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Saturday, 4 September 2010

Peter Switzer - A Prophet of the Cult of Equity

I've been reading Pep Talk Time on Yahoo!7 Finance. In this article, Peter Switzer claims that even though we are going through times of great uncertainty with many people fearing a double-dip recession, it is now that we should actually be starting to pile up into dividend-paying stocks. His analysis offers no reasons as to why things will improve in the future. The arguments for a double-dip recession are strong: massive public debt caused by massive stimulus, which will require either extreme money printing or massive taxation, which will retard future economic growth. This is black-and-white logical reasoning for why difficult economic conditions are ahead of us. But Switzer resorts to cheap tactics like name calling, calling those who are pessimistic about the economy "nervous Nellies." His reasons for why the good times are ahead are completely illogical:
  1. The contrarian argument - Everyone thinks things are bad. Therefore things are good. According to Switzer, "The best piece of analysis of why it's unlikely that we will see another stock market crash, like the one of 2008, is because there are so many prophets of doom out there who are preparing lots of people for another stock market slump." This is a horrible argument. It is wrong to believe something is correct just because everyone else believes it, but it is also just as wrong to believe that somthing is wrong just because everyone else believes it.
  2. Faith - The economy will do well in the future because it just will. According to Switzer, "I knew it would take time for the repair jobs and the stimulus to kick in but I knew or suspected on the strength of history, informed opinion and economics it would happen." I should add that nowhere in the article does Switzer actually explain what sort of "informed opinion" or "economics" he used to argue that we are in for good times ahead. His argument is simply based on faith, faith that things will be good in the future. Switzer goes on to say the following: "Eventually the global economy will turn from doubtful growth to definite growth and then stronger growth culminating in very strong growth. However, that will take a few years and the market will anticipate this gradual improvement but now is not the time." In other words, in the long run everything will be okay. But does he present actual reasons why this will happen? No. He just says it will for no reason. This is blind faith.
  3. Speculation has been retarded - According to Switzer, there are no more asset price bubbles because all the bubbles that have been blown in the past have popped. People are now parking their wealth in cash. They money on the sidelines means that there is no more rampant speculation, which is what causes bubbles and leads to crashes. According to Switzer, "all of this caution and the enormous amount of cash that's on the sidelines in bonds and bank deposits as investors play it safe, actually stops the unbridled enthusiasm that creates excessive booms and then crashes." This may have been true after the GFC when asset price bubbles popped all over the world, leading to an economic disaster. But right after the GFC, the world's government implemented a massive stimulus program, which has reinflated the bubbles again. It used to be the case that keeping your money in cash is a safe option, but this is not the case anymore. The rising price of gold shows that investors are worried about the status of government currency as an actual currency. Rampant inflation (rising prices of goods) makes dollars a poor store of wealth, and so people are forced to beat inflation by investing, either in stocks, real estate, gold, or many other assets. Does this reduce speculation? Far from it. Speculation should increase as people seek assets that hold value.
This faith that the economy will always recover in the long run looks very much like a religion or a cult. Robert Buckland from Citigroup called this the "Cult of Equity" and argued that this faith-based cult is under attack. If buy-and-hold (a more apt term is buy-and-hope) is a cult then Peter Switzer is a prophet of the cult of equity. Prophets are those religious figures who believe they have communication with God. Cult of equity prophets believe that through supernatural faith they can forecast the future and infer that the the economy will grow strongly in the long run.

Right after GFC, when I heard on the news that governments would engage in massive stimulus of the economy, I made every effort I could to buy shares. The market rallied strongly by about 50 per cent. However, the stimulus does nothing. It creates jobs and income by inducing demand for products, but where the private sector gains due to the stimulus the government sector must suffer because stimulus money comes from the government. Government must somehow make up for their losses, which means they must increase taxes inthe future. The losses of yesterday's private sector is today's government sector loss, which is tomorrow's private sector loss. If we add interest costs if government borrows money to fund the stimulus, this means that in the long run the private sector ends up paying more to cover up the losses of the past. This is crazy. It is like a teenager paying off a credit card with another credit card. I am not necessarily saying that we are in for a double-dip recession, but I am now pessimistic, and I am no longer 100% in the stock market. I have sold off shares and am now starting to load up on cash, bonds, and gold.


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