So I don’t use Inflatable Dividends.

    Hope that makes sense.

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