Moving to the other side of hope

A lot of hope has been floating around lately. With President Obama getting people hyped up about hope and change, those words have moved from a campaign theme to the White House.

But as President Obama will soon find out, wishing something is so or hoping something is so doesn’t make it so. The reality of dealing with the actual economic, fiscal and political issues challenging leaders today will make that evident.

The leaders of China and Russia, speaking at the Davos Economic Summit, blamed the excesses of the West for causing the current financial crisis that has become a global event because of the interrelationship of economies and markets. Unfortunately, they have a point because many people have been living beyond their means for a generation, borrowing on the future and producing the demand for credit that ultimately resulted in a lot of “money” being created out of thin air by banks and financial institutions.

Of course, what the leaders of China and Russia didn’t emphasize was how Western demand for crude oil and many products boosted their export earnings and gave their countries some of the best economic growth statistics ever reported. But, in the blame game of political rhetoric, there is not a lot of room for facts.

The global financial crisis is the type of development I have been warning about since the late 1980s in various articles and editorials when my research convinced me that intermarket relationships would have far-reaching effects beyond what anyone imagined and for which no one was preparing. The financial leaders and regulators simply ignored the consequences of expanding, globally interconnected markets and even encouraged actions that would lead to financial disaster.

Now that the crap has hit the fan – and will continue to do so in 2009 – hope seems to be about the only way out of the financial mess – hope that the housing market will bottom, hope that bailout funds will save banks and automakers and who knows what else, hope that the stock market will go up, hope that the newly proposed “bad bank” will take all those toxic assets off the banks balance sheets, so that the business of banking can return to normal and the credit spigot opened in the hope that consumer demand will help reflate the global economy.

But hope alone won’t solve today’s global financial problems. Hope won’t help you sell your home for an inflated value. Hope won’t make your 401(k) or IRA go back to where it used to be. Hope won’t make the bailouts work (though some “entrepreneurs” will likely scam the government and taxpayers to get rich). Hope won’t reverse all of the economic debacles of the last year.

Instead, investors are going to have to make money the old-fashioned way – they will have to earn it. And that means putting in the necessary effort. And, in all probability, it also means that the mind set of many investors (particularly the baby boomers and recently retired) will have to change. You can’t just sit back passively and wait and hope that a miraculous rebound in the stock or housing market in 2009 will undo the wealth destruction that you may have experienced. If like me, you believe that there is more pain to come, then it behooves you to take a much more active and aggressive role in the overall management of your financial assets and in the formulation and execution of your trading and investing strategies as if your future depends on it – because it does.

In November, 2007 I moved to a highly defensive posture by transferring liquid assets into money market accounts that invested solely in US Treasuries. Now, admittedly, with 20/20 hindsight I was a little bit early at pulling that trigger (particularly since I didn’t know that the Treasury would guarantee money market accounts after they broke the dollar), but I believed that it is better to be safe than sorry. Sometimes you need to ride out the storm in safe harbor, with capital preservation foremost in your mind. I think that 2009 will be no different in that regard than 2008.

We are not out of this storm yet, so now is the time to be plotting and planning your strategies to weather the continuing storm and most importantly to position yourself to avoid any further damage and to actually profit from upcoming global, economic and financial market dynamics as they unfold this year and in 2010. This means paying close attention to the issue of counter-party risk. It also means focusing on gold, currencies, treasurys and oil – not to mention other hard commodities. There is going to be a lot of money to be made in these markets as the deflationary threat fades and U.S. inflation rears its ugly head again. There are all sorts of ways to ‘play’ this, each with their own pros and cons, but one thing is for sure: sticking your head in the sand and just hoping that you’ll come through the storm unscathed and with your previous level of wealth restored is sheer folly.

Best Wishes for a Prosperous 2009,

Lou Mendelsohn