Thursday, January 28, 2010

Swiss cheese: it’s about the holes.

There is a high level meeting in Switzerland between the top bureaucrats and leaders of the biggest economies in the world. These conquering heroes are the same ones whose precedent setting cooperation saved the world’s banking system a year ago. They all lowered interest rates sharply, loaned billions to the banks and stimulated their economies dramatically. And it worked. The system survived.

But two nations will be particularly concerned this year. The Dutch will have noticed a crack in the dike and the British will be dealing with a sticky wicket. Between them they could lose 3.8 billion Euros. These two governments loaned money to the shaky Bank of Iceland. But the bank failed anyway. So, the Icelandic government is now being asked to make good on its loan guarantee. Earlier this month [January 2010] their parliament passed a bill scheduling the repayment of this mega-loan. But the people rebelled. 25% of Icelandic voters signed a petition stating they did not want to repay the loan to Britain and the Netherlands. They felt cheated. In the good times, the banks kept the profits; but when it failed, it’s the population who has to pay back the bank’s debt. Not fair. And, of course, it’s not fair that the citizens of England and Holland lose the 3.8 billion either.

Last year, the G-8 solved the banking crisis. Will the World Economic Forum be able to solve this year’s loss-of-faith crisis? How can they prevent Icelandic cynicism from spreading to England and Holland?

Will loss-of-faith spread to America? 140 US banks failed in 2009. Eight more failed on January 26, 2010! Over one third of American houses have mortgages that are bigger than the value of the house. Americans are ticked off with the president and with the Democrats. Are Americans losing faith too?

These are good times to be Canadian. Our economy never got as weak as most other modern economies. And our recovery seems stronger than most. And our banks are widely recognized as the safest in the world. No loss-of-faith in Canada.

This is my Economic Faith Metre for the Swiss Cheese World Economic Forum:
Iceland -lost faith
Britain and Holland -worried
USA -losing faith
Canada -full faith

Faith is important in modern economies. The whole concept of making loans in full expectation that those loans will be repaid is a matter of faith. No faith, no loans. No loans, no economy. It is very important that the G-8 leaders make great efforts to insure that people keep their faith in the system.

Now let’s talk about your faith: will the Swiss Cheese World Economic Forum affect your faith? How does your faith in the Canadian economy affect your retirement plans? In 2008 the stock markets of the world all crashed simultaneously. Citizens of all countries who kept the faith lost their shirts! In 2009, the world’s stock markets recovered some of the 2008 losses. Those who hung in there and kept the faith made back some of their retirement nest eggs. And what should we expect for 2010?

Our expectations are more a matter of faith than facts. Bankers don’t hang out their dirty laundry. They hide the facts so we’ll keep the faith. Here’s my assessment of the faith that Canadians have in the financial world: most investors have noticed that their investments have not fully recovered from the 2008 stock market crash. Most plan to sell out of the stock market if it ever goes back to the 2008 highs.

This is not faith: it’s hope. They are hoping it will go back up – and if it does go back up, they’ll sell and invest in something safer. The 2008 stock market crash broke investors’ hearts: they no longer love the market. And now they’re hoping to break even.

In my book, Beyond the Bull I discuss how the stock market reflects our human emotions. At stock market tops, investors love the markets. At bottoms, they hate the markets. And on the way down, they keep hoping it will go back up. Traders sometimes sarcastically refer to a bear market as “the slope of hope.” Where does faith fit into all this?

It’s faith in the world’s banking system that is at risk right now. It’s about ordinary people like Icelanders, Europeans and Americans keeping their faith in the banking system. And it’s about your faith too. It’s your investments that are surfing on this wave of human emotions. Will the financial waves recover or will they crash like they did in 2008 and early 2009?

We know what the attendees at the World Economic Forum will do. They will wheel and deal and do whatever they can to help us all keep the faith. But what will we do. Most investors are not economic leaders, they’re economic followers. They love the markets when it peaks, hate it when it bottoms and on the way down, they hope it will go back up. They feel love or hate or hope, but they seldom do anything.

What should investors do?

Let me re-phrase that question: the stock market has rallied over 50% in 10 months and another banking crisis seems to be emerging in Europe. Do you think investors should stop hoping the market will go higher and move into something safer now?

The TSX composite index has been drifting since September. Do you think the economic leaders attending the World Economic Forum will help this market go higher? Or will they trigger another 2008 sell-off?

It’s your portfolio: it’s your retirement nest egg that is at risk. Your financial future is a function of what you own, not what you think or what you feel.

The Swiss Cheese World Economic Forum is about what you think and feel: it’s about keeping the faith. Your financial future is about what investments you own and what you do with them. You may love or hate of hope whatever you want in the financial world. But the key to investment success is to own securities that are going up and sell them when they start to go down.

Your investments are the Swiss cheese: your feelings and thoughts are the holes.

Ken Norquay, CMT Jan 28, 2010.
Chief Market Strategist,
CastleMoore Inc

These are the links to Amazon for those interested in my book:





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