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I am like a bank

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October 10, 2008 – Comments (5)

I was reading a Big Picture post about how the banks are unwilling to loan to each other because they don't know who will be standing tomorrow kind of thing.

One of the reasons that I have given in the past for not being in the market is that even though I have thought that there could very well be good companies out there, I don't know what will hit them.  They may be a very responsibly operated business, but clients that owe them money may run into trouble, which would then be trouble for them.  

"The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don’t know if the other bank whom they are dealing with will still to be standing tomorrow."

I am just like a bank when it comes to my personal investing.  I don't know if the business that look good today will be standing tomorrow.  Some I can tell won't be standing tomorrow, but just because I can't see a problem today, well, this unwind it hitting everyone and some of the unseen blows are going to be fatal.

I am going to let the dust settle a bit so I can actually see the good stuff in the debris.

5 Comments – Post Your Own

#1) On October 10, 2008 at 3:48 PM, kfisherprotege (30.30) wrote:

Hats off to you for having the foresight to sidestep the hole.  The fear that comes from all the interconnectedness is exacerbating the very suspicion between the banks that you refer to and driving down prices of otherwise very well run companies.

Don't let the dust settle too long, though.  You might miss the bounce.

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#2) On October 10, 2008 at 4:01 PM, etamar2 (45.83) wrote:

I agree with the need to sidestep, and perhaps I should have too instead of losing 30% in the caps standing from 95 to 65...

But I think the important thing now is to remind everyone that what is going on is not a rational move like dwot is doing.

What many are doing now is selling frantically, while losing money, losing life savings, losing good positions when the market is sure to settle up eventually.

Two markets that can take good use of the mass sell-off are foreign investors, and intelligent, wealthy investors who buy now stocks for cheap. 

Like the dot-com bubble had a layer of people getting richer - the CEO levels mainly - the current "reverse bubble" will make those that are rich and can purchase for low even richer.  I wouldn't mind it, if it wasn't at the same time be making the confused, unaware and scared american people go poor, bankrupt and out of jobs.

Just my two cents.

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#3) On October 10, 2008 at 4:20 PM, ResearchLover (47.63) wrote:

As far as dust settling, it's hard to say what will happen Monday.  I think a weekend is long enough for some of the savvy to spot oversold bargains, but the assumption that the company doesn't rely on the credit market (or its customers) is always there...

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#4) On October 10, 2008 at 8:58 PM, TheGarcipian (54.17) wrote:

Hi D,

Those are exactly my thoughts too, sentiments that I expressed here. I understood that something had to be done to "unfreeze the credit markets" but was fundamentally opposed to the bailout bill because it never addressed this same issue you brought up: trust. But politicians during election season being like feral animals in heat, they feel they must do something so it appears that they care and are handling the situation. Then we are left to clean up the fallout. Like you, I too am waiting for the dust to settle. Then, I'll pick through the debris. Before that happens though, we've still got another 8% or so to fall with about 2-3 months of solid floor to be built.

--Gar

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#5) On October 11, 2008 at 12:02 PM, dwot (97.29) wrote:

Gar,

Another issue is moral hazard.  I completely disagree with this idea about increasing deposit insurance.  Perhaps it is wrong to say that.  I completely disagree with the 100% transfer to taxpayers.  There has to be some responsibility on the part of investors.  This idiots chasing an extra dangerous 1% should not be getting that 1% and then transferring the risk to tax payers.

A better solution would a graduated deposit insurance, 90% on the second $100k, then 80% on the next $100k, down to 50% on up to say $10 million.  Seriously, if you have $200k in a bank, you can afford a $10k loss and that's a good lesson that makes a country and a banking system stronger.  At half a million your risk would be $100k.

This is a far more balanced approach between wealth and poor and it teaches lessons that must be learned.

And it helps to get off this entitlement title wave.  People that saying the deposits insurance should be increased without any risk sharing really aren't looking at any kind of fair or balanced picture.

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