Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

An FYI for anyone with money in the market.
Ty Durden on the "Tax Billionaires" Proposal

It's not what you may think. He cites the potential for a market crash, as millionaires cash out of income producing stocks with high paper profits, into hard assets, while grabbing on to the still existing 15% capital gains rates.

On a similar and more dire note, the buzz in the comment pages of many financial sites, is a possible rapid and catastrophic drop in the DJ to to as little as $4000... much worse than the original prediction cited in the first post in this thread.

This is scuttlebutt, if course, but be assured that it is not beyond the realm of possibility. Remember that the largest corporations now have about $2 Trillion in cash. Pressure from stockholders could flush these dollars out of company value, into the pockets of these same stockholders... rushing to get in on the 15% tax rate. As company values drop, the concurrent result is a market drop.

As inferred in the article, this could trigger the crash.

These are all "IFFY" scenarios, but for those who are at risk, should be a warning to watch for sudden changes. Instead of the slow decline in previous market adjustments, like the frog in the boiling water, the crash could be that of a lightning bolt.

At this point, it's all just speculation, but a cautionary point that you might want to store in the back of your mind.

In my opinion, for some time the whole Wall Street scene has been just speculation. The difference is that the speculation is now warming to grabbing your money and running (I already did, 18% ago...)

The question I always had was, when in competition with the professionals at Wall Street gambling, what good will it do to store a cautionary point in the back of one's mind? It took me (admittedly a total novice) three full days to convert my mutual fund portfolio to cash and do the paperwork to have it transferred to a local bank. Part of the delay was bad "advice" given to me by the brokerage company employees in the first two days.

After that, my meager IRA funds went missing in the informational black hole of the transfer for five weeks! The sender said it was out of their hands and the bank couldn't find any way to track it, I thought it was gone... when it finally did show up it was another hundred bucks lighter because of the fee they charged me to use my money gratis for more than a month.

Anyway, my point is that if you wait for the crisis to become obvious, the burden of your speculative nest egg will probably be very much lighter by the time you get your non-electronic mitts on it. My advice is to abandon the casino asap and put your money to work in the real world, invest in something you know that has a triple bottom line of return; social, environmental, and financial.

If you are giving those big money bastards your money to use and abuse, just because it seems to make you some more money, then you are part of the problem.

Think of money as an addictive drug and the Wall Streeters as a drug cartel. That's our economy.

Yes... exactly.

Though I don't know this for sure, I think that most prudent people who have 401K's or are just doing what they're advised to do... "save for the future"... are not very sophisticated in the actual investing. There is no way an individual today, can beat the electronic trading system. Fortunes are made and lost in a matter of minutes... sometimes, even seconds.

Now... as to when do you get out of the market, and where do you put that money? Several big important things happen here that have to be considered. For sake of argument, lets consider an example... your mileage will vary.

A 401K with $400,000. (Could be $25,000 or $1 Million+)

1. Taxes- Taking it out of the market completely... Even if the timing were perfect, and the market exit was at it's high... There are capital gains. If the gains are $100,000 then the tax would be $15,000.

2. Timing- As your example shows most of the time, you can't control the timing. (Your example of delay is probably very common for most people who don't work with a broker daily, and even at best, in a rapidly falling market... this type of investment will be transacted at the day's lows.)

3. Transfer the money to ?????- Here's where we differ. First of all, I would presume that most long tern IRA/401K accounts would be conservative in the first place. I was not talking about Speculation per se. So lets presume that the investment is in conservative funds, with low volatility. Typically, these funds follow the market. My "warning" was not about getting out of speculative stocks, but about stocks as a whole.
What about a drop of the DJIA from $12,000 to $4,000? In the example above, with a $400,000 401K... the loss would bring the account to $134,000.
During the last market drop, a good friend who had just retired, saw a paper loss from $800,000 down to less than $500,000. Because of the capital gains, and a broker that rode the market down slowly... he had to stay in, and spent three years of agonized worry as his account edged back to about $700,000.

4. The Main Point- Over the past 60 years, the market Mantra has been... "The Stock Market Always Comes Back". Perhaps... but then since the end of WWII, there has never been a situation where the total global finance system has been this bad, or unstable. Recovery from the Great Depression was not complete until the mid 1950's.

