Economic freefall… Time for families…

ANALYSIS, Global — It is always a folly to assume the past is an extension of the present.

Thinkers call this the problem of induction. i.e. Assuming that the past is a predictor of future performance. It’s why if you draw a straight line above a graph, invariably the graph will deviate if it’s measured over a long enough time frame.

Don’t be economically disappointed

This flawed human tendency to view the current set of circumstances as normal is why many countries now place on financial products a disclaimer: “Current financial performance is not an indicator of future performance”.

It’s also why humans ignore that. 10-20% returns for 5 years means you expect the same in year 6.

And typically you will not get it.

Because as good news begets good. Bad news begets bad.

Economic Opportunity to 2009

Of course, there are still economic opportunities in negative market conditions, but these are more for the far-sighted and risk-averse. Someone who has enough money and equity to take risks, even if the risks become losing bets.

Around me, I see a lot of people refusing to accept that the “good times are over”. Even as loan defaults rise in Australia, and more people bring their lunch to work than buy it.

I predicted the current economic downturn in 2007, and have been speaking of an 08 recession for some time. The trends are here.

One core reason is that inflation has been disguised for a long time in Australia, USA & UK, hidden by substitution of increasingly low-quality goods. It’s an economists trick to keep the inflation rate low and ramp-up economic ‘good times’.

But the economic engine is overheated, and not much can cool it in Australia.

In the USA, the economic engine has a flooded carburetor. Too much cash injected into an engine running on the vapors of Clinton’s economic management for the last few years. The current US Adminitstration has fatally harmed the US economy.

In the UK Blair and Brown will leave a sad cultural and financial legacy.

The innovation in Australia, USA, UK & Germany is with a downward trend in markets. That means expect shrinking returns in most industries. Expect a year of savage losses.

This happened because such growth is simply not sustainable, and a boom cannot continue forever.

Avoid the “economic bloodbath”

Don’t make the Year 6 mistake after 5 or more years. Don’t believe the market’s are going to recover quickly.

In other words don’t miss the fact we are in a bear/defensive market. This is the new paradigm.

The new normal is defensive, reduce costs, don’t spend. This is the strategy to deal with the coming market conditions in most Western economies.

2thinknow Predictions

And sometime in 2008 it is most likely that things will get worse, as an economic shock event is still likely to occur. 2thinknow analysis place this in the April to October 2008 continuum.

Shares and real estate in most Western markets are about to fall further. Credit is about to become dangerous, as the multiplier effect kicks in.

The multiplier means borrowing to buy assets in a falling market causes the falls to multiply. Optimism (or hanging on) causes the inevitable exit to have more of a floodgates effect.

It looks like bad times (economically speaking) may well be here.

For the mid-term future of 3 to 10 years look to the commencement of re-nationalization of strategic assets by government. Northern Rock was a start.

A lot of greed, hubris and arrogance still have to work their way out of the international financial system. That’s why it’s going to be a bloodbath.

Greed, arrogance and hubris are what I have seen in the investment banking sector in my experience.

But let’s follow that through in the mid-term effects on public psyche. Citizens, investors or markets are not very tolerant of losses, so when there is an economic bloodbath we should hear talk of economic regulation.

No one can of course predict the future, so this post is an opinion and analysis based on certain assumptions.

Individually everyone has to decide what they believe and take action based on that. There is a great deal of specific industry and share advice available to investors in these times. This analysis is not advice.

In our analysis, the aggregate whole which indexes like the Dow, FTSE, All Ordinaries and others represent are on a downward trend.

Hope springs eternal

But there is always opportunity in adversity. Even in the 1930s, certain industries (eg Hollywood) prospered. So if you are cashed up, there are opportunities personally.

Perhaps 2008 is an opportunity for many in the Western competitive economic treadmill to rediscover living life, as opposed to economics.

2thinknow support richer cultural and family life, something economic life alone does not satisfy. The Western world in the 1990s and beyond has been solely focussed on economics.

Perhaps culture and family is the silver lining in the cloud.

What do you think?