Pfäffikon SZ, Switzerland – Investors and citizens are praised for their achieved returns. 2017 may go down as a stable and successful investment year based on the returns achieved. Volatility is low, and stocks slowly move up; It’s Bernie Madoff in his best days. The low-interest rate would justify the current valuations. That investors can be crushed by the steam roll does not seem to be realized.
Legendary investor Warren Buffett thinks there is a correlation between low-interest rates and valuations. He even calls it an economic act. But what he adds is that this law is incomplete. The ease of investing is pushing aside careful thinking about finances. Central bankers have been active for decades to brainwash the ignorant citizen in the area of responsible investing. The investor and the citizen shift historical facts aside in their blind pursuit of returns. Buffett is currently of the opinion that the current investment climate can lead to one of the biggest disasters on the global equity markets.
Granted, the undersigned is questioning valuations in general for much longer. Today, an average Dutch family finds it normal getting deep into debt, as their monthly expenses are so low. It is remarkable that the new Dutch cabinet Rutte III is emerging as an unreliable partner in the development of debt. Debt relief in The Netherlands is suddenly becoming a tedious fiscal tail; this aside.
Investors are wise to realize that they have taken a huge advance on the future. When considering market cycles and using the most reliable measuring instruments based on historical values, the S&P 500 is approximately 170% above its fair value. Low growth is compensated by extremely low-interest rates and does not warrant a premium. A negative return of the S&P 500 within a period of ten to fifteen years is very likely. An interim loss of 60% or more is definitely justified.
Perhaps you should consider not to be the last to hold the glowing rod in your hands. Do not let Bernie Madoff’s hard lessons doze you off.
It remains for me to wish you a good weekend.
Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.