When others are frightened, you should be greedy
It has been a while since I updated this blog, or for that matter did any authoring on any of the other sites that wasn’t promoted by technical bug fixes or feature enhancement, and in all fairness little as such. Well, it is never too late to change, so hopefully I’ll get back to posting more regularly again.
The financial markets are more interesting to follow than ever before in my history of dealing with them, with an extraordinary volatility and moving at a speed that is worthy of the internet age. We’ve witnessed a black swan event that has gotten most quants to question the assumption of normal distribution of return (about time), which will re-write financial theory as most know it.
I wrote in my post The fall and decline of USA and the USD, Feb, 2008 that
And being competitive internationally is something the US of A has neglected for quite some time. If we e.g. look at the the automaker industry and agriculture; the political reign has been dominated by protectionism and neglected modernization, supported by, to mention one factor, strong lobbying from worker’s unions.
If we look at today’s situation; where USA has a net negative savings rate (being indebted on average), China has a savings rate above 50%. Politicians are already trying to bring the savings rate down and support consumption rather than savings, in order to offset negative consumption growth from the US. And we are indeed seeing a slightly higher effort in savings, if only it had happened 15 years ago.
My short term targets for the USD were obviously wrong, as I didn’t take into account the importance of USD as a safe heaven. But it does give a sense of Schadenfreude , or sense of pleasure on others behalf, to see that at least some of what I pointed out as an issue with USA actually turned out to have this effect. And longer term I’m still bearish the dollar using much of the same arguments to back it up.
The situation highlights the importance of information gathering from multiple sources and across fields of expertise. Today’s markets are as much driven by psychology (fear) than it is by objective fundamental analysis of the firms.
For many it is also a question of philosophy (tried reading Being and Nothingness by Sartre, about existentialism? ). In times like these, fortunes are lost and fortunes are gained. I intend to use this time to do the latter, build a foundation for the rest of my life.
The troubled population is people about to go into, or that already is on their pension with a degree of 401k-like investment or other form of contribution based pension plan or a high degree of the pension savings in financial assets. Or even pension holders with a high degree of cash/liquidity at hand that due to the time horizon consideration will (and should) remain in such moneymarket instruments. But why is the latter group affected? Even if we exclude the alternative cost that the younger part can gain in such a situation, we see a situation with low interest rates in the moneymarket. Combined with an expectancy of a high inflation to come, a situation where debt is profitable. But this group has spent their life paying down the debt, and often find themselves with a religious wish to avoid having it in the first place.
For the younger part of the population the situation is more promising. I have no issue recommending a young individual with money to set aside for saving (p.s. I wouldn’t recommend this for saving for a house in 5 years) to start a savings plan to buy into a mutual fund ( preferably index funds, there are plenty of nice Exchange Traded Funds for this), especially in the Norwegian markets. The important thing is that there should be a balance in the weights of the different asset classes, but this is a good time to increase the weight on equities and bonds (retail clients can get exposure to this through money-market funds).
As Warren Buffet has stated (paraphrased); When others are frightened, you should be greedy.
