Is Crazy Really the “New Normal”?

10/23/2008 11:15 am EST

Focus: GLOBAL

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

This week, Aaron Task wrote a piece on Yahoo Finance about global markets, called “Crazy Is the New Normal.” I sure hope that’s not true! But thinking about that phrase sparked a thought. Wouldn’t that be so like Wall Street to latch onto the concept of wildly-erratic markets as “normal”, as the perfect opportunity to develop some fabulous new investment scheme to pad their pockets?

It would not be the first time that opportunists seized a chance to coerce gullible investors into tucking away their common sense and buying into the “new era” of investing theory. First comes a product to take advantage of the volatility of the global markets. Then, the hype to gain momentum, pushing up prices so that investors can’t wait to get into this “new thing”. Then, the inevitable crash and burn, leaving the pundits fat and happy and the investors reeling with losses.

If this sounds far-fetched, I’ll remind you of past market rationalizations, including the “new economy” of the tech stock bubble, “Dow 36,000,” “$200 oil,” “they aren’t making more land,” and “decoupling markets.” These catch phrases were created to justify why “this time is different” and resulted in pushing investors to jump on board any number of bubbles—right before they burst.

Of course, there is no bubble right now; instead, we are in crisis mode. And until there are clear signs of stability, investors must exercise extreme caution. Rushing headlong into the markets at this point would be a dip into foolhardiness (although some say nibbling a bit might be a good idea).

Every day, global markets set sail with a hope and a prayer. And for the most part, they are not rewarded. Instead, it is more of the same—incredible volatility. Recession fears and falling earnings are particularly hurting commodity, bank, and energy stocks, and it doesn’t look like much relief is coming any time soon.

The volatility continues to take its toll on stocks around the world. In the UK, the benchmark FTSE 100 is off 38% for the year. The FTSEurofirst 300 index of top European shares is down 44% so far in 2008. 

Wednesday, Japan's Nikkei average fell 6.8%, to its lowest close in a week. In Hong Kong, shares tumbled 5.2% to a three-year low. And MSCI's emerging markets index hit its lowest point since June 2005.

Central banks around the world appear to be bracing for what Bank of England Governor Mervyn King said is “round one” in the bailout plans. Looking for the UK to slide into its first recession in 16 years, King said in a speech this week, “The outlook has not worsened as rapidly as it has in the past month for a very long time.”

Hungary jacked up interest rates by three full percentage points. The International Monetary Fund (IMF) is besieged with requests for help from Belarus’s central bank, Pakistan, and Iceland.

In the US, the Federal Reserve is offering up to $540 billion in financing to the money market mutual fund industry to help boost the availability of credit.

However, falling oil remains a bright spot for consumers, as crude now changes hands for under $70 a barrel. Earnings reports from global companies are mixed, mostly on the down side, but a few positive surprises, such as McDonald’s and Apple, usher in a little hope. And while Russia is claiming that bank credit is easing there, no one expects a quick turnaround.

Yet, investing ideas continue to percolate, and while we wait for market recovery, it’s a good time to consider opportunities that may be ripe to pounce upon once we do see signs of stability.

This week’s Q&A features Vahan Janjigian, editor of Forbes Growth Investor, who discussed the challenges in today’s investing climate. Andrew McHattie, editor of Investment Trust Newsletter, gives investors insight into a couple of strategies for tough times.

As for recommendations, Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, finds opportunities in Switzerland, and John H. Christy III, editor of Forbes International Investment Report, sees potential in a Chinese real estate firm.

As the song says, “Fools rush in,” so take your time, assess your financial goals and strategies, and be ready for the next round—whenever it comes.

Nancy Zambell edits Global Investing for MoneyShow.com. Her opinions are her own and not necessarily the views of InterShow or MoneyShow.com.

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