08/10/2009 - 00:00

Adapting behaviour to the ‘new normal’

08/10/2009 - 00:00


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Small and large investors are going to have to get used to a new paradigm as the GFC fallout continues in 2010.

WHAT is the new normal? In the wake of the global financial crisis this will be next year's most important question in every aspect of life, especially in politics and investment.

The political aspect will be driven by the awful problem of the Western world's massive debt load.

The investment aspect is the problem of calculating what is a fair return, a number that might be half what was once considered normal.

Rather than targeting 10 per cent as a fair return on a share portfolio, 5 per cent might be the new normal, and that not only means a big pay cut for self-funded retirees it could be the trigger for a future crisis as investors chase above normal returns, and raise their risk profile.

The investment angle is easier to forecast than the political because no-one is quite sure how politics will play out in 2010, though it's a fair bet that Kevin Rudd will keep his job as prime minister.

There is something magnetic about a person who tosses money your way, even if you don't deserve it, or it was actually yours in the first place, or it was borrowed.

For proof of the 'other people's money effect' we need look no further than Alan Bond, who retained his popularity after winning the America's Cup using public donations, or shareholder's funds from bankrupt companies. Mr Rudd is benefitting from the same 'cash splash' principle, and will until the bill is presented.

That bill will come when governments in Europe, the US and Australia are forced to repay the trillions of dollars they have created out of thin air to paper over the global cracks created by the GFC. Either they will be forced to allow inflation to run rampant, effectively inflating away the problem, or they will increase taxes and cut public-sector spending.

Britain, where services are already being savagely cut and taxes raised, is a model for what must happen elsewhere, including Australia, as the GFC gives way to the GDC (global debt crisis).

Three people influenced Bystander's thinking this week. One was a pensioner at an investment conference, another was the world's biggest investor in bonds (fixed interest securities), and the third was an 83-year-old economist and former banker.

The pensioner used the least words to assess the situation: "If the GFC was such a big catastrophe, how come it's been fixed so quickly?" Indeed.

Trust an oldie to know that big problems are not fixed with band-aids.

The bond investor was Bill Gross, boss of Pacific Investment Management Company (Pimco) who manages $US177 billion of other people's money from his head office in California.

Mr Gross told the Bloomberg news service last week that a 5 per cent annual return might be "the new normal" on investment as consumers curb spending and increase saving. He also warned that tighter government regulation and slower world growth would stifle investment returns.

The old banker was Alan Greenspan, former head of America's central bank, the Federal Reserve. He said slow growth next year would "put a dull face" on the economy. This year's strong rebound after the GFC will not be repeated in 2010.

Australia, especially Western Australia and Queensland, might do better than the rest of the world thanks to Chinese demand for raw materials, but it would be wise to budget for smaller rewards in the new normal.

The party's over

NOT everyone will accept that the 10 per cent party really is over. There will still be plenty of investors prepared to accept higher risks in the hunt for the magic of a double-digit return on shares and property.

There are two ways of describing those people. Either they are speculators prepared to lose heavily in the hope of winning heavily, or they are fools.

Sadly, an awful lot of Australians fit the second description, as we have seen repeatedly in the past when someone with a reputation somewhat lower than a failed second-hand caravan salesman offers them an investment opportunity double the norm.

The so-called mortgage brokers' scandal, which cost a lot of pensioners dearly, was a classic and Bystander sticks with a view that both sides of that scam were equally guilty - the mortgage brokers for offering an unrealistic return, and investors for being greedy.

This time around it will be the same. Greed will rise to the surface, again, and people who should not take risks with their life savings will do just that because they remember the days when 10 per cent was normal.

As Bill Gross, Alan Greenspan, and an old man in the crowd at an investment conference have warned, the new normal is a lot less than you're used to, so take care in 2010.

Worth toasting

NORMALITY might also return next year to Bystander's favourite agricultural industry, wine, because there are signs that the mega corporations that have done so much to sully Australia's reputation in the global wine sector are breaking up.

Foster's, which should have stuck to making beer, is starting to fracture with the sale of the Cumbandry vineyard to its original owner, Bill Oatley.

Followers of the wine game will remember that Mr Oatley played a key role in the consolidation of wine production by the big brewers, Foster's and Lion Nathan.

In a remarkable burst of wasted money and energy, he first sold his Rosemount business to Southcorp, best known in the 1990s (and earlier) as a maker of water heaters, and then sold his 18.8 per cent stake in Southcorp to Foster's.

What happened after that was a disaster for Australian wine as the beer boys dumbed down the quality of wine and tried, successfully, to make all wine taste the same.

Today, Australian wine is a global joke, with a desperate marketing plan launched to get back to the time when wine was sold on a quality basis, and not on volume.

In WA, the place to watch is Margaret River because if Foster's and Lion Nathan (which is now owned by Japan's Kirin brewery) are serious about sticking to what they do best, then there could be a wholesale dumping of surplus vineyard assets, which might be an opportunity for quality wine makers, or a disaster for people who enter the industry for 'lifestyle' reasons.

New sport

BASHING company executives over excess pay is one of the more popular sports in Australia today, a bit like bank bashing of a few years ago.

The problem is that not all executives are alike, and while some have undoubtedly milked the system unfairly, a lot work very hard for their reward, creating two issues to consider.

Firstly, who's the guilty party in the excess pay debate? The executive for taking it? Hardly. How about the directors and shareholders for agreeing to it? Definitely.

Secondly, we should be very grateful that bank bashing failed, because our strong banks have helped minimise damage from the GFC, making it possible to imagine what would happen if we slashed executive pay and employed monkeys to do their job.


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