Traders condemn Obama, selves

The world was yesterday treated to the edifying spectacle of Barack Obama returned to the White House on a clear majority, despite pre-election polls forecasting a very tight election race.

The mandate Obama now has for his second term is mostly positive for the US economy, with fiscal and monetary policy likely to be more accommodative than it would have under any tea-stained administration of Mitt Romney. Yet for all the promises that Obama will better promote lower and middle-income consumption, avoid an unnecessary trade war with China, or prevent swingeing cuts to government spending beyond the Pentagon, markets nevertheless reacted with an increasingly typical myopia.

Focused instead on the impending fiscal cliff – where a Republican Congress threatens to stymie the administration’s reforms (usually it is the other way around) – traders effectively short sold the American dream overnight despite expectations, ours included, of a rally. But in a hyper-cynical, electronically mediated world, who could really blame them? We have, after all, seen this show before: hope, change and disillusionment. And to many Americans, unsurprisingly, four more years of that is not a tantalising prospect.

It is said that happiness is the difference between expectations and reality. If your reality is better than your expectations things are good, but if reversed, things are bad, no matter what may objectively be the case. Essentially, modern capitalism suffers this same ennui. A president who has by-and-large improved America’s reality has been re-elected, but because expectations were and are far loftier, this is nevertheless a great disappointment.

As with other recent economic events – the announcement of outright monetary transactions to stem the European liquidity crisis, the implementation of open-ended quantitative easing at the Federal Reserve, the turnaround in weakening Chinese data – enthusiasm has been short lived. Like a spoilt child at a birthday party, a cake that’s smaller than last year’s appears worse than no cake at all. A tantrum, naturally, ensues.

The problem though is that life isn’t always easy and great undertakings take a great amount of time. In an age of constant communications and instant gratification this is sometimes difficult to accept, but the United States will need a lot longer than four more years to right its economy and the world will take longer still to find a sustainable path of growth that doesn’t require large amounts of debt or harmful degrees of environmental degradation. Politicians, with only several years in office (two in the case of the cantankerous US Congress), must promise a short-range vision to get elected, but like a company CEO, such short-range leadership can be a very dangerous thing.

As an equities analyst, I was taught to look at the cash flows and balance sheet of a company as well as its profit and loss statement. What I learnt also was that the companies that delivered the greatest amount of profit growth also had some of the worst balance sheets and some of the most unsustainable cash flow.

The world, if it were a company, would be Enron. Its various divisions have, in the past 100 years or so, delivered blistering rates of growth, but its business model is structurally unsound and there is a massive disconnect between the gains of its executives and the returns enjoyed by all shareholders. Its administration is opaque, its financial measurement is flawed, its environmental record is awful and many of its managers are corrupt, incompetent or both. Some don’t even show up for work. Most of all, however, the world is largely borrowing from its future to deliver returns to the present. And while there’s no small amount of true innovation and genius in the mix, most of this entity’s economic performance, its profit line if you will, has been at the expense of its balance sheet: the earth.

America is the biggest operating unit of this planet-company and its re-elected boss is not a bad guy; some would even say he’s the best we have. But rather than demand ever-increasing dividends from a clapped-out machine, the world’s investors – all of us – should be looking at the balance sheet and start thinking about the structural issues that warrant major repair work.

Our obsession with bottom-line growth – gross domestic product – is ultimately going to harm our investment, just as it did to share market investors leading up to the financial crisis. Our inability to comprehend that growth is a careful balance of land, labour, capital and innovation – not a right that can be delivered sustainably through expedient means – will eventually leave us unstuck. The market’s refusal to comprehend politics beyond the trading day is evidence of a system that’s deeply flawed.

At Macro Investor we have been thinking hard about what stocks to invest in an Australia beyond the mining boom, which is the subject of a forthcoming special report, but the exercise also begs the question of how to be an investor in a world beyond growth.

