The Feel-Good Factor
Have you ever bought a winning lottery ticket, watched you favourite sports team win or had a fantastic time with your friends and family? These events bring feel good emotions that make us happy and more carefree because we are enjoying ourselves. It’s the Feel-Good Factor.
In the world of investing you get the feel-good factor when you make a deal that allows you to make money at the start of the investment and again at the end of an investment. You get the feel-good factor when you’ve bought an investment that goes up and up to make you a lot of money.
In September 2007, Northern Rock Bank became the first UK bank in 150 years to see a run on a bank. A run is when there is a panic by depositors wanting to get their money back. This together with a string of economic disasters led to the Credit Crunch in February 2008 and subsequently the worst recession in history. So bad it became known at the Great Recession. Throughout this difficult time everyone became familiar with the terms Austerity or Austerity Measures. It meant everything financially was restricted. There was no government spending as governments tried to balance the books. Benefits were reduced or even scrapped in some cases. Infrastructure spending on roads, schools, energy, railways were all stopped. Wages were frozen. While some loosing of the restrictions did happen eventually, no matter what country you were in everyone spoke about austerity measures.
Fast Forward to 2020 and the Coronavirus lockdown. The lockdown in almost every country was instigated to try and reduce the spread of the virus so hospitals could cope with the massive influx of patients suffering from an illness no-one had previous experience of dealing with. The lockdowns were longer than initially thought dragging into 3 months or more before lockdown restrictions were eased and, in some areas, removed completely. The result of this was an economic disaster which has seen many countries, whose economies were balanced on a knife edge, plunged into the worst recession they have known.
Having learnt, austerity measures have a restrictive effect on growth within the economy governments introduced the feel-good factor to boost spending and increase motivation to get back to work, have holidays and show the world’s populations everything is back to normal. But is it?
As an investor, it has caused confusion within the financial markets with mini booms that will no doubt go bust leaving financially uneducated people struggling to make decisions on what to do with their money. As a professional investor trying to identify the safest investments during this period is difficult, what hope do novice investors have?
Each country came up with their own initiative about which area of the economy needed the biggest boost or would help reduce the impact or a market collapse.
The UK boosted the property market by reducing stamp duty in the UK. England benefitted from this with Wales, Scotland and Northern Ireland, devolved governments, offering less incentives. The impact a robust increase in English with increased house prices taking property investment money from the Welsh, Scottish and Irish Markets. Instead of a stable UK property market it is now fractured.
The UK Share Market is also interesting. Being paid to stay at home gave people a false sense of financial wellbeing with surplus cash in their pockets people started investing the share market to the extent that one business which had called in the administrators and seen it’s share price drop from several pounds to pennies had uneducated people piling their money into the shares thinking it was a buying opportunity instead of a dud.
Finally, the UK decided, if they can’t get workers back into business offices which would trickle spending into high streets and malls, there must be another way to do this. 50% dining vouchers to encourage eating in restaurants and getting the population mobile again. What happens when the vouchers end later this month? Are families still going to eat out?
The US have been plowing money into the Bond Market to prop it up. It is an essential market for the flow of cash in world economies but it has created a false economy where people think they can’t fail as the government will bail them out. The bailout is part of an agreed support mechanism between many countries to keep economies moving.
Instead of the one extreme we’ve seen for many years, that of austerity measures, governments have gone to the other extreme of creating a false economy of reckless spending and investing through the feel-good factor. When the feel-good factor diminishes so will the economic fallout.
There is no doubt, the feel-good factor, is overriding common sense. It is creating unsafe and unstable bubbles which will implode at any time leaving small investors out of pocket. We’ve already seen Gold go up to US$2075.76 and then rebound down to US$1865.79 before settling around US$1924. The UK property market went up 1.7% in a month. The FTSE100 which dropped from 6818 down to 4993 quickly went back up to 6500. Based on current economics this market should be down much further than it is.
Don’t let the feel-good factor lull you into a false sense of being able to make money quickly. Become an investor. Investors are people who sit back, watch the turmoil, absorb the information and wait. And wait. And wait until the right market conditions come to them to make the best, safest, profitable investments.
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