Blow the economic myths
4 Aug 08
Alan Steel takes a tilt at the financial doomsayers who wield unhelpful statistics and regurgitate unsubstantiated gloom to spread misery via media that relish a bad news story
by Alan Steel
Last year, when I bought a holiday home in Nova Scotia, a friend of mine gave me a book about Commander E Peary’s 1909 expedition to the North Pole, and wished me luck.
Whether Peary, as he claimed, was the first man to reach the top of the world is neither here nor there. My point is that my friend was a subscriber to the commonly held misconception that Nova Scotia lies in Arctic wastelands.
The truth is Halifax, capital of Nova Scotia, is on the same latitude as Bordeaux. During the summer, the wonderful scenery enjoys temperatures into the
30s – Centigrade not Fahrenheit. It may not be Hawaiian but neither is it a husky’s paradise.
Unfortunately, commonly held myths are rife. Much of the information we blindly accept as being true does not stand up to scrutiny. We far too readily believe what we read and we are too quick to accept views of experts. They, in turn, are too quick to regurgitate what is perceived wisdom on any given subject, without researching it thoroughly for themselves.
Given the headlines that have dominated not only the financial pages but the news sections over the first few months of 2008, it is a wonder we still have the stomach to carry on our daily lives. There has been a diet of stories about the continuing effect of the US sub-prime market, once-mighty banks brought to their knees, the UK mortgage market drying up, share prices tumbling, and a consumer base saddled with debt it cannot service. It is said we are a nation of spenders rather than savers, and the wave of consumer debt we have built up over recent years apparently will finish us off.
Experts point to things like the savings ratio and claim it shows we are not saving enough for our future. But what exactly is it? According to HBOS, it is “the
proportion of gross disposable income households save rather than spend”. Oh really?
The truth is the savings ratio is riddled with inconsistencies which make it useless as a barometer of saving activity or economic wellbeing. Experts continue to use this ratio to bolster all manner of negative statements, but in truth you should ignore it.
For example, most people taking out a mortgage consider it an effective way of saving and building up tax-free assets. And if they are putting money away into pensions, shares, unit trusts, property, or even art, there is no doubt they assume they count as savings.
But they do not. In the UK, the savings ratio only takes into account money kept on deposit, and it classes a mortgage as debt. It is even less rational in the US. They also only include deposits as a credit, ignoring all other investments in the process, and on the debit side not only do they add mortgage payments, but they also include rent they assume you should be paying even although you are not. Yet these skewed ratios fuel countless bad news stories.
Whether it is paying too much attention to flawed data such as the savings ratio, over-reacting to the latest decision from a monetary policy committee, or getting in a tizzy about a slight increase in inflation rates, there is too much focus from experts on the
immediate future without understanding fundamentals that actually affect our economy over the long term.
If we want to get a better understanding of what is really going on in our economy, we need to take a step back and look at more central influences. For example, we should be looking at demographic trends and trying to understand how a changing population alters the basic balance of supply and demand in our manufacturing, financial, housing and industrial sectors. Economies function best when there is a rising number of 40-somethings in an economy. Research by demographic economists, such as Harry S Dent in the US, show this age group is the engine-room of an economy, being at a stage in their lives when they have maximum impact thanks to their lifetime peak of spending in real terms.
Given this, how hard is it for our Government to study population change to avert future economic problems? Had it done so, I would argue, pension investors would not have had to endure the nightmare forced on them over the past decade.
If we spend too much time focusing on one threat after another, we will lose sight of more fundamental issues. There will always be things that come out of the blue that have to be dealt with, but they will not necessarily blow us off course over the long term.
Instead of focusing on flawed indices or statistics and over-hyped world events, we should be encouraged to pay attention to the bigger picture. Following the underlying demographic trends, productivity gains, long-running economic cycles and money flows from the largest institutional investors on the planet always makes more sense.
If we really want to help investors make the right decisions, they have to be encouraged to drop the commonly held belief that each and every set of figures on this or that has a big negative impact. If it has any impact, it will be short term.
So let’s stop taking the easy option – using daily updates to invent horror stories. Let’s stop believing these events are in some way the driving force of an economy. It would also be helpful to make it illegal to use the word “experts” in articles without prefixing the word with “some”.
So despite the usual array of negative predictions, I am confident that 2008 will deliver a pleasant surprise for equity investors. I also believe the US sub-prime problem will disappear more quickly than most imagine. So the next time somebody tries to tell you Nova Scotia is in the Arctic, you know better.And you’ll be able to prove it.
Simply applying the same questioning habit to other commonly held beliefs might make you a little money as well.
Alan Steel is chairman of Alan Steel Asset Management, Linlithgow.