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Gordon Gekko

 

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Share Markets

Initially shares were a way of investing capital to start up business with the desire of sharing in the success of the business as it grew over many years. This approach to investment endured into the beginning of the 20th century.

As a young man I remember the days when I spent endless hours trawling over balance sheets and profit and loss statements, endless days of research in libraries, to determine future trends and fashions in the economy and crunching all this data to come up with companies that looked like they were going places - long term.

But that approach to investing has all but gone.

A growing trend that developed towards the latter part of the 20 Century was not so much to provide start up capital for the development of new businesses but to make money solely from the regular buying and selling of shares in existing businesses (trading) .

This trend accelerated as the century drew to a close bring with it a totally new fundamental change in investment strategy.

Million and then billions and eventually now trillions of units of currency are directed at buying shares in existing business. The the sole source of profits from this activity is not related to the fundamentals of the company but to the percieved potential of the rise and of more recent times to the fall, of the traded share price.

Now, huge pressure is placed upon businesses to have the price of their shares continuing to significiently rise even at the risk of the longer term stainability for both the corporation and the community.

This pressure has driven much corporate decision-making away from investing company funds into longer term innovative and sometimes speculative research and development, instead into declaring profits and dividends to advance the companies traded share price.

A further and even more concerning development has been the move by a number of governments of wealthy countries worldwide, to provide a system for independent financial support of their ageing populations by developing a concept called ‘superannuation’.

One of the major recipients of investment for superannuation funds collected on behalf of workers was the stock market.

To add an even more dangerous dimension, in order to protect the assets of super funds, strict guidelines were in place, in relation to the investment types that the Fund managers could undertake. This resulted in the Funds investing the vast majority of their resources into what was perceived as very big and stable business organisations.

Historically termed in some quarters as 'Blue Chip" companies..

The net result of this was that each year, billions of dollars of income collected by the Funds, were then required to be invested. The majority of these investments often went into the stock market and the majority of these funds were directed to a very small spread of big well established companies.

The net result was that each year, the Funds would go into the market to buy shares, in existing companies. This buying pressure itself would then drive up the price of these companies, and as each year brought a new round of investment the price of these companies shares continues to climb and climb, irrespective of the business fundamentals of the corporations.

The superannuation system has in actual fact produced a self-fulfilling prophecy, because as the years rolled by, the companies with the greatest annual growth in share market price were the companies that were most sought-after by the fund managers and in turn, the fund managers were seek those companies with a track record of constant share price growth.

We are now in a situation where the market value of these companies, based on their share price, bears no prudential relationship to business fundamentals or sustainable economics of these corporations.

Australian Example

A large Bank in Australia on 11 March 2014 traded at AU$76.00 per share.

For 1,606,299,601 share on issue this represented a value of $122 billion. But its Balance Sheet (30 December 2013) showed the bank had only $46 billion in assets with only $26 billion in a liquid format.

The maximum redeemable asset based value of each share is $28.64. The maximum redeamable currency based value of each share is $16.19

In Australia, the period 1946 to 1961 is know as the period of the 'Baby Boomer' generation. This generation of Australians is the most affluent of all generations so far (thanks to historic resoure conversion) and represent a sizable investment in Superannuation fund.

This generation is the first demographic group to mandatory contribute to Superannuation and the first 'group' to commence draw down on their investments.

2011 was the first retirement year for the Baby Boomers generation.

Over the forthcoming period to 2026, 5.3 million Boomers will retire. This will initiate an avalanche of draw down of funds (either to spend or called up by their estate settlement on death).

I cannot find a figure as to how much this represents but some researchers seem to suggest the average Baby Boomer Super Fund assets may ne as low as of $100,000 per person.

If this is accurate that still represents a $1/2 trillion dollar withdrawn from these Funds which are reported to collectively hold currently about $1.4 trillion in total .

To meet these obligation these Funds, for the first time, could experience payout in excess of income growth and be forced to sell down assets (liquidate) to meet these liabilities.

If these assets include shares, then selling pressure similar to the buying pressure of the last 3 decades will develop. This will have a considerable impact of the share price and could start a downward spiral all of it own.

