As we close out the first half of 2008, we find our economy dipping deeper and deeper into recession and the
The consumer, who is responsible for more than two-thirds of our economic engine, is just about tapped out. Evidence of this abounds as homeowners are falling behind on mortgage loans and home equity lines of credit faster than at any time in the past twenty years. Delinquency in credit card payments is also rising indicating that consumers are fast running out of sources for paying their bills.
The stock market has responded by flirting in bear market territory with the Dow down almost 20% since its October 2007 peak.
So what can we expect for the second half of the year? By all accounts, things are likely to get worse before they get better. Consumer spending for May and June was boosted by approximately $71 billion in tax rebates with another $45 billion to come. As the rebates run out, expect the economy to worsen. On a global basis, the International Monetary Funds suggests that the credit crisis is a $900 billion problem, of which about $400 billion has already been written off…meaning we may be less than half way through the credit crisis, extending its reach into 2009.
How should you prepare yourself? I have two schools of thought:
In a credit crisis, cash is king. Think of all the ways you can raise and conserve cash. Be sure your cash is stored in a safe place such as US treasuries; FDIC insured bank deposits and CDs and high quality money markets. Note that not all money market funds are equal. Just last month, Legg Mason, Inc., a large brokerage firm, elected to contribute $240 million to bail out three money market funds of one of its subsidiary companies.
Any crisis breeds opportunities. Consider using this as an opportunity to invest over the next twelve months in beaten-down assets such as bank stocks and real estate. Remember, the bottom of every bear market is preceded by overwhelming pessimism and capitulation. If we are not there yet, it seems we will be in the not too distant future.
If it’ll make you feel better, not everyone is hurting. According to the Wall Street Journal, in the oil-rich region of the