Over the weekend, I received an e-mail from a listener in Japan. He listens to Prudent Money via the daily podcasts. He was asking me about an investment trading strategy that he had some success using. He asked me if it were a zero sum game if he was making money while everyone else lost.
My answer to him was that whenever someone loses money, there is someone who makes money. When the market was going down last year, there was someone making money. With any investment trade, you have a winner and a loser. You just need to have a strategy. What most investors think of as a strategy might really end up being a disaster. This listener has gone out and learned an investment strategy. Buying and holding and doing nothing is a strategy. However, it is not a good one considering this particular environment.
When I speak of this particular environment, I am talking about the new environment which is a permanent change. I truly believe that we will never go back to the old days (pre-2008) when it comes to investing. If I am correct in my thinking, those who do not adapt to this new environment could be in for some real heartache.
Well, consider the environment and tell me how this enormous amount of debt is going to go away and things get back to normal. Also consider that the Federal Government seems to be set on continuing to add to the debt on a daily basis with more and more government spending. The following excerpt is from Michael Panzner’s blog Financial Armageddon.
Even under the best of economic circumstances, tax season is a tense time for American households. The number of hours we collectively spend working on our returns is probably a lot more than government agencies claim.
The burden in financial terms is even greater: A recent independent survey found that the average American’s total federal, state and local tax bill roughly equals his or her entire earnings from January 1 up until right before tax day.
Now imagine that tax bill doubling over time.
In recent years, the federal government has spent more money than it takes in at an increasing rate. Total federal debt almost doubled during President George W. Bush’s administration and, as much as we needed some stimulus spending to boost the economy, the nonpartisan Congressional Budget Office now estimates total debt levels could almost double again over the next eight years based on the budget recently outlined by President Obama.
Regardless of what politicians tell you, any additional accumulations of debt are, absent dramatic reductions in the size and role of government, basically deferred tax increases. Remember the old saw? “You can pay me now or you can pay me later, with interest.”
To help put things in perspective, the Peterson Foundation calculated the federal government accumulated $56.4 trillion in total liabilities and unfunded promises for Medicare and Social Security as of September 30, 2008. The numbers used to calculate this figure come directly from the audited financial statements of the U.S. government.
If $56.4 trillion in financial commitments is too big a number to digest, think of it as $483,000 per American household, or $184,000 for every man, woman and child in the country.
So, this is the environment that we are dealt and it is full of risk. Investors need to learn a strategy or have someone manage money that understands the concept of strategy and investing versus buying and holding.
Market Update
As I wrote last week, my indicators are sending a warning sign right now. The markets are having a very tough time this morning (at the time of writing). This is the worst morning opening that we have encountered in a while. It is important to look for a change of character in the market. This is pre-mature and purely on gut feeling. I think that we are seeing a change of character right now. The bear might be back.
Prudent Money Market Outlook 