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Hindsight is a wonderful thing

With outcomes impossible to predict, are we powerless to tackle the economic crisis?

I dread to think how many emails I receive each day. Not that I’m complaining. Hidden among the alerts to claim against mis-sold PPI policies and exhortations to purchase performance enhancing drugs are plenty of gems that help build a picture of what investors might expect for the future. The problem is knowing what’s important and what’s irrelevant.

Last week was a case in point. These days some very important players in financial markets are prepared to share their thoughts with you. Recently these opinions have not been too cheering. One well known and successful operator in both hedge funds and more conventional investment products stated, “as a fund manager it is impossible to add much value”. Not what investors wish to read, I feel.

Then there was the technical analyst who emphatically stated that Australian mining shares were heading downwards. Apparently the materials sector over there struck a three-year low. The reason appeared to be fears of a global slowdown leading to reduced demand for commodities. And this, it seems, does not presage well for other markets.

The opinions expressed on Europe are refreshingly diverse. Some fully expect Greece to default and then recover swiftly, leading to a rush for the exit from the other embattled Eurozone nations. Others fear even a single member cutting loose would have incalculable consequences for the European financial system and thus economic growth worldwide.

And there are those who express the view that Germany must – and indeed will – put its hand in its pocket to bail out the indebted countries. One interesting article made comparisons with the Marshall Plan, which put Germany back on its feet after the Second World War, and the current bailout packages for Greece and others. The conclusions drawn were not entirely comforting .

Of course, even the most prescient of comments received by email may not necessarily generate a winning strategy, although it can be interesting to look back with all the benefit hindsight confers.

Nearly six years ago I learned of the impending sub-prime crisis through a daily email update from someone in the derivatives department of an investment bank. I had not heard of sub-prime before, but the news that two specialist lenders had gone under seemed worthy of examination.

It prompted me to look at the state of the US residential property market. It seemed it had peaked in the middle of 2005 and the subsequent decline had uncovered some pretty dodgy lending.

The correct course of action in my view was to ditch equities, which in some measure I did. Within six months shares on both sides of the Atlantic were more than 10 per cent higher. Then the financial tsunami struck. I was right, but early.

The problem today is that final outcomes are simply unforecastable. Much of the material I have read recently is sound, but is very much describing a “what if” scenario. Constitutional restraints and the will of several electorates will dictate what happens. Perhaps that is why Europe’s leaders appear powerless to impose a solution.

Still, if Warren Buffett feels inclined to hold real assets rather than cash, who am I to argue?

Markets are gripped in a paralysis of uncertainty. Trading volumes are thin and nobody appears prepared to bet the farm on anything. Except the Sage of Omaha, that is. But even he does not possess second sight.

I fear the lack of direction for equity markets will remain while current problems persist. We’ll only know what we should have done after the event.

Brian Tora is an associate with investment managers JM Finn & Co.


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