“Re-capitalization is needed now, and only the government can make it happen. It would help to limit the more destructive aspects of de-leveraging, strengthening capital to asset ratios without intensifying the pace of asset sales. It would contribute to rebuilding confidence in money markets, institutions and instruments.”

- George Magnus, senior economic advisor, UBS Investment Bank

The less government, the better...

I’ve always adhered to these principles. As an investor, the more the government intervenes, the worse the ultimate outcome.

But it’s time for concerted global government intervention because the threat to our financial well-being will otherwise be greatly jeopardized. We came very close yesterday to a total shutdown of credit markets as money-markets are firmly locked-up. This is a crash.

But as George Magnus commented this morning in The Financial Times (see above quote), it’s time for global central banks and governments to grab accelerating deflation by the horns and calm markets down. We have to end this crisis.

Like most investors I was shocked by the failure of the United States to pass the Paulson bailout yesterday. Markets were merciless. We are now staring a global panic right in the face and governments must throw everything at calming markets down and rebuilding investor confidence. The Paulson plan, even a watered down version, will pass Congress this week and that should result in a massive relief rally. We are extremely oversold.

If you own more stocks than you’d like to hold during these tumultuous times, then you’ll have another chance at paring down those assets soon. All indicators I track point to a massively oversold market and a big bounce is coming. Use this opportunity to sell any stocks you don’t want to hold in the upcoming days or weeks.

There are two types of investors right now: those with ten years or more in the market and those approaching retirement and worried about their nest-egg as they start living off their portfolio in the next few years.

Assuming you own strong companies or diversified equity funds, then selling at these bombed-out levels is the wrong thing to do. Your worst enemy is yourself as the battle to control your emotions perhaps compels you to dump everything and hide in a cave. But stay invested, remain diversified across asset classes and take a deep breathe. In ten years I think you’ll be rewarded for hanging in there.

However, if you’re approaching retirement over the next several years and find yourself still over-weighted equities then use the upcoming rebound to sell stocks and buy only high quality government securities and high-grade corporate debt. Eventually, I’d also buy some distressed convertible bonds once that market unclogs.

Also, all investors, regardless of age or risk, should hold at least 10% of their portfolios in gold, either overseas at a private bank for maximum safety and privacy or domestically through dealers like Kitco.

This is deflation. That means cash is king. You should be pretty liquid now. My managed accounts are about 50-60% in cash.

We need government action now to stabilize the financial system. Without their help, the free market will rape a host of global financial and non-financial companies because liquidity is being hoarded and borrowers are being stranded. Only government can instill inter-bank confidence and help to finally quash this credit crash. Letting major institutions fail is not the solution. The world is too interwoven.