Webdiarist John Pratt [0] has collected some recent commentary on the global economic situation and speculates on its implications for our future. Thank you, John – this is an elephant that we must not ignore.
Reckless Greed: How exposed are we?
by John Pratt
Four weeks ago, Will Hutton wrote in the Observer [1]:
Never in human affairs have so few been allowed to make so much money by so many for so little wider benefit. Across the globe, societies and governments have been hoodwinked by a collection of self-confident chancers in the guise of investment bankers, hedge and private equity fund partners and bankers who, in the cause of their monumental self-enrichment, have taken the world to the brink of a major recession. It has been economic history's most one-sided bargain. Last week's financial panic was further evidence of the extreme foolhardiness with which global finance has been organised and managed. There was the biggest one-day fall in Wall Street since 11 September, which spilled over into every world stock market and the largest single cut in American interest rates for 25 years as an emergency attempt to stop the rout. A new crisis emerged in an obscure American insurance business (monoline, it is called). To cap it all, there was the £3.7bn bank fraud at Société Générale.
The growing realisation of how exposed the financial system is – and from transactions that should never have taken place – is reinforcing the mounting credit crunch, which, in turn, is spooking stock markets. The US economy is weakening while in Britain new mortgage lending is at a 10-year low. The staples of a settled life – jobs, pensions and house prices – are all under threat.
The Australian stock market is experiencing another week of extreme volatility. How safe is our superannuation? [2] How safe is the Future Fund set up by the Howard government, 61 billion dollars being gambled on the stock market instead of building schools and hospitals. Australian super funds are holding a summit in on April fools day in Sydney. This is a promotion for the event.
Australia’s $1 trillion superannuation industry is poised to deliver its best returns this decade. The industry has reported its strongest financial gains for four years in a row. Sweeping super reforms are boosting industry coffers, including profitability for sectors like retail and wholesale master trusts and self managed funds.
Just how safe is the $1 trillion? What happens if world markets collapse? Will the superannuation industry still be able to report strong financial gains? What happens if the US goes into recession and the Chinese boom falters? Have Australians put too much faith in the continued growth of the stock market? Some experts think that we are due for a stock market crash.
Back in November 2007, Dan Denning wrote in the Daily Reckoning [3]:
Your guess is as good as ours. All we have here is our knowledge of history and market cycles. We seem to be at the apogee of a great growth cycle. But if you look around in the two main engines of that cycle—China and the US—you begin to see evidence that the cycle is at its limit. A great contraction is in order. Or even a crash.
“Crash is coming, warns top investor,” write Jason Dowling and Peter Weekes in the Age. The gentlemen have spoken with Leo de Bever, the chief investment officer of the Victorian Funds Management corporation. He thinks that when things can’t get any better, they don’t.
“The man responsible for investing AU$41 billion of the State’s money has warned mum-and-dad investors to prepare for a massive sharemarket crash. He says a dramatic downturn is inevitable as the rapid rate of investment is unsustainable, and the repercussions of the US$300 billion subprime lending crisis in the US are yet to be felt fully.”