Saturday, January 19, 2008

Our Frankenstein Economy

In the classic horror film, Mary Shelly’s gothic colossus is reanimated through massive doses of electro-shock. As bolts of lightning illuminate the silver screen, the Frankenstein corpse begins to twitch, and through the miracle of mad science is awakened from death.

After his resurrection, the creature (best-played by Boris Karloff) becomes like a doe-eyed child fascinated with flowers and the lost beauty of the world. But in a sad turn of cinematic events, the superstitious town folk are reviled by the great doctor’s marvel. In the tragic final scene, a mob armed with torches corners the creature in the village windmill, where his delusion life renewed ends in a pile of smoke and ash.

Apropos of the film (mea culpa for my second movie reference in as many weeks), the “mad scientists” in Washington are floating plans to stimulate our faltering economy. There appear to be as many proposals as there are lobbyists to promote them. The real hidden danger of any “stimulus” plan is the illusion that there is some type of predictive science that will produce a quantifiable outcome. Nothing could be further from the truth. In fact, if cornered and pressed to honesty, none of these otherwise well-meaning advocates could predict a certainty of result.

The prospect of a bipartisan deal briefly brightened Wall Street. But, at week’s end, the Dow fell nearly 500 points. During a speech to Congress, Fed Chair Bernanke gingerly told his audience that a well-designed and swiftly implemented stimulus package “could be helpful.” He, however, hedged his support of an economic jumpstart, when he said that “fiscal and monetary stimulus together may provide broader support for the economy than monetary policy alone.” As a self-aware man, the Chairman is forthright enough to acknowledge that no matter how well crafted the package, economic stimulus is by it very nature, a “crap shoot.”

The stimulus packages being pitched reflect a broad spectrum of political ideologies. Several conservatives lawmakers propose that the government grant additional tax cuts or provide direct tax rebates. On the other side of the aisle, liberals, urge a one-time cash enhancement to the monthly checks received by social security recipients. One group argues that any stimulus package must target low and middle income families. While the other advocates a package that jumpstarts corporate spending. The price tags for these proposed packages are just as varied as their proposed components. The projected costs range from a paltry $50 billion to whopping quarter trillion dollars! The sheer cost gap between the top and bottom ends of these proposals is further indicative of the inherent uncertainty surrounding the outcome of any stimulus package.

To complicate matters, Congress and the President also must weigh the questions of timing and the possible impact on the federal deficit. As Mr. Bernanke warned, a stimulus plan that kicks in too late or that worsens the structural budget deficit could be “quite counterproductive.”

As your father always taught you … don’t “throw good money after bad.” Apparently in an election year, the absolute truth of this advice is quickly forgotten. The federal government could scatter hundred dollar bills from the rooftops or drops bags of money from the sky. But unless we address the issues of our waning industrial base, long-term job creation and increasing the efficiency of resource use, we will be chasing good money after bad.

If the great minds of Washington and Wall Street are unable to agree, what course should the individual investor take? There is no question that the Washington and Wall Street insiders will push a package that protects their imbedded interests. This means that the savvy investors must be proactive to protect their portfolios.

Consider limiting your exposure by unwinding a portion of your stock market positions. Become more liquid. Find markets that are negatively correlated or actually non-correlated with the U.S. stock market. The big brokerage houses and hedge funds already are playing the foreign exchanges, precious metals, foreign currencies and indices. Why can’t you?

In this climate of flux and uncertainty, you must choose the type of investor you will be? Will you let the villagers chase you into the burning windmill … or will you decline the good doctor’s kind offer, and take responsibility for reanimating your own portfolio?

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