The stock market looks very tempting right now. You can hardly look at any of the financial press without finding someone declaring that the market has hit bottom; or that we are in a bear market rally and you should take advantage of the buying opportunities which can be found everywhere.
Stocks are cheap! Don't miss out on this once in a lifetime buying opportunity!
Yes, it is very tempting... if you believe the hype. The trouble is, you shouldn't.
We Know It's Bad...
We are no longer debating whether or not we are in a recession. Instead we are debating how bad it will be and whether or not it will become a depression. If you bother to do just a little digging beneath the surface of the headlines and hype, you will find plenty of intelligent commentary expressing the reasons why this recession is just getting started, and why it is in real danger of becoming much worse.
Perfect Storm
Just consider the unprecedented confluence of calamities we have encountered in the last three months. Can you apprehend that and really believe that the worst is behind us?
Consider the fact that 1 out of 5 homeowners owes more on their house than it's worth; that consumer confidence is at an historically low level; that the financial underpinnings of our economy have collapsed and are near complete failure; that major titans of the financial services industry have completely vanished - either through bankruptcy or "bailout"; that economic activity in the US manufacturing sector is grinding to a halt; that bank lending has already all but ground to a halt; that credit card defaults are rising; that the US auto industry is on the verge of total annihilation; that the US housing industry will take years to work off the glut of new houses in inventory; that unemployment is rising and forecast to get much higher; that many foreign economies are in worse shape than our own; that the massive deleveraging and CDS (credit default swap) valuation (devaluation) has the mass and weight to destroy an already weakened financial system; that the looming crisis in the private equity markets just might be the proverbial straw on the back of our economic camel? Considering all of that, can you possibly think that this perfect storm won't wreak havoc?
Cassandra or Pollyanna?
So, do you look at everything with rose-colored glasses? Is wishful thinking all you need to make your investment decisions? If you can truly ignore all that's brewing in the global economy right now, then, yes, it is time to buy stocks. If current valuations and PE ratios are the only parameters which inspire your investment strategies, then how can you not buy stocks at these levels?
Are you as Nimble and Quick as Jack?
I am a wishful thinker, too, but a very pragmatic one. I, too, see a lot of attractive prices in the market. But I also see a world economy which is very fragile. I can almost guarantee that we have not seen the worst of this recession yet, and that the recent surge in the stock market is only a bear market rally. Do you really want to enter a long position on any security knowing that it could, and probably will, be wiped out by a certain resumption of the bear market? Can you be nimble and quick enough to get out of your positions when (not if) we have another huge market downdraft?
Cash Is King
We are facing a very real possibility of spiralling deflation. If that comes to pass, you definitely do not want to have your money tied up in the stock market. The only way to survive deflation is to have a lot of cash. Perhaps you think that inflation is the focus of Ben Bernanke and the regulatory bodies. Disabuse yourself of that notion right now. The Fed recently reduced interest rates to 1%. If inflation were the worry, rates would be raised, not lowered.
You Can Lead a Bank to Liquidity, But You Can't Make it Lend
The fact that many of the banks which have received government bailout money are reluctant to loan means that, so far, the government bailout of the banks has yet to get traction. The banks are hoarding cash. Perhaps you should, too.
You Can't Go Below Zero
The specter of spiralling deflation is every bit as fearsome as hyper-inflation, and right now, monetary policy is geared toward preventing deflation. The problem is that the Fed needs to be able to govern policy with a very fine precision. If they don't do enough, we will fall into the deflationary abyss. If they do too much, they will likely put us into the opposite and equally ominous prospect of hyper-inflation. With interest rates at 1%, they are running out of anti-deflationary ammunition. As rates approach zero, that avenue gets cut off, and the only strategy left would be to put the monetary printing presses into overdrive.
Pull the Trigger?
Whether you believe all of this doom and gloom talk or not, you would be doing yourself a disservice not to consider the possibilities (none of them good) presented by the current economic situation. If you can seriously look at these admittedly worst-case scenarios and still believe that worst is behind us, then by all means pull the trigger on those stock purchases you are looking at. I wish you the best.
