Is the glass half empty, or half full?

Challenging the ‘doom and gloom’ mentality

by Rob McEwen, December 2019

The local market on July 25 hit a record high after the previous all-time high set back in November 2007, on the eve of the GFC.

The closing market high happened on July 30 – the All Ordinaries Index closed at 6928.33. Heaven forbid that this record will stand for another 12 years – we have a lot of pain ahead if that’s the case.

This time last year the markets fell off a cliff after rising strongly in the previous six months. The cause was the prospect of higher interest rates in the US. The Fed had lowered rates in the previous 12 months but turned towards a tightening bias.

This wreaked havoc – our market fell about 15% from its highs. Then suddenly in December it turned on a dime and within three months it was as if the falls had never happened.

The Fed indicated no more tightening and moved to an easing bias, or what Jerome Powell referred to as a “mid-cycle adjustment”.

The markets behaved themselves until early October, and suddenly we saw another bout of extreme volatility. This time it was fears of unemployment rising in the US – see below.

This so far has proven to be unfounded. But what the volatility indicates to me, and this been evident since the GFC, there is still a pervading fear that we are all doomed, whether it’s due to global warming, trade wars, a looming recession or a myriad of reasons we choose to focus on.

The fact is our world is improving in many respects. For example, statistics that plot the incidence of violence – murder, war, rape etc, show a long-term declining trend. There is less violence in the world than there ever was. But we don’t read that such-and-such a country hasn’t had a war for thirty years – it’s not news. The chance of being a victim of violence has gone down, but we are presented with a distorted view of reality, i.e. we only hear bad news.

200 years ago, 90% of the world’s population lived in extreme poverty – now it’s 10% and three-quarters of the reduction has happened in the last 30 years.

In most of history very few people have been able to read and write – it was for the privileged few. Now 90% of those under 25 are literate.

People have more leisure time and they are happier.

What has this got to do with share markets? We tend to be more pessimistic than optimistic. There is a negativity bias. Bad things affect us more than good things. We wear losses worse than we do gains. We forget about the good stuff and focus on the bad. We tend to be nostalgic about the past.

We tend to attribute a sophistication, a greater insight to the prophet who says we’re all doomed. Two people come to mind. Steven Keen, who famously lost a bet that housing prices would fall 40% and now is saying the US is heading for a recession; and Gerard Minack, who constantly opines that we are headed for a recession. These guys get a lot of air time because when you talk about problems you are afforded a status of seeing things that others don’t. Most of the press we read is about how bad things might get and the risks we face. Eventually they may be right. But the opportunity cost of acting on their advice can be immense. Warren Buffet didn’t make his fortune by keeping his money in cash.

It colours our view of the world, especially investments. We constantly think that even if the share market rises, it’s only a matter of time before it all comes crashing down. But the evidence is lacking. The nature of markets is to keep rising and making new highs. This has happened despite depressions, recessions, world wars, high inflation, low inflation and whatever other economic conditions you can think of.

We are living with the lowest interest rates in our history – we should be enjoying these times while they last.