CURRENT INVESTOR CONCERNS

Okay, this market thought of the week is an interesting read.  However, I’m concerned his comparison is unfair given that the IMF just defended negative interest rates!  

Imagine you bring your money to the bank and instead of them paying you for the privilege of borrowing your money, because borrow your money is what they do.  You call it savings, but you are really lending the bank your money.  That’s why banks pay you.  But they don’t keep your money.  They lend it out.  

Banks are supposed to keep a reserve so you can access your cash if you want it.  Ever try to get cash from the bank recently.  Most won’t allow a withdrawal of more than $5,000.  And, if negative interest rates come to the US and it increases the banks overall cost, do you think they will pass those costs on to you?  Of course they will.  We are in uncharted territory people, in my humble opinion.   - Chris Everett


SYNOPSIS

  • Slow economic growth, Fed policy decisions, and China represent three of the biggest concerns on the minds of investors right now.

  • Many of the current investor concerns have been around for decades, and they will most likely continue to persist for some time.

  • Once everything in the economy is strong and not even the most bearish pundit can find a problem, that will be the time to sell. 

WHAT’S CONCERNING INVESTORS THESE DAYS

Investors have plenty to fret about these days, and the volatile start to the year certainly has not made things better for the psyche of most investors.  Although the list of current investor concerns is quite extensive, let’s look at three of the more prevalent issues at the moment:

  1.  Sluggish economic growth

  2.  Fed policy mistakes

  3.  China is a “house of cards”

SLUGGISH ECONOMIC GROWTH

It’s safe to say that most investors have heard one or more of the following since the financial crisis ended: 

“The US economy is stuck in one of the most sluggish recoveries in history.”
“Growth is just 2% and it will remain slow as consumers and companies work off vast amounts of debt.”
“The country has gotten off track, as consumers have become disillusioned with the American Dream of rising prosperity.  Americans don’t see any solution in sight.”

The picture above is an excerpt from a summary of the publication posted on a financial blog. These same phrases continue to be used to describe the current economic environment, despite the stock market’s meteoric rise over the past seven years.

Click here to read the summary: http://mjperry.blogspot.com/2009/01/time-magazine-cover-storywhy-were-so.html

Click here to read the actual Time article (subscription required): http://content.time.com/
time/magazine/article/0,9171,974645,00.html

THE FED’S INEFFECTIVENESS

Investors don’t have to go too far to find criticism of Fed policy these days, and market pundits regularly attack the Fed by saying:

“The Fed has really put itself in a bad spot.”
“Their policies are ineffective and created massive deficits.”
“Interest rate policy is killing us.”
“A new strategy is long overdue.”

Although these comments may sound familiar, they were actually taken from the excerpt below:

This article was written in the New York Times back in 1982, right before the beginning of an 18-year bull market.  Since the day the Fed was founded back in 1913, critics have slammed their policy decisions, and the accusations rarely change all that much over time.

Click here to read the full article: http://www.nytimes.com/1982/04/01/business/fed-criticismon-rates.html?pagewanted=all

CHINA IS A HOUSE OF CARDS

One of the biggest sources of market volatility over the past year has involved China. Stories of “bridges to nowhere” and “empty cities” being built by highly corrupt leaders using massive amounts of debt that could never possibly be paid back have made page one on an almost weekly basis in most mainstream media publications.  This book cover pretty much sums up the current view of the world’s second largest economy.

In the last paragraph on the fly-page, the author even sets up his readers for what’s to come with this powerful quote: “The People’s Republic has five years, perhaps ten, before it falls.”

Some may assume that this book hit the shelves back in August after China caused a tremendous amount of volatility in global financial markets, or perhaps right after 60 Minutes aired its segment in 2013 that accused China of being nothing more than a “house of cards.”

However, this book was printed back in 2001, and an academic paper with the same title written by a different author was also published back in 1995.  Apparently, China has been on the verge of collapse for more than 20 years.

NOTE:  I will give the author an “A” for persistence.  After admitting that he was wrong when China did not collapse in 2011, he published an article stating that he was only off by one year, and we all could bet on China collapsing in 2012 instead.

Click here to read his revised prediction for 2012:
http://foreignpolicy.com/2011/12/29/the-comingcollapse-of-china-2012-edition/

IMPLICATIONS FOR INVESTORS

Many of the current concerns are the same ones that plagued investors ten and twenty years ago. They come and go with the state of the economy, stock market, and investor sentiment.  For example, as the economy continues to get stronger during the cycle, the bears slowly begin to disappear since it becomes harder to find things to complain about. By the time we reach the top of the economic cycle, the bears are forced into hibernation, and there’s nothing stopping one of the most dangerous risks from attacking investors.

This risk is euphoria, or a situation where investors believe that nothing can go wrong.  Here, the bears and their stories get replaced with ones that speak of impenetrable economic growth fueled by new and exciting business ventures that don’t have a shot of ever making money.

Stocks soar to meteoric valuations as greed replaces discipline until the party abruptly ends.  Eventually, the bears wake up and repeat the cycle.  Hence, rather than fear these stories right now, think of them as an immune system that is preventing euphoria and greed from attacking.  The bottom line is that once everything in the economy is strong and not even the most bearish pundit can find a problem, that will be the time to sell.  It’s safe to say that the bears are still rampant in this current market, so now’s not the time to panic.

NOTE:  The source for all pictures and the inspiration for these examples, along with other notable investor concerns, are detailed here:  http://fat-pitch.blogspot.com/2016/03/current-investor-concerns.html