Report of the Investment Committee 2008 - St James's Place

Anatole Kaletsky“This time it’s different” are said to be the four most expensive words inthe English language. In every speculative mania, investors believe theyhave found something “different” from previous boom-bust cycles – andevery time this turns out to be a delusion, the bulls lose their shirts, whilethe bears get the last laugh.But is this really true? Consider the bearish sceptic who pulled out ofglobal stockmarkets when the phrase “irrational exuberance” was firstcoined. In December 1996, when Alan Greenspan used these words todescribe what was widely seen as an unsustainable bull-market, the DowJones Industrial Average stood at 6400. Today, after the worst bear marketfor 70 years, it is 9000. And comparing the present bear market with previous financial panics, wefind that investors are up five-fold in terms of the Dow and three-fold in terms of the FTSE if theybought shares in the 1987 global meltdown, when George Soros first declared that “this is 1929”.The point of these comparisons is not just to state the obvious: that panics are a better time to buythan to sell. There is a subtler point. Just as the bulls believe that every market boom is “different”and heralds unprecedented economic prosperity, pessimists think that each bear market is uniqueand portends a recession that will never end. And indeed, there usually is something different aboutevery slump. This time it’s the credit crunch and property crash; in 1992 it was 15% interest ratesand the collapse of sterling; in 1982 it was three million unemployed and 20% inflation; in 1987 itwas a one-day fall in stockmarkets which, according to statistical models, should not have occurredin a billion years. After each such unique disaster the prophets of doom declare that capitalism isdoomed, that markets will never recover, that this is a “once in a lifetime crisis” – but each timemarkets do recover, capitalism survives and investors who kept their nerve are amply rewarded.This is not to deny that several features of the present economic crisis really are exceptionally grave.The collapse of global finance triggered by the Lehman bankruptcy really was unprecedented; aswas the subsequent fall in industrial output; and the level of debts is high in many countries, thoughnot quite as daunting as generally believed. But against these unprecedented deflationary pressuresare arrayed expansionary forces that are unprecedented too: the lowest interest rates in history; thesteepest ever fall in oil prices; the biggest-ever peacetime public works programmes and tax cuts;and a willingness to print money without limit by the central banks. And behind theseunprecedented policies, two unprecedented long-term trends continue to push the world economyahead: the integration into the world capitalist system of 3 billion new producers and consumers inAsia and former communist countries; the truly global division of labour created by costlesscommunications, cheap transport and free trade.8