Today's Financial Times runs a story entitled Is it back to the Fifties? which points out that over the past 40 years, ever since the postwar “baby boom” generation joined the workforce, stocks have performed no better than 20-year government bonds.
The point of the article and its title is to suggest that we may now be returning to a era not dissimilar to the 1950s, which "marked the start of a period of relative peace and prosperity [which] came on the heels of a tumultuous 50 years that included two world wars and an economic depression".
Nobody can deny that we have just come through a very tumultuous two years for the global economy. But to suggest this is comparable to the 50 years that preceeded the "golden era" of the 1950s is like suggesting that the wars in Iraq and Afghanistan are equivalent to World Wars III and IV.
While both conflicts have cost thousands of lives and global stock markets had collapsed as much as 75% by one point last year, I've never see anyone hiding in a bunker or people lining the streets in shabby clothing asking for food stamps.
We are now familar with the reason why there hasn't been another Great Depression; governments have learnt the lessons of the past and won't make the same mistakes again. So we have seen a massive injection of cash into the system to ensure that banks remain solvent and companies continue to function.
Meanwhile, finance chiefs around the world are busy "fixing" the financial system so this never happens again.
What should we make of all this?
I suggest looking at it this way:
1) The financial markets have collapsed because the economic cycle turned
2) The economic cycle always turns
3) Financial advisers are not paid to understand the economic cycle. They are paid to sell products
4) If you had understood the economic cycle then you would have been able to anticpate the decline in the stock market
5) Finance chiefs will not be able to avoid the next downturn in the economic cycle
6) Finance chiefs are working to bring about an upturn in the economic cycle
7) This upturn in the economic cycle will be accompanied by a recovery in the stock market
Of course, much of what I have said is either flattered by hindsight or highly speculative. I recognise this uncertainty and believe that only by understanding this uncertainty can you act in a way that protects you from it. Before you can profit from the economic cycle - because that's essentially what you are attemping to do by investing in the stock market - you need to understand it. If you don't, then you should not invest in the equity market. As the past 40 years show, if you don't understand it yet than you never will.
Tuesday 24 March 2009
Sunday 22 March 2009
To tax or not to tax
The mainstream political debate over taxation has always been heavily divided but it has never been so counter-productive.
On the right wing, higher taxes have generally been viewed as a burden on productive members of society, providing disincentives to work for individuals and businesses.
On the left wing, higher taxes are seen as a necessary way to raise money to help those most in need and to balance the government's finances.
At the current stage of the economic cycle, higher taxes have become very difficult to justify, giving the upper hand in the debate to those on the right.
It has never been easier to argue in favour of lower taxes, which are necessary to ensure the economy does not deteriorate any further.
However, the victory for the right in this debate has not come without a price: higher budget deficits.
If a choice were offered between higher taxes and higher budget deficits, the right wing would prefer the latter. The left wing will always aim to reduce the budget deficit before reducing taxes.
As unpopular as this may seem, in the long run it does offer the most sustainable way of running the public finances; this helps to explain the swing in political preference among the voting public over time.
During good times, when the public finances are in good shape, a right wing government will always opt for lower taxes, but when the economy is weak, a higher deficit makes it impossible to cut taxes, leading to an even sharper slowdown.
This helps to explain why the Obama administration has inhereted a massive budget deficit and a sharp economic slowdown with little options for cutting taxes when the economy is at its most weak.
In reponse, the right wing has responded by calling for lower budget deficits before lower taxes. Today's comments by British Conservative MP Ken Clarke are also indicative of this shift in tone. Of course, this type of suggestion would be most helpful during good times and not in the middle of a recession.
As always, the political debate is behind the curve and in this case, will not help make lower taxes part of the solution, which inevitably they will need to be.
On the right wing, higher taxes have generally been viewed as a burden on productive members of society, providing disincentives to work for individuals and businesses.
On the left wing, higher taxes are seen as a necessary way to raise money to help those most in need and to balance the government's finances.
At the current stage of the economic cycle, higher taxes have become very difficult to justify, giving the upper hand in the debate to those on the right.
It has never been easier to argue in favour of lower taxes, which are necessary to ensure the economy does not deteriorate any further.
However, the victory for the right in this debate has not come without a price: higher budget deficits.
If a choice were offered between higher taxes and higher budget deficits, the right wing would prefer the latter. The left wing will always aim to reduce the budget deficit before reducing taxes.
As unpopular as this may seem, in the long run it does offer the most sustainable way of running the public finances; this helps to explain the swing in political preference among the voting public over time.
During good times, when the public finances are in good shape, a right wing government will always opt for lower taxes, but when the economy is weak, a higher deficit makes it impossible to cut taxes, leading to an even sharper slowdown.
This helps to explain why the Obama administration has inhereted a massive budget deficit and a sharp economic slowdown with little options for cutting taxes when the economy is at its most weak.
In reponse, the right wing has responded by calling for lower budget deficits before lower taxes. Today's comments by British Conservative MP Ken Clarke are also indicative of this shift in tone. Of course, this type of suggestion would be most helpful during good times and not in the middle of a recession.
As always, the political debate is behind the curve and in this case, will not help make lower taxes part of the solution, which inevitably they will need to be.
Saturday 21 March 2009
Welcome
Over 95% of the time, blogging serves one of the following two purposes:
1) To make those with a loud voice (i.e. celebrities) even louder
2) To give those without a voice (i.e. "everyman") a chance to be heard
The other 5% gives those with a quiet voice (i.e. intelligentsia) a chance to be heard more.
When I use the word "voice", I'm not referring to the physical sound, but the intellectual sound.
In other words, the second function of blogging listed above generally gives rise to the type of "noise" that we often see when jumping from blog to blog. A lot of it isn't interesting, isn't worth reading and does't need to be there. The fact that it is there simply helps serve the second purpose of blogging.
There is a mundane aspect to everything in life. Blogging is no exception.
Luckily for you, dear reader, my blog is intended to serve the purpose alloted to 5% of the population.
I have a voice and I want you and many others to hear it.
Why should you listen to me?
Well, after having listened to a lot of people over the years, people with voices that are heard all over the world, I believe that a lot of what these people say is either missing the point or fails to account for something significant, which I intend to bring to light.
Hopefully, by doing this I will be able to offer some sense of conclusivity to the issue at hand.
In other words, the final (final) word.
1) To make those with a loud voice (i.e. celebrities) even louder
2) To give those without a voice (i.e. "everyman") a chance to be heard
The other 5% gives those with a quiet voice (i.e. intelligentsia) a chance to be heard more.
When I use the word "voice", I'm not referring to the physical sound, but the intellectual sound.
In other words, the second function of blogging listed above generally gives rise to the type of "noise" that we often see when jumping from blog to blog. A lot of it isn't interesting, isn't worth reading and does't need to be there. The fact that it is there simply helps serve the second purpose of blogging.
There is a mundane aspect to everything in life. Blogging is no exception.
Luckily for you, dear reader, my blog is intended to serve the purpose alloted to 5% of the population.
I have a voice and I want you and many others to hear it.
Why should you listen to me?
Well, after having listened to a lot of people over the years, people with voices that are heard all over the world, I believe that a lot of what these people say is either missing the point or fails to account for something significant, which I intend to bring to light.
Hopefully, by doing this I will be able to offer some sense of conclusivity to the issue at hand.
In other words, the final (final) word.
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