Friday, September 26, 2008

The $700 Billion Question: How much will the taxpayer bailout affect my investments?

I have been busy consumed with dirty politics over the last few weeks and haven't been writing much on investing. I cant help myself, these are interesting times in which we live.

I, like many of us, have been nervous about global economic problems and what that might mean to my investments.

I have a share portfolio, a house, a business, money in the bank and other financial interests that are going to be deleteriously affected by the fallout from the Sub-Prime meltdown.

Whatever your politics or attitude to investing, the US$ 700 billion taxpayer bailout of the US banking system is a necessary evil-I happen to be vehemently opposed to this kind of corporate welfare, but that is another story-we will suffer more economically if nothing is done.

So lets get to the point of this little rant.

Assuming the bailout will go ahead in a reasonably swift fashion, and it is likely to happen, how much impact will there be on your assets?

To be sure there is no free lunch when this size bailout is made, someone has to pay, in this case the American taxpayer digs deep and pays directly and the rest of the world will get caught in the fallout in a more indirect way.

$700 billion of extra debt for the biggest economy in the world means higher interest rates, higher gas, food and living costs and much, much more for the rest of us. All this unproductive spending means higher inflation, a slow down in the US economy, and a cut back by corporations-even outside the crippled financial sector-which will clearly have an impact on employment.

A decent recession is something we will have to look forward to and this will impact on asset classes of all kinds. When $700 billion is removed from an economy like that, your house, shares and business are going to be worth less.

Even though I am a long-term investor in all the assets that I hold, it is still hard to take the day to day devaluing of those assets.

I wrote a piece the other day about what companies you might consider buying during an economic slump of this kind and came to the conclusion that buying stocks in companies that sell day to day commodities or things that people will still use during a recession is a relatively safe bet.

I called it "The Monopoly Board" approach to investing, buy the eclectic, water and airport company monopolies and you will soon see your wealth increase.

Clearly shares in companies that sell widgets that are not essential are going to struggle during the coming downturn and as a result they ain't going to be worth as much.

If the bailout works and it probably will in the medium term, we will still need to hunker down and live a bit more frugally than we have been over the last 15 years or so.

Global economic growth was astounding in those years, assets increased in value multiple times and you shouldn't be surprised if your current assets lose half of their value before things get better. Even with a decrease of that nature we will still all be better off than we were at the beginning of this century.

Oh well, at least I still have my health.


Buy Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up: What I've Learned About Surviving Tough Times

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c Share Investor 2008