Advice is what we ask for when we already know the answer but wish we didn't. -Erica Jong
Stocks are cheap! Don't miss out on this once in a lifetime buying opportunity!
Yes, it is very tempting... if you believe the hype. The trouble is, you shouldn't.
We Know It's Bad...
We are no longer debating whether or not we are in a recession. Instead we are debating how bad it will be and whether or not it will become a depression. If you bother to do just a little digging beneath the surface of the headlines and hype, you will find plenty of intelligent commentary expressing the reasons why this recession is just getting started, and why it is in real danger of becoming much worse.
Perfect Storm
Just consider the unprecedented confluence of calamities we have encountered in the last three months. Can you apprehend that and really believe that the worst is behind us?
Consider the fact that 1 out of 5 homeowners owes more on their house than it's worth; that consumer confidence is at an historically low level; that the financial underpinnings of our economy have collapsed and are near complete failure; that major titans of the financial services industry have completely vanished - either through bankruptcy or "bailout"; that economic activity in the US manufacturing sector is grinding to a halt; that bank lending has already all but ground to a halt; that credit card defaults are rising; that the US auto industry is on the verge of total annihilation; that the US housing industry will take years to work off the glut of new houses in inventory; that unemployment is rising and forecast to get much higher; that many foreign economies are in worse shape than our own; that the massive deleveraging and CDS (credit default swap) valuation (devaluation) has the mass and weight to destroy an already weakened financial system; that the looming crisis in the private equity markets just might be the proverbial straw on the back of our economic camel? Considering all of that, can you possibly think that this perfect storm won't wreak havoc?
Cassandra or Pollyanna?
So, do you look at everything with rose-colored glasses? Is wishful thinking all you need to make your investment decisions? If you can truly ignore all that's brewing in the global economy right now, then, yes, it is time to buy stocks. If current valuations and PE ratios are the only parameters which inspire your investment strategies, then how can you not buy stocks at these levels?
Are you as Nimble and Quick as Jack?
I am a wishful thinker, too, but a very pragmatic one. I, too, see a lot of attractive prices in the market. But I also see a world economy which is very fragile. I can almost guarantee that we have not seen the worst of this recession yet, and that the recent surge in the stock market is only a bear market rally. Do you really want to enter a long position on any security knowing that it could, and probably will, be wiped out by a certain resumption of the bear market? Can you be nimble and quick enough to get out of your positions when (not if) we have another huge market downdraft?
Cash Is King
We are facing a very real possibility of spiralling deflation. If that comes to pass, you definitely do not want to have your money tied up in the stock market. The only way to survive deflation is to have a lot of cash. Perhaps you think that inflation is the focus of Ben Bernanke and the regulatory bodies. Disabuse yourself of that notion right now. The Fed recently reduced interest rates to 1%. If inflation were the worry, rates would be raised, not lowered.
You Can Lead a Bank to Liquidity, But You Can't Make it Lend
The fact that many of the banks which have received government bailout money are reluctant to loan means that, so far, the government bailout of the banks has yet to get traction. The banks are hoarding cash. Perhaps you should, too.
You Can't Go Below Zero
The specter of spiralling deflation is every bit as fearsome as hyper-inflation, and right now, monetary policy is geared toward preventing deflation. The problem is that the Fed needs to be able to govern policy with a very fine precision. If they don't do enough, we will fall into the deflationary abyss. If they do too much, they will likely put us into the opposite and equally ominous prospect of hyper-inflation. With interest rates at 1%, they are running out of anti-deflationary ammunition. As rates approach zero, that avenue gets cut off, and the only strategy left would be to put the monetary printing presses into overdrive.
Pull the Trigger?
Whether you believe all of this doom and gloom talk or not, you would be doing yourself a disservice not to consider the possibilities (none of them good) presented by the current economic situation. If you can seriously look at these admittedly worst-case scenarios and still believe that worst is behind us, then by all means pull the trigger on those stock purchases you are looking at. I wish you the best.
Advice is what we ask for when we already know the answer but wish we didn't. -Erica Jong
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