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Financial Fitness & Life Planning

Too Big To Be Bailed Out

The stock market ripped higher in December as investors continued to take comfort in the fact that the economy is recovering nicely and corporate profits and balance sheets are robust. With equity prices that generally are not excessive and the Federal Reserve’s overt efforts to boost asset prices, the market is clearly in a good spot right now. I remain quite concerned, however, about the potential for some extremely unpleasant scenarios. The timing of such events, of course, is always uncertain. The economy and stock market could continue on their current courses for a few months, quarters, or even into next year. But I foresee trouble eventually.
 
The global solution to all major financial problems over the past couple of decades has been bailouts and other forms of artificial intervention. On the surface it has been successful each time and so it has become even more accepted, and authorities are now quicker to rely upon it in times of stress. Eventually, however, we are going to face a crisis at a level that is too big to be bailed out. Each bailout along the way further weakens the balance sheet of the higher entity or institution that bailed out the weaker one. Therefore, the eventuality becomes not only delayed but also magnified. 
 
Even in the absence of such a dire situation there are still plenty of more ordinary concerns, including persistently higher unemployment due to structural changes in the economy, a new round of housing weakness, rapidly rising interest rates and valuations that are becoming fuller and in many cases extended.
 
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership. He previously worked at Lehman Brothers, and before that at Ernst & Young. Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.
 
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928
 

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