Davos Comments that Made Us Nervous

Over the last few days, investors have had one eye on China and the other eye on the World Economic Forum in Davos, Switzerland. The eye on China is concerned about the Coronavirus and how it is spreading with investors wondering what impact it will have on the global economy. China has already taken extreme measures by locking down travel to and from certain areas in order to try to contain the virus. Even with these measures in place, we have seen the virus spread to other countries and even one case has been reported in the U.S.

As for the meetings in Davos, the tone of this year’s forum seems to be much different than it was last year. With recession fears subsiding over the last six months or so, the tone seems to be more upbeat—at least for the most part.

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In fact, there have been several prominent figures in the investment world that have issued comments about the current environment that I find concerning. First, Ray Dalio, who’s known for making strong or shocking comments, stated that, “Cash is trash”. The founder of Bridgewater Associates made the statement on January 22 and is basically saying that anyone sitting on cash is making a mistake.

The second comment was from Rob Kapito, the co-founder of BlackRock. In an interview with Yahoo Finance, Kapito made a statement regarding retirees. He said, “They’re never going to be able to retire in dignity if that money is not invested.” His comment seemed to echo Ray Dalio’s belief that anyone sitting on cash right now is foolish and that they are risking their lifestyle in retirement.

The third comment came from Bob Prince, the co-Chief Investment Officer at Bridgewater. In an interview with Bloomberg, Prince commented that the central bank tightening around the world “didn’t want to cause the downturn, didn’t want to do what it did, but I think lessons have been learned, and I think it was really an indication that we probably saw the end of the boom-bust cycle.” Think about that—the central banks have learned their lesson and now we won’t have boom cycles and then bust cycles anymore. Really?

If I had heard or read one of these comments, I probably would have just shrugged it off. However, when the collective thinking is like this, I get worried about a top in the market and the economy being near. As I stated before, the fears of a recession have subsided in the last six months, but that doesn’t mean that we can’t see a bear market without a recession. Just look back at the market in 2000-2002. The economy never officially went into a recession, but the stock market sure did take a huge hit.

The collective thinking back in 1999-2000 seemed to be similar to what we are seeing now. People became fearful of missing out on the huge run up in stocks and jumped in head-first without really thinking that the end of the bullish run could be near. That’s not to say that the three gentlemen above were making comments like the ones they made recently, but there was enough optimism toward the market that it led Fed Chairman Alan Greenspan to coin the phrase “irrational exuberance” to describe the market.

One interesting contrast to Dalio’s comment is where Warren Buffett finds himself currently. Buffett’s Berkshire Hathaway is sitting on $128 billion in cash. The famed value investor wrote a letter to shareholders in 2019 and he made two important comments.

“Prices are sky-high for businesses possessing decent long-term prospects.”

“I will never risk getting caught short of cash.”

I am not really a value investor, I am more of a growth investor. But I do follow what Buffett has to say and believe, as he does, that most stock prices are too high. That’s not to say that I don’t follow what Ray Dalio has to say, I just have a hard time buying a stock that has gone up 100% in less than a year and is in overbought territory. And there are a number of stocks out there right now that meet that criterion. One such company is Apple and they are set to announce earnings next week. Apple’s a great company with great management efficiency measurements, but my concern isn’t with the company. My concern is with other investors expecting too much out of the report.

While I am happy that the recession concerns have subsided, I don’t believe for a minute that we have seen the end of the boom-bust cycle. There will be another downturn. If I knew exactly when and why it would hit I would tell you and we could all make a lot of money. Unfortunately, bear markets and recessions aren’t like cars, they don’t have turn signals that tell you when they are turning.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. It seems as though greed and fear feed on themselves. And robots will exacerbate the fear-greed cycle. Right now, before today, the greed cycle has been in charge. Hope there are some level headed money makers and administrators out there to turn off the computer trading and tell people to calm down on both sides of the cycle.

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