I read last week that an HMO in Florida had to close because they could not get at its cash in a frozen money market account to pay claims, bills or payroll. In order for our economy to work, companies and people need access to money. If money is hard to get then the economy stops or at least slows down until it can get the necessary money to keep running.
With the new legislation, money should start flowing again; slowly at first, but over time I expect to see the volume of money available to expand our economy increase. We know that the stock markets are off about 25% over the last 12 months and the quarter end statements will be scary. I think there are two questions many people will be asking after they get over the shock of the statements.
The first question is, “Will my account recover?,” and second, “Do I own the right things to recover?” Both of these are excellent questions and I think deserve answers. If we look at the investments that had the biggest decline, they were financial services stocks, preferred, and bonds. These investments all declined because of a lack of liquidity in the credit markets. As money increases in circulation along with new valuation standards I expect the stocks that were the most beaten down will lead the reversal.
As the economy continues to slowdown there will be more pressure on the Federal Reserve to lower interest rates to try to help spur the economy out of recession. I would also expect to see Euroland and The Bank of England lower interest rates to try to preserve their economies. As a result, the level of interest rates around the world will begin to decline. As interest rates decline investments that pay an above market return should out perform other investments.
I want to make it very clear that while we have had a very difficult and scary year because of all the problems in the financial services industry, I expect that the problems in the rest of the world are very far behind the United States in recognizing and dealing with their problems. If, in fact, the rest of the world has yet to deal with their problems as we have in the United States the demand for dollar denominated assets will drive significant demand for US investments including fixed income investment.
Do not look for the US markets to recover quickly. I believe it will take time to rebuild the confidence in the markets. The beauty of what we own is that we are being paid while we are waiting for the assets to recover.