We Have Nothing to Fear but the Lack of Fear Itself
 When your teenager is about to hop in the car and head to the beach, what are your parting words? “Have a good time honey” or “for God’s sake, please drive safely”. Do you imagine your kid having fun or are you riddled with fear? I’m guessing most of us want our kids to experience life and have fun, yet we beg them to be safe nonetheless. We’re thinking a little fear is a good thing (and we pray our words will somehow sink into an adolescent skull).
And what are you thinking when you think about your portfolio? Are you optimistic in light of this big rally, or are you afraid the market has already exceeded the speed limit?
If you happen to be the worrying sort, you’re not alone; all indications suggest that there are still plenty of folks (consumers and prognosticators) who, in spite of the market’s (recent) resiliency, see danger at every turn. And quite frankly, a little fear (theirs’, not yours’) is a very good thing at this particular moment.
I caught CNBC’s Mad Money show last week and listened to host Jim Cramer chastise the media for all its dooming and glooming. I quote: “This gang of doomsayers and Chicken Littles has been scoffing at any progress we’ve made since emerging from late 2008’s garden-variety depression. Instead of seeing= the positive effects of government programs like Cash for Clunkers or the $8,000 tax credit for homebuyers, they worry about cannibalized future sales. Despite all evidence to the contrary, the glass-half-empty crowd is convinced that the markets and the economy will continue to get worse. People have to stop believing that everything is bad and everyone who has something positive to say is not a snake-oil salesman. Just because they’re positive doesn’t mean they’re lying or making stuff up.”
Oh I beg to differ. Not with his premise that this rally is for real, but with the notion that “people have to stop believing that everything is bad”. People indeed do not have to stop believing that everything is bad; in fact we want them to keep believing that everything is bad. Think about it; in the last six months the Dow is up 3,300 points in the midst of all this pessimism. Why would we want people to stop thinking whatever it is they’re thinking?
Now I do appreciate that Mr. Cramer is the don’t-be-afraid, “have a good time honey” kind of guy. He believes that the road is safe to drive, that at current levels there’s still plenty of opportunity ahead for those willing to leave the shade of the T Bill. My point is that if everyone agreed with this self-proclaimed madman, if the pessimists all at once capitulated, there’d be an exodus from bonds (particularly Treasuries), the likes of which we’ve never seen. And while the stock market would hit mach speed (for a moment or two) as the crowds raced to the beach, the desertion of the bond market would send interest rates through the roof, and believe you me, that would be a very bad thing for the economy right about now. It’s never good when we’re all heading in the same direction.
Other people’s fear therefore, as I’ve been preaching for months, is today’s market’s best friend. It keeps interest rates down and liquidity up, which has always been a recipe for higher stock prices.
According to CNBC, the current money market fund assets to equities ratio is 30%. The long-term average is 20%. I.e., there remains an abundance of cash (relatively speaking) on the sidelines looking for something to do. In March of this year (3,300 Dow points ago) the ratio was 45% (huge).
So when you’re kibitzing with your naysaying neighbor, you know the one whose kids are always in the house and on the Xbox (and never been to the beach), the one who brags about being in CDs the past two years, the one who says it’s all smoke and mirrors and we’re going to a hot place in a hand basket – simply nod and smile; the last thing in the world you’d ever want to do is change his mind…
I hope you have a great time this week and I hope everybody else continues to drive safely…
Marty
“It is when we all play safe that we create a world of insecurity”
-Dag Hammarskjold
Leave a Reply
|
