Three great forces rule the world: Stupidity, Fear, and Greed. – Albert Einstein
The investment markets are facing turbulent times, largely due to the erratic behavior of the newly elected US president. His unpredictable actions, influenced by his immediate advisors and extremist hangers-on overseas, have created uncertainty and instability, impacting both domestic and international markets.
US Political Climate: The new president’s actions have led to a chaotic political environment. Unlike previous administrations that built competent teams, this presidency is marked by settling scores and threatening allies like Denmark, Canada, Mexico, and Panama. The US is aggressively seeking access to raw materials, offering military aid to some African countries in exchange for resources. This aggressive stance has created a volatile international landscape, with no friendships or alliances being honored.
To quote Bob Marley, “The greatness of a man is not in how much wealth he acquires, but in his integrity and his ability to affect those around him positively,”
Market Conditions: Traditional markets are facing turbulence due to geopolitical tensions and political decisions. The US equity market is currently strong, partly due to foreign investment in the US dollar. However, disagreements between the new US government and the Federal Reserve regarding interest rates could lead to broader market instability. A potential US dollar selloff could trigger further instability, affecting investor confidence and market performance.
Investment Risks: In this environment, less sophisticated investors are being lured into high-risk investments, including meme-cryptocurrencies. These cryptocurrencies, despite their popularity, lack financial foundation and regulation, posing significant risks. The crypto craze has led to the creation of various meme coins like $Trump coin, $Melania coin, and $Doge coin, which are based on transient social media trends and are even riskier than Bitcoin. There is even an eye-catching, humour-like Fartcoin, which peaked at a theoretical valuation of US$836 million. This situation is reminiscent of historical investment bubbles, where investors’ fear of missing out drives irrational behavior.
Historical Parallels: The current crypto craze is compared to historical investment bubbles like the Tulip Mania in Holland, the South Sea Company in England, and the Mississippi Company, founded by the Duke of Orleans in France. The Tulip Mania (1634-1637) saw investors losing everything when the overvalued tulip bulbs became worthless. Similarly, the South Sea Company and the Mississippi Company in the 18th century, ended in disaster for investors who were lured by rumors and false promises. These historical events highlight the dangers of speculative investments and the importance of understanding intrinsic value.
Investment Strategy: Diversification is crucial to mitigate risks. Investors should focus on excellent companies in North America, Europe (especially Germany), and Southeast Asia. The BRICS countries as a group are not recommended for retail investors due to their political and economic risks. Germany, despite facing political challenges, has strong industries that hold the country together. A new government could potentially bring positive change especially in relieving bureaucratic stifling, fostering a more favorable investment environment.
Sustainability and Fund Management: Sustainability is an important factor in selecting investments. Not all managers who claim to offer sustainable products actually do so, making it essential to read and understand the prospectus small print. Investors should seek fund managers with a track record of success in their fields of specialization. Diversified and risk-managed portfolios are essential to navigate the current market conditions, ensuring limited exposure to any one sector.
Artificial Intelligence: It is important not to be a Luddite in the denial of progress. The world will continue to be improved by the use of artificial intelligence and scientific progress. Artificial intelligence is a tool and not a product in itself, and while indescribably useful in many different fields from medicinal research, through producing industry to electronic games, it is not the only sector needed for the benefit of civilization. Many engineering and telecommunication companies, as well as those producing food and treating water, are not being given the recognition or importance by investors that they are due.
Conclusion: Investors must stay diversified, avoid unnecessary risks, and be cautious of high-risk but fashionable investments like cryptocurrencies. The focus should be on sustainable investments and finding reliable and experienced fund managers in order to construct risk-managed portfolios. The world will continue to be improved by technological advancements, but it is crucial to balance innovation with traditional sectors that benefit civilization. In the current climate, a broad and diversified investment approach is more important than ever.
Past performance is not a guide to and cannot guarantee future profitability. The value of investments and the income they generate may go down as well as up and investors may not get back the amounts they originally invested. All investments involve risks including the risk of possible loss of principal. John Townsend advises the clients of Matz-Townsend Finanzplanung with their investment portfolios. He is a fellow of the Chartered Institute for Securities and Investment in London. (Townsend@insure-invest.de)