Aug 16 Investment Advisor - Are We There Yet

"Are we there yet?" ~ Spoken from a child in the back seat

While I would swear that I never did this as a child (although I'm sure I actually did), a common question from a child in the middle of a long car trip is, "Are we there yet?" From a very young age, humans want to be in control and we don't like pain.

The same can be said about economic pain and investment losses. When things are going against us we all want it to end quickly - like yesterday. The challenge with that is that unlike the long car trip (which is usually pretty monotonous), economic and financial situations rarely move in a straight line. Sharp losses are followed by recoveries which are, in turn, followed by more losses.

 

The "Debt Matters" Correction

I am calling the decline of the past several weeks "The Debt Matters Correction." Corrections happen when market confidence collapses. Since we're dealing with a human emotion (confidence) and mass market psychology it is near impossible to identify all the factors or pinpoint the time when those factors matter.

It seems pretty safe to say, however, that the combination of discussions in Washington DC over the debt ceiling, an anemic response to that issue by Congress and S&P's downgrade of United States sovereign debt were the lightning rods in the most recent decline.

Is That It?

Investors right now are like the child on the long car trip - feeling uncomfortable and out-of-control of the situation. The question everyone seems to be asking and the pundits in financial pornography are trying to answer is, "Was that it? Are we there yet? Is this the bottom?"

It would seem that the fundamental reasons for starting this correction several weeks ago are all still intact - irresponsible money management at the federal and global level; an even more disfunctional political quaqmire; we're still trying to buy our way out of a debt problem with money we don't have; we have high unemployment, over-priced equities and a banking system that rewards failure.

Could we have another positive run like last fall and early this year? Sure, but past bull-runs happened because Bernanke and the Fed pumped up the system with Quantitative Easing and billions of dollars. We're not seeing that ... at least not yet. The probabilities are that we have just been through one short leg in a long trend downward. We may see a bit more to this bounce, but the odds are in favor of things being worse several months from now than better.

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The Pain of the Slow Slog

So here we are looking into a slow grind in the wrong direction - which presents it's own psychological issues. The most challenging of those issues is simply that we've been here before and the wounds are not healed.

When I was young, I dislocated my shoulder when I fell on it (I tripped over a cable while chasing my brother through a Christmas tree lot). Yes, it was very painful but it did slowly heal. Just about the time it started feeling pretty good, I would bump into something or lie on it wrong and I'd be in excruciating pain all over again - not because the injury was worse, but because my pain receptors were on hyper-alert.

Been There

That is how this second round of what has been called "The Great Recession" is going to feel. Unemployment is already high. Confidence is low. Businesses and consumers are both trying to deleverage and trying NOT to spend money. Even a small hiccup in the economic numbers will feel worse than ever because we're all sensitive and vulnerable right now.

We've been there, done that ... and don't want to go back.

Solutions

For many months in this blog, I've been talking about economic factors that are going to put serious pressure on equity prices and have a negative effect on overall economics. The global economy is slowing. We have not addressed the root problems and on top of all that, we're already scarred, sensitive and vulnerable to even the slightest correction.

What should you do in this kind of situation?

The first step is to acknowledge that it is possible. The second step is to build some kind of strategy to make the most of the situation. Protect your weaknesses, build on your strengths and most important try to stay as nimble as possible so you can adjust to whatever challenges come your way.

What does that look like? It's a plan ... a strategy ... thinking through what could happen and how you are going to deal with it.

Plan = Control

When you go on that road trip with the 4-year old, you might pack some extra games, toys and videos to make the trip more palatable - that is your travel plan. When you play sports against a tough opponent, you develop a game plan.

When your financial situation is challenging and you feel out of control, the best thing you can do to minimize the pain you feel and the sense of helplessness is to develop a financial plan and an investment plan.

You don't have to work with me although I do recommend you work with a trusted professional. There are just too many people who are willing to sell you a product and call that a solution - but in those instances you have no more control than you did before you bought the product ... and that almost never feels very good.

John