The financial news continues to be so bad that I am hearing many say they cannot even watch it anymore. Last week nasty news continued to pour out of the financial services sector – State Street, Bank of America, Merrill Lynch… The sector lead the overall market lower for the week, with the major indexes down 7 to 10% on the year. We are firmly in bear market territory. Long dates US treasuries also bit the dust, likely over concerns regarding the $2 trillion plus in borrowing that the US government will need this year.
The good news of course is that we have a brand new President and he promises to try to make everything better. A shockingly high stimulus package sparks dreams of jump starting the economy, but the experts I listen to are not that hopeful. Sadly we are experiencing a “debilitating combination of economic stagnation and deflation,” that will take a while to reverse. We are facing a triple whammy of a liquidity trap (nominal rates cannot go below zero), a deflation trap (falling prices choking off consumption and investment) and debt deflation (the real value of nominal debts rises as prices fall). ( RGE Monitor)
So what do you do? Financially I would suggest buttoning down the hatches and prepare for the storm to get worse. Maintain ample liquidity if you can and cut spending. Stocks may go up, down, sideways, but by guess is we test the lows as the economy worsens. In case this makes you feel just a little better, it is a lot worse in the UK.