(By Chris Rees) This market walks on the dubious crutches of the good Doctor Ben Shalom Bernanke. Our dollar bills should read ‘In Ben we trust'. The Bernanke Put will protect us all. This new invincible Atlas can carry the world on his shoulders. His medicine will cure all ills. Fear not. Buy the dips. Invest with abandon. Ben has your back.
This market wide reliance on the Federal Reserve Bank's chairman's belief system makes us nervous. We truly have arrived at a faith-based economy. But is it smart to buy the Bernanke ‘wealth effect' doctrine lock, stock and barrel or is some caution warranted? We've been thinking about this and when we do two words keep pushing their way to the front of the thought process. Those two words are ‘event risk'.
During 1999 and through to mid-2001 (pre-Covestor) we had built an investment portfolio heavy in hotel stocks. While our exposure to hotels had grown uncomfortably high, we weren't overly concerned as each was very close to our sell targets and we expected to reduce exposure within days or weeks.
Then September 11th came. All hotel stocks got brutally crushed. On that day the world changed for many people. As investors it changed our world too. We decided we needed to incorporate a permanent additional discount to our valuation work to help insure against unforeseen and unrelated event risk.
This added buy cheaper protection has served us well over the years. And we've been thinking about whether the current market carries an adequate event risk discount for one simple reason: Nobody seems to talk about it anymore. We were intrigued. It seemed to us event risk was discussed much more a few years ago. Had investor complacency set in due to the euphoric stimulant effect of one too many Bennies?
In search of answers we hot-footed over to Google Trends and punched in ‘event risk'. Google only has data since 2005 but it still tells an interesting story. In July 2005 ‘event risk' search volume reached a high of 100 on their scale. It's fallen steadily since then. As of September 2012 it stood at 25. That's a big drop. Is the world really a safer and more predictable place now than in 2005? We don't think so. Unrelated and unpredictable event risk has not disappeared. We've just stopped looking for it.
While at Google Trends curiosity led us to seek out search data for ‘stocks are cheap'. The peak at 100 was October 2008 when stocks really were very cheap. For September 2012 it's fallen to 23. The search term ‘stocks are expensive' didn't move the Google data needle until March 2011 when it reached 88. For September 2012 it was at 94.
In Ben we trust. Indeed.
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