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More Thought on the Economy Part VIII

By Andy Shaw | January 25, 2010

Originally Posted 14th January 2009

What About The Savers?

The Fed and the Bank of England are punishing savers and the prudent people by manipulating interest rates to zero. So you can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark.

I actually agree with this policy (for some but not all, especially pension funds) but the problem is that in the main this is going to be forcing money into risky assets and this could be a very dangerous experiment, if not the most dangerous ever done. It will be so large in scale and so unprecedented that we really have no idea how it will end.

Most expect it to end with hyper-inflation. However, I think that is unlikely but have not as yet figured out where I think it will end (more info is still required). However, I do think that the funnelling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed out. I think this is a bit of a 3 card trick and is an illusion.

What I Think Of The Buy and Hold Stock Market Right Now

I read in an article one analyst wrote, ”The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card-and with our money no less. They are also setting up the ULTIMATE BULL TRAP-a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.” I agree with this, the Fed want people spending, they don’t want them saving. It’s just as when they called in all the gold, they will get what they want. I also agree with the analogy of the stock market trap that is being set as I commented recently.

Cash in the US is now officially trash and if you buy one month of Treasury Bills, you are rewarded with a yield of a whopping 0.02% per year. So I suppose people with more than enough money can keep it invested for an entire year and make nothing or they can give in to the pressure and say, ”I can’t make zero forever if I want to retire!”

Now, let’s imagine that you are a professional money manager that is paid 1% a year to invest other people’s money (a nice way to make money). If you feel that being prudent is to sit in cash, and attempt to charge a fee the math is simple: 0.02% per year minus any reasonable fee is a negative return. This is forcing many managers out on the risk spectrum at precisely the wrong moment, when risks are at their highest ever.

Do you see how dangerous this is, these managers can only invest in certain assets and do not have the freedom to choose from everything and they now no longer have the freedom to choose cash, if they want to get paid. Would you feel safe having your ISA’s with these people?

Well it reminds me of this:

”You got to know when to hold ‘em know when to fold ‘em

Know when to walk away and know when to run.

You never count your money when you’re sittin’ at the table.

They’ll be time enough for countin’when the dealins done.”

–Kenny Rogers, The Gambler

Most money managers are driven by ‘beating the benchmark’; no matter how imprudent it may be to do so. Like Kenny Rogers sang in The Gambler, ”you have to know when to hold ‘em and know when to fold ‘em.” Knowing when to fold ‘em or play it close to the vest, while everyone around you is partying is perhaps the most difficult task we face as investors.

I am fully aware of the Fed’s goal to both ’save the system’ and ‘force everyone out on the risk spectrum’, but I have seen this play before.

I believe very strongly that investors who believe that they must be invested in risky assets at the expense of prudence will rue the day that they did so. A comment that I agree with, again from an American analyst is, ”when I consider the risk/reward ratio with equities at 22 times earnings (using 931 S&P 500 and $42 in earnings in 2009), I cringe when I hear people say that stocks are cheap.”

I really worry about the funds people have invested in UK pensions and ISA’s at the moment as the money managers that once were searching for that extra profit are now FORCED to search for ANY profit. If that isn’t gambling then I don’t know what is! But the real losers won’t just be the managers who fail and top themselves, it will be their families, and the families of the thousands, if not millions who have trusted their pensions to people who are trapped.

Depressing stuff, but there is light at the end of the tunnel for mortgages as I have a little good news in the next article…

Best wishes

Andy

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