The Fear Bubble

The Fear Bubble

What does the Author mean by a "Fear Bubble"? I believe he is speaking about the changing attitudes of investors and how they have learned to approach investments in this day and age. The author states that since about 1912 stock market investors have enjoyed annual returns of around 6.6 percent, but times have severely changed. He claims that today's investors face a new reality, where their money may never earn them enough to be wealthy, and let alone have enough to survive for retirement.

Today we are four years out of a major banking crisis that shook the global economy; however its recovery has been less than timely. Investors are now more aware of what they do with their cash and have begun investing into government and corporate bonds causing prices to skyrocket on what would be described as a low risk investment. "It may sound odd, but we appear to be witnessing a speculative rush away from rational risk." Another quote that caught my eye was Bank of Canada governor Mark Carney saying to companies that they are sitting on "dead money". "The level of caution among corporate managers could be viewed as excessive ....their job is to put money to work and if they can't think of what to do with it, they should give it back to their shareholders.

This financial crisis puts a huge burden on the shoulders of this coming generation if they are to recover and grow from this. Since 2007, nearly 350 billion has left the stock market, and nearly 1 trillion has been stashed into bonds. However the interest paid on these bonds are at lows not seen since 1940, with some European countries seeing negative yields this year, meaning investors are paying to lend money to governments. An interest payment that cannot keep pace with inflation is not good for the baby boomers, which are looking to put aside money for pension and retirement. With so much money being put into bonds, if interest rates were to fall bondholders would lose more than 30 percent of their investment. Jan Dehn claims, "Buying US Bonds is like walking in front of a steamroller to pick up a dime."

Personally, I am born and live in Bermuda, which makes my situation a bit different from that of Canada. This could affect my financial plan a bit longer than the average student in Canada as the Bermudian economy normally trails the US by a 1-2 year delay. While the recession hit in 2008, Bermuda did not feel its affects until early 2010, when international business began pulling out. So it is anticipated that Bermuda will begin to pick up a year after the American economy bounces back, however this could still be for some time now.