The hand of history rests very heavily on the shoulders of market watchers like myself as we watch the amazing developments in the past two years – the near-collapse of the global financial system and the subsequent V-shaped stock market recovery.
As I observed in my ST news analysis this morning, there is a seismic shift in the centre of financial gravity from the United States to China. The only sure thing when such a cataclysmic event takes place is more turbulence, as the financial markets adjust to the new realities.
I am sure the fallout from the financial turmoil has kept those of us in our 40s and 50s wide awake at night, wondering what to do with our nesteggs. Will the money we have painstakingly accumulated for our retirement suddenly turn into a piece of toilet paper, if inflation gallops out of hand ?
Parking the money in the bank gives us almost zero returns, but the run-up in equities has been so sharp and scary – and without support from any positive earnings surprises – that putting money in stocks seems equally dicey as well.
One writer in the Financial Times complains bitterly that it is generational theft. The trillions of dollars printed by central banks to nurse huge economies such as the US back to health is punishing those, nearing retirement, who have kept the bulk of their assets in cash for their living expenses.
Instead, it is rewarding the young who are saddled with large debts and some equity investments – as inflation erodes the value of their borrowings.
In an opinion piece in the New York Times yesterday, legendary investor Warren Buffett described the monetary medicine administered by the Fed as greenback emissions. The threat it poses might turn out to be as ominous as the financial crisis itself.
Like other market watchers, I have tried to search for a precedent in history to get clues on how things may unfold.
Rather than the gloomy 1929-1930 scenario, we may have to grapple going forward, we may find ourselves reliving the lost decade in the 1970s when stagflation – a toxic mixture of high inflation and rising unemployment – reigned supreme.
The only memories I had of the 1970s was the relentless rise in the prices of necessities. But those were also the days when Singapore was emerging as one of the four dragon economies in Asia – with dazzling growth rates and rapidly rising standards of living.
But as a developed economy now, the trajectory of our stock prices is more likely to be in tune with those on Wall Street and London and that is what made the 1975 comparison discomforting. In the 1970s, stock markets languished for years, as companies struggled with the uncertainties of rising prices and tepid consumer demand.
How about properties, you may ask ? If I recall correctly, the residential market was bubbly till 1981, with home-owners willing to pay as much as 10 per cent interest on their housing loans.
Then the housing bubble burst and home prices languished for over a decade, before picking up in 1993 when the stock market enjoyed its biggest bull-run until it was overtaken by 2007’s rally. Those who bought homes in the late 1970s had to wait a good 12 years to get any return on their investments!
The 1973 to 1982 period had been described as one huge bear market era which only came to an end when the US Fed squeezed out inflation with sky-high interest rates to take excess money out of the system.
Things may not be so simple now. The US does not call all the shots, with the emergence of China as an economic superpower to be reckoned with.
It is a trying time for investors making decisions on what to do with their nesteggs alright. If history is any guide at all, it is that uncertainties will prevail.