Even though DAX and its Western European partners are hitting records every week, not everyone is entirely happy about it. In the interview Joachim Goldberg, author of Behavioural Finance, and former foreign exchange and security stockbroker said that according to his experiences, portfolio managers across Europe are praying for a correction, because all these records make them miserable. Their minds are troubled by being afraid of letting further yields slip. However, there is no evidence of stock market bubbles being formed again, like 8 or 15 years ago. There is no enough experience to understand the current situation, because there has never been similar stable-zero interest rate environments, and there has not been so much free money printed. According to the interviewee if millions of people joined the game and got involved in the stock market, it might bring a change…
Péter Zentai: While the German stock index, DAX keeps hitting world records, German citizens are still not interested in the capital markets. They rather keep their money in bank deposits than taking a chance on the stock market. Can this negative attitude originate from the conventional revulsion against brokers?
Joachim Goldberg: In Germany and most of continental Europe there is an absolutely reasonable and deeply rooted mistrust of bankers, money changers and brokers. The dislike is strengthened by the surge of information from the internet as well. Millions of semi-scientific financial sites have appeared and spread ill-advised information, while the real, valid knowledge-based papers are losing ground, since their accuracy and expertise are less understandable than the easy to read nonsense. It has been observed that if a financial scandal is exposed, it generates greater reaction than it would if a different field was involved – such as politics. In the latter case, blaming everything on a politician and his or her resignation are enough to calm people down. After that, everythingreverts back to normal fairly quickly. Ordinary people and the media – being able to influence their minds – along with politics can easily create a stable and generalised mass attitude, not like bankers or brokers.
People have always hated speculators’ guts…
Among continental Europeans the words ‘speculator’ and ‘speculation’ still have a negative meaning. However, millions of observations support that most people think: „if I earn profit by selling goods for more than I bought them, then I am a fair and good investor. But if someone else does the same, then they are evil speculators”. So „a speculator is someone who can make money cleverly, except if that person is me”.
Anyway, it is alarming how uninterested we Germans are in terms of capital market investments. According to a recent study, only ten percent of Germans between the age of 18 and 30 show some sign of interest in this field. Members of the older generation still feel the trauma experienced during market crashes in 1990 and then ten years later again (with the Tech bubble).
As long as millions of Germans do not want to become shareholders and become rich through the stock market, there is no market bubble to talk about – at least in the case of DAX. DAX is a reference for Europe…
The main participants in the German and other Western European stock markets are undoubtedly large and small institutional investors. They earn the most from profits generated by such bull markets.
Still, there is no sign that these new records are being celebrated. Every asset manager and investor I know is obsessed with these records. Their hands are almost shaking. They are under such pressure: they process the eternal truth that ,,trees cannot grow to reach the sky”, and therefore that the DAX is fundamentally expensive. As a result, they would rather ‘quit the game’ but are held back wondering what would happen if this rally went on for years, in which case they would forego enormous returns.
In other words, every competing institutional investor remains in the game and exchange rates keep on rising. It is obvious that nobody is happy about a DAX at 12,000 and everyone is hoping for a gradual correction.
Why hasn’t a correction happened pressured by negative external events? The Greek situation could result in a tragic ending, Russia is waging war in Ukraine which could escalate, and there are social tensions across Europe…
We have become immune to bad news, we notice them selectively. We only hear what Draghi (president of ECB) said: ,,we are going to protect the euro, whatever it takes”. And the European money printing keeps working; we have never been flooded with so much free money. Another thing that lowers our guard is that the ,,doomsday forecasts” of non-central bank experts hasn’t taken place in the last eight years. Hence, asset managers have stopped listening to news, except if related to capital markets.
Ordinary people cannot feel it yet – in contrast with what happened seven years ago…
Based my experience, change – probably with negative consequences – will eventually take place once ordinary people get involved.
If people realized that deposit interests and other “safe” short-term products offered by banks not only produce no interest or yield, but worse, generated losses due to negative interest rates, then a dramatic change of attitude will be necessary. This realization is only about to happen. Its first sign is the ,,appearance of masses” on the real estate market, which is an absolutely new phenomenon here. Meanwhile, if the dynamism of the stock rally is not decreased but keeps growing higher, then smaller investors can flood the stock rather quickly.
This can be seen as a certain stage of the bubble. However, we have not reached that stage yet… DAX may still have a few months – or even years -to grow.
Written by Zentuccio – appeared in Alapblog.hu on Monday, April 20th, 2015.