Peter Switzer: Please Ignore Freddy Krueger and the World Bank
by Peter Switzer, Switzer Super Report
Now that most of us are close to being back to work for 2012, I thought I would lay down my expectations ? not my predictions ? for the year.
I thought it was the least I could do when I saw the Sydney Morning Herald's headline: "Financial Crisis: get ready for next wave!"
This came out of a World Bank warning that a downturn was coming that was going to be so severe it would be worse than what followed the collapse of Lehman Brothers. This, in a nutshell, would be global financial crisis (GFC) Mk II.
After teaching economics at such august places as the University of New South Wales, and writing as well as analysing finance and economic matters for major newspapers and other media outlets for over 27 years, I have learnt a thing or two about what the media can do with the warnings of impressive sounding bodies such as the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).
Bad track record
Let me say, straight up, this mob have the tipping credentials of trainers and jockeys who are about as reliable as a taxi turning up on time on a wet day.
When it comes to tipping a GFC Mk II, I go back to an old Billy Joel line with a twist: "They may be right. They may be crazy." In fact, I think they have gone over the top and Wall Street, at least for most days this year, have agreed with my more cautious view on what lies ahead for the world economy and stock markets.
I reckon Westpac's chief economist, Bill Evans, put this World Bank warning story into a sensible context when he pointed to the World Bank's actual forecast for the global economy over 2012. The Bank has peeled back its old forecast from 3.6% to 2.5% and while some alarmists call anything under 3% growth for the world economy a recession, the fact is that when the global financial crisis happened, the world economy actually went into a real recession and contracted!
Economics and economic forecasting are complex games and that's why the Treasury, the Reserve Bank of Australia and most banking economists have been way off the mark with forecasts for inflation, economic growth, the stock market, unemployment and interest rates. Then throw in that the media has been trained to jump on bad news with glee and treat good news with suspicion and you have the reason why newspapers run with scary headlines that will spook investors.
I blame the media and a few well known people, one of which I tag as the Freddy Krueger of finance commentary, for scaring people into cash and out of sensible investments in the stock market. I hope these guys can warn people when the next big bounce of the market happens ahead of the start of the inevitable bull market.
If he can do that, he is not Freddy Krueger, he is God!
A look at the numbers
I reckon it's worthwhile to review what has happened with stocks since the GFC and even since the market crash before ? the dotcom bust in 2002.
Let's just look at the recent GFC. Using S&P/ASX closes we can see what happened to many investors' and super trustees' nest eggs. Their share wealth peaked on 1 November 2007 with the index at 6,828.7 and by 6 March 2009 it had more than halved to 3,145.5.
In that month the first big bounce happened and by 11 April 2011, the index climbed to 4,971.2. We are now at 4,217.9, so with this info we can have a look at how risky shares are and whether the media is too misleading for investors to rely upon.
If we start at 13 March 2003, which was the index closing low of 2,700.4, by 1 November 2007 the index had grown to 6,828.7. That's a 152% gain in just four and a half years! So if you had $100,000 invested over that period it would have grown to $252,000.
Even if we look at where we are now at 4,217.9, the jump from 2003 when the index was 2,700, is still pretty good. It is about 56%.
That means if you have $100,000 in stocks over that time you would now have $156,000, but if you had it in a 5% term deposit, it would only be $140,000.
Investing in term deposits gives you peace of mind, but you won't get the highs of seeing the stock market zoom ahead when the worst is behind us.
So is the worst behind us?
I suspect there could be some dramatic moments ahead linked to Europe, but I think they will manage it. I expect the European Union to sign up to more fiscal discipline and the European Central Bank to help the banks, the governments and Europe's economy.
I expect the Yanks to keep growing better than the doomsday merchants have been predicting, and they were wrong about a double-dip recession in the USA.
I expect the stock market to end higher this year in Australia and that we will see a big bounce.
Of course, I could be right, I could be crazy, but I know I'm not a lunatic and history shows me that stocks eventually come through and if you can endure losses, they will reward you for the faith you show them.
But make sure they are good stocks worth holding over the course of a stock market cycle.
One final comment for those who hate the memory of the market falling by more than half ? the 6,771.9-level was outrageously high built on too easy money. Possibly, it should have been more like 4,000 or so and then the fall to 3,145.5 would not have been so great. And by the way, if we had never gone so high, we would never have fallen so far.
When you live in cloud cuckoo land, the fall to earth can come with a really big thud.