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Making Sense of the Global Financial Crisis

Pedestrians are reflected on an electric market board in Tokyo showing the Japanese stock's 974.12-point fall in Tokyo, Friday, Oct. 10, 2008. Japan's key stock index plunged a stunning 9.6 percent Friday to close out its worst week in history as frantic investors worried about a global recession dumped stocks after huge losses on Wall Street. The benchmark Nikkei 225 index tumbled 881.06 points to 8,276.43, its lowest since May 2003. It was its biggest one-day percentage loss since the stock market crash of October 1987. (AP Photo/Katsumi Kasahara)
Pedestrians are reflected on an electric market board in Tokyo showing the Japanese stock's 974.12-point fall in Tokyo, Friday, Oct. 10, 2008. Japan's key stock index plunged a stunning 9.6 percent Friday to close out its worst week in history as frantic investors worried about a global recession dumped stocks after huge losses on Wall Street. The benchmark Nikkei 225 index tumbled 881.06 points to 8,276.43, its lowest since May 2003. It was its biggest one-day percentage loss since the stock market crash of October 1987. (AP Photo/Katsumi Kasahara) (Katsumi Kasahara - AP)
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Olivier Garret
Economist and CEO, Casey Research
Friday, October 10, 2008; 12:00 PM

U.S. stocks continued a relentless sell off today as fears of global recession continue to overtake government efforts to address the financial crisis.

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The market is headed toward eight days of losses as it faces deepening fears about the financial crisis and its spillover to other parts of the economy. Traders have consistently shrugged off drastic government efforts to address the problem, from a global rate cut to plans to buy toxic mortgage debt. The Bush administration is now hammering out the final details of a plan that would allow the government to inject cash into banks in exchange for ownership stakes.

Olivier Garret, economist and CEO at Casey Research, an investments firm, was online Friday, Oct. 10, at Noon ET to discuss current economic conditions and address the "unsettling fear," as President Bush described it this morning at the White House, about individuals' and the world's economic well-being.

A transcript follows.

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Olivier Garret: Hi, I am Olivier Garret, CEO of Casey, I am happy to answer your questions as the credit crisis continues to unfold and markets continue to collapse.

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I don't get it: So, if we aren't supposed to panic, why are people selling off their stocks like crazy? Don't they understand that continues the vicious cycle going on?

Olivier Garret: As contrarian investors we believe that it is in times of panics that the best opportunities have found, the current crisis is very severe and I am not sure we have hit bottom but bear market rallies are the best time to make money

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Maryland: Good Afternoon. As someone who is watching his 401k deplete, What is really the blame? Free market capitalism, deregulation or just plain greed from the CEO's? This swap credit fiasco is killing many American retirement plans.

Olivier Garret: I believe that our own government making credit easy for people that should never have afforded to buy houses was a start.

Low interest rates, incentive for Fannie and Freddie to loan to everyone. Poor regulation of investment banking allowing banks to leverage 30 to one

Unfortunately until the bubble has burst completely, all of us are going to get hurt

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Kenosha, Wisc.: Thanks for taking the time to do this chat. I've thought the market has been overvalued for a while so I've been keeping most of my money in CDs the past few years. Now that stocks seem more reasonably priced, I am considering starting to move some money into stocks. Do you think we've hit bottom or do you think there is more downside?

Olivier Garret: I do not think we have hit bottom yet. The best investment at this point is probably gold, we are facing a real meltdown, a greater depression, the Fed is injecting money in the economy by the Trillions and this will result into very high inflation, the dollar is going to collapse, Gold is your best bet to safety until the storms quite down

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Ellicott City, Md.: There must be huge amounts of cash sitting out the market right now. Where is it? In Treasuries yielding 0 percent? When it comes back (and it will, right?) the market might bounce back as fast as it's dropped, or am I dreaming?

Olivier Garret: The markets will come back, the question is when. We believe that this is not your usual depression and that a lot more bad news is going to come out. At this point we think people should have cash and gold to hedge against the collapse of the dollar. There will be soon opportunities to get back in the market but I would not rush to it.

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Boston, Mass.: Olivier, I just looked at Casey Research and it looks like you guys are big fans of gold. Do you suggest buying gold right now, and why? What percentage of portfolio? How can I buy gold?

Olivier Garret: In normal times we would recommend up to 10% right now we recommend to increase this level to 30% in physical gold and in addition to invest in gold and energy producers as they will see great appreciation going forward.

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N.Y. Capitalist: OK. I'm buying gold. My question: Numismatic or just plain old bullion? Which is the better investment?

Olivier Garret: Plain old bullion if you can put your hand on it (most suppliers are out right now and the mints can't produce enough. You can buy ETF's like GLD or buy futures an option, our publication Big Gold can give you very good advice.

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Washington, D.C.: When you say "cash," what precisely do you mean? Dollar bills under the mattress? Money market accounts? Treasuries?

Olivier Garret: We think people should have cash on hand, the balance in FDIC insured account and treasuries. Long term cash will be a very poor investment as we expect the serious inflation from the large injection of money the Fed is putting into the economy, the printing presses are rolling and will not stop for a while, expect prices to increase dramatically in 2009-2010.

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Denver, Colo.: What if your retirement mutual fund companies don't have gold as an investment option? Then where do you go? Do you move all your diversified investments to a companies that do have gold?

