Southern Write - Contrarian commentary on issues African and global.

Following the enduring boom times experienced in the closing decade of the 20^th century, current business expectations in the western world appear to be confronted with considerable obstacles, not least those stemming from the longevity of the previous economic expansion, sponsored particularly by Sir Allan Greenspan’s policy of financial largesse  as the panacea for all financial and economic ills, the so called “Greenspan put”.

 While the normal cyclical expansion also creates a feeling of well being and “devil-may-care” attitude amongst investors naturally tempered by the gravity of reality in the form of the subsequent economic contraction, the sustained upswing of the 1990’s led most to believe that the growth pattern would continue unabated. Easy money, low inflation(the Far East played it’s part here), full employment, profits way above trend and resultantly competitive(low) tax rates worldwide were all part of the virtuous circle. Politics, fortified by the worldwide collapse of communism remained largely business friendly. Even the labour unions had few cards to play given the engulfing price competition from the east and, in particular China. The world preference for business(profits) versus labour(costs) swung about as far to the right as might ever reasonably be expected.

 “Have money will spend” was the order of the decade .Man-in-the-street, business and government all pitched in. The trouble was that not only money earned in the boom was spent but because the duration of the upswing seemed unending, borrowing was promoted with little attention to risk(after all with Greenspan there, was there any risk?). Risk is always greatest when it is ignored and speculation boils over. Resultant bank failures were largely propped up by government debt. Further, and perhaps more importantly, governments continue to “buy” votes by handing out ever increasing health and social benefit packages, seemingly without end thereby encumbering future generations in terms of a snowballing national debt. Of course, as the artificially hyped economy gravitates towards a more sustainable level of production, economic problems that were less obvious in the good times are suddenly revealed and rapidly assume monstrous proportions. So now we know that “PIIGS”  can indeed fly, at least momentarily, before they come crashing down to earth! I refer of course to the alarming budget deficits of Portugal, Italy, Ireland, Greece and Spain. However, it seems that periodically this category of debt ridden countries is joined by others more recently of  eastern European origin but don’t forget Iceland. World economic leaders, specifically the USA, UK and particularly Japan are faced with monumental budgetary problems and although they claim to be addressing this social “ogre”, little concrete has occurred to date.

 Now then, has the western world, as an entity, not already overspent and overpromised too much to too many? We are faced with the reality of paying for our past indiscretions and furthermore popping the growing bubble of expectations nurtured in the “cradle to grave” nanny state. Trouble is it is easier to give than take away, ask the politicians in Spain and Greece. However, if this is not strenuously addressed the western world as we know it is going to become ever more uncompetitive and their standards of living, including exchange rates are eventually going to plummet. Expenditure cuts must occur (some signs are already evident, eg: recent budget proposals aired in Europe for immediately cutting certain public salaries by 5 percent)or the problem is going to rapidly balloon. Suffice to say, debt especially public debt must be reduced. The recuperative process will take a long time and give rise to reduced spending(both public and private), rising taxes(see Australia’s recent desperate punitive mining tax suggestion (subsequently reversed), weak profits and inhibited economic growth statistics. Expect the political pendulum to swing back to the left ahead. Socialism/communism could find fertile ground in this type of environment.

 What does this mean for those of us who have saved a few hard earned bucks for investment in our future? Looking around at available worldwide yields, ALL major categories are EXPENSIVE. Commencing with yields on short term, “low risk” bank deposits the returns after tax are negative. In other words, you are guaranteed to lose unless rates rise dramatically, which is unlikely over such a short period. Long bonds look even more scary as the yields are miniscule and of course, one way to ultimately get rid of the ballooning public debt is to inflate it away. In that case bondholders at the current low carry yields would be financially wrecked. Equities are highly priced in terms of historic average profit levels and multiples(PE’s).  Of course, the high earnings multiples are “justified” in the investment community by the poor returns available from interest derived investments. Property yields are also low due to this background.

 So, currently we are faced with:

 1.Low economic and  profit growth

 2. Low yields on money earned and certain loss of real value after inflation and tax

 3. Shares are highly priced and facing headwinds

 4. Property yields are also low due to interest rate comparisons.

 So everything is expensive, there is no obvious place to hide. When yields are poor, focus on risk. Rather a guaranteed small loss than the fair chance of a financial train smash. In bear markets, he who loses least is the winner.

• Posted on Tuesday, June 15th, 2010
• 6 comments