PortfolioConstruction Markets Summit 2010

Theme 1:  The big picture - are we there yet?

Unbelievable. The first decade of the new millennium gone!

What kind of decade was it? >
(Save the file to your computer, unzip it and view in Windows Media Player.)

And 2009 wasn’t such a bad year after all! Remember meeting this time last year and leaving with an air of concern, if not despondency, as a result of where we were at, and of what our faculty had to tell us.

So the question we are discussing today is - in terms of the road to economic recovery, “Are we there yet?”

As it’s turned out, while the average Australian’s wealth is not yet back at the highs of before the Global Financial Crisis, the threat of imminent financial disaster has passed for most, the wealthy are back to spending extra, and surely we’re all back on the way to a comfortable retirement, in this lucky country?

In terms of Bloomberg’s Global Misery Index (below) Australian’s were less miserable last year than in 2008 (as were New Zealanders!). For the record, Malaysians are the least miserable, Americans and Brits feel worse than they did a year ago, as do all of the G8. Of course, we didn’t even have to experience a recession. 

Yes, the 2009 gains should be viewed in the light of 2008 losses...

... but, surely, we can stamp the end of the first decade of the new millennium as better than it looked like it was going to be?

I wonder whether the good fortune we have at being in Australia means that we not only missed a recession, but we also missed the chance to think deeply about the importance of different aspects of economy that we are a part of?

Harvard Professor Michael Sandel, political philosopher, commented on the GFC aftermath by saying...

[One of the lessons I’d like us to learn is that] "Some of the good things in life are corrupted or degraded if turned into commodities, so to decide when to use markets, it’s not enough to think about efficiency; we have also to decide how to value the goods in question. Health, education, national defence, criminal justice, environmental protection and so on - these are moral and political questions, not merely economic ones. To decide them democratically, we have to debate case by case the moral meaning of these goods in the proper way of valuing. This is the debate we didn’t have during the age of market triumphalism. As a result, without quite realising it, without ever deciding to do so, we drifted from having a market economy to being a market society. The hope for moral and civic renewal depends on having that debate now. It is not a debate that is likely to produce quick or easy agreement. To argue about the right way of valuing goods is to bring moral and even spiritual questions into public discourse."

The Reith Lectures
Markets and morals >
Morality in politics >
Genetics and morality >
A new politics >

So, is it true that compared with the hope, optimism and potential that greeted the new century, just ten years ago, we have largely had a decade that wasted the potential? My dad used to say... "the graveyard’s full of people who had potential."

As a consequence of the enormous costs to the global economy of the irrational exuberance which resulted in the Tech Wreck, and of the War on Terror, (now seemingly more like Borat's "War of Terror") - both pretty much at the beginning of the decade - and the GFC at the end of the decade, and everything else in between, it seems like much of the potential we all had ten years ago has been squandered. Pretty well all the global stockmarkets other than a few emerging markets, had a dismal decade. Money that could and should have been deployed to beating world hunger, beating world health problems, reinvigorating world infrastructure, and dealing to climate change issues was spent irretrievably on wars on terror and on preventing total financial meltdown.

Or, can we be satisfied with a past decade of success?  Take a look at the last decade from a business point of view.

What kind of decade was it? Business >
(Save the file to your computer, unzip it and view in Windows Media Player.)

When I look back on the past decade, it seems to me that we have been unwitting travellers through an historical inflection point of modern history... one that has coincidentally coincided with the first decade of the new millennium.

Central to the inflection point of the last decade has been the now widespread recognition of the dominant and interconnected roles of China and America in the performance of global markets. One of the key themes raised by Niall Fergusson during our 2009 PortfolioConstruction Conference, was Chimerica. As we focus on the outlook for the markets, it's relevant that we update ourselves on where we're at with Chimerica.

Nouriel Roubini, the US NYU economics professor who reliably predicted the sub-prime crisis in 2006, says that the 2010 outlook and beyond for the US is precarious to say the least. His view is that the US economy "stands a 20 to 25% chance" of slipping back into recession in the next 12 to 18 months - that is, a double dip - but his more likely scenario is that the US economy will wallow through the downturn as demonstrated by several years of below trend growth.

