If you can create the belief that there will be an economic collapse, you can in fact create that collapse. Psychology rules markets; modern communication creates un-unprecedented linkage in global media. Global media drives global psychology. Media hysteria triggered by the meltdown of the housing market in the US has created an un-unprecedented global financial slowdown. The meltdown itself was a localized phenomenon which does not even affect all U.S. Markets uniformly.
As a result of this media barrage, consumer sentiment worldwide is at or near historical lows, even in countries which have solid fundamentals and are still doing well. If consumers believe there will be a recession they will withdraw from the market and bingo, you will have your recession.
I have been living in Hong Kong these past several years. When I look back at Canada based on the statistics, I see a country which is in sound financial condition. I see a banking system respected as the srongest and most liquid in the world; I see a government which has pursued a stable course and an economy which has proven remarkably stable; I see a country with solid fundamentals.
While I was in Canada over the recent Christmas season I was surprised to find people experiencing a level of fear and concern completely out of sync with these realities. I noted the lemmings of the press jumping headfirst into their prognostication of disaster; I came to the realization that Canadians are so exposed to US media that they seem unable to separate their own news from the noise.
It is true that there is reason for concern as Canada’s largest trading partner is in a period of upheaval and economic restructuring. It is also true that Canada remains well positioned and is very competitive as the currency has softened along with commodity prices. Going forward even the most negative projections see unemployment remaining below historical averages and the recession, if it turns out there is one, looks to be shallow and short lived in Canada.
The meltdown in U.S. real estate and financial markets is not really a cyclical event but rather is the result of failed policies of the Bush and Republican administration driven by the Freidman based neo-conservative agenda.
The concept that the market would be self regulating assumes that the government will not interfere before, during, or after markets correct which has been proven false by a government which intervenes before, during, and after market corrections.
This is not surprising as no one can realistically assume that the government will not attempt to control the economy using monetary policy. Further, in a modern media environment what government would be willing to stand still for starvation and dislocation of the masses leading to chaos, rather than intervene to protect it’s tax base, population, and political survival?
International ratings agencies have made the statement that they have maintained the highest rating on U.S. government debt on the basis of thier faith the U.S. Government would provide the economy support required to protect thier tax base. A statement of faith which seems vindicated with the ongoing series of interventions and bailouts.
The newly minted U.S. administration is preparing to deliver on a dramatic restructuring of the U.S. system from pensions to healthcare and infrastructure. Crafting a much needed “new deal” to re-invigorate the middle class and put the country back on a solid footing to return to a growing economy.
Fortunately for Canadians the last decade and a half of fiscal restraint, paying down debt, pre-funding retirement and pension plans and running surplus budgets have put Canada in a good position to weather the storm from the U.S. and remain on stable footing.
One of the most important things to remember is this: Over the longer haul fundamentals always win out. Yes we go through periods of hysteria when the fundamentals of value seem to be lost. Yet, always at the end fundamentals win out. When markets rise too rapidly the bubble bursts and markets again seek to find fundamental values, similarly when markets overshoot and are oversold they tend to rapidly advance before calm returns. If you are watching fundamentals you will see lots of opportunity to profit.
You can be certain that if you continue to invest in and hold investments which are based in strong fundamentals you will reap the harvest you need over time. No one can predict market timing but experience shows that investors who attempt to time the markets are usually out of the market during the rapid recovery periods after the markets bottom. If you are not in the market you do not gain the advantage.
If you are looking for action items for these times, they are counter intuitive. Buy when other are selling; Always invest based on fundamentals; Don’t be a media or news driven lemming, selling along with the crowd; Evaluate opportunities based on fundamentals, especially when the pundits are ignoring them; Save when others are spending. Take the long view even when the press says the world will end tomorrow; and finally to quote Kipling “keep your head when all of those around you are losing theirs ”. Remember that time is implacable, whether it is your friend or foe depends on you.
If you do these things, no one can guarantee you will win all the time, but on balance you will win, and you will win big...
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