2012 is definitely lining up to be a watershed year, in which some of the global monetary tensions built up over the past 4 years finally work themselves out. The big question, of course, is exactly how these monetary pressures will resolve.

Panic Buy or Panic Sell?

In my role as a financial planner, i get exposed to many of the ‘trends’ in markets, which reflect the broader hopes, fears and tensions cultivated in ‘mainstream’ media. For over 4 years now, most investors have continued to take a long term approach to their finances, opting to let market booms and busts resolve themselves, and to work on the assumption that the last bust will eventually work into a new boom. On the other hand, there are a few people who are convinced that 2012 will herald “Global Financial Crisis – Mark II”. These people are selling as much of their investment exposure as they can.

And here lies the dilemma, the worry, the angst, the fear and the uncertainty of trying to make a good decision in the face of uncertainty. There are many very informed people who think the GFC II will happen. There are many very informed people who think the GFC II will not happen. The blindingly obvious truth is that no-one knows.

There is an old saying that “everyone has a barrow to push” (most likely misquoted… but i’ve just returned from time out of the office, and time is in short supply right now, so please feel free to independently verify any grammatical or epistemology errors that you may identify in this post), which means that each commentator brings their own partisan ideas to the table when commenting on the future.

I do not believe that investors face an “all” or “nothing” choice. That is a false dichotomy, and in my opinion it is simply a result of all those barrows being pushed in different directions.

Arguments for Panic Sell

For some, GFC II is the “double-dip” recession that must happen owing to demographic movements. For example, there is a fellow called Harry Dent (more fully – Harry S. Dent Junior – if you pay attention to the associated marketing material), who has spent decades following demographic trends, and who now suggests that the wave of retiring baby boomers will trigger an extended price fall, or deflation, owing to the oversupply of just about everything, when 80 million baby boomers try to sell their land, homes, gold, assets, debts and wealth to the 69 million who make up the follow-up generation.

For others, GFC II is a matter of ‘social mood’, and can be tracked alongside a number of variables by looking at various charting or mathematical correlations – such as Fibonacci lines, Elliott Wave signals and others. The suggestion is that these point to deflation.

Yet others again may see GFC II as an inevitable outcome of the credit spiral caused by the move away from the “gold standard” (where the value of money is tied to a physical asset such as a pile of gold) and into the area of “fiat money” (where there is a little bit of hard cash floating around, while the bulk of wealth is created by issuing debt). The current band of Republican politicians touring the USofA with their circus caravans include a few of these people, who see doom and gloom for the country unless it returns to the good ol’ gold standard.

And yet other groups see political instability, corruptibility, indecision and arrogance as likely to lead to disaster, if not outright war. The inability of the USA government representatives to even agree to pay the country’s bills last year was a classic example. The German government insisting on Greece losing its soverignty in return for more loans to help pay its earlier loans is another. The number of ‘hung parliaments’ and the unequal power placed in the hands of minority parties globally is yet another.

As a planner, i have noticed the increase in the number of adverts, emails, headlines and articles that suggest your ‘way ahead’ is to buy this or sell that or to move to cash or to start active trading of shares/currency/property/gold/commodities or what have you. My own take on these marketing efforts is that many Very Clever People realise that this is a wonderful opportunity to cash in on the fear and greed principle.

No-one can know just what the future will bring. Europe may or may not solve its political issues, with or without a war. The United States may or may not resolve its spiralling income inequality, and China may or may not successfully manage the transition of a few hundred million country folk into city living. If all of this is not sufficient drama or reasons for fear for the future just let me know, and i’ll post a few more.

IF you believe that we are headed for GFC II then that involves some fairly serious thinking, in terms of setting your finances up to deal with such an outcome.

Under this scenario, global banking will face huge difficulties, leading to credit squeeze conditions and failing banks. Such an outcome would impact Australian banks massively, as our country borrows heavily from global markets every year just to keep the economy turning over. We do not have a pool of savings large enough to fund our growth and lifestyle expectations, so we borrow overseas. Credit constraints on our banks would need to be very serious before cash deposits would be at risk – BUT the assumption of a full GFC II is the assumption that such things would happen, in which case even bank accounts would need careful scrutiny.

The case for Panic Buying

The long term return of sharemarkets has averaged something like 10% a year for the bulk of 10 year periods for around 100 years or so. That is a rather large data-set, and attempts to suggest that future growth is impossible will stumble when attempting to discredit that historical background simply by saying “this time it is different”.

I am hesitant to mention the 10% figure – as it is only an average, and as such is one of those things that doesn’t actually exist (to prove my point, there are 5 guys sitting in a bar… Bill Gates walks in and Voila!, the average person in the bar is a millionaire!!!!). Some radicalised folk like to grasp such figures, and try to pin guys like me to the wall, suggesting that i am in some way guaranteeing an outcome while saying the future is unpredictable. However, sharemarkets have earned what most people would call a “reasonable rate” regardless of global murder and conflict on a massive scale, huge levels of industrialisation, trade wars, depressions, bank failures, the rise and fall of Communism, the “End of History” (as professor Francis Fukuyama would have it), the height of and the eventual fall of appartheid, transfers of global hegemony from Britain and Colonial Powers to the Cold War bohemoths to the BRIC nations, et cetera.

