The sky is falling — again. No, I’m not talking about the election campaign — at least not directly — but the resident coterie of Chicken Littles who only seem happy when they have bad news to squawk about. Yes, the Australian PMI (which gauges the health of the manufacturing industry), released last week, showed manufacturing in decline. Yet another sign that the economy is faltering, according to some. It’s become our dominant national conversation — how terrible the economy is, and how much we have to be worried about. Are there clouds on the horizon? Absolutely, but there are…
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The sky is falling — again.
No, I’m not talking about the election campaign — at least not directly — but the resident coterie of Chicken Littles who only seem happy when they have bad news to squawk about.
Yes, the Australian PMI (which gauges the health of the manufacturing industry), released last week, showed manufacturing in decline. Yet another sign that the economy is faltering, according to some.
It’s become our dominant national conversation — how terrible the economy is, and how much we have to be worried about. Are there clouds on the horizon? Absolutely, but there are always clouds on the horizon. The problem with human nature is that we see only the clouds we want to see.
Don’t believe the hype
In the share market boom of 2007, as share prices rose to all-time highs, the investing coast seemed clear. No-one, then, was focused on clouds.
Very few people saw the GFC coming, despite many years of booming US house prices, lax lending standards and increasing leverage and interconnectedness among the world’s investment banks. Ditto growing sovereign debt in Europe. All it took, finally, was a little doubt to creep into the minds of the bankers — “hang on, are we going to be repaid?” — and the walls came crumbling down for US homeowners and southern European governments alike.
Now, as we emerge from the shadow of the GFC, we see clouds and looming threats everywhere — some that exist, many that don’t. Egged on by vested economic and political interests, the dominant national discourse centres on how bad economic conditions are.
But, as the US hip hop group Public Enemy told us in the 1980s, don’t believe the hype.
It’s not too much to suggest that living — and investing — in fear will rob you of your financial future!
The best problems in the world
We’ve lost perspective, so it was refreshing last week to have two different international figures — with no axes to grind — provide some.
The first was US investment banker, Lloyd Blankfein. The Goldman Sachs chief told a conference:
“I’ve been coming here for a long, long time, and during the last two decades of growth, growth, growth, and people are always distraught, overwrought, wringing their hands about how horrible things are and to my observation, they don’t look that bad”; and
“You’ve now sunk to a level that we’re trying to get up to, so my heart goes out to you.”
Citi’s global chief economist, Willem Buiter told The Australian Financial Review: “Australia’s problems are luxury problems compared to the rest of the world. If the economy were to get another unpleasant hit from China or elsewhere, you have monetary ammunition and fiscal ammunition in the tank which would be of considerable envy to a finance minister in Europe.”
These are two of the smartest, best-connected and respected figures in world business. When they speak, we should listen — closely. They know what they’re talking about.
Talking ourselves into a slump
Our pessimism is a self-perpetuating cycle, and it’s time that we stopped.
Our economic system is built on confidence. You and I spend money today, because we expect that we’ll have jobs tomorrow. If you remove that confidence, no-one spends. If no-one spends, businesses don’t sell anything. Without sales, staff have to go, rents don’t get paid and businesses close. As unemployment rises, spending slows even more — and we go further and further down the spiral.
But here’s the thing: the same works in reverse. More spending means more jobs, which means more spending and more jobs.
Now, I’m not advocating mindless spending and conspicuous consumption. Far from it — it was exactly that approach that saw our national savings pool entirely dry up in the mid-2000s, the aftermath of which has stalled our return to growth as we collectively restock ‘rainy day’ accounts.
What’s good in small doses can kill you in large ones
But the current consumer strike, based on little more than (unjustified) fear, is hurting our economy. We needed to lose the fat of excess spending and credit card debt, but now our economic fasting runs the risk of eating away muscle and damaging vital organs.
As Mr Buiter says, our governments and Reserve Bank have the ammunition required, should they need to use it. The RBA had hoped that consumer spending and residential construction would pick up in time to offset the decline in mining — a hope that appears forlorn, with most economists now forecasting a cut to official interest rates next Tuesday.
We may have had Paul Keating’s ‘recession we had to have’, but if we suffer one in the next couple of years, it’ll go down as the ‘recession we didn’t have to have… but created for ourselves’.
Take the bit between the teeth
So what should investors do?
Despite the noise — the deafening, ceaseless chatter, doomsaying and point-scoring — investors need to keep doing exactly what they should have always been doing. They should be looking for wonderful businesses with bright long-term futures, selling for attractive prices.
I don’t expect we’ll have a recession in the next couple of years — I expect the recovering US and European economies to continue their bumpy return to some semblance of economic normality, Chinese demand will continue to be strong and Australian consumers will return to the stores and build more houses once we can remove the economic albatross of pessimism from around our necks.
But even if a recession comes, it won’t be the last in our lifetimes. There will be recessions, recoveries, booms and busts. As far away and unlikely as it now seems, at some point in the not-too distant future, we’ll be enjoying an economic and share-market wave that seems to promise a new and lasting prosperity… which in its turn signals that a decline isn’t far away.
The future is bright
And despite — not in the absence of — all of such economic and business cycles, the future will continue to be much, much better than the past. I firmly believe economic progress will continue apace (with the occasional setback) and that investors with a long-term view are best placed to reap the rewards.
It is not fanciful to expect our best days are still to come. With a little perspective, those days will come sooner rather than later. Without that perspective, they’ll still come — we’ll just have to recover from a self-inflicted injury first.
Simple. Foolish. Profit.
And don’t let anyone tell you that investing needs to be complex to be market-beating, either!
We’re not really ones for bells and whistles here at The Motley Fool. Some people (mistakenly, in our opinion) equate complexity with superior returns.
Try telling that to the geniuses who were trading CDOs when the GFC hit and leveraged gold ETFs when gold was at $1,800/oz! (Perhaps there might be a little correlation between three-letter acronyms and disaster, though!)
We try to keep it simple.
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