If that is not enough of a impact, consider if you will, the following:

It is 2013 the world stock markets are starting to recover back to the levels they were before the 2008 global financial crisis and the ambassadors of what we now call the financial services industry. (better described as the business of using money to make money, but nothing else), are excited at the prospect of a return to the conditions that existed between the 1970's and 2008 (The year the world felt the first tremor of a global financial meltdown).

However while these paragons of investment virtue are preparing to celebrate, and the managers of the big global Funds are beginning to salivate, perhaps we should look at the world in 2013, and what it might tell us about the future of the stock market.

As I write this article world public debt is 49 Trillion US Dollars. It will be 56 Trillion by the end of the year (2013). Nobody seem to know World private debt some suggest is is about 150 Trillion.

World population is now 7 Billion. We will add 200 million this year(2013). That is 2/3 of the current population of America. (Which took 200 years to achieve its current 300 million).

World atmospheric CO2 is 400 ppm.- 30% higher level than when America was discovered. It is predicted to be 407ppm by the end of 2014 as a consequence of the additional 4 billion tones of co2 from fossil fuels .

This year (2014) global sea levels will rise by 3mm. A rate of increase of 50% over that rate of rise in 1950. Iceland Ice is now melting 300% faster than in 1990.

The World food production per area tilled has fallen by 31% during the period 2003 to 2012

And I could go on and on and on with even more drastic news about 2014 but if this is more than enough to demonstrate the prospects for a rosy financial future.

To offer more is a waste of my time any yours. If you are not convinced of the impact that environemt will have on Global economic health then I can't help you any further.

I am not advocating anyone stop gambling on the stock market. It certainly is no riskier than horse racing, but please I wish we could call it for what it is. The speculation preference for big financial punters .

If you have a few minutes, check out stock prices of alternative energy stock - perhaps the only and best long term investment option on the board and you will see most are languishing, even though they are the only long term Investment that has any real future.

Make no mistake the biggest crash in the history of global finance has not yet happen.

I don’t know when. Not this year I suspect, but not impossible and most probably will have occurred by 2020.

This is not idle scare mongering or a severe bout of pessimism but the simple application of well know universal law. There is just too much pressure building up in to many arenas for it to be avoided.

Remember the reason why crashes happen.

It is not that a vast number of people that invest in the share market are stupid, it is just they are not wise.

They know in the back of their minds that things are amiss (like every Jew in Germany did, in the 1930’s) and are primed with nervous energy. Just for the very same reason a victim will allow perpetrator to take them at gunpoint from a location where they have a slight chance of being assisted if they resited, to a remote location where they have none.

We all, when faced with pending doom, try to buy time in a hope we may find the prospect for a solution. However if no prospect appears in the time we buy we have successfully taken the option where the chances of reprieve are zero.

and just like those Jews in Germany in the 1930s, at the end of every concerning episode, we elect the option that this one will be that last, the tide will turn, the skies will clear, the worst of the storm has passed, even though there is no tangible evidence for adopting this belief.

Any single event can trigger this cascading of mass exodus from the share markets but most want to ride the train for as long as it last, while keeping thier bads packed and handy. Alas for many it will be too late when that event arrives.

Nobody really know the actual figure but the highest estimate for Lehman Brothers collapse was that it took less than 50 billion in assets with it when it folded.

That represents 0.009% of the estimated total assets of the World and the same amount the US government spent on 36 days of wars between 2001 and 2012.

So why did the loss of global wealth, equal to US expenditure on only 36 days of war, plunge the financial markets of the world into chaos?

Because 80% of the people involved in the financial industry knew deep down that the fragility of the current circumstances, that had been unfolding over years and that it could not go on indefinitely and that Lehman was just the beginning of the crumble.

A system with a naturally build it sunset clause. But just like many the Jews in Germany, almost everyone was leaving their departure as long as possible (except Einstein, who left in 1933 when Hitler came to power- not just smart but wise also) while some simply refused to believe what was plain to every impartial observers.

In the big depression of 1928, it was just financial pressure that caused the collapse but the environment still have reserves capacity to accommodate a longer term recovery – Now, this time, the rush is coming from ALL arenas, Financial, Social, Population and Environmental and as yet, no possible solution for any of these anywhere on the horizons.

When the crumble start it will be huge.

 

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