The yo-yo decade

We've got some push/pull ahead in our economy. Two steps forward, one back, one forward, two back. If you're investing for the long run, to buy and hold, you may as well be saving your cash in a mattress. Honestly, if you look back at the decade most economically similar to our own (late 70's-early 80's) you'll see the market has no real direction.

We've had all of the things that gave us the economy of the 1970's. We've had a massive expansion in government (LBJ, Bush) we've had oil price shocks due to geopolitics, and years of inflation weighing on our standard of living.

In some ways, we have yet to really feel some of the problems of the 70's. We haven't gotten bit by huge inflation...yet. It's probably coming pretty soon, and it stands to be even more severe than the 1970's. For now, the serious inflation will probably have to wait a few years, we've probably got some mild inflation in the next few years.

The inflation will be limited by the amount of bank money to be lost, and the unemployment rate. For inflation to really get hot, the banks have to stop having writedowns, and jobs have to start returning. They both work against inflation.

We've had some pretty good feelings recently (not me, the loons not paying attention) but we're due for a little reality. We have put off problems in our economy for too long, and they must be felt.

The real question I have right now is...will the US swoop in and bail out the small banks, when they have the same effect as the residential real estate did on the big banks? The banks which will be hurt by this are local banks who lent money to local small businesses who are being crushed, and then they find themselves unable to sell the building the business once occupied.

Will there be a bailout for small banks? I think there will be action, but short of a full bailout (see my article describing the bailout below). I think Obama will enact some "save the American small business" bridge...either in the form of interest free loans to small banks, or some kind of pre-recievership condition before the FDIC lets them fail. Obama will do something, because he has carte blanche from congress.

I'm pretty sure talk of this kind, identifying a problem (like George II did last year) and talk of a solution to save small banks, will start tanking the markets this fall. The inevitable yo-yo...my advice, sell and buy when you think things are the crappiest.

I think the Dow will be over 10,000 this year...but I know it will fall below 8000, that is for certain.

False recovery, be sure to be ahead of the game.

Note...I'm guessing we won't see a full scale recovery, a real and lasting recovery, until at least 2016, maybe even 2020. Until then, the weeding out will continue. You should not be staying out of the markets completely, but be smart about when/how you invest.

Think about what kind of businesses will be hurt the most this fall. Certainly anything tied to consumer non-discretionary spending (Microwave ovens, custom kitchens, color TV's) will fall off pretty hard. Probaby another round of falls in the financial world, nowhere near the scope of last year's fall.

Even if you love a company in one of these categories...stay out until you think the bottom is out...then buy.

Commodities should be no exception to the rule, although depending on the level of panic, gold may hold decently. Silver should be hurt, I'm thinking it's likely overpriced now.

The auto companies will go down with the rest of them, but it may provide the buying opporitunity of a lifetime, Ford or GM only...not Chrysler. Both Ford and GM are in the middle of a massive shedding/restructuring, which along with the US consumer slowly trickling back into the showroom, will at least give you a chance to sell at 2 or 3 times what it will be worth this fall.

I'm still scoping for some fall-proof stocks, but we might just have a slide across the board.

When things do start going badly, that's when you need to start picking up some great values. Do it conservatively, don't put your nest egg into a 4 cent stock. Find some companies that fall in price only because everything else is. It is important to do your research early, so you know which ones you're keeping your eye on.

It is going to feel weird to be selling in the next month or so, when things seem better, and even weirder to be buying when the world seems to be covered in manure...but people who do so are the ones getting wealthy.