Thoughts ‘Borrowed’ From Davos

Posted by admin on January 29, 2010 in borrowing, public borrowing, recession | Short Link

No, sorry. I didn’t make it to Davos 2010 – I wish. After Copenhagen, this would have been an event too far…

In a blog post from Davos, the Beeb’s Robert Peston discusses the thoughts of some of the world’s top bankers about the state of things now.

It seems that these guys agree with the opinions recently alluded to in this blog in this post about Public Sector Debt and this one about my estimates for the length of this recession.

I’d like to bring your attention to points 1 and 2. “prospects are particularly poor for the heavily indebted economies of the west” and “a meaningful risk of sovereign debt crises in economies with large and rising deficits“.

Why do I do this?

Because I am mean and like to write depressing things? Because I like poking fun at politicians and their lies? Because I like to delude myself that I understand economics?

Well, yes, all of those. Of course!

But this blog is aimed and written for investors. To be an investor – especially a successful one – requires a mindset that is realistic and sees the world as it most likely is.

Making poor judgements about economic conditions or business and market reality will most likely lead to buying the wrong asset or company and – sooner or later – losing money.

Therefore, we need to see the reality. And the reality is that more and more of the people that really ought to know, are starting to say that this will be a very long recession.

It is almost a year ago that I was involved in interviewing Paul Krugman where he called it ‘The Mother of all Recessions’. Despite being a Nobel Prize winning economist, the tide was against him – as he has published a book about depressions (a clear bias). But now the world is agreeing more and more with him.

In between then and now, just about every politician in the world has seen ‘green shoots of recovery’, ‘an end in sight’ and all sorts of other hopeful things. They can’t really say much else, of course. But as an investor, it is our job to see through the smoke and past the mirrors to get to the underlying reality.

What is that underlying reality?

It seems clear – at least to this amateur economist – that real GDP growth in major economies will be hard to find and that this recession will last and last. It also seems clear that we as investors need to think very deeply about how to best manage our finances. In a world where either inflation or deflation takes hold, the correct decisions will make or break family finances.

The low interest rate ‘stimulus’ environment ought to have a finite lifespan and has probably built something of a bubble in stock markets. When cash on deposit earns less than 1% pa gross, why keep money in the bank? When governments are borrowing like a drunken Admiral, why buy or hold bonds? That, in combination with quantitative easing (I suspect) has pushed money into global markets when the majority ought to be selling.

We all need to be thinking deeply and clearly about our financial positions right now.

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