It's Only Good for a Limited Time

It's the economy, stupid. - Bill Clinton

What keeps you up at night?  Recently I can say this blog is keeping me awake, though it's because I'm busy typing in front of my computer instead searching for the cool spot on my pillow.  Still in the spirit of the question, one item that keeps recurring in my mind is bullish stock analysts versus my hesitance to reallocate into stock mutual funds.  As I wrote at the end of To the Moon and Back:

I'm still not sold on buying stocks for my "retiree" nest egg, but I do find that I'm questioning it more every day.

For new readers, please read Maybe I'm Not a Lazy Investor and Stay True to the Path or Take the Fork in the Road for the background on why I'm bearish on stock investing.  If you don't have the time right now, I can boil it down to a simple phrase - it's the debt, stupid!

Now About Those Bullish Analysts

I wish I was keeping a list of headlines that articulate the views of bullish stock analysts since I started this blog.  Likewise, I could keep a tally of bullish stock commentary on CNBC, but I don't think my 2 and 5 year old would buy my argument that my count is more important than Curious George on PBS.  Nonetheless my point is that the quantity of bullish stock commentary I'm seeing dwarfs calls for caution.

To be fair, the analysts in To the Moon and Back spoke about how central banks have calmed markets down and provided optimism, which lead to a recommendation of buying stocks for the months ahead.

Additionally in How Many Bulls in this Rodeo, Clowns Want to Know, David Kotok from Cumberland Advisors stated:

The key to watch is in the credit markets. Credit spreads tell a story of overwhelming liquidity being applied to the financial-system open wounds like a steroidal salve. Such treatment can alleviate interim pain. It is treatment for the symptom; it works for a while. It does not provide a permanent cure. (emphasis mine)

Ok, by unleashing a flood of liquidity in the form of low interest rates, quantitative easing, and refinancing operations, world central banks distort financial markets encouraging investors to take on more risk.  Stocks are a natural fit, especially with reports and prognostications of an improving economy.  Furthermore, the Federal Reserve has strongly hinted at more quantitative easing in December and January.  

Now put yourself in the shoes of a financial manager.  Your worst fear is the thought of underperforming your peers.  To a financial manager, underperformance is worse than losing money.  Thus it is to be avoided at all costs.  David Kotok admits as much in his recent commentary Stocks Upward Bias, Golden Cross, Risk Rising:

Liquidity-driven rallies are extraordinarily strong. The central banks of the world have increased their balance sheets by trillions, and the short-term interest rate is near zero. If you use the short-term rate to compute an equity risk premium, you get a huge number. Of course, we know that zero is a poor standard. Moreover, we know that it will not last forever. In addition, we believe there will be a penalty to pay for this prolonged period of zero-cost financing. However, while we wait the party continues. It is harder and harder for folks to stay on the sidelines. It is too soon to abandon the bull market.

One Big Difference Between Me and the Analysts

While reading this article, and perhaps previous articles, did you pick up the big difference between me and the analysts?  Time horizon.

Liquidity from central banks is much like the McRib, it's only good for a limited time.  Limited time is the same as short term in my vocabulary.  Anyone who is moving in and out of stocks over the short term is a trader.  There's nothing wrong with that, it's just not for my retiree portfolio.

Whenever I talk about my retiree portfolio, I'm referring to my rolled-over 401k from my previous employer.  The analysts I've quoted are not necessarily looking to invest long term as I am.   

Parting Thoughts

In a former life, I would have never bet on me quoting Bill Clinton for any reason.  Now that I'm older, I appreciate that he was pragmatic.  I'm not sure I can say the same for central bankers.  In order to buy time for the economy to recover, central banks add liquidity, which keeps credits markets happy and that enables stock markets to rise.  If QE3 is announced, the S&P 500 may well rise up to a new all time high above 1565.

However, central banks are playing a dangerous game.  If the economy does not recover, can central banks keep adding liquidity without consequence?  What happens when the music stops?  What happens if the music stops in Europe or Japan or China?  Remember, all that debt is still not going away.

Ultimately even if this turns out to be a legitimate economic recovery, this is a risk that I do not want to take with my long term money.  After all, opportunities are easier to make up than losses.

Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.

With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:

1. It’s your nest egg.
2. Opportunities are easier to make up than losses.