The "D" Word

It has been bounced around a bit of late, but there has probably been no serious talk of this turning into a Depression. It seems unthinkable with all we know today that it could happen. A few Doom-and-Gloomers have made passing reference to the possibility, and a few heretics have proclaimed we are on the verge or in one, but there have been few if any credible sources to say we are there or almost there. That is why this piece got my attention. When the managing director of the IMF says that advanced economies are already in "D" territory, plus a lot of downside risk, it deserves some attention.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home

In my experience, the IMF has been one of the few official bodies that has been calling it like it sees it. They predicted, as I recall, about $2 trillion in losses long before we got to $1 trillion. At the time, their prediction was at the high end of most estimates, yet now it is probably toward the low end. Roubini is around $3.6 trillion right now.

Whether right or not, this has to give some doubt to how effectively we can fix our financial institutions with the support we are offering. Some of these institutions are effectively insolvent, and have been for some time. When their losses double or perhaps even triple, then what? We are simply throwing good money after bad.

I suggested last week that we need to nationalize certain of the too-big-to-fail financial institutions. Perhaps not all of them but some of them. We are in some instances giving them more money than they are worth in terms of market captial. Why then shouldn't we, the taxpayers, own them.

Some commented in response to my nationalization post that there are millions of individual investors who invested in these institution that would be wiped out if we nationalize them. These are people told by consultants to put their money in these companies as safe havens paying good dividends. I truly feel for these people, but they are already toast if they invested in these companies and did not sell already. For example, Citigroup was at a high around $57 a share. Let's use an easy math example and say you had $57,000 in Citigroup at the high, i.e. 1,000 shares. Now your investment would be worth less than $4,000, and that is after a 10% gain Friday. Taking the other $4,000 is not wiping these people out, they are already wiped out. And they need to understand that holding this particular stock is going to be speculation, not investment. Could it go up several hundred percent this year? Sure if the government gets stupid, but it could also get wiped out. "Investors" are not in this stock now, or should not be, "speculators" should be the only owners.

Mind you, this is not to say that if you have a stock down 40, 50, 60 or so percent that continuing to hold it is a bad idea or speculation. My comments are isolated to a few poorly run financial companies that in my view deserve to fold one way or the other. There are still plenty of companies out there that undoubtedly will survive and that are probably good bets right now. Indeed, several very good investment books I have read would highly recommend this period as a promised land for investment. You see certain very good investors like Buffet putting his foot back into the pool. He certainly sees potential for more downside but he certainly knows it is foolish to try to guess a bottom.

I do not recommend individual stocks, but right now I personally am only investing in very well capitalized stocks with little to no debt. And of course they need to have a good product/service that will not become obselete. There are a lot of these out there, you just need to look. They too can go down significantly from here, but they will likely do quite well when we come out of this.

Disclosures: None