Sunday, March 28, 2010

Keep Looking Over Your Shoulder

The stock market has performed nicely over the past few weeks. Confidence appears to be growing and investors have been piling in. However , confidence can be fleeting. When it changes, damage can be severe. Making money is exhilarating, but losing is traumatic.

I hate trauma. That's why it's prudent to always look over your shoulder and see if investor psychology is changing. And change it will. Every professional investor knows that debt as a percentage of GDP is at an all-time high, far exceeding the Depressions ratio, and rapidly growing. Not just in the USA, but worldwide. They are all exhilarated and will continue to ride the momentum until they are shocked. Then the exits will become crowded and trauma pricing will set in. A forward looking stock market will soon see issues that government can't solve because government is a large part of the debt problem.

2011 is coming. Bush era tax cuts will soon be expiring. Quarterly estimated tax payments will hit the psyche of businessmen between the eyes. The realization of higher taxes will be here. Higher taxes stunt growth, hiring, and investment.Will the market actually anticipate the upcoming damage of rising taxes? I think it will.

Will we lose confidence prior to the tax increases for other reasons? I think so. State and Soverign debt is a smoldering problem. Central banks and governments can't bail them all out. Taxpayers, eventually, won't stand for all the debt forgiveness being placed on their shoulders. If debt will no longer be able to be transfered to taxpayers, banks, bond funds, and pension plans will need to start eating losses. Confidence and markets will erode. Everyone will look for safety and the exits will get crowded.

Our debt binge hasn't been solved so keep looking over your shoulder, better yet, shoulders.

No comments:

Add to Technorati Favorites