It is increasingly difficult in this market to find an investment vehicle that will provide a good return. Where can an investor attempt to make money in this present economy? In the current world environment of increasing government regulation and taxes on economic activity, it is becoming ever more challenging to find an avenue to invest for future growth and security. Returns are getting ever closer to zero, for an increasing number of investors.
There are for the moment at least, declining returns on commodities on almost every kind including precious metals. Buying government debt and bonds for historical low rates has little appeal, not only in the United States, but elsewhere as well. The only countries where a decent rate of return is possible, are in those countries at or near default. Therefore higher returns, involves much greater risk.
Real estate has gone through some recovery since the mortgage crisis of 2008 and 2009, but returns are no where near to where they had been before the meltdown. The improvement where it has arrived, is in select markets where inventory is tight and prices already high. A number of countries are already experiencing another downward trend for housing and commercial building. Such is the case in China for example.
The energy markets have taken a serious beating in the last few months. Prices for crude and natural gas have plunged as slowing growth and increasing inventories pervade the international economy. Forecasts are predicting a massive movement of money out of this investment sector. Although some companies will attempt to maintain profit levels with higher levels of production, eventually abundant supplies will force less efficient operations from the market.
Renewable energy in this present environment is not fairing any better. Lower prices for fossil fuels have made alternative sources of power far less profitable. Many would already be bankrupt without government provided subsidies. The future may seem bright for this industry, the present is a bit more complicated.
Precious metals including gold, silver, platinum and palladium continue to trade in a narrow band, disallowing any real profit. Prices continue to be manipulated by investment houses, national governments and central banks. The recent return of the United States Dollar (USD) in international finance as an appreciating currency, has also hurt investments in precious metals. The status of USD as the global reserve currency, keeps a lid on prices and therefore profits at least for now.
Stocks remain the one place where an investor seems to be able to generate sufficient returns to justify the risk involved. The rally in the United States and elsewhere began in 2009 and has continued with some pauses on an upward trend since. The long bull market has resulted in current valuations to be over 100% with subsequent returns. In other words, the market has become overvalued and returns are beginning to lag.
As the only remaining alternative for investment, money continues to pour into markets well beyond what is prudent given current economic growth, not only in the United States, but around the world. The growth is being further fueled with the easy money policies set by central banks. Historically low interest rates and quantitative easing, have lead to a mass of liquidity in financial markets.
The inflated supply of money is not being used as intended. Quantitative easing and almost unbelievably low interest rates, were to be used to finance more business creation and expansion. It was the way to bring about more jobs and the return of growth, in domestic economies in the industrially advanced parts of the world.
Instead it has helped fuel a mass speculation in the stock market. This is beginning to create a bubble much like what existed in the housing market, in the years before the mortgage crisis. The increases in value for real estate in the early years of the 21st century were simply unsustainable, culminating in the peak in late 2007.
An all important indicator, that is corporate profits are now declining. There is simply not enough economic growth domestically or internationally, to provide the expansion needed for more lucrative results. Yet a growing number of investors seem to have missed this fundamental instrument in measuring the risk involved in stocks. It will become increasingly difficult for investors to find companies that are actually worthy of further investment.
Central banks are not really printing vast sums of money, they are instead making credit exceptionally cheap. Market forces and ever increasing government regulation, have prevented this credit bonanza from really stimulating the economy anywhere. In the United States, Japan and now in Europe the availability of cheap financing, is encouraging not only a rise in government debt, but that of corporate liability as well.
In order to entice investors and to keep the money rolling in, corporations in the United States and elsewhere have been on a buying spree. There has been a subsequent rise in corporate acquisitions, mergers, leveraged buy outs and a new market phenomena known as massive share buy backs.
Having shares being repurchased by the company that issued them is not a bad thing in all cases. It can actually be prudent, for a company flush with cash and limited options for other types of growth. Although recently, it has taken a new direction. Corporations are now borrowing ever higher amounts to buy their own shares back. The result makes the remaining shares still available in the market, far more valuable to investors. It is also helping to drive the speculation in stocks to an almost frenzied level.
In the United States alone, last month was a record for share buy backs. It is estimated that $5 billion USD a day, was used for this purpose. Since the return of the bull market in 2009 the total in stock repurchases, is somewhere near $2 trillion USD. That is 10% of the value of the S&P 500 alone.
The end result on the economy is a rise in the value for assets, but no real economic expansion. There is wealth being generated, but only a small percentage prosper. This would be the investment class. In other terms in this case, the rich are getting richer. The vast majority of the people see little benefit. That is because real investment at the corporate level, is not taking place. That would be expanding plant and equipment for future growth. That is in the end, the only way to grow the economy and produce more jobs.
There has been a dearth in real capital investment in the last business cycle. In the United States for example, more businesses are now closing than are being opened. This is a recent and troubling development for future growth.
The policies of quantitative easing and nonsensical rates of interest have actually discouraged traditional investment and more normal business practices. It has encouraged massive speculation and permits non credit worthy companies and entities to issue debt for investors to purchase. It allows corporate leadership to avoid the harder task of creating real growth in the companies they manage.
What is actually occurring once again, is a speculative bubble that will eventually level off and begin to collapse. It will be the third one in less than two decades. The first one was the boom in technology stocks in the late 1990’s, that culminated in the bust that arrived in 2001. The second was the collapse in the mortgage real estate market in 2008 and the third one is now well on its way.
The coming collapse in the stock market will usher in a mass of bankruptcies and fresh government bailouts that will dwarf the previous financial restructuring. As new investment dries up, the Second Great Recession will then commence, bringing untold economic misery to millions on a global scale.