Musings of the Sundarman

The Coming Storm

It is with a heavy heart that I write this post.

After more than six decades of unparalleled growth, America is sinking into the first Great Gloom of modern times.

America's coming Great Gloom is not a typical 20th century recession (think 1974 or 1987) that has struck a bit harder than usual. Nor is it merely a fictitious story line conjured up by economists with a murky crystal ball partnering up with the best Hollywood screen writers.

Fact: The Great Gloom is clearly the fallout, the consequence, of the great American bungalow bust (as I call it), a massive mortgage meltdown and the fattest financial fog in American history.

It promises to bring the worst wave of bankruptcies, job losses and wealth destruction any citizen under 90 has ever experienced.

It has challenged the brightest brains in Washington, defied the deepest pockets on Wall Street and threatens to rip through our life with the force of a category-5 hurricane. And yet, among all those making the decisions that could forever change our future, not one individual has personal experience with a similar episode. Not Henry Paulson, Not George Bush, not Neil Kashkari (Czar of the TARP bailout program).

I remember when a Trillion dollars was a LOT of MONEY...

The Fed has pledged $7.2 Trillion of our money... Bloomberg News has reported that the U.S. government is prepared to lend more than $7.4 trillion — approximately half the value of everything produced in the nation last year — to rescue the financial system, which has been in cardiac arrest since the credit markets seized up.

How much is that? The pledged money is equal to $24,000 for every man, woman and child in the country. And $2.8 trillion of that has already been spent, according to Bloomberg.

The Government Has Already Spent $4.3 Trillion Bailing Out Wall Street. According to CNBC, as of last week, the Federal government had already spent $4.3 trillion in bailouts, from $900 billion for the Term Auction Facility ... to $112 billion bailing out AIG ... to $540 billion backing up Money Market funds ... to $700 billion for the Treasury Asset Relief Program (TARP), and more.

$4.3 trillion — that's more than America spent on World War II, adjusted for inflation. And it's all going down a black hole created by Wall Street bankers.

All that money has to come from somewhere. Investors are stuffing their money into Treasuries with no yield, and the government still has to go out and borrow more. The U.S. Treasury is on course to borrow $1.5 trillion this year, and it's still not enough! Next year's budget deficit will easily top $1 trillion; more than double this year's deficit.

The financial crisis is really chinese torture - the death of a thousand cuts. Let's take the Citigroup fiasco as an example. You may have heard that Citigroup is getting a $20 billion equity injection on top of the $25 billion it got in October.

But Citi will also carve out $300 billion in troubled assets, which will remain on its balance sheet.

* The first $37-$40 billion in losses on those assets will go to Citi.

* The next $5 billion in losses will hit Treasury.

* The next $10 billion in losses will go to the FDIC.

* Any more losses will go to the Fed.

These assets are crap-tacularly bad, so basically Uncle Sam is on the hook for another $260 billion in assets, in addition to the $45 billion in liquidity poured onto the desert of Citi's balance sheet.

And do you notice that the clowns on Wall Street are balking at giving Detroit a $25 billion bridge loan to save America's auto industry (and prevent a chain of dominos as all of the Big Three's suppliers, finance units and vendors go belly up) but Citi — a zombie of a bank that is probably lurching towards failure — gets $45 billion without even a debate.

Right now, our country's finances have deteriorated too far to balance the federal budget anytime soon. But it's not too late to avoid some major financial blunders that could seriously weaken our country for the rest of the century. Even in the worst-case scenario, it is certainly not too late for us to protect our savings, boost our incomes and grow our wealth.

How long could the Great Gloom last? How much further can our home prices fall? How far down will the stock market go? Will it be as bad as the 1930s? At this juncture, you can count on your fingers the number of serious analysts who believe that's even a remote possibility. And yet, stranger things have already happened, including the largest bank and insurance company collapses of all time.

The reality is that most Americans — especially the best and brightest graduates of our illustrious Ivy League business schools, who manage billions of dollars on Wall Street — have no concept of the power and speed of a great stock market crash. They've never lived through one. So it's impossible for them to visualize it.

We have all heard of horror stories from 1929, of people were jumping out of windows and one-time wealthy people were selling apples on street corners. The shock waves reached into almost every office and every home in the country and in the world.

Trouble is, there are no historical precedents for what's happening in this era. Any forecasts we make today, no matter how well researched, are not nearly as valuable as the awareness we will have of current events as they unfold in real time. So rather than pick a number for the bottom in the Dow or guess the low price of an average home, we need to understand how to make decisions right now and then adjust them as the crisis unfolds.

Our immediate task, which may seem hard, is actually very simple — get our money to safety.

Your second task, which may seem easy, could actually be more difficult — wait patiently.

But it's the last step that will be the most rewarding — when real estate, stocks and bonds are near a true bottom, reinvest in America and greatly improve your life for years to come.

Surviving the crisis on Wall Street and Main Street is not rocket science. We don't have to forecast the future. We don't even need investing experience. All we need is the courage to get out of its way and the patience to stay out of its way for the duration.

It means accepting the reality that the value of our homes, our 401(k)s, and even some of our supposedly "safe" investments CAN fall a lot further. And most important, it requires the realization that we have the power to stop the bloodletting.

There's no law, rule or ethic that requires you to sit quietly and accept financial punishment passively. You have every right — and every mechanism — to get your money to safety without remorse.
The Solutions:

Our and most urgent priority is to survive the Great Gloom, while building the biggest pile of CASH we can. Whether it's a molehill of pennies that we from daily sacrifices or a mountain of dollars we squeeze out of asset sales, the more cash you can accumulate now, the better.

To make sure your cash is in the safest place possible., my $.02 is short-term Treasury securities, despite their low yield.

Third, for the duration of this crisis, plus any new ones that may strike, our best friend and companion will be patience.

We should not yield to the temptation of so-called "bargains" and "big discounts" from peak prices. Many of those peak prices were a fiction from a bygone era that may never be seen again in my lifetime or yours.

Don't jump in too soon. You can afford to wait. Indeed, just by waiting patiently, you can build wealth tremendously.

Last, the big pay-off will come when we hit rock bottom and it's time to buy the greatest bargains of the century. So recognizing the bottom can unlock the opportunity to boost your income, allowing you to buy some of the best assets in the world for a pittance and stake out the high ground for yourself, your children and generations to come.

Just remember that nothing is predetermined. Right now, the tsunami of crisis seems unstoppable. But in the foreseeable future, there will also come a singular moment in time when the worst of the storm has passed and the tides of history have ebbed, opening a window for you, me and our leaders to choose our own destiny. Before then, we need to have a serious discussion about what the best — and worst — choices may be.

I'd be happy — very happy — if the Great Gloom is averted. But then we'll still have to deal with a system thrown off balance by trillions of dollars in newly created money. The hundreds of billions of dollars in a new stimulus package for Main Street — Obama's job #1 when he gets into office — will be icing on the inflationary cake. Once you start flooding money into the system, it's very difficult to know when to stop. We are in deflation now, sure, but I think government-fueled inflation is sure to follow. But the Great Gloom WILL end some day and on that day, we should be ready to re-invest and make our fortunes once again.

Let's remember: The end of the Great Depression came with two events: The inauguration of a president, Franklin D. Roosevelt, and the national banking holiday he declared on his third day in office. But after three years of panics and crashes, most people greeted those events with dread. They thought it would be the beginning of another, even steeper slide. Some people even said it was the final chapter of capitalism itself. As it turned out, that was precisely the right time to pick up some of the greatest bargains of the century and make a lot of money.