"When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." This quote, given to the FT in July 2007 by Citigroup's then-chief executive Chuck Prince, should be nailed to the wall of every private investor. No other piece of Wall Street wisdom comes close to Prince's perfect encapsulation of how the financial industry works during a bubble.
One thing that people get wrong about bubbles all the time is that no one sees them coming. As Prince's quote shows, this isn't true. You need only read a newspaper today to realise that plenty of financial professionals feel wary of markets right now every other investment section contains someone quoting the Shiller price/earnings ratio and marvelling at the latest "top of the market" indicator (such as the launch of a financial instrument dedicated solely to trading the biggest tech stocks using borrowed money). In fact, according to the latest fund manager sentiment survey from Bank of America Merrill Lynch, more fund managers than ever before believe the stockmarket is overvalued and that they are taking more risk than usual by remaining invested. And yet, they're still dancing. Cash levels are falling fast at 4.4%, they're below the ten-year average of 4.5% and well down from highs of near-6% last year.
The problem with bubbles is that timing your exit is tricky. And the brutal calculus is that, if you are an investment professional, it is far better to get caught up in a crash with 95% of your peers, than to pull out early and miss the juiciest bits of the "melt-up" as a result. After all, if you pull out too early, it's your job that's at risk. If you hang on for the bust, it's merely your clients' savings.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As a private investor you are under no pressure to be as relaxed about these things. So should you prepare for a crash? There are some worrying signs. Over and above the capitulation of the fund-management industry, we're also seeing stress in the junk-bond market. None of this means a 1987-style panic or a 2008-style crisis is imminent. But it's probably not a bad idea to take stock of your asset allocation, make sure you are happy with it, and if you're not, rebalance your portfolio and perhaps also raise the levels of cash you hold.
The nice thing about cash is that it gives you options if prices fall, you have a cushion to prevent panic and also money ready to invest when stocks get cheaper. Economist Andrew Smithers points out that a 30% holding in cash becomes more like 50% if equities fall in half, as John Authers notes in the FT. That sounds like a sensible compromise to us.
-
Starmer says Britain cannot ignore Russia threat – should you invest in defence?Defence stocks have been enjoying a winning streak since March. As Keir Starmer unveils Britain’s defence spending plan for the next decade, is it time to invest in defence?
-
How to manage a windfall: what to do with a £10,000 lump sumThe FCA has warned wealthy savers they have too much in cash, but beneficiaries of windfalls are still hugging safe havens and losing out
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Everything is getting more expensive – including moneyEditor's letter Investors are about to start feeling rather more pain, says Merryn Somerset Webb – from the rising price of money.
-
We may be heading for recession – and it will be no ordinary recessionEditor's letter Just as the downturn in 2020 was not a typical recession. the next downturn could be very different too, says Merryn Somerset Webb.
-
What companies should be prioritising this decadeEditor's letter In a world beset by uncertainty, companies should be prioritising slack over efficiency, says Merryn Somerset Webb.
-
Inflation could soon start to hurtEditor's letter Inflation is not going away. And with people's wages not keeping up, things are going to start to hurt, says Merryn Somerset Webb.
