Who Needs A Put, We Get Bail Outs!

It seems like the twilight zone when stepping back and surmising the last year from 50,000 feet.

Last spring was one of the strongest bull markets in recent history, and the economy (and real estate market) was humming along with seemingly unbreakable speed.

Although the writing was on the wall for many of us, bringing profits in being ahead of the curve in shorting some of the worst offenders of the subprime crisis, most people thought we were doomsdayers and brushed us aside.

I remember vividly a number of conversations with friends who graduated from HBS in the Spring, which consisted of me trying to explain to them that we were headed into a seriously challenging economic situation and them nodding while their eyes said: "sure buddy...I'm off to my sweet consulting gig...you stay here and come up with more conspiracies".

Now, just 8 months later, the fact that we are heading into an economic downspiral is of such consensus that Bush and Pelosi are having friendly jabber about it.

What started as a "put" through continued rate cuts has now become a full on economic bailout as the President and the Congress are working hand in hand to come up with what they are terming an "economic stimulus" package.

It is discussed further in this article: Bush Nears Plan That Economists Say May Boost Growth

The punch line is this: we are going to try to deficit spend just a little more to somehow buy our way out of a leverage-induced economic cyclical downturn.

My take: this is election year politics at its finest. $150B is peanuts to this economy in the first place, not to mention the fact that at a fundamental level this is perpetuating the kind of overly-leveraged fiscal policy at the household and country level that got us into this mess.

We borrowed too much, can't pay our mortgages (and soon auto-loans, credit cards, commercial real estate loans, corporate loans, etc), so how do we fix this problem? Borrow more.

Unfortunately, I think something like this might be needed for psychological reasons (and on the campaign trail) if nothing else - we need to trick at least some people out there into thinking that things are going to be OK in the short run, as most of us are so myopic that long-run payoffs don't register.

For those of us paying attention, as I mentioned in my last post, there are starting to be some opportunities to invest in strong companies for the rebound. Not to mention all of the super-sweet stuff happening in the world of technology.

There is hope on the horizon...but in the foreground let's face the fact that there is more carnage to come.