Your Share of the Pie
There is a lot of back slapping, high fives and smug looks on the faces of stock market operators these days and in the background you can hear the lovely sound of champagne popping.
The Dow Jones Industrial Average and the All Share Index of the Johannesburg Stock Exchange are now at all time highs.
Stock Markets have been moving steadily upwards for five years and the question is where do we go from here?
The strange thing is that most people don’t realise that the markets are at all time highs. Mom and Pop investors are largely absent and the markets are dominated by professional traders.
The reason for stock market highs stems from a healing world economy and interest rates that are at historical lows. Interest rates have not been at these levels in living memory.
Central Banks around the world are involved in a deliberate strategy to destroy their currencies and it is a race to the bottom. Bond yields have been forced down to encourage confidence and spending. Risk on bond investments is massive. Cash and cash equivalent provide negative returns after tax and inflation. So what is the alternative?
Now it is generally agreed that increased stimulation and spending by governments is the correct approach when economies are plunged into crisis. But is this really correct? Can we escape recession after years of over spending and excess and when debt levels are out of control? Are recessions not a natural economic phenomenon – a forest fire to purge excess and encourage new growth?
This “gigantic economic experiment” is certainly not without risk. How does a government encourage short term spending, and then metamorphise its citizens into long term savers who will happily pay massively increased taxes? Spending patterns especially when they have been increased, are like salaries and wages – sticky downwards. Try cutting your own lifestyle or happily accepting a lower salary with an increased tax burden. I wonder if this can be done? If not a recession has not been avoided just delayed, but the debt levels are now even higher.
I actually miss the old boom and bust model. That provided real opportunity for investors. Shouldn’t central banks and governments provide its citizens with a strong and stable currency? Shouldn’t hard work and savings be encouraged and shouldn’t spending be discouraged? Why not tax consumption more?
Economics teaches us that if you want less of something then tax it! Income taxes punish productive work, risk taking and growth. We have Capital Gains Taxes that discourage new investment and taxes on profits that destroy the incentives of entrepreneurs or simply chases them to a new jurisdiction.
So what have the stock markets got going for them? At the risk of repeating, but this really bears repeating, incredibly low interest rates. Investments with steadily increasing cash flows in an environment of low inflation and low interest rates become increasingly valuable.
Investors should not bet against the Tsunami of cheap money. Let the trend be your friend. We are experiencing a massive bull market so why not take advantage of it?
Another very important factor alluded to earlier and often overlooked is that smaller investors are not yet involved in the markets, but this is starting to change. This suggests we are not near the end of the bull market. A lot of money is also waiting on the side lines in bond funds and money market funds. A switch from these funds to stock funds will be another catalyst for the markets.
Against this background it is hard to envision stock prices that are not higher at the end of this year. We are up 10% already.
What can derail this investment train? Well obviously rapidly rising interest rates or an economic shock of some kind possibly caused by war or terrorism. The former is unlikely, the latter is any one’s guess.