INVESTING: Looming debt problems present an opportunity

Is there another California lurking? Will New York or New Jersey or Alabama begin paying vendors with IOUs?

The White House tells us there will be no bailout for California because the administration fears the long line of states that would form right behind it. They are right about the line, but they may have no choice but to bail out California and at least a half-dozen other states sometime in the next 18 months. Money seems to be running dry in just about every corner of our country.

When Orange County, Calif., went bankrupt, the municipal bond market fell into a temporary tizzy as investors grew concerned that several other highly leveraged counties would suffer the same fate. From our 2009 vantage point, it is easy to see that those concerns were overblown due to the early rumblings of what would turn out to be the greatest equity bubble of all time.

The technology-driven stock market of the late 1990s masked and even corrected a slew of sloppy and inefficient behaviors, essentially bailing out a lot of dumb investors. Maybe Orange County should be looked at not as an anomaly, but rather an early warning sign of what may soon erupt in towns, counties and states all over America.

Our federal government is not the only entity with an unconscious debt load. Almost the entire world is using the cause of the problem as its cure. The IOUs California is passing out are another form of debt. A gathering of almost any intelligent people would agree that this constant escalation of debt will eventually lead the world to ruin and, yet, they can’t stop themselves. But this distorted and misplaced thought process could lead to the greatest opportunity of your lifetime.

Many people and institutions still believe that early March was the beginning of a new bull market and they are acting in ways that verify this belief. They are going about business as usual, hoping these green shoots, which are looking more and more like rotten tomatoes, are going to blossom soon. These people are spending every dollar in their pockets and taking on more debt, which is the exact opposite of what they should be doing. This is the time to truly get your financial and investing house in order.

Allow me to shed a little light on the path I have chosen for myself. We are keeping things tight on the home front. My wife and I both drive simple and paid-for Toyotas. The only debt we have is our mortgage, and we own about half our house.

The only problem I have with our expenses is our health insurance, and there doesn’t seem to be anything we can do about it. I continue to maintain a very low overhead on the business right now. With the growing possibility of new lows in the stock market in the coming months, it is still too early to pursue an aggressive growth strategy for this firm. Today, I still want lots of cash on hand and the ability to get lots more quickly.

I have conducted myself in this fiscally prudent manner because the day is coming soon when those with cash and the ability to get more can benefit from what could be one of the greatest wealth transfers seen in more than 30 years.

Whenever this bear market bottoms—and, again, there is a growing possibility that we will see new lows in coming months—millions of investors will be throwing all kinds of assets away for pennies on the dollar. The discounts so far could pale in comparison. So, be patient, be prudent and be ready!•

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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.