Short-Term Speculation Kills Prudence, Good Stewardship and Risk Management?

Yesterday I published a follow-up to my earlier post, "THE ELITE MEET IN DAVOS AS TRUMP, WHO THEY HELPED CREATE, IS INAUGURATED." https://lnkd.in/gmdx2_tR In my follow-up article I provided evidence that the large corporations, who are to be blamed for corrupting American politics and government, and for creating the conditions that put Trump back in power, are celebrating their stupidity. I cited the Financial Times report that US Executives at Davos are full of enthusiasm, plus the very large in-flows of foreign direct investment which are at record levels. In my comments I suggested this is all based on reckless short-term speculative actions with proper risk management, prudence and stewardship having been thrown out.

As further evidence of that let me cite two additional articles in the Financial Times from today and yesterday. The article yesterday was titled “the mother of all bubbles.” In it Ruchir Sharma, ??chair of Rockefeller International, said “The US has never been so overhyped, relative to the rest of the world.” He observes that, “Relative prices are the highest since data began over a century ago and relative valuations are at a peak since data began half a century ago.”

Some of the US premium is justified, in his view. But he notes, “global investors are committing more capital to a single country than ever before in modern history.” He suggests, “The overwhelming consensus is that the gap between the US and the world is justified by the earnings power of top US companies, their global reach and their leading role in tech innovation.” He acknowledges that “these strengths are all real.” But, he adds, “Awe of “American exceptionalism” in markets has now gone too far.”

Sharma observes that, “This is not a bubble in US markets, it’s mania in global markets.” That, “America’s share of global stock markets is far greater than its 27 per cent share of the global economy.” And that, “the US market did not trade at nearly so vast a premium to the rest of the world” during the 2000 Dotcom bubble.

He concludes, “Investors still like to believe that fundamentals drive prices and sentiment. But there comes a time when sentiment starts to drive fundamentals.” And this trend has been massively increased following Trump’s election. As a result, “America is over-owned, overvalued and overhyped to a degree never seen before,” resulting in “the mother of all bubbles in US markets.”

The article today is titled “US stocks at most expensive relative to bonds since dotcom era.” It notes, “US equities have soared to their most expensive level relative to government bonds in a generation, amid growing nervousness among some investors over high valuations of megacap technology companies and other Wall Street stocks.”

And to my point about the lack of prudence, proper risk management and good stewardship, ?Ben Inker, co-head of asset allocation at asset manager GMO says, “Investors are effectively saying ‘I want to own these dominant tech companies and I am prepared to do it without much of a risk premium,’” And he added, “I think that is a crazy attitude.”

The greatest risk is that so much of the investment is concentrated in a very small number of “Big Tech” stocks in a year when the uncertainty, that a Trump Presidency intensifies massively, ?means “this is the year where you want to be diversified on your equity exposure,” as Andrew Pease, chief investment strategist at Russell Investments rightly said.