China Shops While American Investors Drop
March 26, 2012
By Neeraj Chaudhary
Unquestionably there has been a significant change in investor sentiment since the crash of 2008. The 50% decline in stock prices in 2008-2009 combined with the financial sector bailouts, the “Flash Crash” of 2010, and the continued demonization of our leading financial institutions, has helped shatter the public’s faith in Wall Street. With U.S. stock markets essentially flat over the past 13 years (despite occasional heart-stopping volatility), many investors may have decided that long term equity investments are just no longer worth the risk.
It is important to realize however that this sentiment is not universal. On the other side of the world, the Chinese are showing no such hesitancy. There is mounting evidence to suggest that the Chinese government is in the midst of a voracious buying spree in which they are actively snapping up productive assets around the world. What do they know that we don’t?
Data shows that in recent years U.S. investors have pulled money out of stock focused mutual funds and have instead piled into assets that at least appear to be less risky, such as bonds and money markets. When one considers the large unresolved problems that currently overhang the market, such as the Greek debt negotiations, the U.S. elections, and the perennial problems in the Middle East, one can understand the concerns that are keeping them on the sidelines.
Although these investors may be somewhat insulated from market volatility the protection comes at a very high price. With near 0% interest rates, bond investors are consistently losing to inflation (for more on how inflation robs you of your purchasing power, see the latest issue of Euro Pacific’s Global Investor Newsletter). The world’s central bankers – led by the Fed – have created a landscape where the shaky ground of the markets is surrounded by the quicksand of deteriorating cash. Investors have seemingly nowhere to run. But China seems undeterred.