Saturday, August 20, 2011

The Trio of Investor Terrors

August has not been a kind month to stock market investors, with about $6 trillion wiped off global equity market valuations so far.

We have seen in August the most 200 point moves in the Dow Industrial Average since December 2008 when the US financial system seemed on the verge of meltdown. Volatility is also at its highest level since the fall of 2008 when Congress was debating TARP.

Why is this happening now? It's simple fear. Investors are facing three major headwinds, what I call the “trio of terror”.

The first fear that investors face is that global economic growth is slowing rapidly. Investors had bid up stocks to levels where the US economy, for instance, would have to grow at a 5% rate to justify the valuations.

Meanwhile, the US economy “grew” at only a 1 percent rate in the first half and it is still decelerating.

In Europe, the problems in nations like Greece are well known. The problem is that the engine of Europe, Germany, is slowing rapidly. Its economic growth in the second quarter of 2011 was almost nonexistent.

Even the emerging markets are slowing, although China and India are still growing at about a 7%-8% rate.

The second fear investors face is renewed worries about the global banking system.

It seems that several European banks have had to turn to their central banks for emergency funding. That is because the value of sovereign country bonds in their portfolios had fallen sharply.

The stocks of US banks, such as Bank of America, have also fallen steeply. What worries me most about US banks are the denials on the financial news networks about their troubles.

All the talking heads say the banks are in fine health which is reminding me more and more of 2008 before their problems were revealed to the public. After all, let's recall nothing has been done about all their bad debts. The debts have simply been locked into a 'closet' and forgotten about while Wall Street partied on the Federal Reserve's free money. But the debts are still there in the 'closet'.

The final fear investors face is their lack of trust, both in the US and Europe, of the political leadership.

Investors are waking up to the reality on both sides of the Atlantic that their political leadership is either unwilling or unable to deal with the debt problems facing both Europe and the US.

This may end up being the toughest fear for investors to overcome. That is because, particularly in the US, we need the type of leadership that has not been seen in this country for decades.

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