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Get Out Your Airsick Bag!

December 13, 2007 By:
Fred D. Snitzer, JE Feature
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Returning from the Thanksgiving vacation, the market, as represented by the Dow Jones Industrial Average, continued to digest more financial data, reassessed the scale and scope of the credit crisis, recalibrated the chance for a recession in 2008, and proceeded to throw up, falling 236 points and ending the day at 12,743.

Over the next two days, it rebounded, gaining more than 500 points, buoyed by a $7.5 billion injection of capital into Citigroup by Abu Dhabi and rumors of another rate cut.

This is rational?

As if on a dime, the market pivoted from the sanguine opinion that the credit problem could be contained into a 50 percent chance of a recession in 2008. This sudden change in market sentiment illustrates several important ideas about the markets and the people who follow them:

· The markets are extremely large and complex.

· Human beings -- even very bright ones with access to massive amounts of data -- cannot possibly know everything going on in a trillion-dollar global economy; they are not omniscient.

· The disparity between the awesome complexity of the world and the limited nature of man means that the confident statements of economists, even those with doctorates and positions of authority at the Federal Reserve, need to be treated with some degree of skepticism.

· The markets are just a collection of people, and people can be erratic -- ergo, down 236 points one day, up 330 the next.

As to what we should do now, the answer depends on who you are talking to.

There are many ways to categorize and divide human beings -- by gender, race, religion, ethnicity, nationality, personality, age, etc. On a more philosophical note, humanity, it is said, can be divided between those who place liberty over order, and those who place order over liberty. One side prefers to keep government small and limited (at the expense of order), while the other side prefers the tangibility and durability of order (at the expense of liberty).

This difference in philosophical temperament can be seen in the different responses to the ongoing credit crisis and the fallout in the housing market.

If you ask someone with a more libertarian temperament, he or she will probably give you a response like this: "Let the market work it out, let those who took risk suffer the consequences and keep the government out of it. If easy money caused this crisis, then trying to cure it with more easy money is like giving heroin to a heroin addict to ease his pain."

In other words, do nothing.

If you ask someone with a more interventionist bent, he or she will probably say something like this: "Markets don't always work, and not using the monetary and fiscal tools of government in this situation is foolish. Not only that, but this experience demands not only a more activist government intervention in the form of rate cuts and possibly tax cuts, but an improvement of overall financial structures."

In other words, policy-makers should not only use existing government tools, but they should expand on them.

How this difference in philosophy plays out among the electorate and the politicians it selects will determine not only the outcome of today's issues, but also the yet-to-be-faced problems of health care and Social Security.

We don't know where we're headed. We don't know how the government is going to respond. And we don't really know where we will be in another year.

What we do know is that markets don't always go up -- and when they do, it's not in a straight line. Progress is three steps forward and two steps back.

Painful times won't go away, but as we come to the end of another eventful year, let's try to remain optimistic by quoting everyone's favorite war hero, Winston Churchill, who said about this country: "America will always do the right thing, but only after exhausting all other options."

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates. For more information, go to: www.prudent management.com.

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