There are finite limits to inputs like air, water, human capital and fossil fuels, therefore it follows there have to be finite limits to outputs like gross domestic product without some kind of quantum leap in technology. There are finite limits to our world’s balance sheet therefore there must be finite limits on sustainable economic performance. We ought to start judging our leaders by more than just a single bottom-line and start considering what constitutes genuine progress.

Michael Feller is an investment strategist at Macro Investor, Australia’s independent newsletter on stocks, fixed interest, property and superannuation. Click here for a free, 21-day trial. This is an op-ed run in the Fairfax press.

19 Responses to “ “Traders condemn Obama, selves”

  1. glen5875 says:

    Flashman said:

    …most of this entity’s economic performance, its profit line if you will, has been at the expense of its balance sheet: the earth.

    Yep. I saw this the other day on CNN:

    Superstorm Sandy was no freak, say experts, but rather a hint of a coming era when millions of Americans will struggle to survive killer weather.
    –CNN, “Experts warn of superstorm era to come”
    http://www.cnn.com/2012/10/31/us/sandy-climate-change/index.html?hpt=hp_t1

    One wonders if the Four Horsemen, so famously portrayed by Albrecht Dürer in the last years of the 15th century (and now on display at the National Gallery of Victoria), aren’t saddling up and getting ready to ride again:
    http://www.ngv.vic.gov.au/whats-on/exhibitions/exhibitions/the-four-horsemen

    The failure of the Crusades, the invention of gunpowder, the severe blow that the Little Ice Age dealt to the agrarian economy, the Black Death, the Great Schism, and the Hundred Years War dealt a deathblow to the just, benevolent, and rational God that had dominated theological and intellectual circles during the high Middle Ages.

    One wonders if the God of Modernity—-science—-won’t meet a simialr fate. Could Modernity be in its final death throes?

    John Donne, in his 1611 poem An Anatomy of the World, reflects the somber mood and sense of loss that overcame Europe after a century of religous strife and war that was unleashed by the demise of the feudal order:

    And now the Springs and Sommers which we see,
    Like sonnes of women after fity bee.
    And new Philosophy cals all in doubt,
    The Element of fire is quite put out;
    The Sun is lost, and th’earth, no mans wit
    Can well direct him, where to looke for it.
    And freely men confesse, that this world’s spent,
    When in the Planets, and the Firmament
    They seeke so many new; they see that this
    Is crumbled out againe to his Atomis.
    ‘Tis all in peeces, all cohaerance gone;
    All just supply, and all Relation:
    Prince, Subject, Father, Sonne, are things forgot,
    For every man alone thinkes he hath got
    To be a Phoenix, and that there can bee
    None of that kinde, of which he is, but hee.

    • glen5875 says:

      Wlliam Butler Yeats, in The Second Coming, would capture the same sense of loss once again in 1919 when Modernism was in the throes of its most acute crisis (1870 to 1945) up until that time:

      ‘Tis all in pieces, all Cohaerance gone,
      All just supply, and all Relation:

      Things fall apart; the center cannot hold;
      Mere anarchy is loosed upon the world..;
      The best lack all conviction, while the worst
      Are full of passionate intensity;

      For every man alone thinkes he hath got
      To be a Phoenix, and that there can bee
      None of that kind, of which he is, but hee.

  2. GSM says:

    Gents,

    Please save the dummy spits. You got it wrong but for 1 session only. Let’s see how it pans out.

    Gambling on responses to an election outcome is always going have it’s hits and misses. If the misses are too painful then stand aside?

    The recent downtrend in stocks began some weeks ago and as we well know, it aint over till it’s over. The “fiscal cliff” has been known too for some time. Just another market lesson I’d say.

    And please, the fundamental analysis thing is all well and good. In these times of QE infinity and Govt awash in debt , Sentiment and HFT trumps anything. Not a level playing field.

    Altruistic sentiments are fine but not for the market. The facade we are shown of a Leader is just that- its what they DO that matters. That and divining the vector of markets correctly.

