Roundtable: The Biggest Investing Danger in 2010

As we close out a topsy-turvy decade that has seen more blown bubbles than a raging preschool party, it's a good time to remind ourselves of the dangers that still loom. So I asked three of our analysts:

What's the biggest investing danger in 2010?
Morgan Housel: I'd say it's getting too cozy with the current interest-rate environment. Right now, laughably low interest rates are supporting just about everything. Stocks, housing, banks. Stimulus packages. Treasuries. Seeds of a job recovery ... you name it, it's riding low interest rates. That won't last forever.

If you invest in banks like Goldman Sachs (NYSE: GS  ) or JPMorgan Chase (NYSE: JPM  ) , you have to look at their current earnings and ask yourself what happens when interest rates inch up even slightly. My guess is it won't be pretty. Both are largely reliant on fixed-income trading, which could get clobbered, at least relative to today, when even a glimpse of interest-rate normality returns.

Some will say, "Well, OK, but the Fed has promised it'll keep rates low indefinitely." That's true, but there are caveats. One, the Federal Reserve will stop buying mortgage-backed securities this coming March. That's almost certain to lift mortgage rates, which hurts housing prices. Second, weak Treasury demand from foreign purchasers could wallop government bond prices, which not only squeezes long-term borrowing rates for businesses looking to expand, but could undermine the financing of stimulus measures that are fueling GDP growth.

I don't think any of these are end-of-the-world problems to fear, but investors who assume that today's interest-rate environment is anything close to sustainable are absolutely, 100%, guaranteed to be disappointed.

Alex Dumortier, CFA: There is certainly no shortage of significant dangers lurking at the moment, but I'll pick one that is topical: a sovereign debt crisis -- S&P downgraded Greece one notch to triple-B-plus last week. Last month, Dubai World, a Dubai-controlled company, requested a standstill agreement from its bondholders, and that roiled the global markets. If the debt crisis of a city-state with the economic heft of Arkansas can upset equity markets, imagine the impact of a fully blown crisis in a Eurozone nation.

In the case of Greece, that process is under way, and, much like the UAE in Dubai's case, the European Union has no formal guidelines for addressing the situation, which creates tremendous uncertainty for investors. Is this a true danger for U.S. stock investors? Armed with a long-term value orientation, one can safely ignore the potential ripple effect on stock prices -- or better yet, seek to profit from it -- but it could be a landmine for weaker hands, including leveraged or momentum investors. Similarly, speculators caught holding weak financials such as Fannie Mae (NYSE: FNM  ) or AIG (NYSE: AIG  ) could pay a heavy price.

Matt Koppenheffer: In a word, complacency.

From late 2007 to early 2009, investors found themselves face-to-face with one of the most severe stock market crashes that the U.S. has ever seen. Even seemingly high-quality companies like General Electric (NYSE: GE  ) and Starbucks (Nasdaq: SBUX  ) saw their stocks chopped by more than half. Banks and financial companies got hammered even harder, and we saw once-venerable firms like Lehman Brothers snuffed out of existence entirely.

Then, between early March and today, the market has charged back, and many of the worst-hit stocks like Citigroup (NYSE: C  ) and AIG have become multibaggers from their low point.

But now where do we stand? The market seems to have been cleansed of extreme fear, but the greed that helped drive 2009's big gains has been waning as well. But that's hardly an excuse for investors to fall asleep. As Alex Dumortier pointed out, the recession may not be over, and even if it's declared "officially" over, there are potential sinkholes still lingering around out there. And even though Fed chief Ben Bernanke may have tried to dispel worries about a stock market bubble, current valuations make me more than a bit wary.

While over-vigilance can do as much damage to your portfolio as neglect, investors will be well served in 2010 by making sure that their portfolio is chock-full of high-quality companies that are still trading at reasonable prices.

Those are our biggest danger warnings...what are yours? Join the discussion in the comments area below.

This roundtable article was compiled by Anand Chokkavelu, who owns shares of Citigroup. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2009, at 6:46 PM, plange01 wrote:

    biggest danger for 2010 REALITY! the US is coming up on its first year in a depression since the 1930's close to 6,000,000 forclosures 20% unemployment rising bankruptcys,energy prices and inflation the US economy is far worse now than it was in march when stocks crashed since then the stock market has been living in dreamworld with the largest false rally in history.REALITY is coming and we will see a far worse crash than we did in march...

