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Investors, no Americans, might want to take heed of some of the notable quotes from a variety of different sources that were reported over the past week or so. More than anything else, what struck us was the sense of urgency emanating from the lips of these individuals.
Warren Buffett, being interviewed on CNBC television this past Wednesday, September 24. “Last week, we were at the brink of something that would have made anything that’s happened in financial history pale.”
Regarding the potential for a $700 billion recapitalization package from Washington, Buffett notes that he is “not saying the Paulson [Treasury Secretary Henry Paulson] plan will eliminate the problems but it’s absolutely necessary, in my view, to avoid going off the precipice.”
Now, given the fact that prior to these comments, Buffett’s Berkshire Hathaway had just invested $5 billion into Goldman Sachs, many readers may cynically think that he was just feathering his own nest, realizing that this $700 billion package would have made his investment much more secure. We disagree wholeheartedly. We believe that Buffett, like many others, is attempting to make a point regarding the tenuous nature of the current situation in the financial markets.
Regarding whether or not the issues affecting Wall Street will end up affecting Main Street, Buffett employs the following analogy. “The economy is a little like a bathtub. You can’t have cold water in the front and hot water in the back.”
Federal Reserve Chairman Ben Bernanke, appearing before Congress, comments also on the impact that a severe downturn on Wall Street will have on Main Street, noting that “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP [Gross Domestic Product] will contract, that the economy will just not be able to recover in a normal, healthy way.” Sobering words from an individual who is an expert on causes of the Great Depression.
Jack Welch, former CEO of General Electric, before the World Business Forum in New York, stated that “I now believe that we are in for one hell of a deep downturn.” Welch, who had been relatively optimistic regarding the economy added that “I am now caving. Get ready for real tough times. They’re coming. There is no credit available.”
Finally, like a sharp stick in the eye, German Finance Minister Peer Steinbrueck said that although “the long-term effects of the crisis are impossible to gauge, one thing seems probable to me. The U.S. will lose its status as the superpower of the global financial system. The global financial system will become multipolar.” If that didn’t get your attention, nothing will.
What to do? Make certain that your investments conform to your long-term objectives, time horizon, tolerance to risk, financial obligations and family concerns. Review your holdings at least once a week during these times. Buy and homework, not buy and hold. Furthermore, be conservative in your estimates of future growth.
Now, regular readers of our column will note that we have not been bullish regarding the short-term outlook for either our economy or the U.S. stock market However, we thought then, as we think now, that investors in stocks over the next two to four years will be rewarded above the other asset classes, namely bonds and cash. If you differ in your outlook, sell your stocks/equity mutual funds now. This is your call.
Our thoughts regarding the $700 aid package or a semblance thereof, we believe that this is not the time for theoretical arguments as to the ultimate impact on our capitalistic society. We think that now is not the time for the theoretical discussion as to whether this package continues the slippery slope toward socialism. We do believe that our economy is on fire, our economic house is burning and that our politicians must act in such a manner, regardless of the upcoming Presidential Election, that extinguishes this fire. When it is out, they can then figure out how it started.