    • glen5875 says:

      GSM said:

      …and Govt awash in debt…

      And no mention whatsoever of private debt!

      I’m always gobsmacked by how foks like you, Obama and Romney can manage to ignore the elephant in the room.

      Steve Keen had a great post on the subject:

      If you were told the following graph showed two indicators of Australia’s economic health, and one of them had to be addressed urgently, which one would you expect politicians and economists to try to bring under control first?

      If you picked the blue line, you’ve obviously not a politician. The blue is the ratio of private debt to GDP in Australia; the red line is the ratio of government debt to GDP (debt to the banking sector only; both series come from RBA table D02). The red line is the one that both sides of politics in Canberra are obsessed about; the blue one they both ignore.

      http://www.debtdeflation.com/blogs/2012/10/31/lets-go-back-to-the-future/

  3. flawse says:

    “There are finite limits to inputs like air, water, human capital and fossil fuels, therefore it follows there have to be finite limits to outputs like gross domestic product without some kind of quantum leap in technology. There are finite limits to our world’s balance sheet therefore there must be finite limits on sustainable economic performance. We ought to start judging our leaders by more than just a single bottom-line and start considering what constitutes genuine progress.”

    Michael thank you….that paragraph should head the MB page so that everyone who contributes or posts here can read it every day! It’s something very very few seem to ‘get’.
    Cheers

    • littleguy says:

      Agree. My only caveat is that GDP is a nonsense measure anyway.

    • Bobby Fischer says:

      You beat me to it flawse… how about this quote from Robert Kennedy in March 1968 to sum up the pointlessness of throwing ourselves at the alter of blind GDP/economic growth?

      “It counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl…Yet…[it]…does not allow for the health of our children, the quality of their education or the joy of their play.

      “It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

      It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile.”

      Research in the 70s by Richard Easterlin looked at GDP growth and subjective well-being measures measuring life satisfaction/happiness. He found that the richest indeed reported the highest levels of satisfaction, but NO evidence that rising per-capita GDP caused a rise in average national well-being.

      Summary: GDP growth is good for the satisfaction of the richest, filthiest rentiers we have spawned, but means nothing for the greater masses; let alone to consider the grave environmental and other destruction wrought by growth for growth’s sake.

  4. flawse says:

    GSM
    Sometimes we like to sit and ponder how things MIGHT be!!! :)

  5. The Lorax says:

    how to be an investor in a world beyond growth.

    Meanwhile our leaders are banking on the “Asian Century” which implies two billion more humans with developed-nation standards of living, placing developed-nation demands on the planet’s resources.

    But don’t worry a fantastic new technology is just around the corner, and “everything will be ok”. Just ask 3d1k.

    • 3d1k says:

      We are not in a world beyond growth.

      Limits to Growth, The Population Bomb yada yada yada – despite the dire predictions of these sorts of publications the world is still growing, global mass starvation has not occurred and standards of living for hundreds of millions have improved.

      Challenges of those kinds will be faced and surmounted.

      Threats of a different kind – global conflict – hold the power for destruction far greater.

      • Bobby Fischer says:

        Have you been reading “The Imaginarium of Doctor Astroturfus” again 3d1k?

        Let’s see – in the film the theater troupe have made a bet/pact with the devil and takes the audience through a magical parallel imaginary universe which can provide them with either insightful, self-fulfilling revelations or indulge their gratifying ignorance.

        In this case, I’m better on the latter.

        Q: Do limited resources on a finite planet allow for unlimited economic and population growth?

        Ans: ‘Computer says no’

      • V says:

        Malthusian alert. When do we reach peak prognostications? Hopefully 2012.

      • the_pop says:

        Malthus was early, not wrong.

  6. 3d1k says:

    Bear Feller – I take it then you don’t subscribe to Jeremy Grantham’s long-term view that ‘everything in the ground (resources), forests and farmland’ are the big plays of the future?

  7. Lori says:

    Why everyone sounds so much as Marx about capitalism? Is that good or bad?