  • Report this Comment On December 22, 2009, at 8:17 PM, rd80 wrote:

    I think the biggest investment risk is rising interest rates. More specifically, rates could be forced up by lack of demand for Treasury debt forcing prices lower and rates higher.

    That could be good for banks if the Fed holds short term rates low. But, it would be disastrous for any company that needs to borrow. Commercial credit is already constrained, partly because gov't finance needs are sucking up so much of the available capital. If gov't bond rates increase, commercial rates will go up right along with them crimping corporate profits and/or shutting down capital expenditures.

  • Report this Comment On December 22, 2009, at 9:21 PM, heidi115 wrote:

    is gold the way to go

  • Report this Comment On December 23, 2009, at 2:17 AM, Howard1ii wrote:

    Disruption caused by the Obama health plan. With a change this broad and expensive we will surely see the "law of unintended consequences" rear it's ugly head. We do not know how this will impact the broader healthcare industry from drug makers, to insurance companies, to individuals. Plus, the 2010 elections will most likely change the political mix in Washington.

  • Report this Comment On December 23, 2009, at 8:06 AM, pondee619 wrote:

    "Disruption caused by the Obama health plan" I have to agree. For the reasons given by the original commentator and, until this "plan" is finalized, in place and working well, how can a small business owner hire people without knowing what his/her true costs will be?

  • Report this Comment On December 23, 2009, at 9:11 AM, Celtics17 wrote:

    ObamaCare and Democrats doing everything they can to bankrupt the country. 2010 mid terms will hopefully mitigate this risk, but that's a long 10 months away. Aside from blue chips, it's hard to make the case for investing in US equities until policies of capital destruction and wealth confiscation are voted out.

  • Report this Comment On December 23, 2009, at 11:43 AM, wtatm wrote:

    Obamacare. Since the current administration did not substantively address the most wasteful and problematic healthcare issues (tort reform, cost-shifting between seniors and non-seniors, cost-shifting between insureds and uninsureds, the exorbitant cost of medical eduation, failure to provide non-emergency medical access to the poor, etc.) any bill that becomes law is almost certain to result in "the law of unintended consequences"... likely in a multi-billion-dollar way. Sadly, this will impact the capital markets of any medical-related company... probably in unfortunate ways.

  • Report this Comment On December 24, 2009, at 11:41 AM, elsiejay wrote:

    The really big events on which history turns are never the ones that we have predicted. Consider what the wize men were thinking (and predicting) in 1914, or 1938, or how about the big brains in our financial system two years ago? 9/11, Swine Flu, Katrina... or Google, MySpace, or the internet or i-phone? We are much better off being concerned about what we don't know than attempting to forcast based on what we do know. We must embrace the knowledge that we don't know what the big changes are going to be,but that to fear them is to forsake progress and choose to fear the unknown.

    Our biggest risk in this next year is fear: "No passion so effectually robs the mind of all of its powers of acting and reasoning as fear," Edmund Burke. The birthers, teabaggers, radical right wing "Christians," secessionist, healthcare ant-reformists, etc. are the selfish and mean spirited core of poor uninformed ultra-conservative pawns cheerled by AM Talk radio are wallowing in fear and their weight is growing. Conservatives fear for their guns, socialism, that the white majoity will be mistreated when minoities have power and that the president is a muslim.

    The biggest risk in the comming year is fear; this message is the core of Limbaugh, Beck, Hannity, et al.... Not to mention Fox news. To be selfish, mean-spirited, angry and afraid may become the social norm and the effects it will have on our portfolios will be immense.

  • Report this Comment On December 24, 2009, at 12:14 PM, smts wrote:

    The arrogant government is the biggest danger in 2010. They have proven that they are oblivious to the realities of the economy and the human spirit. Drafting and passing bills behind closed doors in secret and in the dead of night says enough about what they are doing. If you are doing good you don't have to do it under the cover of darkness. The economy will suffer from the constant manipulation and undermining of the free market. All this uncertainty of where the government "lightening" will strike next parallizes our business environment and stops banks from lending money while the government is sucking up all the available capital.

