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New York • Investors around the world have retreated from risk before. But this time is different.
So says Arne Holzhausen, a senior economist at Allianz, an insurer based in Munich. He says what's keeping people from returning to taking chances with their money is not just a fear of loss, but a mistrust of the financial system. His prediction: Investors will remain cautious for several years to come.
Depending on your view, Holzhausen is qualified either to understand this new cautious world, or to exaggerate its impact. A German, he shares with his countrymen a reluctance to gamble with money even in the best of times. He also has seen the damage when the appetite for risk swings from one extreme to the other: He lived and studied in Japan in 1989-1990 when overconfident investors pushed stock prices to a record, then in 1994-1995 after many had sold at a loss and the economy had entered a two-decade slump.
In an interview, Holzhausen, 46, explained the psychological "scarring" that has kept people from buying stocks in the past five years, how living in Japan during its boom and bust shaped his views, why Germany is not the model economy widely assumed, and why he, like many Germans, has stayed away from stocks.
Excerpts below have been edited for clarity and length:
AP: Some economists talk about "scarring" from the financial crisis. What do they mean by that term?
Holzhausen: If you have a bad experience in your young, formative years, you don't easily forget. In the beginning of the (last) decade, there was the tech bubble, then came the financial crisis. The generations in their 30s and 40s will keep cautious.
It's not so much about value. People are deeply skeptical about the fairness of financial markets — heads the banks win, tails you lose.
AP: People have been burned before, but they always come back. The '70s were terrible for investors, yet they ended up buying stocks the next decade, and borrowed more and spent.
Holzhausen: After the oil shock of the 1970s, I don't think there was such mistrust. That was seen as an external shock. (Now) people think something is rotten in the financial system. People see financial markets as a casino.
When I started (as an economist) in the '80s, the mood was you have to buy stocks. You heard it even in China, "To get rich is glorious." Now, people don't feel that anymore. People want to get as much distance as possible from the financial system. They want to be in control of their financial matters.
AP: How much longer do you think households will continue to spend slowly, sell stocks and shun debt? Is it five years? Ten years?
Holzhausen: That's hard to predict, but look at the Japanese: They have not been in the mood (to spend and invest) for more than two decades. That might be an extreme case, but with low growth in the foreseeable future (in Europe) and a rapidly aging society, the revival of animal spirits is certainly not around the corner. Five years at least.
AP: In the U.S., investors are starting to inch back into stocks. The Japanese stock market is up 45 percent in nine months. Some households there are buying again, too.
Holzhausen: There is some movement on the margins. People are repositioning their portfolios to try to take advantage of recent equity booms. But overall, the stance is very cautious.
AP: What about in Europe?
Holzhausen: People in Europe are talking about a "great rotation" (back to stocks), but it's still early. Is this really the return of the risky investor or is it a false dawn? There's slow improvement. But the euro crisis is not yet over. People are still too fearful to get back into the markets. There is still a lot of angst. There is a lot of mistrust.
AP: What have you done with your money?
Holzhausen: I bought stocks back in the '90s, and lost a lot of money in the dot-com bubble and decided to get rid of them. Most of my money is in life insurance and in real estate.
AP: You lived in Japan twice, in the late '80s when the real-estate and stock markets hit records, and in the mid-'90s.
Holzhausen: It was really eye opening, if you came from Europe. Asia was the future. It was more dynamic. It was richer. I couldn't afford anything. There really was exuberance, then there was pessimism. People don't believe in a better future, in a bright future, that Japan will return to high growth.
AP: Germany is seen as a model for other countries. Unemployment is low, and Germans never borrowed too much. You have a different view of this.
Holzhausen: Our performance looks good, but only in comparison to other European countries.
Private investment is very low. Most companies are overly dependent on banks, and banks are reluctant to (lend). The market for equity and bonds for small and medium-size companies has not taken off. People are looking for safer assets. There is a lack of capital.
We didn't pile on risk (before the financial crisis), so we avoided the slump. But looking forward, if Germany is the new normal you have to settle on much more meager results and performance in the long run.