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Thursday, 10 February 2011

If all else fails, I turn to you: Why saving might be the safest investment!

When the world is darker than I can understand.
When nothing turns out the way I planned.
When the sky turns grey and there's no end in sight.
When I can't sleep through the lonely night.
I turn to you[…]

The current year 2011 had a good start from an investor’s point of view:

-         The stock markets in all of Europe showed a healthy growth over the last 1.5 months.
o        The situation on the stock market still seems to be promising and almost nobody is talking about the ‘double dip’ anymore.
o        The pundits are certain that a lot of stocks are still underpriced

-         The prices for gold, silver and other precious metals are higher than ever and demand still exceeds supply.

-         The oil price increases gain in momentum as the social acrimony in the Middle East remains growing: bad for the people, but good for the wallet.

-         Also the prices for food like grain, rice and soy seem to be rising uptil 2008-levels.

But in my opinion, dark clouds might gather over the heads of professional and amateur investors. They should count their blessings and might consider to change their investment strategy to the most liquid form of investing: cash!  

This opinion is based on the facts that:

-       Real growth of fundamental data, like consumption, employment and production in the western world fails to occur
o        Although the Netherlands showed a healthy growth of the production and export last year, the situation in Germany looks less promising with disappointing economic growth and a descent of 3.4% in factory orders.
o        Don’t be mistaken: Germany is still the third economy in the world and the motor of growth in all Europe;

-         The growth in the BRIC-countries and especially India and China shows also some signs of exhaustion:
o        Cities built for nobody in the middle-of-nowhere in China
o        Looming inflation in China and the growing necessity for the Chinese government to do something about it
o        An inflation of 8.3% in India, which forces the Indian government to do something about it.
o        The growing chance that Indian knowledge workers (IT Specialists, service desk personnel) might be in less demand, due to stagnating growth within the financials in the European countries and the USA.

And there is more. The gold and silver prices are so extremely high, that the only possible way seems to be down. I bought some gold in 1999 and would I have held it uptil now, I would have had a profit of about 500%.

Besides that the markets for oil and food, although seemingly promising, could become a disappointment. There is a lot of expectation in the market, due to the demand for oil and food in the emerging countries. Above that the situation in the Middle East might predict problems in the oil supply. But... if the economies of the emerging markets cool down and the situation in the Middle East stabilizes, the oil and foodprices might prove to be a bubble after all.

And then the stock market. Mike “Mish” Shedlock (anybody who doesn’t know him, should read this) wrote a very interesting article on the expected annualized returns of Stock Markets: Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

Some highlights of this article, which as a whole is a definite must-read:
Reasons for Unsustainable Earnings Growth
  • Much of the recent earnings growth is directly related to federal stimulus that will eventually end.
  • Much of the earnings in the financial sector are a mirage, based on assets not marked-to-market and insufficient loan loss reserves. The Fed and the FASB have repeatedly postponed rules changes for the benefit of banks and other financial institutions.
  • Earnings in both the financial and nonfinancial sectors have margins outside historical norms, based on very low headcounts and outsourcing

Mish also points out that the moment you step into the stockmarket is decisive for your expected returns:
-         If the Case-Shiller normalized PE is very low (under 10) in a year, you might expect good returns in the years to come.
-         However, if the PE is high (above 20) the returns might be average or even negative for years to come.

Although the stock markets gave in fact a very low return if you stepped in the stock market in 1996 and remained there until now, the Case-Shiller normalized PE (price/equity) for the end of 2010 is still quite high at 23.

Bear in mind, the Case-Shiller normalized PE for the year ending 2010 is 23. Does that bode well for the next decade? 
Of course no one knows what this year or next year will bring.
Take a look at 1996[...] In spite of several years of huge stock market gains, the annualized rate-of-return to date sits at 3

This probably means that the stockmarket is a no go-zone for the years to come.

Inquiring minds might wonder about the bondmarket and chances there with the high-yield sovereign bonds. In my opinion the bond market turned into a junk bond market like in the eighties. The only difference is that there is not a clear Michael Milken figure and that the junk bonds are not from companies like KKR, Philip Morris and Kraft, but from countries like Greece, Spain and Ireland. Have yourself a nice ballgame!

So what remains then, if you want to make some profit without too much risk? Saving!

Make no mistake: the interests that banks pay for savings accounts and deposits are still insulting. But there is a clear movement towards higher interest rates, as people and institutes demand a higer reward on their cash.

And remember, we are still in a deflationary world (when you are in doubt: check it out with Mish ( and the 2-3% interest on your deposit or savings account might be the best return that you can get on your investment.


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