photo by eflon
Written by Nathan White, CFA
I think the current sentiment about the investment environment and the economy is about the worst I have ever seen.
It seems nearly impossible to find anyone that is optimistic! It amazing how the media exaggerates the slowdown in economic data to mean Armageddon.
Every time I look at something like the Drudgerport, I see someone new coming out with a book on how to profit from the coming depression or market crash. Even political pundit, Dick Morris, has a book like this out!
Now, I’m not a rabid bull, nor do I believe that there aren’t concerns and real risks out there. I just wonder how much has already been priced into the market, and that is always the trick with investing.
Investor actions have been confirming their negative view as seen by the record amount of money just piling into bond funds at historically low interest rates.
Do people buying the 10-year Treasury at this price realize that a one percent increase in interest rate could mean a 9-10 percent loss on their investment and take about four years just to “break even” with interest payments; and this is a “risk-free” investment?
Longer-term bonds would produce even worse results!
A report that came out the other day that said hedge fund managers indicated that just 17 percent were bullish, and around 47 percent were short ahead of the historically bad month of September. Perhaps September came a month earlier in the form of August this year?
I’ve been in this business just long enough now to see what happens when everyone is thinking negative and have positioned themselves in the same manner; the market likes to do the opposite.
I agree that things are not great, and the recovery has been so-so. It should have been better, but we are by no means in a depression.
Instead we are feeling the consequences of government bail-out and intervention in the economy in the form of limited upside growth. It is just simply impossible to grow very robustly when the government is creating so much uncertainty and making it harder for businesses to conduct business.
Bail outs and government interventions in the market may help to put a temporary floor on a market slide or economic downturn, but only the cost is giving away the upside later on. This is what we are feeling now.
This produces a Jekyll and Hyde environment where some things look good and others bad, which results in a great degree of uncertainty and markets that bounce around. Choppy markets can be very hazardous to investors’ health as it produces a lot of buy high, sell low activity.
The current economic conditions seem to resemble the early 80’s with few opposite ironic twists. Instead of interest rates at extreme highs, the current rates are at extreme lows and the economic approach of the Obama administration is the “opposite” of what the “Reagan” was. We’ll see how this shakes out…
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