Eco­nomic cy­cle still on the up

Fol­low the herd to your detri­ment

Finweek English Edition - - Openers - BY STEPHEN MUL­HOL­LAND stephenm@fin­week.co.za

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.

SHARP GROWTH IN JOB AD­VER­TISE­MENT SPACE

Source: SARB

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