2009: the focus shifts again
Hope springs eternal, and there’s nothing like a new year to trigger a new bout of optimism. As a result, the end-of-year reviews and the looking-forward-to-2009 analyses were characterised by an almost desperate attempt to identify positive, or at least promising, developments that can perhaps be discerned in the gloom enveloping the global economy at the end of 2008.
In the area of the financial markets, which have suffered losses that varied between the extraordinary and the unprecedented, these efforts were directed at finding ways to make money. This is a natural enough reaction and there is an increasingly good case to be made in favour of investing in various financial assets which have not only been beaten-down, but – more importantly – have a good chance of coming back. In fact, many ‘fundamental’ or ‘value’ investors, meaning people who focus on the underlying measures of corporate profitability, can be found declaring that they are finding more and better opportunities to invest than at any time since the mid-1990s. It is indeed likely, on the basis of historical and statistical precedents, that anyone buying a portfolio of first-class companies today – whether via their shares or bonds – and going to sleep for the next decade, will do well. It is a near-certainty that a portfolio of this kind will do better from now until 2018 than its equivalent did in 1999-2008.
In that narrow sense, the worst is behind us – on condition that you measure good and bad, worse and worst, by whether the stock market rises or falls. However, as people in Ashdod, Beersheva and the rest of the ever-widening zone known as ‘the Gaza envelope’ learnt this week, there are things that fall which are more important than stock prices – and that even a week when the markets went up is not such a big deal, compared to a rocket landing in your living-room, or your kid’s classroom.
It is actually possible to explain why markets rarely react to terror attacks, or even to military operations. After years of practice in Israel, you can get quite good at it. But the problem many market professionals have is that they become convinced that what happens in the financial markets, which is central to their lives, is of critical importance from an objective standpoint. This is part of the wider problem noted here last week, that an entire generation has grown up believing – in the full, quasi-religious sense of the word – that the financial system is the centre of the economic universe. The crash of 2008 has actually strengthened this belief, since it has demonstrated that everyone is deeply affected by the crumbling of the old financial system and that most Western governments are prepared to spend huge amounts of (their taxpayers’) money to prevent it collapsing totally.
2009 is likely to destroy this remaining aspect of the finance-centred economic model, that developed in the 1980s and 1990s and reached its apogee in the first half of this decade. The crisis that began in 2006 as a small cloud, no larger than a man’s fist, among the houses of Las Vegas and the condos of Miami, developed into a full-fledged financial ‘tsunami’ in the second-half of 2007. Last year’s story was not just how the financial crisis got steadily worse, despite repeated predictions to the contrary, but how it morphed into a global economic downturn – again, in defiance of the consensus forecast that this would not happen.
This year will surely see further dramatic swings on the markets, but in 2009 the financial crisis is going to cede top billing, as the worst global economic crisis in eighty years swallows up the global boom of 2003-2007, probably to the point where – like the seven fat cows in Pharaoh’s dream – there is no trace left of them. That much is a given, but unfortunately it gets much worse. Financial collapse and economic hardship lead directly to social unrest and political upheaval. In countries with developed economies and a reasonable level of social cohesion, these latter phenomenon might be limited to an upsurge in crime, rioting spurred by ethnic or religious tensions, and so forth. But in poorer and/or socially unstable countries, the outcome is more likely to include revolution, civil war and socio-political disintegration. The extreme examples of these two outcomes are already on display, having emerged during 2008 within the relatively narrow confines of Europe: few countries have a greater degree of social cohesion than Iceland, and few have less political and institutional stability than Ukraine.
This year, therefore, should see the focus move from markets and corporations to countries and populations. It may end up seeing share prices rising – but by then, hardly anyone will care.