Today, U.S. markets were rocked by the news that the U.S. House of Representatives rejected the widely anticipated $700 billion “bailout” package for U.S. banks. U.S. markets responded by dropping more than the day after September 11, 2001, and hurtling the Dow Jones industrials down nearly 7%. The almost 780-point decline was the largest one-day point drop ever for the index.
For all of the criticism surrounding the U.S. government’s plan, even its critics had conceded that at least it was an attempt at a systemic solution. The fact that it was overturned by the U.S. Congress puts U.S. policymakers in a bind. On the one hand, the defeat of the bill reflected the will of Main Street. No one wants to pay for the bailout of the “greedy Wall Street bankers.” But Main Street should be careful what it wishes for. When markets drop as much they have today, it’s your pension fund and investments that are worth a lot less. The price of exacting “revenge” and “punishment” on Wall Street is high.
It’s also an angry young man’s game in a complicated world. The elephant in the room may be that what you as the U.S. taxpayer are really paying for is the cost of federally mandated “financial affirmative action” by Fannie Mae and Freddie Mac — granting loans to a bunch of unemployed borrowers whose welfare payments were counted as salary in evaluating their creditworthiness. That doesn’t absolve Wall Street’s institutions of taking on too much leverage. But it does suggest that casting blame is a more subtle game than the media headlines would suggest.
The bottom line? Times of crises call for pragmatic solutions. Playing dice with the country’s economic future for the sake of pandering to local political predilections because there are elections coming up in five week’s time — well, there’s a high price to pay. The U.S. House of Representatives sent a message by rejecting the Paulson bailout plan. But to arresting financial panic, policymakers must move beyond philosophical arguments of "right" and "wrong." Having rejected this game plan, they need to come up with a new one. And pronto. As they say, “no one ever erected a statute to a critic.”
So how should you deal with your investments? Clearly, it’s a time to play defense. In an interview in Jack Schwager’s classic book Market Wizards, Jim Rogers observed that there are times when you should step back from the stock market altogether. As Rogers pointed out: “One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do… Most people always have to be playing.” Certainly, with the kind of volatility in the stock market we’ve seen in the past three weeks — including today’s record drop in U.S. markets — this is one of those times.
That’s why you see that all of your recent positions in the Global Stock Investor portfolio are currency bets. In times of global economic dislocation, currencies continue to be where the action is. More importantly, they zig when the market zags. Even as Wall Street suffered it’s biggest drop of the decade, your safe haven currency WisdomTree Dreyfus Chinese Yuan (CYB) fund barely budged, ending down .39% and the CurrencyShares Japanese Yen Trust (FXY) rose 1.8%.