The Financial crisis and what we can do?

These are tough economic times and I believe, as many do, that things will get worse still, notwithstanding the Financial rescues that Governments around the world are involved in right now. Some of the things that people are not putting in perspective are the following:

1. Several leveraged Hedge funds have not yet liquidated and when they do the stocks will fall further. Several markets in the world – specially the investors darlings like Emerging markets and the real estate areas will face tremendous declines.

2. Banks are in bad shape – that we know. How bad is not very clear. Based on data provided by Bloomberg using a JP Morgan financial model, price of insurance currently implies that odds of Morgan Stanley defaulting in the next 5 years is 45% and that of Citigroup are 21%. However, to me, given the Government move of “buying stock” in US Financial Institutions implies that they were facing imminent failure. The odds were high enough for a US Government to “Nationalise” the entire financial sector! It must have been significant enough to summarily abandon the raison d’etre of America’s Capitalist system. So historic was it and yet everyone missed the enormity of abandoning of the most cherished of US principles!

3. Derivative markets have not completely unravelled as yet. Given their size and the hollow nature of their underlying assets – given the current turmoil – it seems that their fall has been delayed. It might hinge on just a few banking/insurance failures. But that decline would be most disastrous!

4. Economies of significantly sized countries are either folding up or on the verge of it (Iceland, Pakistan, Ukraine, Argentina etc). The socio-economic cost within their borders will be significant but it could start a spiral outside their borders as well – eg; British had invested significantly in the Icelandic banks and UK Government has threatened to sue Iceland, which is going bankrupt anyways!! Countries like Pakistan have additional dimensions of terrorism and nuclear threat associated with their failure. Ukraine could also unravel Nukes threat. Argentina’s economy is very closely intertwined into the Latin American economy as a whole – which many people do not appreciate. It is common for Argentines to work in other countries (Venezuela etc.) and vice versa. Argentina a solid source of talent around the continent. The configuration of the comity of nations and their relationships will be strongly affected – in ways that we have not seen or imagined ever. Specifically because the world was never globalised and intertwined as much!

Am I a doomsday predictor only? Well, I can’t find much to cheer about right now. There are lot of variables that are unravelling or about to and it seems most analysis I read is only one or two dimensional.

What should an individual do?

Have patience and a sense of humor.

These two qualities will come in a lot of use in the coming days.

On the investment front:

1. Save cash and despite the bad situation in the world, I still feel that US Dollar is a resonably fine place to keep your money in for the next 6 months. Some of the money could be held in Euros or say Canadian Dollars, but the problem with Euro could be that multiple countries may not be able to take as quick a decision on interventions as US could.

2. Buy Gold. No not Gold bonds. Gold. The yellow metal and keep them in safe lockers of your bank.

3. Wait for good companies to go down in value. Companies like IBM, GE, Unilever, P&G, Coke etc are companies that strong and even if the world is in midst of bad shape, they have the wherewithal to survive.

4. Start “Dollar Cost Averaging” (or as in India it is called Systematic Investing Plan or SIP) – which means invest a fixed amount of money every month – come hail or sunshine. There is never a better time for this than when you are heading into a loooong recession or depression (which I am sure this is!).

5. Learn to be frugal and consistent. Things can better if you don’t need a whole lot.

6. Just hold on! There are many in this world who live eating two meals a day and are happy. Instead of yearning for wealth of the Rich who are unhappy… try aiming for the Happiness of the poor who are unwealthy! It will change the world!