Economic cycle still on the up
Follow the herd to your detriment
AS WE ALL KNOW, economies have cycles and, when investing or planning, these must be taken into account.
So where are we now in the cycle? At the top, just before the top, in the middle, at the start? And, in an interconnected world, who will rise or fall first and fastest, who will then be affected and how?
Far better minds than mine work on these questions all the time, updating their forecasts with reams of data and highly sophisticated methods of analyses.
And, of course, aside from the data and the analyses one also has to bear in mind the psychological aspects of crowd behaviour (psychologie des foules) originally described by the French philosopher, Gustave Le Bon.
Here we refer to the madness of crowds that grips, for example, stock markets, which are driven up, or down, as the case may be, on irrational grounds. When prices are rising, logical analysis can fly out of the window as all rush to join in the hunt for profit.
And when markets fall, otherwise sensible folk panic and bale out of sound, high-quality shares they have held for years and which, if they held on, would usually recover.
Most of us will benefit if we take a conservative, long-term approach and don't try to call the highs and the lows. For generations patient investors have found that the best long-term results are to be had in what’s called dollar cost averaging (or rand cost averaging, or whatever currency applies).
In this approach you invest regularly (say monthly) regardless of the state of the market. Thus, over time, you buy high and you buy low and in the end you do well if markets do well over the long term, which they most certainly have.
Aside from brave and clever speculators, such as Bernard Baruch, we should not seek to beat the cycle. When asked which was the most dangerous month for market speculation, Baruch replied: “Well, there is November, then there’s April, there’s January, then there’s August...” You get the drift.
Our upward swing commenced, quite modestly, in September 1999, so it should now be near the top. It’s the longest upturn we’ve ever experienced.
But the real spurt started only in 2003, so this alone supports an argument that we still have some way to go.
Further, the world economy appears set for continued growth with the new giant China exhibiting an inexhaustible appetite for resources; India burgeoning and the USA, amazingly in the face of the Iraq burden, the wider war on terror, the exogenous shock of soaring oil prices and an allegedly incompetent president, continues to flourish.
At an IMF-World Bank meeting in Washington some 30 years ago, the late Gerhard de Kock, like his father Theunis, a distinguished governor of the SA Reserve Bank, remarked that what many did not grasp was what we called the “inertia” of the US economy.
He meant in the way physicists employ the word, that is “a property of matter by which it continues in its existing state of rest or uniform motion, in a straight line...” (OED 10th Ed).
One also recalls De Kock wittily advising a meeting of business leaders at the start of what he correctly perceived to be an economic upswing: “Prepare to meet thy boom.”
That could well be the case in SA today. Perhaps, as they say in the Bronx, you ain’t seen nothin’ yet.
It’s probably not widely known that the SA Reserve Bank uses the volumes of job advertising in the Sunday Times Business Times section as an important component of its leading indicators of the business cycle.
When there’s a growing demand for skills, it follows that there’s a wide expectation of economic growth. This is quite simple and logical but it’s an indicator that not too many people outside of economists focus on.
Total recruitment advertising volumes in Business Times over the past three years are reflected in the table below:
Growth over the past year alone has exceeded 20% in volumes and more, of course, in money as the rates were increased, albeit only modestly at 7,5%. For a leading indicator such as job ads to exhibit this sort of growth lends strong support to the argument that our economic upswing still has some way to go.
It was precisely the same in Australia where I was a publishing CEO from 1992-96. Fortunately for me, job-advertising volumes were at a low when I arrived but then took off, heralding the expansion of the Australian economy that’s now more than a decade old.
What’s also encouraging is that, while our economy has boomed, inflation has been held in check and interest rates have not yet had to be used as the blunt instrument to curb demand. In addition, the relative strength of the rand has enabled us to escape imported inflation while the recent softening of the oil price works in our favour.
It seems that when Thabo Mbeki leaves office, his legacy, whatever else it contains, will include an economic boom such as we have never before known. Sadly, it has not created jobs for the masses because the modern economy has little use for unskilled labour.