Nikkei stock average nine consecutive gains! What is the "liquidity trap" leading to a bubble?
The Nikkei stock average index has risen for nine consecutive sessions, continuing its upward trend.During the streak, the rise reached 6.6%.
“Liquidity trap” and bubbles
The main factors behind the rise are the following two points.
- Expectations for easing in the US-China trade war
- Additional easing by the European Central Bank (ECB)
Regarding the US-China trade war, China first announced that it would remove some items from the retaliatory tariff list against imports from the United States. In response, President Trump postponed the planned additional tariffs from October 1 to October 15, and further stated that he would not rule out a provisional agreement.
The mood of coming thaw quickly grewappearing to be forming.
Furthermore, the ECB’s announcement of a rate cut (deeper negative rates) and the restart of quantitative easing also provided wind in the sails of stock prices.
President Trump interpreted the ECB’s rate cut as a move to weaken the euro and gain an advantage in trade, and has pressed the Fed for further rate cuts. This has increased expectations for additional easing at the meeting next week...
The US-China trade war and rate cuts have been themes that will continue to move the market for the next year or two. However, neither has yielded decisiveness yet.
The trade war is not merely a balance of payments issue; it is a global competition for supremacy,a form reminiscent of the Cold War-era confrontation. Just as the US and the Soviet Union stared at each other for nearly half a century, this standoff is unlikely to be resolved easily.
Also, lowering rates does not automatically lead to an economic recovery in a simple way.
The effect of lowering rates occurs when it influences the psychology of people around the economy. If rates fall significantly, companies will be more inclined to undertake capital expenditures and housing investment that had been held back due to high interest costs. Yet, after more than a decade of ultra-low rates,there is little additional impact from further declines, and it does not easily translate into increased investment or consumption.
The situation where continued rate cuts lose their effectiveness is called the “liquidity trap”. The economy becomes desensitized to interest rates. Japan experienced this in the mid-1990s.
The surplus money tends to flow into financial assets like stocks and real estate. However, rising prices of financial assets are supposed to be backed by real value, and when prices far exceed intrinsic value, that is a “bubble.”
In other words,the current stock price rise could be a dangerous sign that is connected to a possible bubble.
Investors who rush in a rising market tend to fail
So, how should we act?
When such a rapid rise continues, it’s natural to feel rushed. “Why didn’t I buy that stock?” “Should I buy now before it’s too late?”
However,this hurry is the main cause of failure in stock investing.
Stock prices go up and down. Even if they trend upward in the long term, there will always be ups and downs within that period.
With that in mind, if you buy during a short-term rally like now, you risk paying more than necessary for your entry price,which will inevitably lead to poorer performance. A high purchase price translates into lower returns.
This is more a matter of mindset than stock selection. Regardless of which stock you buy, for a long-term investment it is surely better to buy at a lower price than at a high price. Therefore,now, when prices are rising, you should not rush to buy stocks; you should think about what you want to buy the next time prices fall.
If you hurry to achieve results, the chances of failure increase. Conversely, the longer the time horizon, the more reliable the results become. We shouldkeep a simple and correct course over a long span.
Value investors do not expect to become rich tomorrow. Those who rush to get rich end up not becoming rich. Taking time to grow rich is by no means a bad thing.
Warren Buffett
