The Edge Of Prosperity

It is such a great feeling to fly down the stairs. The adrenaline rush, feeling of freedom and fear combined. But eventually there comes a crash. We’ve been flying for almost thirty years with increasing acceleration and increasing sense of prosperity. Slowing the downfall will inflict some pain and maybe some broken bonds, and so we are avoiding pain at all cost hoping that the final crash won’t be so bad.

Anecdotal evidence does not correlate with the “jokers” on the screen of the TV in my office. It has been some time since I actually turned the volume on. This is not because I am smarter than any of those guys, but rather because I understand one thing that they do not…..neither I nor them poses absolute knowledge of what is going to happen in the future.

In my line of work, I am quite frequently findign my self face to face with a number of business owners, most of whom are barely making ends meat these days. Their situation continues to deteriorate. Almost all of them do not have access to financing and regardless of my advice use their own capital to keep the business running. Many of them wanted to get some kind of financing from the bank a year ago as well as six months ago with no luck. Now, when the government and our president project from the screens how the lending has increased, they are still unable to get the loans they need to grow or to sustain the operational level. The major reason is that no one will lend money to a business that is in the red, regardless of what the government says.

A friend who runs the risk control unit for the regional bank told me a month ago that regulators do not want banks to lend at all. There is common sense behind this conspiracy. Government knows that there is more to come. They know that they are limited in the amount of adrenalin they can supply into the system. They are deliberately preparing the banks to face another tidal wave of foreclosures in commercial and higher end residential real estate. The “sit and wait” strategy may not work and we will have to face the situation where small and medium businesses will seize to exist, and what is going to be left are big banks and corporations.

The downsizing or complete elimination of the small business will adversely affect the work force and it’s spending ability. The restaurants are still full and people fill the malls. They buy less, but looking at the value of their 401(k)s and investment portfolios they hope that the economy will follow and the times of exuberant prosperity will come back. Once again the tail wages the dog. In my understanding the market has very little to do with the reality and vice versa. Hard to believe, but this is the way it is. In 2007 the market was at its peak and the economy was about to stall. Today the economy is still in intensive care unit and the market rallied 70%.

If you are an investor, the only advice I give you is…… stick to the basics. In the current scenario the risk cannot be calculated or estimated properly. There are too many variables that may cause a trigger event which will cause the market to go down in a very abrupt manner. Your broker is probably satisfied with the performance of the last year and his guard is down. The next wave may be brutal and I do not want you to be in the position where the gains that you had in the last year will evaporate in the market.

Flipping through the channels of the TV set a few years ago I came across the devestating story of the tragic plain crash that left singer Alia dead. There were some passengers that were still talking normally after the crash and were dead just a few minutes after. Our economy and the state of the financial system remind me of that case. Adrenalin in the system allows us to live another day, but the adrenaline (read “money”) supply is drying out and we will soon face the inevitable day where we will get to the edge of prosperity. Another flight of stairs may lead to the crash that will make the 1929 look like a joke.

by Yugine Abudimer

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