So back to my original post... The worry is a sudden market drop, as large investors withdraw their money as they try to avoid taxes. The warning is probably moot, since there isn't any easy way to beat the system... As Ty Darden suggested, the very rich would buy hard assets and move out of the country.
Unfortunately no one that I know would be able to do that.

In a real depression, there aren't any investment "Safe Havens". Sadly, even Federal Bonds will not be an answer.

As they say, "When rape is inevitable, relax... "

signed,

Grinch

P.S. (aside) Don't think many people read this stuff here, but it's a great place to sort things out in one's own mind.

Yes, there really is no obvious solution for beating the system and preserving one's personal wealth. Besides, beating the system actually means beating a whole lot of other people, without whom the system won't be very functional, anyway.

My thought vector is much less about preserving personal wealth than it is about making moves to a more progressive and possibly sustainable economic system. If the System (all systems, not just the economic system) is healthy, then it is more likely that we all will be healthy, though less likely to be financially wealthy.

I outlined an example recently, about making insulation locally from recycled materials. A few days ago we had a second meeting of what we are calling the Local Investment Forum, and the opportunity to invest money in creating a local, mobile insulation manufacturing operation was presented. One stumbling block for some is how to convert a retirement account into locally usable funds. Those with that problem will work together to find a work around that doesn't involve the conversion losses that you described, It. Perhaps the solution will be to change some laws, but that will take a good deal of time and popular support to accomplish. Many may lose far more than the conversion losses by waiting, though. One avenue might be through a credit union or other established financial institution that can act as custodian to satisfy the SEC and IRS rules.

One new slant on the insulation concept is that local government, which stands to benefit rather significantly as a result of creating a market for what is now a liability, should create a pool of money to pay the upfront costs of weatherization of homes and businesses, with repayment coming out of the savings in energy costs. Local government could pump up the pool using some of its new revenue stream (from NOT paying to have the material hauled off and getting paid by the insulation company). The energy savings realized by the home and business owners would become more money circulating in the local economy, tanker loads of fossil fuels wouldn't be burned in wasteful transportation and heating, jobs would be created, landfills would fill up more slowly, and people will make money.

That's a triple bottom line economy in spades! And it is just one example that can result from thinking differently about money and investing.

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You call that contagion?

CHART

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Asia slide deepens

My own opinion is that we are experiencing a worldwide adjustment downward. Baby steps back to reality after a series of booms, busts, bubbles and speculation.
Link

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HA ! HA ! · · · That'll be the day ! · · · · · ·

Stranger things have happened. Is your little Island well defended? Armaments in place to prevent the looting by thousands of hungry Americans storming your shores, raping and pillaging? If I were you I'd be hoping against all hope that America comes to it's senses and gets on with working, investing, producing, and governing.

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This royal throne of kings, this scepter'd isle,
This earth of majesty, this seat of flow'rs,
This other Eden, demi-paradise,
This fortress built by Nature for herself
Against infection and the hand of war,
This happy breed of men, this little world,
This precious stone set in the silver sea,
Which serves it in the office of a wall,
Or as a moat defensive to a house,
Against the envy of less happier lands,
This blesséd plot, this earth, this realm, this island....

Well, there is certainly no hope that America will come to its senses---it never has in the past.

How typically American to think that we need guns to defend ourselves here. One month of Canadian passive-aggressive snide humour would send Americans shrieking back to the south.

Moreover, they woud never get here in the first place. How many Americans can read a map, or know what is beyond their limited ken? Canada is a great, blank void in the minds of most Americans, and long may it continue so ! And as for the few who discovered Canada, a great gulf of water sepaarates me from you. Moreover, if any Americans ever did escape from Victoria's tourist ghetto, all that is needed is to raise the Canadian dollar above the value of the American dollar in order to drive the buyers of shoddy trinkets screaming back across the borders !

Let them mourn for their own country, a land which once had such bright prospects for becoming truly worth while.

This land of such dear souls, this dear dear land,
Dear for her reputation through the world,
Is now leased out---I die pronouncing it---
Like to a tenement or pelting farm:
Yankland, bound in with the triumphant sea
Whose rocky shore beats back the envious siege
Of watery Neptune, is now bound in with shame,
With inky blots and rotten parchment bonds:
That Yankland, that was wont to conquer others,
Hath made a shameful conquest of itself.