It was the best of times, it was the worst of times…

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Charles Dickens penned these words as the start of his ‘Tale of Two Cities‘ – a stark portrayal of social, political and economic contrasts so vivid that it remains, even today,  one of the biggest selling English novels.

Why the literary reference? Apart from enjoying the novel immensely, the key phrase most clearly elucidates my view of the current global economic and social climate. Today there are just as many positives to point to as there are negatives, and the mood of the month fluctuates according to who is getting more airplay at any given time. Markets rapidly move from positive to negative, with the result that the average person simply feels more uncertain.

Into this balancing act have stepped some rather heavy-handed prophets of doom, forecasting anything from rampant inflation through to long-term deflation and even stagflation. Some predict the United States will enter a new Depression, and it seems no-one is suggesting much other than extreme outcomes. As noted in previous posts, my perspective is that we are in the process of global deleveraging, as asset prices fall to reflect the reduction in total available credit, and that this process is ‘uneven’ in its impact. That is, some areas will feel it more than others.

Australia’s economy has only shown negative growth in 3 quarters since 1991. This is an incredible feat, especially for a country that has long been sidelined as a passive  “price-taker” producer of basic commodities when unfavourably compared with the industrial production might of the Asian Tigers and the nimble flexibility of the US and European service sectors. If you look at the article linked above, in which Peter Schiff forecasts a Depression in the US, you will see that the suggested action step for Americans is to send their money overseas to places like Australia and China. So it seems that Australia is relatively well placed regardless.

Contrast this with the US position, which includes deficits of well over a trillion dollars and official forecasts that suggest the country will be lucky to escape its current dilemma. As an example, view this article, which suggests that the US government is heading towards bankruptcy. If that is not a doomsday scenario, i don’t know what would be…!

The European position is just as startling in its picture of governments struggling to cope with issues of debt, ageing populations, welfare and health costs.

We here in Australia have just endured the Seinfeld Election, during which our political aspirants have tip-toed around real issues while attempting to present their most marketable face to a jaded electorate. How has it transpired that Australia can have an election-about-nothing in the face of “unusually uncertain times“?

The Reserve Bank Governor, Glenn Stevens, delivered a very well-written and researched speech in Perth on the 17th August, in which he highlighted just how well Australia is running economically at the moment, while looking at the development of banking and finance in Australia. To help put the current position into perspective, consider the Endnote (4) of the article, which considers the awful recession of the 1890’s in which “…more than half the note-issuing banks had suspended payment – one third never re-opened (Cornish 2010, Kent forthcoming). By comparison, only three minor banks failed in the 1930’s Depression”. So when things are bad they can be very, very bad. However, the speech shows the development of strong and prudent regulation of banking and finance over the past decades in Australia, as well as showing how that has, and is helping Australia to weather the current global storm.

For the sake of brevity, let’s summarise:

  • Global deleveraging of financial markets continues – even in the face of a huge pool of “free” money, banks are not prepared to take on risk (acknowleding that this leaves me open to all sorts of comments by those in the Australian banking community – but that is another argument for another day).
  • Some countries/industries/companies will be hit much harder than others.
  • The flow of funds is being driven by extremely short-term views on returns.
  • Medium and long term views are heavily polarised into “depression”, “hyperinflation”, “double dip”, etc type phrasology.
  • The actual market returns are pretty much in line with very long term historical averages.

This note is to confirm that we here at Wealth & Security Planners are fully aware of the scope of predictions, and that we are continually looking at how these various scenarios can play out. That does not mean that we have any better idea of the future than Peter Schiff, Nouriel Rubini, Marc Faber, Nassim Taleb, George Soros, AMP, MLC, the IMF or the World Bank. It simply means that when looking at an investor’s portfolio, we will attempt to discuss the potential impact of various outcomes, and point out when those outcomes may not match the financial goals or preferences of the investor.

A close look at a lot of the more extreme views will often show a form of bias in operation. A classic example is the case of the US, where the political views of “Libertarian” Republicans are often portrayed as independent economic comment (Peter Schiff’s article is arguably an example of this). There are also those who have never liked the move from a Gold currency standard to a fiat money system, and this colours many opinions that are expressed (although it will not usually be presented as clearly as this, and the comment will often seem quite independent of such views).

For all the prophesies of gloom and doom or boom, the broader markets will continue to operate according to the risk/return equation when measured over the long term, and the role of financial planners in all of this is to stay focussed on objectives and potential outcomes, and NOT the attitudes of extremists. Where time permits, we will post other articles that help display the difference between the extreme rhetoric and how things actually play out in the real world.

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  1 comment for “It was the best of times, it was the worst of times…

  1. Neville Ward
    August 25, 2010 at 7:13 pm

    Thanks Michael,

    Great encouragement not to lose one’s perspective in the short term. Methinks the media are almost always looking for “sensationalism” and short term perspectives. I agree not to be unnerved by all this short term hype. I just don’t think it helps!!

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