A week ago, the AMP’s chief strategist and chief economist, Dr Shane Oliver, re-examined the Wall of Worry that confronts markets and investors.
This week he wonders if the Wall is being made higher by the information overload for markets and investors.
It is self-evident there is a long worry list for investors right now.
There are fears Greece will bring down Europe and lead to another Lehman event.
The US economy has slowed, QE2 is ending and US politicians are squabbling about increasing the US Government’s debt ceiling.
In China and the emerging world there are worries policies to slow inflation will cause a hard landing.
Australia has its own overlay of worries around further interest rate hikes, the strong $A and uncertainty around Government policy, notably the carbon tax. Natural disasters such as floods, earthquakes, tornados, volcanic ash, etc, have only added to the sense of unease.
This is all driving investor fear and trepidation.
One financial planner observed to me last week he had never before felt such a sense of fear on the part of clients.
And a client recently asked me whether relationships and analysis based on the past are of any relevance in a world of more frequent natural disasters.
While these worries are real, all this has me wondering whether 24 hour news cycles, combined with the information avalanche we are now being smothered with, has actually improved the lot of investors?
Or has it just made investors more fearful, short sighted and jittery?
In short, has it led investors to a short term focus which is not in their long term financial interest?
Has the world become worse?
There is no doubt the GFC has left the world with a hangover in the form of excessive debt levels and extreme monetary policy settings in advanced countries, excessively easy monetary conditions in emerging countries, a greater reliance on the more volatile emerging world and increasing business regulation.
This is resulting in shorter, more volatile cycles and an increase in the importance of asset allocation.
At the same time, talk of looming physical crisis – egg, “peak oil”, food shortages, resource depletion, global warming, etc are only adding to the sense of unease.
This has not been helped this year by a run of natural disasters – floods, earthquakes, tornados, volcanic ash, etc.
But has the world really changed?
The global economy has been through difficult phases in the past, such as in the 1970s. And we got over it.
The last century has been full of disasters and catastrophes.
Here’s a sample: 1906 San Francisco earthquake; 1907 US financial panic; WWI; 1918 Spanish flu pandemic (up to 50 million killed); The Great Depression; WW2; Korean War; 1957 flu pandemic; 1960 credit crunch; Cuban missile crisis; Vietnam War; 1968 flu pandemic; 1973 OPEC oil embargo; Watergate; Iranian revolution/second oil crisis; Latin American debt crisis; Chernobyl nuclear disaster; October 1987 share crash; First Gulf War; Japanese bubble economy collapse; US Savings and Loan crisis; Second Gulf War; Asian crisis; Tech wreck; 9/11 terrorist attacks; Lehman Brothers collapse.
Australia has regularly been hit by droughts, floods (the 1974 Brisbane floods were actually worse than this year), cyclones and bushfires and the world has regularly seen a whole range of natural disasters.
And yet despite this litany of disasters and periodic cyclical swings up and down, since 1900 Australian shares have returned 11.8% per annum (or 7.7% pa after inflation), which is double the 5.9% return from bonds over the same period (and cash which returned 5.3% pa from 1926).
And if you are worried the world is about to hit some sort of limit in terms of growth, population, resources or the environment, after which will come some sort of “great disruption”, bear in mind such prognostications have been regularly made over the last two hundred years.
Thomas Malthus, Paul Ehrlich in the 1960s, the Club of Room report on the Limits to Growth in 1972, etc.
Such Malthusian analyses dramatically underestimate resources, the role of price increases in driving change & the role of technological progress in facilitating it and heading off disaster.
Maybe the world has become more problematic, but I doubt it. When I think of what my parents went through (Great Depression, lost infant siblings on both sides, numerous wars and severe post war recessions) I find it very hard to agree life is harder today than it was when they were growing up and raising my sister and myself.
Or are we suffering from information overload?
While not to deny the current list of worries, one wonders whether the communications revolution we are now going through is making them seem a whole lot worse than they really are.
Thanks to the information technology and communications revolution, we are now bombarded by economic and financial news on a continuous basis.
Whether it’s on the TV via regular finance updates, numerous news and finance channels, websites and blogs, twitter on a smart phone, it’s hard to escape.
The trouble is much of this is noise – random moves in economic data more due to statistical aberrations than fundamental swings in the economy, second order economic data of no real significance, gyrations in share prices and currencies that reflect swings in sentiment on the day, and in Australia’s case constant chatter about interest rates.
Much of this reflects opinions and commentary.
