1:30pm December 31, 2012

2013: The Apocalypse of the Financial Markets


With multi-month highs, and in some cases multi-year highs, hitting stock markets around the world, it’s hard to believe that some of the Earth’s savviest investors are calling stocks and bonds what the Rolling Stones have looked like for years: dead.

We’ve all known the truth for years:  government, analyst, and popular opinion moves markets.  Economists struggle harder than Miss Venezuela to explain why the underlying fundamentals of our economy often do not support the direction in which they head.  It seems as though the job of predicting market movement is better suited for a psychologist than a classically trained, Nobel prize-winning economist.

When describing current investment trends, that’s why some of the world’s most successful, like Bill Gross—the founder of PIMCO who helps manage their multi-trillion dollar investment portfolio—thinks that investors have been riding an unsupported wave of opinion and it just might be time get out of the water.

“[The investment wave is like] surfing, you want to ride the wave, but you also want to recognize that there’s a crest and that ultimately a good surfer has to kick out,” said Gross in a recent interview with Time magazine.

The foundation of that wave has been supported by the Federal Reserve’s recent easy money policies, according to many economists.  By buying back unusually high amounts of U.S. bonds and mortgage-backed securities, investors have returned to riskier equity, lifting the stock market.

PIMCO and other analysts and economists have suggested that this might be a huge mistake.  Inflation has been steadily rising and is expected to accelerate its ascent soon decreasing the real value of returns.  In turn, lenders will increase their required return (i.e. less money for entrepreneurs), stock values will falter, real estate gains will ease, and eventually investors will just sit on their money.  It won’t be pretty.

Others presume that our current and future markets will devalue, not completely due to the Fed’s policies, but because of our own “do-nothing” Congress.

“At least the Fed stuck a finger in the dike.  The politicians stuck their thumbs elsewhere,” says Rana Foroohar, a business and economics editor at Time magazine.

The Fed, along with central banks around the world, has continued easy-money policies since the 80s to flatten the cyclical behavior of markets.  Investors have naturally taken advantage of it.

However, the Fed, along with many economists concur that this is just a bandage to maintain stability until our underlying economic issues are addressed.  Real growth requires an increasingly educated workforce, retraining for a shifting economy, infrastructure development, and entrepreneurial opportunity.  Now that Congress is seriously considering taking up the issues, political risk has created growing timidity in the investment world.

All of this doesn’t bode well for future growth.  The Congressional Budget Office has proclaimed that 2.4% yearly growth is to be our “new normal” for the next decade.  Inflation is forecast to be even higher than that, effectively wiping out any growth.

Our national savings rate, which is used to invest in economic expansion, is at its lowest since the Great Depression.  Analysts concur, that while savings rates might have temporarily increased after the recent recession, our country’s net savings rate is still just barely above zero percent.

There have been and always will be opportunities for success in this country, however.  Despite politicians putting dividend income on their list of “ways to get the rich” in 2013, blue chips are still paying out dividend rates that beat inflation.  The entrepreneurial spirit will not too soon be waned, despite efforts to increase regulation and, albeit often unintentionally, limit access to capital.

And there are still plenty of places to take advantage of irrational markets.  Take the housing market in D.C., for example, where, after a recent bidding war, a house sold for more than twice the asking price.

Maybe we do need more psychologists and fewer economists.

JUSTIN VELEZ-HAGAN is Senior Contributing Writer and Commentator for Politic365.com.  He is also an Adjunct Instructor of Economics at the University of Maryland-University College and the National Executive Director of The National Puerto Rican Chamber of Commerce.  He can be reached at Justin@Politic365.com.

About the Author

Justin Velez-Hagan
Justin Vélez-Hagan is Senior Contributing Writer and Commentator for Politic365.com. He is also the National Executive Director of The National Puerto Rican Chamber of Commerce, an international developer of senior living facilities, and is a reservist in the U.S. Air Force. He can be reached at Justin@Politic365.com.



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