  • Report this Comment On December 24, 2009, at 12:59 PM, elsiejay wrote:

    24-7 news... reported instantly by a zillion observers makes the argument about ".... passing bills...in the dead of night..." a silly statement. It is all there to see and there are a surfeit of reporters giving lots of information and misinformation. Government has screwed up a lot in recent history; too many troops sent on the wrong mission and the guy who got a PhD on the Great Depression failed to see this one comming... in spite of all of the signs. Plus, as smts says, too much of the wrong kind of manipulation. It was the failure of the government oversite guys to pass laws and to enforce regulations that allowed the jerks on WS to get us in this mess. Make no mistake, it is not the fault of government for doing the dumb things with customers money, but they should have at least made it illegal.

  • Report this Comment On December 25, 2009, at 12:03 PM, foolishfoible wrote:

    Many of the accompanying comments hit the mark as to what to be concerned with over the next year. But as a long term investor, I would suggest attention to short term phenomena like countries and governments is to short sighted. The US is in a period of relative decline, perhaps not absolute decline. The key is to understand this and invest accordingly. Over the past 200 years, the world has witnessed dozens of nations devalue their currencies in order to avoid responsibly paying their creditors. They implement these tactics out of desperation to prevent the inevitable. Trading parties with those countries are not stupid. They will also try tactics like competitive devaluations or like France in the 1970s when they essentially told Nixon they would no longer honor US Currency and would rather take the gold that it was backed by. Nixon realizing the hoax of a convertible currency with inadequate gold reserves told them to take a hike and slammed the Gold convertibility window shut. Thus, sparking the Bretton Woods 2 agreement and the end of convertibility into gold for most of the worlds currencies. The world was left with fiat currency system and 10 years of inflation unprecedented in US history. The world was left with little more than scribbles on colored paper. As I write this I am struck by the number of people who believe, I think unwisely, that gold and other hard assets are not true currency or have too little float to support the worlds economies. In a world of competitive devaluations they are the only real currency. The question to ponder is not whether a gold standard would curb the excesses of the worlds economies but rather at what price of gold other other metals would the worlds reserves of the metals aprroximate the buying power of the fiat currencies. That price would then be a fair estimate of where gold silver or other metals with currency like properties will trade eventually if the world governments dont stop the pathological stick saves to the system. While all are probably happy about the Feds behavior over the past 2 years, it is short sighted behavior and the logic of it can be applied now to trivial pursuits such as short term stimulus efforts to prevent naturally occurring and healthy recessions. This recession was so big for the very reason the prior recessions were never allowed to complete their transformations. Scarily this one was also prevented from running its course. Hence bubbles got bigger but in reality they really just rolled around the economy in different asset classes. This time will be no different, I couldn't tell you at this point where the next one is, but I could certainly speculate and I doubt its in metals with currency like properties. It is more likely in man made devices....bonds for a starter and perhaps some stocks and stock markets. Now the US has a problem a deficit it is unlikely to get control of without enormous tax increases on the 20% who provide the 80% with their sustanance. Assuming that is the new new, savers will become supporters of the broken system. The current administration admits as much with its populist rhetoric and long term dumb anti savings behavior. How does the system premised on this end? Like it always ends....violently and swiftly. It may seem swift initially, in fact most of the biggest swan dives of civilizations took more than 100 years. And depending on when you were born during these episodes you might have actually experienced a positive change in your standard of living but across 2 or 3 generations it usually was a wipeout....and most didnt see it coming. Since 1860, a mere 150 years there have been nearly 100 near total wipeouts of currencies. Of the major currencies there have been nearly 8 near 70% depreciations. To suggest its not possible or think the probabilities are low is to underestimate the historical precedents that suggest the probabilities are actually quite high. These are the black swan events to borrow from Taleb. Following major devaluations, the world political order shifts and whole civilizations are consumed. Doubt it? Lets start with US history. 1860s--confederate and northern currency both experience dramatic decline 1900s England Germany France Russia US all essentially wipout there constituents in varying forms. I will pursue this commentary later.....but suffice it to say.....thinking this crisis is over for the long haul is truly foolish. For the short term, though party like its 1999. Oh yeah that didnt work out too well in the end but while the party rolled on it sure felt great!

  • Report this Comment On December 27, 2009, at 2:10 PM, noslen wrote:

    Mr. foolishfoible -- you are my leader. Marked decrease in our standard of living is inevitable. I am glad that I am old!

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