Mutual Funds: Will This Medicine Work?
This was before the talks of the bailout - which at the time of this writing was predicted but not yet a Washington reality. This was before several major banks disappeared. Before Bear Stearns and Lehman brothers exited the public domain. Before the word toxic was being bandied around like so much backwater sludge and before we realized that no matter what we were to try (or are currently trying) were born in the spirit of free markets and deregulation.
I offered lessons to the investor in the book about Mexico and Brazil and Argentina, all excellent examples of global investors and their seemingly insatiable appetite for risk. The US fell directly into the same trap and allowed it to happen. Even as the administration was touting a strong dollar policy, the worth of the greenback continued t slip in value off American shores.
This made the cost of the products we so deeply craved much more expensive and because many of the world’s goods are transferred from seller to buyer with dollars attached, this left our suppliers holding vast amounts of dollar-based wealth. Sadly, the only thing they could do with it was to strengthen their own economic footprint with xenophobic hoarding of resources and vast investments in their own infrastructure - and to loan us the money back.
We were hit with a double whammy of sorts as this worldwide quest resources drove the prices up - in dollars - for Americans who were hard pressed to find the money to buy what they needed, namely food and fuel.
Back in March of 2008, Mr. Roach wrote the following in a New York Times editorial: “The current recession has been set off by the simultaneous bursting of property and credit bubbles. The unwinding of these excesses is likely to exact a lasting toll on both homebuilders and American consumers. Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.”
Because of his focus on Japan and the Asia markets, he worried that the similarities between the US and this former economic giant were too alike to avoid comparison. Japan he wrote, “initially denied the perils caused by bubbles” and in doing so, he pointed out that “In Japan, a banking crisis constricted lending for years. In the United States, a full-blown credit crisis could do the same.”
But the same weak dollar that has been around for going on seven years now, may be the single thing that saves us. Focusing on the consumer he suggests would require and enormous investment in infrastructure that would help build back the confidence of our exports. meaning that we need to export hard goods, not just services.
These concerns about the strength of a country’s economy made international investing a perilous undertaking. Now that peril is present here. No matter what happens in the near term, bailout or no bailout, the dangerous landscape that was once solely offshore has hit home. Will any medicine offered now help with a quick cure? Probably not.
And as I read between the lines - as numerous news reports find numerous damaged 401(k) and retirement plans - I hear the faint whisper of stocks being used for investments in these plans. Once you move away from the realm of mutual funds, your risk grows exponentially.
But I do offer a caveat for investing with mutual funds, in your retirement plans or outside of the tax-deferred status that those plans offer. “Mutual Funds”, I write, “do not provide a safe haven from events of this kind.” To which I add: “They provide a safer haven.”
