Prudence

Let's just get right down to things. You don't need me to tell you that the financial markets are broken. Just like Japan circa 1990 and the World circa 1930. Don't let anyone talk you down or sugar coat things with lists comparing why this time is different than the last great unwind. It isn't. In many ways it could be worst. I remember listening to CNBC's chief economist Steve Leisman proudly report in 2006 that all of the major 66 developed economies where enjoying parallel growth; and mind you not tepid growth, historic growth. I remember thinking, why is that good? In fact, I thought so much of the quote I wrote it down across the top of my white board in bold face. My concern was if we were all expanding at the same time there would be little to hold back the eventual contraction. And just as our collective expansion amplified our growth potential, the collective contraction would be equally magnified. These are the same principals taught in your high school physics class. When two waves of identical wavelength are in phase, they form a new wave with an amplitude equal to the sum of their individual amplitudes (constructive interference). My fear is the trough of this cycle could be a ways off, just as it was in the 1930's.

An interesting conversation keeps recurring to me. Friends and family inevitably talk about the financial crisis and why it appears overblown and even conspiratorial. Either, "the media is making people hysterical", "the bankers were corrupt" or "the government failed us". When I start rattling off why this situations closest historical equivalent is the 1930's, their eyes glaze over and you get the look of, "did this guy just say he was abducted by aliens?" In any case, today I got an email with Merrill's latest research on Bear Market's. It's take away:

"This is not 1929. The Great Depression was exaggerated by fiscal and
monetary policy mistakes.

• Global policy makers do not seem to be repeating them and that period
may be a poor comparison for today. "

My Brother-in-Law who had sent me the email had been attempting for several weeks to make the case of why this situation was not 1929. I found it quite funny when not a few hours went buy and I read the headlines from Merrill's own CEO, John Thain:

Financial Times- Merrill Chief sees severe global slowdown. Thain compares situation to 1929.

Mr. Thain went on to say, “Right now, the US economy is contracting very rapidly. We are looking at a period of global slowdown...This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow down we’re seeing now.”

Oops! Perhaps Mr. Thain is attempting to correct the irony of Merrill's own contradictory research. These are the same guys who told you why "it's different this time" on the way up in the Tech bubble, the housing bubble, the commodities bubble and now on the way down in the credit crisis. If this doesn't reinforce that it's just one giant ponzi scheme and these guys are the mother of all salesmen, yikes!

So where does that leave us today and what should I do with my money? I can't write this assuming individuals own risk tolerances and how they approach the market, but for me it's all about relative performance and perspective. Isn't that all we should care about in a deflationary environment? If the portfolios of my average countrymen are loosing 50% of their purchasing power and I only loose 25%, havn't I strengthen my relative purchasing power two times even though I lost 25%? The octogenarian investor Richard Russell once wisely described a bear market as a market environment where everyone looses, the winners are those who loose the least. This is the mentality to maintain in the current market environment, those who choose to be brave, ignorant or reckless will surely have their heads handed to them quicker than they can scream UNCLE.