EXCESS CONSUMPTION

I Try To Stay Away From Sugar. That's because I have diabetes. Fortunately, they make everything from Hershey's chocolate to Jello Pudding without sugar. Sometimes they use a substance called "sugar alcohols" which are chemically altered sugars that have a sweetening effect without causing an increase in blood sugar. If you read the label carefully, you will see a warning that says: "Excess Consumption may have a laxative effect. As one who has experienced excess consumption of sugar alcohols, I am here to tell you not to ignore that warning.

We Can Extend That Warning To The Economy. A natural consequence of excess consumption causes considerable discomfort in our economy. That's why the Fed and JP Morgan had to bail out Bear Stearns. The Bear got in trouble because they were stuck in the sub-prime mire. The sub-prime fiasco was started to allow borrowers with no down payment and marginal income to buy houses they couldn't really afford (excess consumption). During the past five years, virtually anyone who could fog a mirror could buy a house. Lenders who originally made sub-prime mortgages cashed in big time. Because few lenders offered these loans, they had little competition and could charge high enough interest rates to offset the projected higher delinquency rates. Because of property appreciation and a high demand for housing, the projected high delinquency rate didn't happen. Because of the high profit margins, more and more lenders got into the business and competition forced lenders to lower their rates and relax their qualification standards. The Fed didn't help when they lowered the fed funds rate to 1%. The yield on savings accounts went through the floor and investors had to utilize a more speculative approach to get higher investment returns. We are now experiencing the "laxative effect" that the labels on sugar free foods warn us of.

So Now What Do We Do? The Fed is trying. They even took time yesterday (Sunday) to lower the fed funds rate by a quarter per cent. Another cut is expected on Tuesday. This is the same practice that caused the present fiasco, only now some other unintended consequences are taking place. The dollar has lost much of its value. In Europe, oil prices are up over 100% as opposed to 200% in the US. This is because of the weak dollar. I may sound like the people I complain about, those who love to point out problems but have few solutions to offer. Here are some of the more obvious measures you can take.

1. Raise cash. I don't mean to imply that you should sell everything and go to cash; however, instead of re-investing your interest and dividend payments, leave them in cash. This will allow you to withdraw money for emergencies without having to sell assets into the current soft market.

2. Avoid excess consumption. Don't use credit cards if you can't pay the balance monthly. Don't borrow on your home to buy depreciating assets (cars, furniture, etc). Before making a major purchase ask yourself if you really need it and make sure you can afford it. If you aren't willing to pay cash or write a check, you probably are better off foregoing the purchase.

3. Diversify. Don't put all your money into any asset class. While I recommend emphasizing certain market sectors to fit what you want to accomplish, don't overdo it, especially in this volatile market.

4. Don't quit your day job. Unless you are absolutely certain you will have adequate cash flow to replace your employment income, don't quit working just yet. If you've already retired, look for new employment, at least part time. This income can help you weather some tough times and may even be better for your mental health than a life of leisure.

Reflections on Turning 70. I guess I am now one of the "elderly" but I am not retired. I still have clients and I still manage money and consult for my former company, "Westmont." Frankly, I am as retired as I want to be. I am reminded of the 103 year old skycap at the Beaumont airport who considered himself extremely fortunate to have such a fine job at his age. He called in sick on a Friday and passed away the following Monday. A much better fate than being "warehoused" in a nursing home waiting for death to set you free.