The Great Deception: Tops & Bottoms of 2009 in Perspective

As we reflect on the tumultuous year that was 2009, it's essential to examine the tops and bottoms of various financial markets. While some may argue that the Federal Reserve and Treasury Department deserve praise for their handling of the credit crisis, others believe that their actions only masked the true extent of the economic turmoil.

The Unspoken Consequences

The debate surrounding the Fed's and Treasury's response to the crisis is far from over. One thing is certain: the measures taken to avert a total economic collapse had severe consequences. By maintaining low interest rates for an extended period, the government inadvertently created a recipe for inflation – perhaps even hyperinflation.

The Anatomy of a Top

In financial markets, a top is often defined as the peak of a bull market or the highest price reached by a particular asset before a decline. However, when considering the tops and bottoms of 2009, it's crucial to examine the underlying factors that influenced these events.

A bottom, on the other hand, marks the lowest point in a bear market or the lowest price reached by an asset before a rebound. The reversals seen in equity markets and the dollar in 2009 were nothing short of dramatic.

A Closer Look at Equity Markets

The S&P 500, represented by the DIA (SPDR Dow Jones Industrial Average ETF Trust), plummeted to its lowest point in March 2009, only to recover substantially throughout the year. The recovery was not limited to equities; the dollar also experienced a significant reversal.

The Goldman Sachs Bonanza

Goldman Sachs' (GS) trading activities in the third quarter of 2009 left many questioning the fairness of the financial system. Traders at Goldman recorded only one daily loss, netting more than $100 million on 36 out of 65 days. Meanwhile, U.S. taxpayers lost $2.3 billion if commercial lender CIT failed.

The SEC & Bank of America Settlement

In a shocking move, Judge Jed Rakoff rejected the SEC's proposed settlement with Bank of America (BAC). The deal would have allowed BofA to pay a mere $33 million fine for allegedly lying to its shareholders about Merrill Lynch bonuses. This decision highlights the need for greater transparency and accountability in financial dealings.

Portfolio Implications

The tops and bottoms of 2009 have significant implications for investors. As we discussed earlier, maintaining low interest rates for an extended period created a recipe for inflation. Investors should be cautious when allocating funds to assets with high sensitivity to interest rate changes, such as corporates (C) and Treasury Inflation-Protected Securities (IEF).

A Word of Caution

Investors must also consider the risks associated with these market conditions. The possibility of hyperinflation looms large, making it essential for investors to diversify their portfolios and maintain a long-term perspective.

Practical Implementation

Given the tops and bottoms of 2009 in perspective, what should investors do? Timing is crucial; investors should be cautious about entering new positions in assets with high sensitivity to interest rate changes. It's also essential to maintain a diversified portfolio and consider hedging strategies to mitigate potential losses.

Conclusion: Actionable Steps

In conclusion, the tops and bottoms of 2009 serve as a stark reminder of the complexities and challenges facing financial markets. Investors must be aware of these underlying factors and adapt their strategies accordingly. By doing so, they can navigate the ever-changing landscape of finance with greater confidence.