Big Changes Are Coming
Rarely has so much uncertainty pervaded the economic and political theatres as it does as 2008 begins. The global economy keeps on booming, the subprime tsunami keeps on swirling and leadership in the world‚s most important capitals, from Beijing to Moscow to London to Paris, and soon Washington, is changing. And that‚s just the beginning of the long list of moving parts driving global events.
Times of turmoil inevitably create opportunities. So I wasn‚t surprised when, in early December, I called Mike Martin of Financial Advantage in Columbia, Md., and asked how my favorite bear was doing. The Dow Jones Industrial Average had just managed to eke out its second 10% correction of the year the prior day, and Mike replied that he was buying stocks.
My own sense is that there‚s only one real problem with the U.S. economy: housing and mortgage lending. The good news is that problem is only three feet wide; the bad news is it‚s three miles deep. Most of the folks in the eye of the storm–from lenders to builders to borrowers–may want to blame the Fed, but they need look no further than the mirror.
Wall Street hedge funds and their bobblehead-bozo mouthpieces on CNBC keep clamoring for interest-rate cuts because they can‚t grasp the fact that lower interest rates won‚t solve their problems any more than another bottle of gin will cure an alcoholic‚s problem. Anecdotal evidence also suggests that banks are more willing to lend to creditworthy businesses that are longtime customers than they are to each other. But for some strange reason, businesses and consumers watching the debacle in Subprimeville are assiduously trying to deleverage themselves. That‚s hardly a tragedy.
More than almost any financial fiasco in recent history, the financial advisory business has managed to avoid any association with the current credit crisis. That doesn‚t mean that 2008 won‚t be a testing 12 months for them. By this time next year, the subprime issue should be receding from the scene, but new pressing issues will be facing clients that advisors won‚t be able to sidestep.
Starting with an election. At a time when the rest of the world is slashing taxes and becoming increasingly competitive, Democrats keep talking about raising taxes, despite mounting odds of a recession, while many Republicans are embracing protectionism.
Foreign equity markets have outperformed domestic stocks for six out of the last seven years. One might think that trend is about to run its course, but Washington gridlock could continue to hamstring American companies. But only for so long.
Economic and financial cycles are growing increasingly long, and there really appears to be something to Warren Buffett‚s observation that post World War II history has given us bull- and bear-market cycles of 15 to 17 years. If that theory continues to hold true, then a new bull market should start some time in the middle of the next decade. Since only fools think these cycles can be perfectly timed, it‚s understandable why prudent bears like Martin are looking for opportunities to buy equities.

Evan Simonoff