The Insolvent Investor

Investing and economics – it isn’t easy.

Markets will remain irrational longer than you can remain solvent

Posted by Warren on August 4, 2008

He didnt listen to Kaynes

He didn't listen to Kaynes

Or so said economist John Maynard Keynes. The US equity markets of today, one could argue, are overpriced. While PE ratios are not high by historical standards, US corporate earnings are poised to fall. The American consumer who has driven the global economic expansion of the last 15 years is out of gas. Housing prices will continue to fall and remain low for years to come. The asset to debt ratio of Americans is at its worst since the before the depression.

Where amongst all this gloom is the silver lining for investors? I don’t think there is one.

With so much liquidity sloshing around, undervalued assets are not to be found. The emerging markets of India, China, Latin America, and Eastern Europe are all over-bought (and likely more precarious than is conventionally believed). Commodities are overpriced. Gold is expensive. So unless you’re willing to try to catch a falling knife and bet against one of these asset classes, a smart investor should probably be almost completely in a mixed basket of currencies. This may not produce the 20% annual returns of the late 90s, but it will keep your portfolio well above the market return for the years to come. Live to fight another day.


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