The strategist Sean Corrigan recently referred to me in some private correspondence as “fashionably declinist”. I can just about accept the “declinist” part, but I have my doubts about whether such a view is either fashionable or popular. The frustrating thing about expressing any kind of negative view on matters of investment is that there is absolutely nothing to be gained from doing so.
Fellow pessimists will merely grumble in agreement, while everyone else will hate you for it. It also happens to be commercial suicide. The investment industry is relentlessly upbeat and abhors negativity. Everybody hates bears – even more so when they have the luck, or judgment, to be right.
But that’s not strictly what Sean was getting at when he used that adjective “declinist”. He was referring to a more-than-vague sense on my part that Western society seems to be slipping relentlessly toward a poorer future, in both material and environmental terms. The argument from an economic perspective has, I suspect, already been won.
There is a fear that the youth of today will not benefit from the natural escalation of living standards that so many of their predecessors took for granted. I look back at my own student days with a sense of relief that I didn’t have to incur huge debts in the process, and that there was a job waiting for me when I graduated.
The class of 2012 faces an altogether more miserable scramble for employment and for a place anywhere on the housing ladder. The only thing rising for those graduates fortunate enough to secure jobs they enjoy will be their future tax burden.
I have also been won over to the environmental arguments advocated by Dr Albert Bartlett, whose presentation on YouTube, ‘Arithmetic, Population and Energy’, is the most impressive I have ever seen.
Bartlett makes a compelling case that mankind’s biggest weakness is our inability to understand the exponential function – the power of anything growing at or above a fixed percentage rate. When that thing happens to be the population, the implications can be severe.
At the start of the 19th century, the world population stood at one billion. It now stands at seven billion. There must surely be a risk that man will overburden the carrying capacity of our planet – if not now, then in the very near future.
Sean is an optimist with tremendous faith in the ability of science to overcome human problems. While I admire the scientific process, I cannot share his optimism. My fears are based on a healthy respect for simple mathematics, and on the gap between those things growing at a geometric rate versus those plodding along arithmetically.
So my “declinist” fears relate to food, energy, and the environment too. But let us restrict the argument solely to matters financial. My argument comes down to this. We live in a debt-based monetary system. The modern world thrives on credit. The money we use was lent into being by banks. So much debt has been created over the past four decades (not least by governments promising much but generating little) that the modern economy requires constant economic growth, if only to service all that outstanding debt.
So what happens when the Western economies go ex-growth, as I fear they have? What happens when the entire West starts to turn into Japan? Not every country can follow Greece into a dramatic debt default. Given that austerity is incompatible with economic growth, the only way out of the maze is by state-sanctioned inflationism. Hence my focus on the importance of holding real assets and currency protection within a balanced portfolio.
Pessimism may be the wrong word to use – I prefer ‘realism’. But let’s face it, when large sums of money get lost in the financial markets, they get lost by optimists. And it is the optimists who will get badly burned when the current bubble in government debt bursts, which it surely will. It can’t be any other way, given the pressure on central banks to inflate, whether through ‘quantitative easing’, ‘long-term refinancing operations’, or some other new weasel coinage. Never was a greater bubble more visible in plain sight.
There are also downside risks in broad equity markets (if not in individual, value stocks) given that those markets are now dependent on the capital flows arising from central-bank monetary stimulus. If Western stockmarkets were valued solely on the prospects for likely economic growth, I doubt they would be trading anywhere near to current levels given the generalised tendency towards austerity, deleverage and economic retrenchment.
There are merits to brutal realism today. We are unlikely to find future investment returns surprising – if they are, they will be pleasantly so. The optimists, on the other hand, may be in for some crushing disappointment.
• Tim Price is director of investment at PFP Wealth Management. He also writes
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