I saw Sam Zell on CNBC the other day, and he reminded us that $700 billion in a rescue plan is on a $14 trillion economy. David Kotok of Cumberland Advisors wrote that if this was to be financed indefinitely at 5%, the annual cost is $35 billion. As my fellow Grandpa David said, "$35 billion is a very low price to pay if it can avert a depression." These are two smart, savvy guys with observations that are very helpful to calm the hysteria and help put this into perspective.
I would add that the $700 billion is not a spending program, but an asset purchase. The value of these things is not zero. Bought prudently and held appropriately, the cost will be much smaller and might even make the government some money. If we come to realize that mark-to-market accounting has been punitive and onerously applied, the government might make a lot of money.
Lastly, The Wall Street Journal noted that the total of $700 billion (or whatever) it might be will not show up as an addition to the deficit. Accounting rules would treat this as a "means of financing," and only the losses plus interest costs would show. Even if you were to add the whole amount, the AAA rating of the U.S would not be remotely threatened. As I mentioned the other day, the U.S. currently has a 63% debt-to-GDP ratio. Add in all $700 billion and the total is still well below 80%. It took a level of almost 120% of debt-to-GDP before Canada and Japan were downgraded from AAA.
P.S. Will you be there when Cramer makes his next move?
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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.
Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.
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