Tuesday, September 16, 2008

The Financial Crisis Expands: Where Should You Invest Now?

Lehman Brothers is bankrupt, Merrill Lynch has been sold off and now AIG, the largest insurer in the country, is on the ropes. Lehman’s bankruptcy was the largest in history and its ramifications will be hard felt in the financial world, but an AIG failure will be even worse. If you read the headlines this morning, it is amusing to see every Wall Street person say AIG is “too big to fail.” Of course they don’t want it to fail because it is going to have a huge impact on the market. AIG insures financial products, and “'I don't know of a major bank that doesn't have some significant exposure to AIG,’'' said Kenneth Lewis, chief executive officer of Bank of America, in a CNBC interview,” as Bloomberg reported.

Yesterday in the blog, I applauded the government for letting Lehman fail, and I hope they are willing to do the same with AIG. Sure, it will be tough, and in the short term things will get worse, but over the long haul, we will be glad we did it. Lessons have to be learned these organizations have to make fundamental changes to the way they are doing business.

Bloomberg reported this morning that, “Republican presidential nominee John McCain told CNBC today that there is a ‘moral hazard’ in forcing taxpayers to be responsible for the poor performance of companies. Asked whether regulators should allow AIG to fail, McCain said, ‘I think you have to.’'' I want to applaud McCain on this statement, and I sincerely hope that the rest of the government feels the same way.

For investors, times like this are extremely confusing and dangerous. The stock market has already taken a huge hit, and it is likely to drop even further. Even bank deposits are in question with many financial institutions on the rocks and the FDIC seemingly underfunded at the moment. You could look to other countries for safety, but it doesn’t appear that you will find any solace there, either, in this truly global financial crisis. Gold has been extremely volatile of late and many investors are wary of investing in it as prices have plunged. Real estate continues to fall, not really offering any comfort either. So again, where should people be investing?

I’m curious to hear what all of you have to say on the subject, so I would encourage you to let us know what you think the best investment is right now and why.


Anonymous said...

Buy gold, gold and more gold. The financial system is coming down, and when it does you are going to wish you had gold. Don't pay attention to the ups and downs that have been going on of late, when things continue to get worse everyone is going to head for gold. Just make sure to get there first.

Anonymous said...

offshore real estate in emerging markets. It is softened as well due to financial issues stateside, however this creates good buys and depending on where you buy it will at least holds its value during the slow times, which is more than you can say for most domestic investments currently.

Eric Ames said...

I think both of these suggestions are valid. While I don't think the sky is necessarily falling, we are looking at a very rough road ahead for our economy, and I do think that things are going to get worse than most people think. That being said gold tends to do good during these times. If you go that route though I wouldn't suggest putting all your assets in gold because it is extremely volatile.

Offshore real estate is also an intriguing possibility, but from experience I know it is a lot of work as well. If this avenue interests you make sure to find good people to help you. Again though I wouldn't recommend putting too much in any one emerging market, because they too can also be volatile. Since this is a global recession for the most part no place will be safe, including emerging markets. But certainly some markets will be better off than others.

I think the key here is that people need to be diversified. The more places you have your money, the less likely you are to loose it when one, or multiple, investments go bad. Diversification is important when things are going good, but it is even more important when things are going bad.

Unknown said...

Inflation, Rotation, Hard Assets:
The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research from Agcapita Partners LP (private equity firm based Calgary Canada) shows that investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market/high inflation period in the 1970s equities materially underperformed farmland. The S&P 500 index returned less than 2% per year nominal (negative 50% in inflation adjusted terms), fund in a money market account returned 6% in real terms (barely keeping ahead of inflation over 10 years) while western Canadian farmland went from around $100/acre to $550/acre (550% nominal return, 176% in inflation adjusted terms).

The world is still in the early stages of the current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further price increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

Unknown said...

Looking for an investment? Consider the Riviera Maya, here in Mexico. Spanish banks are pouring money in to the region, real estate prices have appreciated 4-fold over the past decade (London Financial Times) and most transactions are all cash so speculators are scarce. Last - it's absolutely beautiful!

Check out: www.investmentpropertiesmexico.com

Christopher Wheat said...

Invest in art it has always been a good investment. . I have tried to advise my clients over the years as to the value of collecting art. The one great thing is that there is virtually an investment for every income level. You don’t have to purchase at the top nor do you want to. The key is to find a good artist that is making a career of being an artist, Not a part-timer. Find an artist that is selling and making art that people like and can understand, representational art is a good place to look… Landscapes, Seascapes, Marine art… If you are looking for the right artist take a look at www.christopherwheat.com Best of luck in this market looks like the art investment doors just might be opening up like flood gates.