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This Time It’s Different

February 5, 2009 by  


By Bob Wood, MMNS

finance1

As I write this column on the last market trading day of January 2009, we now know that this has been another losing month for stock investors. As observed from market history, a down January typically does not portend positive results for the rest of the year. But that history will not, and certainly does not, stop Wall Street promoters from assuring us “Not to worry,” since a second-half rebound is all but inevitable. Of course, over the long run, “Everything will be just super!”

Perhaps my last column on these pages helped pour some cold water on that notion. Our domestic economic news has shown steady deterioration in housing and job markets, which don’t seem destined to hit bottom anytime soon. This time, I think we’re in for a very different aftermath of a big down period for stocks, and the overall economy. Of course, whenever someone says ‘’this time is different’ you can expect to hear howls of derision from all-knowing market promoters.

But it sure looks like there are structural, secular changes happening that won’t be temporary in nature. These are changes that will stick, and make our world look a lot different ten or twenty years from today than what we’re used to seeing.

The U.S. government will run its first-ever trillion dollar deficit in the current fiscal year, adding to the mountain of debt at every other level — from personal installment debt (now at over $2.5 trillion) to state and local governments’ borrowing to fill budget holes, and of course, to the federal government’s need for more loans to offset its huge shortfall.

With asset values such as houses and stock market accounts having fallen so drastically in the past couple years, the greatly reduced power of those assets to offset debt on our collective balance sheets argues strongly against any return to the good old days. Servicing that huge debt has become virtually impossible, considering the loss of so much wealth. To us realists, this imbalance signals a much longer period of economic stagnation and recession, if not worse.

While I could attempt to provide even more rationale for why I think the long term could be more painful than the Wall Street consensus portends, an article I saw in a recent Financial Times newspaper does a great job of presenting this alternative view. If you consider yourself a serious investor and do not read this newspaper regularly, you penalize yourself in a big way, since you miss some of the best coverage available of the global financial scene.

Reprinted here, with permission from the U.K. author, Luke Johnson, is a concise explanation of why we should all be looking more realistically at the long term, as in what comes after the January numbers hit the record books?

Why I fear the west’s luck has run out
Courtesy Luke Johnson
(Published in The Financial Times, January 28 2009 )

Over the months I have told my colleagues at Channel 4 and the Royal Society of Arts that this is not just a financial hiccup, or something happening to the City and Wall Street.

We need to make programs, do research and deliver lectures about this moment – because this downturn is very bad indeed. It will sear itself into a generation’s memory and scar lives. It may well be the worst slump most of us have ever experienced. It surely needs to be recorded and discussed, while solutions are sought – and in the meantime we have to struggle through it.

For at least a year I have been as restrained and positive as I felt I could be. I am past all that now. It is time for some blunt talk, I fear.

It is clear that as a society we must learn something painful and radical – how to live within our means – because the credit just is not there any more. The easy money is all gone, and there will be no more for a long time.

Previous assumptions simply do not apply. Homeowners should forget about houses going up in value – all that is history. They are places to live in. So cut back on your outgoings. Pay rises are off the agenda. Wholesale pay cuts may yet become common. Put some cash aside if you possibly can; you might lose your job. I fear most citizens’ plans for the future must be put on hold. This is not something happening to other people – we are all in trouble.

Business must adjust to the idea that this stagnation could last for many years. The age of free money from mad lenders is finished. The growth game is over. Whole swathes of industry are on life support. The banks are in desperate straits. If their management cannot see that, then they are even more incompetent than they are portrayed.

Indeed, too many of us still fail to see just how severe conditions are, and how horrible things are likely to get. This is not a correction, a brief hiatus until the upward march once more resumes. At some point, the Japanese, Chinese and Saudi buyers of US and European government bonds will see just what miserable value they offer. Then governments may have to stop all the runaway state spending and bail-outs, and even put up interest rates.

Plenty of observers, including me, have criticized the media for being too gloomy. I am now beginning to believe that they have not been gloomy enough, if they want to reflect the true consequences of our profligacy and past conceit.

After all, who wants to face up to the bleak reality that confronts us? The experts say we will not suffer a repeat of the 1930s slump. Indeed, we have to contend with fresh issues. Like the fact that there are 1.5bn recent additions to the capitalist workforce in China and India – hard-working, increasingly well-educated people, all keen to better themselves. Meanwhile, modern logistics and communications mean trade and production can take place almost anywhere if it makes economic sense.

So why should industrious Asians earn a tiny fraction of what citizens in the west earn? Especially when they have so much of the cash and productive resources, while we have deficits, high costs and poor demographics.

Prepare for a wrenching, unstoppable redistribution of wealth – and I am not talking about domestic taxes. For too long it has been more profitable in the west to finance consumption rather than production. That cannot continue. I am afraid that the west’s credibility – and luck – has run out.

This vast reordering of our economic system has only just begun. We shall have to cancel all the self-indulgence of endless welfare spending and cultivate rather more of a work ethic and a sense of self-sufficiency. Expectations must be modified and attitudes altered profoundly. Expect years of negligible growth, permanent high unemployment, declining property prices, higher taxes, crumbling currencies and falling living standards.

We shall look back on the last decade and think: we never realized what we had until it was gone.

lukej@riskcapitalpartners.co.uk

The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm

I couldn’t have said it better!

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

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