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Benson's Economic & Market Trends

Risk is What you Don't See! 

 September 26, 2003

When it comes to taking risks on Wall Street, the old saying "now you see it, now you don't" still applies.  This is why.

If you must take risks, it would be  much wiser to get other people to assume the risk with their money so you can get what you want without taking the risk!  However, most average retail investors assume the risks and suffer the losses.  

The Wall Street business model is designed to encourage the average investor to take high risks with their own money, while  Wall Street continues to profit - only a few lucky average investors ever win the lottery, and actually get to cash in the ticket.    Investment bankers, traders and money managers will continue to make money as long as the average investor  plays the Wall Street Casino.  Indeed, Wall Street is designed to make money whether you, as an investor, do or not as long as you assume the risk of using your own money.

At present, the average  investor is being sold on the idea that with interest rates at 1%, the only risk a retail investor faces is missing out on the new bull market.  The message Wall Street is selling to the average investor is that they risk being left out of the rising stock market.  Today, you won't hear from Wall Street that P/E multiples on the NASDAQ are over 100, that margin debt has skyrocketed, and retail investors are just "throwing their money" at the market.  The Wall Street strategy is to make sure that the speculator thinks he is an investor surrounded by other investors, so he feels safe. If a speculator feels safe, he isn't focused on the risk.  With stocks at Bubble levels again, the current bout of speculation looks like it will end well for Wall Street but not for the "average investor".

It's interesting.  Both the Federal Reserve and the US Treasury have now adopted the same model for running economic policy that Wall Street uses to "Shear the Sheep".  The Fed wants to get retail investors, professional investors, and businessmen "all juiced up" and they need high "animal spirits" in the investment community to insure the continued flow of funds into the economy.  And, it would appear, the Fed has succeeded by getting both retail and professional investors interested in financial speculation rather than honest investment in new businesses, or the latest, most efficient, equipment. (All of that kind of investment is headed to China and the rest of Asia.)  When it comes to speculative investment, only the professionals know when to get out and when they do, they need the average investor to sell their stocks to!

Yes, money is pouring into stock market speculation and back into the mortgage "carry trade" where long-term mortgages are financed with overnight debt.  The Fed is trying to convince financial market participants that there is no risk because the Fed can keep monetary policy easy forever! 

The US Treasury is playing the same "risk free" game with the budget and trade deficits by acting as if these twin $500 billion deficits pose no risk at all.  Indeed, we are told the deficits must increase economic growth and the US remains committed to a strong dollar policy, even though we are committed to making America the largest debtor nation the world has ever known! 

What if the dollar continues to drop?  You certainly won't hear the Fed talking about the risk of the dollar dropping 30% and the rate of inflation moving up. Moreover, the US Treasury wouldn't dare mention the risk that foreigners may stop financing our trade deficits if we ask them to revalue their currencies, or that foreigners may decide not to finance our major federal deficit and our foreign wars.  These are particularly serious risks because the United States lacks savings to finance our own deficits. Rather, the Fed will talk about the miracle of productivity growth and the "risk of deflation".  At the same time, the US Treasury talks about all the job growth to come from the tax cuts. 

Could it be that it is in their political interests to get you to speculate and keep your money in dollar assets

If you are the average retail investor you need to know that the government's interests may not necessarily be in your best interests.  To save the US economy, the government is willing to make sure your money gets spent, whether you know its happening or not " this is what government deficits and inflation are all about.

As an investor today your  primary goal should be the preservation of your capital.  That means not only a return of your money but getting a return of the "purchasing power" of your money before you can even think of getting a return on your money

This fact remains:  If you keep up with inflation and the falling dollar, you haven't kept up at all.

The risks are always what you don't see!  The risks are not that you will miss out on the next bull market, or that speculators will miss out on extra profits by buying mortgages and financing them in the REPO market.  The real risks are:  the dollar will fall, interest rates will rise, inflation will rise faster, the stock market will drop like a stone, and, anyone domestic or foreign holding US Treasury bonds, will be left holding the bag and made to feel "feel like a sucker". 

If you are in cash, you could lose 30% just from a drop in the dollar.  If you are in stocks or bonds, you could lose 30% from a drop in the dollar, and another 30% - 50% decline in the price of the stocks and bonds.  These are real risks, whether you choose to see them or not. 

Just wait for the day when either Japan or China stops buying US Treasuries.  On that day, the   word "Risk" will take on a whole new meaning and it will not be of missing out on the new bull market.  Tread carefully. Owning stocks or bonds could be dangerous. Holding cash in dollars is not "risk free".