Some thoughts before the holiday weekend.

(If you’ve had your fill of bad news about the prevailing economic problems, just read the headings. You’ll get the point.)

More problems on the front-end of the subprime mess – The bulk of rate resets on the most irresponsibly originated mortgage loans are yet to come, and most “option/arm” loans, which give the borrower the option to set his own payment amounts (that’s right!) for the first few years, are yet to start requiring normal payments. And, home prices continue to fall, with more and more now worth less than the amount of the mortgage. So, the flow of mortgage-related problems going into the credit markets has not yet peaked.

More problems on the back-end of the subprime mess – Write-downs of subprime-related debt continue as holders realize that they have more exposure than they thought, and the exposures they have are riskier than they thought. A bond guarantee company (it promises to pay the interest on a bond if the issuer defaults) is the latest casualty, which, of course, turns the supposedly sound bonds it insures (many of which are municipal bonds) into illiquid junk. At the same time, the rating agencies can’t lower bond ratings fast enough to shield them from endless lawsuits, further exacerbating the problems. Soon, the fidelity bond and “errors and omissions” insurers will be announcing ballooning claims.

More problems emanating from the subprime mess – Retail sales, finally, are showing what may be some weakness in consumer spending. Credit card debt is still building, but only slowly, and I expect to soon be reading about spreading defaults in this huge arena, which somewhat like home mortgages, will be felt throughout the nation’s financial system. I would put he chances of avoiding a recession now at no better than 50/50.

In spite of this backdrop, I hope you can enjoy your Turkey Day. And, I have a couple of other thoughts for you as you then begin your Holiday shopping.

a. Instead of all the usual toys, games or whatever you usually buy for the kids or grandkids, put some of your gifting in the form of future financial freedom. Open a mutual fund account for them and put, say, $1,000 in a globally diversified fund or mix of funds. When they are considering retirement 50 years from now, assuming the fund delivers 8% average annual returns, they will have nearly $47,000. Wait 60 years and it will be $101,000. Factoring in the Fed’s inflation target of 1% to 2% to put these future sums in today’s purchasing power will cut them approximately in half to $23,000 after 50 years and $44,000 after 60 years – still very handsome sums. And, that’s with one gift of $1,000 now. Invest another $1,000 in each of the next 19 years, and the ending amounts grow to approximately $257,000 and $482,000 . . . in today’s (inflation-adjusted) dollars.

b. Is it reasonable to expect 8% returns, or about 6 ½% after inflation, over the next few decades from a diversified portfolio? With a world view, I believe these kinds of returns can readily be attained. Here in the U. S., however, it may well be harder to achieve this in the next 50 years than it was in the last 50 years. You’ll have to do less of your buying when things look rosy and more when markets are reacting to pervasive concerns and the expectation of more bad news to come. Like . . . now?