Corporate balance sheets the world over have been repaired or improved since the Global Financial Crisis. In fact, corporate profits in the USA are back to pre-GFC levels, mountains of cash are sitting on balance sheets, and the price paid for a future income stream is at historically low levels.

Australia’s economy has continued to show resilience in the face of global turmoil – something that isn’t really appreciated for the miracle that it is. Yet our market is being priced by global mandates, and not by Australians themselves. While the USA sharemarket indicators are nearly back to pre-GFC levels, Australia’s sharemarket needs an increase of over 50% just to get back to that level. The fact that our dollar has appreciated and soaked up a lot of the stength of our economy just proves the influence of foreign investment all the more.

When markets recover, they tend to do so quickly. It is just as hard to predict a large lift in markets as it is to predict a large fall. Let’s not get fooled into thinking that we can ‘time’ the exact period where a strong lift is beginning.

Optimistic Pessimism

A number of people have suggested to me that they are tired of listening to stories of doom and gloom. Frankly, i couldn’t agree more. If anyone feels that Australia has ceased to be a good place to live or that ‘things are bad’ then i would recommend sitting down with the book “The Road” by Cormac McCarthy. If that doesn’t convince you that we have it ‘pretty good here’ then my next suggestion would be group therapy or individual counselling.

Here’s my take on the world of money as it stands today. For what it is worth (and i’m not saying it is worth anything), this is an overview of how i view the crossroads.

• i don’t believe the world will descend into anarchy and chaos. Nor do i believe that the complete failure of the capitalist and democratic institutions is a likely outcome of any currently available data sets.
• i don’t believe the politicians of the world will be any less arrogant, egotistical, power-driven, idealistic or pig-headed in the future than they have been in the past. Therefore, i see political change as a continuing process – and i actually see that as a healthy thing. Major imbalances in trade, wealth, rights and obligations have built up over past decades, and these will need a lot a Very Important Meetings and talk-fests to resolve themselves peacefully. That is a whole lot better than picking up clubs to try to beat your opponent into agreement, so i’m all for a “muddle through” approach to global politics.
• Demographic change will be large but i don’t see it as overtly predictable. There have been predictions of global starvation, food famines and other extreme scenarios but they haven’t yet played out. Looking at future population statistic forecasts, it is easy to see an ever-expanding population and disaster – but that overlooks the scope of forecasts, which include scenarios where the global population peaks and then declines significantly.
• Forecasts of doom and gloom at the extreme seem to forget that a huge drop in markets means a huge drop in capacity to repay debt, which in turn means a loss for debt holders – and that’s cash (believe it or not). So most of the suggested ‘preparation work’ for disaster is really just window dressing, and won’t work if the worst predictions actually occur.
• If there is a double dip recession then markets will fall, and cash will again be king. Up to a point. The last time it looked like the financial world was about to end, the sharemarket fell to a level around 28% below where we are today. So maybe there’ll be a 30% drop (or more) if the world falls apart – but that is pretty much the ‘standard’ expectation of short term volatility for markets at any time. In fact, our current post GFC market progress is about on par with that which followed the 1987 crash. Nothing new there folks. And yet the long term return of markets eventually played out the way that it had for a hundred or so years before that crash.  Therefore, holding growth assets long term, in a broadbased “buy and hold” approach is not a dead strategy. It may not look good when considered over the past 10 years in isolation but that is not a robust method of measuring what to do today.
• The future may or may not hold more or less volatility than the past – but historically, attempts to avoid that volatility by active ‘trading’ have generally ended up in little more than reduced long term returns over simple long term market exposure.
• In troubled times, look to your own position. That is, ponder in detail your own position through a “SWOT Analysis”… ie, Strengths, Weaknesses, Opportunities and Threats.

Now is not the time to hide in the pack, and assume that you can adopt a ‘standard’ pathway successfully. In other words, your planning must be very personal and seek to address the areas that you can have an impact on – and not allow yourself to get hung up on things you cannot change. If you read a note saying “you’ve gotta buy BHP” then understand that tens of thousands of other people are reading the same note, so you’re not really the possessor of privileged information there. It’s better to ask yourself whether you should be buying anything at all? Whether you should be saving, paying down debt, investing into property, reducing share exposure, buying more or what have you.

Don’t get waylaid by other people’s priorities.

As always, there are far more pathways than a simple choice between two alternatives. Take your time to work out just what will work for you, and act accordingly.

That’s my very quick overview. If anyone wants backup for any of my comments (i acknowledge that i’ve made broad statements from my own views, experience and outlook, and haven’t put in links to Very Clever People to back up my arguments), please simply post a reply at the base of this note, and i’ll do my best to refer to the relevant authorities.

Please remember the Great Disclaimer – None of this is personal advice. You cannot act on this as if it is personal advice – because it is not! This is a general note out to the general virtual world, and my thoughts and commentary only. The future is an unknown, and hopefully it will remain so. The past influences the future only as much as the victors decide to include it in their new-and-improved versions of history.