So who amongst us, I wonder, was worried by the Cyprus banking crisis? If you were, then you then, let me assure you, that you were not alone. At a recent SIAS seminar, I asked the audience whether they were concerned by the events that were unfolding in the tiny Mediterranean island. There was a significant show of hands. I then asked them how many were worried about the level of America’s national debt, a slowdown in China’s economic growth and the Eurozone debt debacle. After each question, a significant number of people admitted that they were concerned. Thing…
At a recent SIAS seminar, I asked the audience whether they were concerned by the events that were unfolding in the tiny Mediterranean island. There was a significant show of hands.
I then asked them how many were worried about the level of America’s national debt, a slowdown in China’s economic growth and the Eurozone debt debacle. After each question, a significant number of people admitted that they were concerned.
Thing is, there are lots of things that we investors can be worried about. But the time to worry is not when there is fear in the market but, instead, when there is nothing left to worry about.
That’s right. The time to be anxious is when you hear, what I consider to be, the six most frightening words in investing, which are: “Nothing can possibly go wrong now”.
That is the time when investors become too confident and too greedy. It is also the time when stock valuations could become too stretched for comfort.
Warren Buffet put it very succinctly when he said: “Be greedy when the market is fearful but be fearful when the market is greedy”. And he is right.
The time to worry is not when there is something to worry about but, instead, when there is nothing left to worry about. I suspect we are still some way from that moment.
However, there is something that you should be aware of now that could manifest itself in the years ahead. It is the threat of higher inflation.
The one question that we need to ask ourselves now is why is the US, the UK, the Eurozone and Japan printing money as though it is going out of fashion.
Just recently, Ben Bernanke, the US Federal Reserve chief defended the easing of money supply in the US and in Western Europe. He said it was helping to boost global economies.
Admittedly, Bernanke wasn’t quite as blunt as former US Treasury Secretary who famously said in 1971 that the US dollar “is our currency, but your problem”.
The simple truth is that central banks are now bereft of ideas to clear up the massive debts that they have accumulated over the years. But they will have to clear up the debts one way or another.
However, solving the debt debacle will not be easy. In fact it could get very messy as shown by the recent events in Cyprus. Unfortunately, Cyprus is unlikely to be the last that we hear about the European debt saga.
If you think about it, there are really only three ways to tackle debt – you can service it; default on it or inflate it away. And right now inflating it away appears to be the preferred choice because it is the least worst option of the three.
But make no mistake. Inflation is around us already. We have already seen glimpses of how inflation is seeping into Singapore with the jump in Consumer Prices Index to 4.9%.
If you are a long-term saver then you need to do something about it to ensure that you savings are not eroded by inflation. Let me give you a simple example: If the inflation rate of 4.9% persists for the next ten years, then $1,000 would only have the buying power of $600 in today’s money.
But you don’t have to take this lying down. You can do something about this now by investing your money in assets that have, historically, shown that they can keep pace with inflation.
The choice is yours. Do something about it or allow inflation to eat away at your wealth.
This article first appeared in Take Stock – Singapore.
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