Don’t get caught up in gloom, doom talk
January 4, 2012
During times like these, I dream about a financial news service that discusses only positive events taking place in the world’s business community.
Way too many people have expressed concerns about problems ranging from a double-dip recession, turmoil in Europe, a spike in interest rates, a collapse of demand for U.S. government securities, and so on.
What this all overlooks is the basic resilience of the world economy and the fact that businesses and economies just keep going at one level or another — like the Energizer Bunny.
Anyone assuming that long-term collapse is just around the corner has been reading too many novels like Cormac McCarthy’s “The Road.” Someone trying too hard to protect against the downside by having all their money in cash is paddling upstream against hundreds of years of economic history.
A stock market losing more than 50 percent of its value would leave any normal person feeling like they are staring into the abyss. Fortunately, a loss that extreme has only happened three times since 1930. The extreme bear markets of 1930 and 1940 were followed by complete recoveries within a few years. We’re watching the recovery right now of the crash of 2008 — the third of the three “big ones.”
While we may be a few percentage points short of being whole again, we have to remember that our reference point was entirely artificial. “Being whole again” for most means returning to that exhilarating high-water mark of the fall of 2007 — a point that we all should recognize as the product of a false economy fueled by bad government policy, the excesses of deregulation and irrational exuberance on the part of investors and consumers.
So, if you want a better reference point, check your records to see what you were worth in about 2005 — after recovering from the dot-com bust. Life is Good.
Today, the signs are pointing toward a substantial rise in market values in 2012. If you don’t believe me, ask Bob Brinker, the newsletter writer and talk show host, who was just ranked among the nine top advisers that made Mark Hulbert’s honor role. Hulbert has been ranking all such advisers for more than 30 years.
To make his honor roll is, in fact, an honor. Brinker expects the stock market to reach the low- to mid-1,400s in 2012, which would be about a 15 to 20 percent increase over its current level depending on which day you look.
Meanwhile, the European banks are selling off assets left and right to get the cash needed to beef up their balance sheets and reduce their leverage. Who’s buying? American investment companies like Blackstone Group and KKR & Co.
Worried about Italy? Their tax collections today are more than enough to pay for their government services. What leaves them short, prompting all the hand-wringing, is the interest it has to pay on its government debt.
The obvious solution is to just collect the taxes that people owe.
Tax evasion costs that country $150 billion a year — about 18 percent of their budget. Throwing tax cheaters in jail — like we do — would solve the problem overnight.
Most of the predictions of doom and gloom in this country are coming from those selling gold or running for office. In reality, the United States is proving to be a sanctuary compared to the rest of the world.
A quick look at foreign investment funds shows us their performance this year has been about 15 percent below the performance of U.S. markets. Just when we were starting to believe that a global economy had everyone moving in lock step, we’re being blindsided by the truth of the matter.
In a way, however, that’s a good thing for those of us who periodically rebalance investments (selling some piece of our winners and beefing up our losers). In recent years, there wasn’t much to rebalance when everything was plummeting and then snapping back in unison.
Now, however, the old pattern of inverse correlation between different investment types is emerging. This offers diversification and reduces our risk.
Good news is not a fantasy right now. It’s the real thing.
Steve Butler is president of Pension Dynamics. Contact him at 925-956-0505, ext. 228.
