U.S. market could prove to be safest haven for investors
TERRY SAVAGE savage@suntimescom August 4, 2011 9:28PM
A trader works on the floor of the New York Stock Exchange on Thursday, Aug. 4, 2011 in New York. Stocks are plunging in another broad sell-off as investors grow concerned about an economic slowdown in the U.S. and Europe.(AP Photo/Jin Lee)
Updated: May 3, 2013 12:15PM
Everything gets pushed to extremes in a panic — and this stock market panic is no exception. In fact, Thursday’s scary slide might well pick up steam in coming days as fear spreads around the world. Now that the attention is off the U.S. debt problems, the focus is on the very real likelihood of a severe global economic slowdown and a double-dip recession here.
Despite that gloomy outlook, it is likely that the scared money of the world will decide that the United States — and its stock market and short-term Treasury market — are the least scary of all the places they can be.
Then the global financial tide will come rushing back in. The safest place you can be is on shore — so you won’t get swamped by the current. There is plenty of liquidity sloshing around the globe. And it has to find a home somewhere. Let’s look at the alternatives.
† Europe has more severe debt woes than the United States. Greece caused a mild panic — but the debt problems of Italy, Spain and Portugal could actually destroy the European Union and the euro. Some of the selling of U.S. stocks is coming from these European banks trying to increase liquidity.
†China is in the midst of a credit crunch and economic slowdown. Its central bank has raised interest rates four times, and increased bank reserve requirements 11 times, in the past 18 months to fight inflation there. Now China’s economy is slowing — as demand for its exports is shrinking in the global economic slowdown. So China’s not a good place to hold global liquidity.
† Japan has a debt to GDP ratio that is twice the size of the United States’. Though its economy has restarted after the terrible earthquake and tsunami, it is still not fully functioning, and must borrow more. That does not make the Japanese yen an especially attractive place for global liquidity.
The United States looks like the “least worst” alternative. Yes, there are still fears that the Fed will create more dollars in a desperate attempt to keep America out of a double-dip recession. But the big stock market drop occurred because with no clear “safe haven,” money is moving wildly, each manager hoping not to be the last one out the door.
America’s economy may be slowing, but its assets remain. Corporate earnings might decline, but most businesses won’t disappear. Stock prices are a share of ownership in those assets and profits. That’s something to keep in mind before dumping out of your piece of America’s future. And that’s The Savage Truth.
Terry Savage is a registered investment adviser.