Consequently, China is stuck with its major debtor having arguably suspect quality assets backing what China has loaned over a trillion dollars in public debt against - and yet, it is in the bizarre situation of needing to purchase even more US dollars and bonds to preserve the value of its existing holdings. And of course, the US (and Australia for that matter), is largely dependent on the continuation of Chinese growth.

Only a generation ago, China had an insignificant influence on the global economy and little influence outside its borders. Today it’s economic and geopolitical influence is almost ubiquitous. No government, business or individual is immune from China’s manufacturing, financing, investing and politicising. Now, in the year of the tiger, China is already the second largest economy in the world.

We can further consider whether China will eventually replace the US as the global economy’s rule-setter. In a new book "When China rules the world", British scholar and author Martin Jacques stats that if we think that China will be integrated smoothly into a liberal, capitalist and democratic world system, we are in for a big surprise. He warns that China will construct a world order that will look and be very different from what we have had so far. Americans, Europeans and, indeed, Australians, blithely assume that China will become more like us as its economy develops and its population gets richer. This is a mirage, Jacques argues.

The Chinese and their government are wedded to a different concept of society and polity: community-based rather than individualist, state centric rather than liberal, authoritarian rather than democratic. China has 2,000 years of history as a distinct civilisation from which to draw strength. It will not simply fold under Western values and institutions, Jacques argues. For example, consider the Copenhagen Climate Summit - China showed the rest of the world that what it wants, it gets. It did not want to curb human-caused carbon emissions where the economic and political cost was too high for its liking. Hence, China’s insistence on "sovereignty" and "consensus" in the so-called negotiations, and the Copenhagen Accord giving China everything it wanted. The Chinese leader who started the middle kingdom on its last 30 years of unimaginable economic and political growth, Den Xiaoping, set forth a so-called 24-character plan for re-securing China’s place in the world. "Hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership," the former Chinese leader said nearly twenty years ago.  Yet 2009 can be remembered as the year China was central to helping the rest of the world in the management of the GFC, tidied up from hosting the Olympics, held its 60th anniversary, prepared for the world expo, and ensured that the Copenhagen accord went its way. In other words, China displayed international political clout to match its economic clout.

What we all need to do is to understand - and not necessarily fear - is what it means for Australia to be trading and living with a powerful China. (And while China seems to be getting all the attention, don’t think that India’s crucial role should be overlooked! Or Brazil’s for that matter.)

So, with the backdrop of the consequence of the last decade, and the current position of China and America, let’s start thinking about the global economies and the global debt and equities markets more specifically.

To introduce the PortfolioConstruction Markets Summit 2010, I refer you to a number of background preparation resources:

1. The global economic outlook

  • 1. What lies ahead in 2010, a Pain Report special, presented by Jonathan Pain.
    Paper >

  • A BBC World interview, conducted late December 2009, with three eminent economists, reviewing 2009 and looking forward to 2010.
    Podcast >

  • "3 Perspectives on the 2007-2009 Global Financial Crisis; Minskian, Austrian and New Keynesian", a thesis by Nicholas Markowitz.
    Paper >

2. Global risks - World Economic Forum Global Risks 2010

  • World Economic Forum Global Risks 2010
    Video >
    (Save the file to your computer, unzip it and view in Windows Media Player.)

  • World Economic Forum Global Risks 2010
    Paper >

  • World Economic Forum Global Risks 2010
    Interactive tool >

3. The global equities market outlook

  • The outlook for equities in 2010 - Longview Economics - recorded in late December 2009, by our colleague Chris Watling of Longview Economics in London, this follows up from Chris' presentation at PortfolioConstruction Conference 2009.
    Video >

  • Selloff or something more sinister? - Since Longview presented its 2010 outlookfor equities, the market has in fact pulled back and moved into the beginning of Phase II of this cyclical bull market, as predicted.
    Paper >

And of course, don't overlook the plethora of presentations, podcasts and papers in the other four areas of this Resources Kit!