Investor dilemma points to an inflection point

Posted on 28 October 2009 with no comments from readers

Perhaps you are a high net worth investor yourself or an institution looking after billions from Arabia. The dilemma is the same. There just do not seem to be any attractive investment opportunities at the moment.

Even just sitting on cash deposits carries a risk of devaluation or negative returns on inflation-adjusted low interest rates. You are always an investor if you have money, so what do you do? Consider the alternatives:

1. Invest in stocks: markets have rallied too high, too soon and for too long. Valuations are more overstretched than in 1999 in many markets.

2. Emerging markets: Russia and the Gulf States have been badly impacted by the Great Recession. Recovery depends on oil and gas prices which look too high due to speculation from the dollar carry trade. China and India look in bubble territory and foreign investors often get burnt.

3. Real estate prices have fallen but are still falling around the world. Yields are often very low as rents have come down too, while empty property yields nothing and offers a negative yield after expenses.

4. Precious metals have had a good run up from gold at $900 and are vulnerable to a correction right now.

5. The US dollar is universally disliked but that might mean its value against other major currencies is about to rise, but then you are investing in a currency where the money presses are working overtime and the longer term outlook has to be bad.

Doing nothing

I suppose if you add all this together you arrive at a good argument for doing nothing, for sitting and waiting for cheaper prices that make investment economically attractive.

If you are in that position then perhaps that is your best investment right now. It is a luxury to be able to sit and wait while others struggle with their debts and failing businesses. The great de-leveraging process continues.

Government intervention to depress interest rates is not helping because it slows this unwinding down. Indeed, low interest rates on the US dollar have created a massive carry trade that has suddenly and artificially inflated stock markets and kept property prices too high.

High risk, no return

This has taken unwise investors into highly risky asset classes from which they now think they will be able to exit before the crash. History suggests they will be over-confident and get this wrong.

That will mean a longer and deeper slump than a more rapid adjustment of asset prices would have produced. Governments are the problem, not the solution.

If investors are confused then admit it and wait for an obvious opportunity to emerge when the more confident guys have blown it. But the very fact that sensible investors can no longer see a way forward points to an inflection point coming very soon.