So Much for the Bailout

On Monday morning, it looked as though Congress was going to pass the bailout bill, and the S&P 500 opened at 1,204. Here we are on Friday afternoon, and Congress has indeed passed the bailout bill; the S&P closed the week at 1,099. To get back to its Monday opening level, it would need to rise by 9.6%.

The bill, clearly, is not enough to turn anything around -- not the banking system, and certainly not the entire economy. If it does restore confidence in banks, it will do so slowly: don't expect the TED spread to tighten sharply on Monday. The best-case scenario right now is a long and painful recovery. The worst-case scenario starts with more financial-institution failures, probably in the insurance industry, and continues with a series of systemically-devastating falling dominoes, with the Fed and Treasury looking on powerlessly from the sidelines.

I don't know how it's possible to hedge against such a thing, but I do know that I wouldn't want to be in equities were it to happen. Stocks might have fallen a lot, but they're not yet cheap.

If you're looking for a safe haven in these difficult times, I think that bank deposits and CDs (use CDARS if you're over the $250,000 FDIC limit) are about as safe as you can get, and very liquid. ING Direct offers rates from 3.75% to 4.50%, depending on maturity: in real terms, you're preserving your capital.

Alternatively, you might be tempted to jump in to the stock market at these levels. In which case I wish you the best of luck. There's certainly a lot of upside there. But you have to have a strong stomach for losses and volatility. Whatever happens, I can guarantee you a bumpy ride ahead.