23/09/2010 - 00:00

Revisiting the lessons from the past

23/09/2010 - 00:00


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Why do we continue to ignore the past? Each generation believes things are different this time around.

It is strange to see the lessons of history repeated, especially when those scarred are meant to be the ones who know better.

A couple of good examples to be considered in recent times are gold and sheep.

What, you might ask, have those two things got in common, apart from having a long association with the success and development of Western Australia?

Both of these assets classes have been spurned by their traditional owners in recent times, considered outmoded and no longer necessary in their portfolios.

For gold, I am talking about central banks – traditionally big gold buyers. With regard to sheep, I am reflecting on farmers, formerly big sellers.

Both have let their stocks of these assets wane as they have viewed them as unnecessary. While it is clear that all property owners want their assets working hardest at all times, there is a cost in that – the natural hedge of the undervalued.

Gold is a great example. It is held as a conservative store of wealth by central banks around the world. The US has the biggest inventory, though its stocks have slid since it freed its currency from the gold standard in the early 1970s. The accompanying graph shows the lead up to that event and subsequent impact.

But the fall in gold stocks held in major official reserves in the late 1960s and early 1970s is nothing compared to the past 15 years or so.

This is a well-known phenomenon, a self-fulfilling cycle, where banks disposed of gold assets because it was no longer seen as a store of value. By dumping gold, the central banks pushed the value down further, prompting even more sales.

Clearly the banks believed that gold was less important than holding other assets such as US dollars and euros.

Furthermore, the central banks have believed their own propaganda that they now controlled the economic levers and could tweak economies up or down.

Economies under such man-made control were no longer at risk of terrible crashes which might see us revisit currency devaluations, a key reason to hold gold stocks.

The global financial crisis changed that. Paper securities are again seen as risky and currencies around the world are at risk of being devalued to lighten the burden of debt.

No wonder gold has reached record highs and central banks are back in the market, restoring their gold stocks and paying handsomely to do so.

So much for their asset efficiency. It must be awful to be buying back gold at two or three times what it was sold just a few years ago. Gold is not a car or computer; apart from the price, an ounce of the stuff is the same as it was five years ago.

Farmers in WA’s Wheatbelt have a similar issue. For many years running sheep was a natural part of every farmer’s life.

But a decline in wool prices and technological improvements in grain survival and yields have combined to channel much of rural WA into a monoculture of cropping.

There is plenty of sense to this decision but it does mean a lack of farm diversity, which can be crippling in dry seasons like the one we are experiencing; the second or third in a row for many Wheatbelt farmers in fringe areas.

Drought, too, affects sheep, and their value falls when poor seasons force farmers to sell at the same time. But feed lotting and live export offer alternative routes to market than the old days, and they can be source of cash in tough times when a crop hasn’t delivered.

Cropping, too, has changed in that time. Huge yield improvements come with more expensive seed and chemicals, which require farmers to make huge up-front commitments in the hope of a payout at the end of the season.

Poor rainfall means that money is sunk.

I am not here to start telling farmers or central bankers their jobs. Nevertheless, I find the similarities in these stories interesting, which perhaps reflects a new generation that seems to need to relearn the lessons of the past.

In traditional arenas, such as farming or central banks, you would expect the slow hand-over of power due to the innately conservative nature of these enterprises would mean that principals would not be changed much.

And yet, a period of just 15 or 20 years is enough to alter the collective memory and allow many to believe in a new paradigm.

We all need to become more like the old money families of Europe who have learned through centuries of experience and pass those lessons from generation to generation.

Risk-free resources?

I WENT to a luncheon the other day with some bankers and their clients, which was very helpful in terms of gauging the economic outlook for WA.

As usual, everyone believes WA is best placed to ride out any storms.

Of course the issue of tighter bank funding was raised. Naturally, the people around the table were the more successful of the bank’s clients, so it does show that even the most confident businesses in the best economy are struggling to raise the funds they need.

Nevertheless, there was also an air of caution. China, the US and Europe were all discussed.

Inevitably, most agreed that WA’s baseline position was better than elsewhere.

Our economic engines don’t stall as easily as others, especially with China and the rest of Asia on a 20-year growth spurt.

But there is one thing that strikes me out of all this confidence. Everything is relative.

Whether you are in a high growth area such as WA or amid the ruins of the US rust belt, business has to plan for growth or decline. If a business in WA was geared to 10 per cent plus growth two years ago, then 3-4 per cent hits almost as hard as going from 5 per cent to 1 percent in a tighter economy.

Of course, the troubles in parts of US and Europe are so drastic that comparison is difficult.

In many places business has stopped, which means going broke – the ultimate adjustment to economic decline – is much more common than here.

Still, we can’t rest on our laurels. Just because other countries want our resources doesn’t mean businesses don’t have to make hard decisions weighing up the risks of expanding to meet the market against holding back and losing market share.

• mark.pownall@wabusinessnews.com.au.



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