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Constant Fretting Doesn't Pay Off

by wchurchill Sun May 27th, 2007 at 01:38:40 PM EST

I thought of Jerome and others on this site when I read this:

Waiting for the end of the world as we know it hasn't worked well as an investment strategy the last few years.
But the article goes on to present, in a humorous way, opposing investment strategies.
Things have been positively wondrous for global stock markets in recent months, but Wall Street has been echoing with warnings of trouble ahead.

Former Federal Reserve Chairman Alan Greenspan last week helped trigger the latest flutter in share prices after he said of the wild rally in Chinese stocks, "There is going to be a dramatic contraction at some point."

Sure, describe the event, but leave it open-ended. Someday you're bound to be right.

Warnings about hot markets do serve a purpose, of course. They may keep people from becoming, well, irrationally exuberant and dumping all of their money into one asset just before it collapses.

But there's a danger that investors who listen to constant fretting about how bad things might get in the economy and markets can end up paralyzed with fear and unwilling to take even minimal risks. That may cost them dearly in terms of their long-term financial health.

There's always something to worry about. Yet look at what the world's stock markets have overcome in recent years: record oil prices, rising short-term interest rates, devastating terrorist attacks in Madrid (2004) and London (2005) and, most recently, a serious U.S. housing slump.

And this of course is a fundamental tenet of my view, maybe the optimistic view:

There should be a fundamental reason stocks have forged ahead, and here it is: The global economy has continued to expand, lifting corporate earnings.

Only to be debunked by those who believe in a money supply out of control everywhere and resulting global bubbles;

To be sure, easy money also is driving markets. Lenders around the planet remain eager to lend and borrowers remain eager to borrow.

Some Wall Street veterans say easy money has led to rank speculation and dangerous bubbles in assets everywhere.

"From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!" Jeremy Grantham, chairman of Boston money manager GMO LLC, wrote in a letter to clients last month.

We are living, he said, in "the first truly global bubble."

But bubble, or bull market?

What a pessimistic investor calls a bubble, an optimist might say is just a fantastic, and justifiable, bull market. That's the view of Edward Yardeni, who heads his own investment and economic research firm in New York.

Yardeni believes the world has not seen a global economic boom on the current scale, with China, India and other developing nations now full-on capitalists and with money flowing so easily and quickly into investment opportunities worldwide.

"If this is the greatest global boom of all times, then why wouldn't we have the greatest global bull markets in stocks and commodities of all times?" Yardeni asked.

And though experienced investors are conditioned to run the other way when someone declares a "new era" for the economy or markets, sometimes it is a new era. Case in point: What else would you call the 20 years after 1980, a period in which U.S. inflation and interest rates were in a sustained decline and stocks mostly marched higher.

To be a buyer of stocks in general now, you pretty much have to believe we're in a new era of global growth -- and that we're somewhere near the start or in the middle of it, not approaching a calamitous end.

Even if Yardeni is right about an ongoing boom, however, there are going to be serious disruptions along the way. At the moment, the deepening trade disputes between the U.S. and China pose one significant risk. So do rising bond yields.

So it's one of life's choices,

A year ago, jitters over frenzied gains in stocks and fear of inflation pressures triggered a five-week pullback in share prices around the globe. The declines were much worse in many foreign markets than in the U.S., exposing the soft underbelly of overseas investing: a lack of liquidity when you need it most.

The next market disruption, whatever the trigger, may play out the same. That's why many Wall Street pros continue to warn clients away from emerging markets for now, despite their longer-term economic promise.

If stocks scare you at these levels, then the prudent decision is to put off buying, and perhaps to start pruning. Nobody ever went broke taking a profit.

But as the last four years have shown, you also have to allow for the possibility, or perhaps probability, that the world as we know it isn't ending -- and that the global economy will keep expanding, other bullish trends will stay in place, and stock market pullbacks will be opportunities to pick up some appealing long-term investments for less.

What do you think?  A poll follows (I hope).

What will world economies and stock markets look like at the end of 2007?
. The global economy is booming, and individual country economies and stock markets will all grow. 15%
. This 4 year run is all driven by bubbles, and they will pop, recession will follow, and all indicators will be down by year end. 23%
. Things will be the same at year end as they are today. 23%
. The US economy will implode, driven by the housing bubble and other financial engineering, and the US will enter a recession and the US market will crash. But the rest of the world will not be significantly impacted. 38%

Votes: 13
Results | Other Polls
 But as the last four years have shown, you also have to allow for the possibility, or perhaps probability, that the world as we know it isn't ending --  and that the global economy will keep expanding

What part of the phrase "Peak Oil" does this guy not understand?

There isn't the oil for the global economy to keep expanding: and it's the Dollar/Oil relationship that is in the firing line...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun May 27th, 2007 at 02:33:17 PM EST
I am very positive on the future economic developments, until Peak Oil hits. Whenever that will be. Anyway, overweighting oil stocks should give some hedge.

Gap between financing and pricing of stocks. Yellow is long term interest rates.

Pricing of European stocks.

So yeah, stocks are up, but that's because profits are up. And profits have gone up more than stocks.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun May 27th, 2007 at 06:16:05 PM EST
[ Parent ]
I think worldwide markets are going to have a strong run for the balance of this year, and maybe again next.  My uranium mining stocks may be somewhat of a hedge on the energy side.
by wchurchill on Sun May 27th, 2007 at 07:12:19 PM EST
[ Parent ]
do you expect profits to keep on growing? They already take the highest ever share of value added in all recorded history.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon May 28th, 2007 at 12:05:45 PM EST
[ Parent ]
this is not a 4-year run, this is a 25-year, soon to be 30-year bull run.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun May 27th, 2007 at 04:37:43 PM EST
good point.  I was paraphrasing from the article:
But as the last four years have shown, you also have to allow for the possibility, or perhaps probability, that the world as we know it isn't ending
 I believe he is dating back to Q1 2003 when the S&P 500 (and I believe many world markets) started a strong upward movement, after a tough period following the 2001 US recession, that has continued with only minor and temporary setbacks.
by wchurchill on Sun May 27th, 2007 at 05:09:01 PM EST
[ Parent ]
The world... as we barely knew it... will end.

I mean, the 25 years episode of "right" economic ideology, coinciding with maxed availability of energy resources, will not last much longer. The financial system cannot keep up with adopting to itself. The snag is that people already forgot the "normal" world of before, especially strongly assuming it was the same as now. We will rediscover a lot.

by das monde on Sun May 27th, 2007 at 11:23:08 PM EST
[ Parent ]

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