Sell! Global financial problems will get worse

Why would you hold on, unless your investment vehicles are already so far down that it is impossible to sell?

Look at the risk and return profile. What is the upside? And what is the possible downside? Surely the main issue for investors is that a return to the boom conditions of the past few years for many asset classes looks impossible as credit has got much tighter, and will likely get tighter still.

So how in those circumstances can it be worth holding on to assets that will in due course, with probably not much longer to wait, be re-valued downwards to reflect the higher cost and lower availability of funds?

No stock market rebound

Ah, you may say but surely US Federal Reserve Chairman Ben Bernanke will soon cut interest rates and the US stock market will rebound. Well what if the Fed does cut rates, will the bond markets really price debt more cheaply or banks again offer home loans with such abandon. No the damage has been done, and the unwinding of asset values therefore has to continue.

So if you can sell then get on and sell out while you still can. Your professional advisers will be aghast and tell you not to do it, but remember who got you into this position in the first place.

For is the next step in a credit crunch not well established and well known to all? There will be less money available to chase up the value of assets and their price will inevitably fall.

What we have seen so far in stock markets is just a dress rehearsal for a full on stock market crash, with October the traditional month for such a calamity. Just look at what has happened to US house prices over the past year, the same thing is going to happen to US equities and this will drag every other global stock market down.

August alert no blip

The idea that August was just a blip or buying opportunity is fantasy. The situation in financial markets has dramatically changed, and just as cheaper money drove the expansion of hedge funds, private equity and stock prices, so the credit crunch has withdrawn this support from the market, and what has gone up must come down.

Central bankers like Bernanke will do their best to make this process as painless as possible, but his room for manoeuvre is limited. If he cuts base rates too fast the US dollar will slump and inflation will rise; if he does nothing markets will hopefully find a new, lower, level without burning too many people.

But why risk being caught by this process when the likely upside is so small and the risk to the downside so large? Better just to sell and wait for better times to buy again: there is little potential upside to lose and significant capital loss to avoid.

See also:
No option for Fed except a bail out!
Dubai real estate needs a soft landing in the global credit crunch
Abu Dhabi property and the global credit crunch
How will the global credit crunch impact on the GCC?
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