We are heading into a full blown recession now and I cannot imagine that it will be "short and sweet" as the last two were. As Rome burned last week and Nero (aka Congress) fiddled away, Main Street got the picture and started a boycott, not out of spite or anger but out of fear. Parking places were suddenly easy to find on Main Street because the shops were empty. Talking to people who have their life savings invested in stocks, bonds and cash, one can palpably sense their fear. I cannot remember a situation like this in the forty years I have been in the investment business.
Even high school children are talking about the adversities that surround us. They are listening to their parents and they are hearing about jobs lost and savings wiped out and homes foreclosed and they are getting the picture.
The banking system, only so recently the willing source of more money than one should ever have needed or wanted, has suddenly and completely clammed up, cutting off funding and reneging on agreed upon lines of credit. Just listen to the stories of small business owners trying to finance inventories and homeowners counting on a line of credit to pay for their children’s college tuition. Just read the newspapers and listen to call in radio shows. It’s not just sad – it’s downright scary.
The passage of TARP last Friday was essential, but it is far from a panacea much less an instant solution. The loss of confidence that has gripped the banking industry will take a serious toll on businesses and consumers and those business and people are the economy. Unless the banks are willing to step up to the plate and make loans to healthy business and worthy individuals, they will only add to an already dreadful situation. Right now the banks are hording their cash because they have no confidence in the value of the assets backing their existing loans.
This problem is not just a US problem. The contagion has spread worldwide – Europe is no better off than the US and Russia’s capital system appears to have completely shut down. The spillover impact will hit India and China, whose economies will absorb the slowdown in demand from Europe and America.
How long this state of affairs will last is a function of how long it takes the world to deleverage. And deleveraging is a deflationary event. That is not good for economies, for profits, for the prices of assets and that includes the price of one’s home. The stock market does not work well in a deflationary environment. The only thing that looks good in deflation is cash. And right now cash is looking pretty good to me.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.