Where Are the Investment Markets Moving Now?2011 Nov 8
Some of the market participants call the current situation a “crisis” others are starting to be convinced that we are in a bear market. While others just don’t know how to call it. Well, I call it the situation that doesn’t have a name yet. We can name it “stagonations” or “debtswitcherings”, or we can give it a form of some letter as “L”, “W” (it is a pity that ABC is so short of interesting characters) or could use some combinations of a letters as “WW” or “VLJ”. But of course it is stupid.
Not the names or letter shapes are that really matters. The sure thing is to know what is really happening in the markets. Most of the stock market indices now aren’t in a record low or record high, but we have to admit, that stock are really cheap (read about stock valuation). They aren’t extremely cheap, but still they are compared to most stock markets of the modern economy times.
Confidence of Investors
And what are the causes for such pricing? Yes, everybody knows it is “Euro crisis” or whatever they call it. However, like I have mentioned it in my previous article US Debt Relief, this crisis concerns not only the euro zone, because all main currencies (USD, EUR, JPY, GBP) have the same problems: high public debt, budget deficit, stagnating economies and increase in inflation (except Japan). All those problems aren’t very new and shocking but they affect confidence of consumers and investors. And confidence is a thing that drives economy over short-middle-term period.
Looses in confidence means that managers of companies’ are cutting their investment plans and decreases growth perspectives. The lower corporate investments are the less new job places are created. The less job places are the less people will spend money. So it is a circle from which sometimes is hard to escape. So we have to know that everything depends on investment and investment depends on confidence. So what confidence depends on?
Well, confidence depends on investments. But if that would be the only factor, we couldn’t run from the current situation. However, we can leave investment and get to expectations. Expectations are important enough to get everything in turnaround.
Everybody is waiting now. It is a main point. The previous stock market turbulences were sharp, explosive and immediate. What we have now, is completely different: stock indices neither drop neither rise and everybody is waiting for the messages from heaven. The messages aren’t coming or at least aren’t coming fast. So investment markets are flat.
Inflation May Be a Key for Debtors and Equity Investments
Those countries with huge public debts cannot just change the fact. Such debts are long term thing that can be solved only it two ways. The way one is to turn to budget surplus which would be possible only if economies would rise significantly and that would help to collect the taxes. The second way is to push inflation even more than it is now (above 5%). Actually UK just crossed that line and obviously is moving in to this direction. And this might be the easiest way to deal with high public debt. For example, if inflation would keep for 6 years at 7% (we are not that for from that in some countries) it would erode the debt (value of money) by one third. And the problem is solved.
Then another problem would arise for investors who are investing in fixed income investments. If money is losing its value (all the main currencies may face this problem) then their investments are losing value too. The real problem that there is no safe investments anymore: stock markets don’t have the trust, bonds and money markets may lose the real value because of inflation and smaller currencies are speculative (I think the same about gold or other precious metals). So investors inevitably will have to take some level of risk and make their own predictions on future factors.
Greece’s and Italy’s problems are on the spotlight now but in reality they are only the few parts of large mosaic which is set by many players and each of them has its own needs and ambitions so that is the main reason why can’t we expect for fast results in this type of situation.
Responsibility of Politicians
Until politicians will not take the real responsibility on themselves the situation of current circle may sustain for centuries. Maybe is a good strategy: to build trust of the government and currency then get country indebted (it increases living standard) after that get inflation increased and the debt gets downgraded. Then make a new currency and do it again. But maybe this is not the fault of politicians, but this fault is of voters, who are judging government only by pension increases and tax changes but not by control of budget deficit which should be the main criteria. Politicians will never worry about that by themselves because they are elected only for short period and if they know that this is not the main judgment criteria, it is normal to expect that the budget control is not the main problem for them.
And for now, let’s just wait for the messages from heaven. And good luck with your investments!
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