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Bear Sterns has gone belly up. Does that affect me?

Posted by jdavis on March 17, 2008

As you may know, on Friday the 5th largest bank in the US lost half its value and was bailed out by the Fed.  Over the weekend, it was taken over by an even bigger bank, JP Morgan (one of the owners of the Fed! – yes the Federal Reserve of the US is not owned by the US but by a small group of super-elite banks).  The sale price was $2/share – down from $170 last year!

If Bear Sterns had simply gone bust the whole banking system would have gone into collapse and, with it, the global economy. Thus, it was the better option.  It does remind me of the joke – you land in a hot air balloon in a field in the middle of nowhere. You ask the farmer standing there how to get to the nearest town and his reply is ‘Well, I wouldn’t have started from here.’

The stock market is back to where it was on January 23rd, when we had meltdown – c 1270 on the S&P 500.

The Yen (¥) is at its strongest against the $ since the mid 1990s – and when the ¥ strengthens the stock market weakens.  Yet, it’s over 6% stronger than 23rd January and the S&P is still the same.  As the Chinese say – ‘May you live in interesting times.’ We are indeed living in interesting times, as it were.

On 31st January, we wrote an email saying we thought the market had a chance to rise from the January low.  It has risen and it has fallen to where it had been.

If it falls further then there will likely be a further leg down in the market of 10-20%, having already lost c 25% since October.

Whatever happens (within reason) – and this is the crucial point – your funds will be OK!  Why?  Because the managers – Ruffer, Miton etc – have continued to be bearish and have continued to keep relatively low amounts of equities and relatively high amounts of cash or equivalent.

The high volatility funds such as gold and agriculture will benefit from $ weakness AND from stock gains i.e. both situations.  For details of why this would be just give me a call.

I have continued to be strongly bearish on the real economy – house prices collapsing, as are mortgage approvals (down 40% from last year), huge numbers of repossessions, bankruptcies, job losses etc and the stock market is NOT the real economy.  It looks ahead and in this case to after the recession/global slowdown.  The recession may yet be much much worse than even I forecast and perhaps this is what the stock market is now forecasting.

The Fed has cut the inter-bank interest rate over the weekend and will probably cut the general rate again tomorrow.  This week will indeed be most interesting.

At Armstrong Davis, we are serious about preserving capital, first and foremost (because remember the way not to make money is to lose it).  After we preserve, we will then aim to grow it efficiently when there are opportunities.

Long term, commodities, agriculture and precious metals are going to the moon.  These will make a lot of money for you.  Short term, we are in wait and see mode.

Please remember, investments can fall as well as rise – and they will.

As ever, if you have any queries – and I ‘m sure you have many – please do not hesitate to contact me.

Who do you know who could benefit from a no-obligation review of their investments.  We tend to work with clients who hold upwards of £300,000 in investments and cash (or who are 6-figure earners) and many of our clients have 7-figure investment accounts.  We’re looking for our first 8-figure client.

We merge our expertise of markets and macroeconomics with financial planning tools to provide excellent financial advice to high net worth families and trust funds.

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