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Fear and Greed Index Reaches New Highs

Posted by Steve Markowitz on January 28, 2013

CNNMoney publishes what a “Fear and Greed Index”.  This index, which is determined by a combination of seven major stocks and bonds indicators, has reached a record high of 92.  As this number gets higher, so too is the level agreed.  To put the current 92 into perspective, a number of 50 indicating neutral bias, with the fear level sinking to a low 12 in September 2008.

It is not surprising that equities are currently reaching highs not seen in years.  Increasing greed pushes investors to take ever larger risks.  As long as the market continues upward, happiness abound.  However, at some point the markets became or become a bubble that will deflate causing pain.  While this is normal in capitalism, too many now look to the government for bailouts, which then create a feedback loop causing ever larger bubbles.

The Wall Street Journal posted a troubling article last week titled Pensions Bet Big With Private Equity.  According to the Journal, some pension funds have morphed into the high risk venture capitalist business.  For example, the Teacher Retirement System of Texas has $114 billion in assets and has invested a significant portion, $30 billion, in private equity and real estate in the last five years.

The reason for the pension funds risky behavior is government intervention into finance markets.  In an effort to stimulate the economy, the Fed pushed interest rates to historic lows where they remain today.  These low returns caused pension funds to miss their actuarial return rates requiring either cuts in benefits or an increased infusion of cash by members.  Neither action is equitable for the parties involved so they have instead taken the high risk investment approach in an effort to increase returns.  This is a very dangerous approach for pension funds, one that has been historically avoided to ensure engineers safety.  Should markets take another downturn, the results will be disastrous.  It is likely under this scenario that should they look for a government bailout, the funds available from a government that is already so far in debt.

There is no such thing as a free lunch.  Governmental interventions have consequences.

Fear And Greed

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