Beverly Hillbillies and the Global Credit Squeeze

While I do think the explanation I gave (Frye style-in my last update) of the recent global market credit problems was right on point (“Market Commentary”-August 16th)I believe the experiences of Mr. Jed Clampett, from the old T.V. sitcom, provide me with another angle from which to approach the issue.

By the way, that last e-mail was sent out on Thursday 8/16 at 2:05 pm just as the markets were at the height of the panic and appeared to be headed toward a free-fall. However, by the close of the market that day, the Fed had begun to release funds as I had predicted, and the markets recovered in a dramatic fashion.

THE BEVERLY HILLBILLIES EPISODE

I am not sure if I have to give the background or setting for this T.V. sitcom that ran during the 1960’s and then continued on in re-runs for decades. For the benefit of you “Generation X and Y” folk, here’s the show’s premise in a nutshell. A ragged Hillbilly from the Ozarks, Jed Clampett, is hunting in his yard for his clan’s dinner (specifically for Granny’s favorite fare-opossum,) shoots his rifle---misses his target---hits an unexpected oil vein---sells his oil rich land for $25 million---moves his hillbilly family to Beverly Hills and deposits all of his cash in the bank headed by his neighbor Mr. Drysdale.—oh, and of course, the family continues to dress and live as hillbillies in their Beverly Hills mansion.

In the episode I recall, Jed becomes upset with the ever-conniving banker Mr. Drysdale and shows up at the bank wanting to withdraw all of his money immediately, in cash. The sum would be in the vicinity of a few billion, in today’s dollars. So Drysdale blanches, stutters and attempts to explain to Hillbilly Jed that the bank doesn’t keep billions of dollars in cash in its vault, because the money is invested in securities and loans, etc. Of course Jed doesn’t quite understand (and neither did I as a kid watching the show) why his cash isn’t on hand.

A GLOBAL BEVERLY HILLBILLIES STYLE RUN ON THE WORLD BANK

Ladies and gentleman, over the last few weeks we had a global run on the worlds banking system. When the word got out that sub-prime mortgage holders were in trouble, the world markets panicked. Hedge fund investors demanded their money—hedge fund managers couldn’t sell their sub prime mortgage debt—they tried to raise capital by borrowing and came up empty because banks were panicking and calling in loans---everyone wanted cash and liquidity at the same time---the only thing left to sell were good quality stock and bonds--so stock and bond prices f ell dramatically---and liquidity and the worlds credit market seized-up.

Fortunately, for Mr. Drysdale in the television episode, Jed said he would be back later, and, of course he changed his mind—the latest crisis was averted, as it always was-- and all was well again in T.V. land.

Fortunately, for the real world markets, the Central bankers and Fed Chairman Bernanke have injected funds into the system and the panic is easing---so for now the crisis has passed. Hopefully, the long-term impact of all of this will be that the mortgage business will become better regulated for future generations and our children and grandchildren will one day read about the global credit crises that was averted in their Economics textbooks.

BUT WE DON’T LIVE IN T.V. LAND--- THIS WAS REAL

Yes, we live in the real world, without scripted endings and it can be scary to watch as unexpected events unfurl. What if the Fed didn’t act? What if Central bankers sat on their hands? My answer to you, as a Capitalist (with a heart, who understands the need for tempered regulation) is that without action by the Bankers, the markets would have dropped more dramatically and the panic would have been more severe. But at the end of the day, the capital markets would have eventually adjusted and the markets would have recovered. In the short-run, as we have recently experienced with Internet stocks, condos, and sub-prime mortgages, financial markets are highly inefficient, and irrational excesses are often created. However, in the long-run, markets are incredibly efficient and investors will be rewarded handsomely for the risk they take and the volatility they have to put up with, periodically.

SO IS IT TIME TO JUMP IN AND INVEST IN MIAMI CONDOS?

Those of you, who follow the markets or my writings, know that there is a cyclical nature to the value of all assets and, as a result, there will be a good time to once again invest in South Florida condos. However, the Wall Street Journal reported on Saturday, that Miami added 4,549 condo units in 2006 and 3,276 so far this year. Another 7985 will be delivered by the end of the year, with another 8260 slated for 2008-2011!!!.

My advice, therefore, is as follows; buy a “shotgun” and some land in Florida’s Everglades swamps, and go out hunting for some “varmints” for dinner---you never know!

I hope you enjoyed this week’s column…Y'all comeback now, y' hear?

Until next time,

Austin A. Frye, MBA, JD, CFP®

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