Olivier Garret: I would put it in cash right now and try to find ways to invest in gold as soon as I could. Energy and commodities will be a great investment too but they may continue to slide a bit as the recession unfold. In the medium term though, the world will need cars and will continue to need food, the recession will not change the demographics in China and India.

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Washington, D.C.: You seriously think gold is a good investment while prices are high? Wouldn't one lose their shirt, once the gold bubble bursts?

Olivier Garret: Remember that the high price of gold is not that high once inflation adjusted, in 1980's dollars gold is trading at around $250. During the recession in 1980, gold peak at $800, we believe the current crisis is much worse than what happened in the late 70's, we predict that gold will climb north of $2000

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Falls Church,Va: Hi Olivier,

We are a hard-working couple that was priced out of the housing boom (we always believed in trying to save 20 percent for the purchase). At this time, I only hear all the economists and academicians talk of reducing the loan amounts for the people that had no idea of the loans they were getting into. Why aren't any economists trying talk people into 50/60-year mortgages rather than reducing the loan -- As a hard-working person and taxpayer I understand that money does not grow on trees -- when a person realizes they will be working for the rest of their lives for a massive loan they took out -- fiscal responsibility will set in. Can you please explain the challenges/pitfalls of this approach 'vs.' continued fiscal irresponsibility being rewarded as an economist?

Olivier Garret: Hi, I am all for fiscal responsibility, helping people out is a great goal but ultimately we all need to live up to our mistakes. It extending the term of a loan will help, I believe the lender should consider it rather than have to foreclose and take a hit in a declining market place. Let the markets adjust, banks do not want to foreclose and realize losses, let them negotiate with borrowers to keep their portfolio and avoid collapse, I am not sure government will help there.

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Portland, Ore.: Are foreign investments/currencies safer than U.S. right now? If so, what country?

Olivier Garret: Europe is in a bigger mess than we are and the rest of the world as challenges too. Diversification is always good but right now all currencies are tied to this financial crisis and governments across the globe are injecting billions and trillions of dollars to ease the credit freeze. This will result in worldwide inflation and gold , energy and commodities will appreciate dramatically against all currencies

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Bailout.: Thanks for taking my question. What about the suggestion by the Feds that at least some of the $800 billion will be recouped? A recent article claims that numerous loopholes are present (to be expected with so little time given to policy analysis) which would minimize or prevent that. An example they provide is that, although if mortgage holders later sell their homes for a profit, that profit reverts to the federal government/taxpayers, there's a de minimus provision for $100 million which allows for banks to package the mortgage profits for less than that (say $99 mill), and the payback provision isn't triggered, so the feds/taxpayers get nothing. Is that the case? And given a few more such loopholes, have we just sent hundreds of billion dollars down a bottomless pit? And is that what the markets are responding to? Thanks.

Olivier Garret: The fact is that the bailout bill also included a provision that allowed the federal government to raise its cumulated deficit by $700 billion, I do not think we will see these billion back, even if there is some recovery, our friends in DC will spend it elsewhere

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Portland, Ore.: For long-term investors who don't have to sell their house right now or aren't retirement age for quite a few years, what is the best way to ride out this storm?

Olivier Garret: Right now, you want to have lots of cash, gold and be ready to invest in commodities and countercyclical businesses like food companies, utilities as soon as the markets stabilize.

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Austin, Tex.: If you expect the dollar to collapse, why has it been strengthening so much over the last few days?

Olivier Garret: It has strengthened temporarily compared to the Euro and other currencies because Asian and mid-eastern investors have decided that there is even more risks in these currencies. Commodities have been beaten down because of the fear of recession but their intrinsic value is there and so is demand for them. In comparison there is nothing backing the dollar other than an IOU from the U.S. government and the more the printing presses churn the least it will be valuable. Gold on the other hand is limited in supply and will conserve its value, that why it has been money for millenniums

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Retirement: I have to make a SEP IRA contribution before the 15th. Needless to say, I'm not wanting to put the money into a stock fund. Should I open a new fund -- a tax-free money market or bond fund, for this contribution?

Olivier Garret: I would not put money in LT bond right now, we expect interest rate to rise in the next 12-18 months and bonds will lose value. Money market funds are better but some of them have exposure to structured investment vehicles (SIVs). I would prefer a fund with short term government securities with the idea that you will move it to gold & energy and commodities before long.

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Richmond, Va.: As a recent college graduate with about $20k in loans I am starting to worry that with inflation and everything I am going to end up paying these loans back until I'm 100.

Is there anything I can do to help minimize the hit on my bank account?

Olivier Garret: If your loans have fixed interest rates, take your time paying them back, they will be worthless in a few years. If they have variable rates, pay them as fast as you can.

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Eugene, Ore: If the Fed drops its interest to 0 percent, does that affect anything; if the Fed was always at 0 percent interest does that reduce/stop inflation?

Olivier Garret: The problem is that we owe 3 trillion dollars to foreigners and that the Fed needs to sell treasuries to be able to finance the bailouts. I am afraid that we are close to the point were foreigners are not going to continue to want to hold dollars if they get a negative real rate of return. In fact they have already started to diversify their holdings and invest a lot more in commodities and real assets. To avoid flight of foreign capital, the Fed will have to raise rate before long.

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washingtonpost.com: This concludes the discussion. Thank you for joining it.

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Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.


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