Tuesday, August 04, 2009

Diversifying for Armageddon Part 2

In my March post, Diversifying for Armageddon, I voiced my fear that the FDIC would run out of money, meaning that future bank failures would cause savings and checking accounts to go up in smoke. My solution was to diversify my savings among several institutions as well as build up a pile of actual cash.

Today Karl Denninger voiced a similar concern on The Market Ticker. Although he's convinced that the FDIC is nearly out of funds, his worst-case scenario isn't quite as bad as mine. He thinks that the next banking emergency would force the FDIC to limit the amount of monthly withdrawals allowed for each account, thereby preventing a total collapse of the banks and giving the system time to recover. Even so, because the limit for one account may be too little to live on, he suggests the same solution that I proposed in March: spread your savings between as many banks as possible, thereby multiplying your personal withdrawal limit.
It is thus my position that even if you are well under FDIC limits you must move money around now so you have multiple bank accounts and thus if your withdrawals and access to your funds are "rationed" in a similar fashion you will be able to access what you need to pay your electric bill, put gas in your car and buy your food.
Food for thought - so to speak.


John said...

I sometimes feel like I'm Mr. Douglas (Eddie Albert)on Green Acres. Based on objective reality, I am the only rational person around but based on subjective reality, I am truly irrational. The headline news today is "Unemployment down". Here is the news nobody read or paid attention to:
The Labor Department report showed U.S. unemployment fell in July to 9.4% even as the economy lost another 247,000 jobs, the smallest decline in nearly a year. See related story.
Even a cursory glance at the numbers tells you something's missing. That something, of course, being the number of people who gave up looking for work. Because that figure exceeded the number of jobs lost by nearly 200,000, the unemployment rate actually fell.
A win is a win, no matter how ugly, and the headline number did go down. And the financial markets are dutifully celebrating the fact that the pace of job losses is slowing. See Market Snapshot.
But the underlying data are worrisome indeed, in as much as they indicate just how fragile a recovery the U.S. is likely to experience when things finally do start growing again.
It'll be hard to rebuild the economy quickly with the ranks of the chronically unemployed at post-Depression highs."

In addition, the average length of unemployment in the US is now 23 months, just shy of 2 years! That is the most since the depression.
Which brings me back to Green Acres. Where is this market going in the next 3 months? I'm open to any thoughts. I've got to go now, the phone is ringing and I have a long climb up that pole.
John from Colorado

Jody Wilson said...

I agree and sympathize, John. It seems to me that there is underlying weakness in the economy that the news reports are ignoring.

I think there are too many huge unknowns (i.e., government action or inaction) to predict where any of the markets are going to be in three months.

vv said...


Actually even if you count the people who have given up looking for a job, (which I agree is the true unemployment rate..) the seasonally adjusted unemployment rate fell from 16.5 to 16.3 % from last month. If you don't count seasonal adjustment then the rate stayed flat at 16.8%. Look at row U-6 in the link.

Jody, Steve Leuthold predicted a market bottom in early March and said a couple of weeks later that the S&P would go to 1100 and that biotech and tech would get us there. He's been right about the bottom so far and the 1100 mark seems close. However, if the consumer keeps deleveraging (since household debt to GDP ratio is about a 100%: http://media.npr.org/blogs/globalpoolofmoney/images/2009/02/household.jpg) earnings will be bad and the downturn may happen again.

Jody Wilson said...

Actually, in this article Leuthold admits turning bullish "too early" and well before November 2008, not March 2009, which means he missed the bottom by a wide margin and rode stocks down for a big loss.

Even if Leuthold had called the bottom correctly, more often than not I see prognosticators make headlines for a correct prediction or two, and then blow it right about the time they've attracted followers. I'm a fan of his bearish mutual fund, but in my mind that doesn't make him any more qualified to predict the market's direction.

I learned about the limits of good track records from following Bob Brinker, who correctly called the top in 2000, the bottom in March 2003, but then rode the 2007-2009 bear market all the way down fully invested in stocks. Fortunately for me I saw the writing on the wall in January 2008 and got out.