A Simple Perspective Will Do
The date is 2000-05-28. Don't you get tired of all the bad news bears reminding you of all these instabilities, excesses, and 'potential' tensions in the global economy? After all, hasn't it always been like that? Yes it has, but not in money it hasn't. Increasingly, investors find it harder to know where to put their savings. What about Government Bonds? Wrong. Their recent record of capital losses have wiped out your guaranteed yields, probably because the stock market keeps crowding them out, and this even in a strong dollar and low inflation environment. Furthermore, there is no reliable liquidity and potentially poor quality debt in the corporate sector. Foreign assets? Wrong. Most of the world's economies are riskier, have been under performing, and also, there is this thing called currency risk. Like how is the average person gonna cope with currency decisions. You can put your money in a Money Market Fund, or a Bank, for lower short term yields and little chance of capital loss, but then it is difficult to take, when your friends, colleagues, and news channels are all cheering on this thing about the technology sector that is making them richer than you. And, what happens if the US Dollar suddenly starts to under perform other currencies? You will have to worry about inflation potentially wiping out your negligible yield if not your capital.
OK, so what about good old-fashioned Blue Chip Stocks that pay a dividend? Wrong. Corporations choosing to pay dividends rather than invest that money in the new economy have been punished by the market for doing so. Not much choice left, except to speculate in order to preserve. You have little choice but to accept risk! So what, hasn't it always been that way? Besides, it seems that the rewards offered in the electronic world of Nasdaq justify the additional marginal risk that everyone else is taking but me.
No, no, no. How is an economy full of people who constantly have a degree of financial stress, efficient? Remember, all this person wants to do is put his hard earned savings somewhere where he doesn't need to worry about guarding it from the vagaries of economic instability. Today, he needs to concentrate less on his traditional business activity, and more on managing his capital, which duty has become increasingly difficult, unless of course he has been speculating in the technology bull market of the day, whose premise itself is responsible for his financial stress. Only recently has this investor seen any kind of stress at all. Mr. Greenspan illuminates the Yin and the Yang of technology very well when he describes the wonderful forces of change on the one hand, and then the dangerous new macro forces on the other hand.
How about Real Estate? Low yields, but hard asset, which has been rising in value recently! The investment is not too liquid if the economy turns down though, and the form of general mortgage lending activity has come into public question recently. Still, it's a physical asset, which can only decline in price during a deflation or credit contraction. Even then, it only increases in value to the owner who doesn't have a callable lien against it to worry about. Of course, real estate will always have value, as will any needed or desired commodity that is fixed in supply, but that is not in question.
By Edmond Bugos
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