As we head into March, global financial markets continue to be troubled. Stocks have opened the year, now two months in, down 8% (globally).
The world is hampered by systemic risks from cheap oil, and fears about a slowdown in China, negative interest rates (i.e. policy mistakes) and rising fears of the UK exiting the European Union (global economic murder-suicide at this stage). And as we’ve said, the longer these fears persist, the unhealthier markets become. Most importantly, the longer oil prices remain low, the closer we get the edge of a cascade of large bankruptcies in the energy sector and in export dependent countries (beginning with Venezuela).
With that backdrop, we had two events of interest over the weekend: 1) the meeting of the G20 finance ministers, and 2) the release of Warren Buffett’s annual letter (for those that seek his calming voice, which many do).
Back in 2009, the G20 meetings were responsible for marking a bottom in the collapsing financial markets and economies, and it was accomplished through promises of big, bold and coordinated intervention. It worked.
This time around G20 finance ministers were handwringing about the current environment, but they failed to deliver anything meaningful, at least for the moment. They focused on the need for fiscal stimulus. This is nothing new. It’s something (fiscal stimulus) the Fed has been begging for from Congress for years, and gotten no help. And the world has been begging for it from low debt countries for years, but they’ve gotten the opposite. For example, Germany, perhaps the best positioned, has chosen the path of debt reduction. That has placed the euro zone back into recession, yet they still resist fiscal stimulus.
With the “big” summit of G20 leaders not until September of this year, here are the other key takeaways from the meeting of the world’s most powerful finance ministers and central bankers over the weekend. They vowed to continue to support economic activity and stability through monetary policy. And they vowed to “enhance our readiness to response to potential risks.”
We’ve said that the BOJ and/or the ECB could/should step up and add commodities (namely oil) to their asset purchase mix when they meet in the coming weeks. That would be an “enhanced” way to deal with the current global shock risks that are threatening global confidence again. The ECB meets March 10 and is expected to do something. The Bank of Japan meets March 14. Both, as aggressive QE-ers, implicitly bear the responsibility of maintaining global economic stability.
Now, onto some of the key “sage advice” takeaways from Warren Buffett’s letter over the weekend. These too address the current fears and uncertainty in markets.
Bigger picture, Buffett says the concern that your kids won’t do as well as you, is hogwash. The growth trajectory for America has been and will continue to be UP.
Buffett adds some polish to this notion we discussed a few weeks ago in one of our Billionaire’s Portfolio Pro Perspectives pieces, where we cited billionaire Ray Dalio, the founder of the biggest hedge fund in the world, as saying what we think is the simplest, yet most important fact ever said about investing. “There are few sure things in investing … that betas rise over time relative to cash is one of them.”
In plain English, he’s saying that major asset classes, over time, will rise (stocks, bonds, real estate). The value of these core assets will grow faster than the value of cash.
That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.
On that note, in his recent letter, Buffet says: “American GDP per capita is now about $56,000. In real terms – that’s a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well."
That growth trajectory has to do with two key factors: Improvements in productivity and innovation.
On productivity, he says: “America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. Transportation, entertainment, communication or medical services.”
On innovation, he says: “A long-employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option. When low-cost competition drove shoe production to Asia, our once-prosperous Dexter operation folded, putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace. The same scenario unfolded in slow-motion at our original New England textile operation, which struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke Portuguese and knew little, if any, English. They had no Plan B. The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever-increasing prosperity for the great majority of Americans should not be penury for the unfortunate.”
And, finally on stocks, as we alluded to on Friday, he says: “In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average – an index fund of sorts – soared from 66 to 11,497, with its component companies all the while paying ever-increasing dividends.”
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.