The Abbott government is well and truly on the nose — both with the voting public and with political journalists and commentators. There have been increasingly frustrated comments made by usually circumspect editors and columnists in The Sydney Morning Herald and the Australian Financial Review and even some of the government's usually most strident supporters.
It's left many people to wonder about the effect on business and consumer confidence.
Economies the world over are less static entities than they are flowing rivers. It's the movement of cash between consumers, businesses, workers, governments and investors that keeps the wheels of capitalism turning. And while current events take their toll, we're all — to a greater and lesser degree — forward-looking in our approach.
That is, we take our cues from what we think the world will be like in the future. Should a business employ more staff? If sales are likely to be higher in the next year or so, the answer is usually 'yes'. Should a consumer buy a new fridge, sofa or laptop? Their confidence in keeping their job is a very important factor in the decision. You can include government spending (what are future tax receipts likely to be?), business capital expenditure (should I buy a machine that will be able to produce widgets for the next 5 or 10 years?) and almost all other spending decisions — the key question that underpins each one is the very simple: "Am I confident in the future?"
Is the pessimism over?
Until this week, it's fair to say that the 'talking down' of the economy has done much more harm than good. Opposition parties are meant, at least in part, to oppose of course, but the risk is that such a task ends up hurting economic confidence. And the government's 'budget emergency' is finally gone, as of the past few days, to be replaced with less inflammatory language.
There are very real and significant challenges facing our economy, to be sure, but confidence is key.
As investors, we can be tripped up by the same problem. In late 2013, one of my colleagues, Morgan Housel, highlighted the case of US hedge fund manager John Hussman. So sure was he of a 'double dip' recession in the USA (two recessions in quick succession), that Hussman shorted the marke.
In 2013, Hussman said:
"I continue to believe that it is plausible to expect the S&P 500 to lose 40-55% of its value over the completion of the present cycle, and suspect that whatever further gains the market enjoys from this point will be surrendered in the first few complacent weeks following the market's peak."
And, as my colleague pointed out:
"But Hussman has been so sure of his outlook that he's had a substantial "short" position in his flagship fund for years. As the market surged, his returns have been decimated.
"The irony is that in the process of preparing for the possibility of a 40% crash, Hussman's fund has almost suffered an actual 40% crash"
Even more pain
I don't need to tell you that the market is up since then, but you mightn't know that the S&P 500 has risen another 18% since November 2013, further hurting the returns of those shorting the market.
Now, I'm not going to criticise anyone for getting forecasts wrong — but I will criticise them for making them in the first place! Market movements are completely unknowable — so trying to guess where the index will end up is silly.
It's easy to find reasons to worry about our economy. Everything from global politics, international economic challenges (most particularly softness in Chinese growth), local economic problems (raging house prices, falling mining jobs and shuttered manufacturers), political stagnation and many others could be enough to keep you on the investing sidelines.
But problems like these are ever present. Think back over the last thirty years — wars, recessions, terrorism, even the fall of the Berlin Wall, were ever-present… but the market shook them all off, because the long term opportunity dwarfs short term pessimism.
