…but don’t overlook their ability to mislead with words!

Finally in Britain we have a government prepared to roll up its sleeves and deal with the horrible financial mess that has been allowed to develop over the last decade.  Almost every day on the news we hear about the state of “the deficit”, the 25% public spending cuts and ugly tax rises that are planned to deal with this problem.

The widely accepted figure for the UK’s deficit is £149bn.  An astronomical figure we all agree, even those who will be most impacted by the spending cuts accept the country cannot go on living on its credit card forever and action is urgently required.

But what are the facts that lie behind the headlines?  When we hear the word “deficit” the picture conjured up is that of an overdraft, a loan, a credit card bill.  That analogy is then built upon by the way journalists write their stories.  People sitting at home watching the news, sucking on their teeth in disbelief at the horror story of the Nation’s debts try to internalise otherwise incomprehensible numbers by thinking of themselves personally in a similar predicament.

Perhaps £149bn of National debt, may create a picture for the individual of they themselves sitting there with £149k on their mortgage or maybe £14.9k on a credit card bill?  They think of their personal deficit if you like, being of such magnitude that an easy way out of the hole eludes them.  All they know is that somehow in that position they would have to find a way of dealing with their “deficit”.

What’s in a word?

Very sadly what normal human beings have been allowed, encouraged and coerced into understanding the word “deficit” to mean, isn’t exactly the same definition as used by our politicians.  For them “deficit” doesn’t mean the whole horrible insurmountable mess.  They don’t mean the current credit card balance or the mortgage on the house.

Their version of the word “deficit” refers only to the rate at which the hole is continuing to be dug!  The £149bn is only the additional debt being added to the pile this single year.  It isn’t the credit card balance at all, just the new spending being added to it.  The actual debt is miles worse.  The last credit card bill stood at £927bn even before this £149bn started to be spent!

So hold on a minute here.  The 25% spending cuts and tax rises are intended to address just the £149bn annual increase in the mess and they don’t even deal with all of that, only a bit of it!  They don’t get anywhere near addressing the £927bn racked up over the last decade, which also has to be paid back.  We don’t hear about that at all when the discussion centres around just this £149bn figure.

I am sure that the majority of the population genuinely believe that if the £149bn could be eliminated, we would be out of the woods completely.  But in reality these 25% cuts and tax rises should only be seen as the first round.  There will have to much much deeper cuts and tax rises to follow if we are to deal with the actual problem once the incremental annual increase has finally been sorted out.

There are two other sorry aspects to this national problem too.  Firstly the public has been led to believe that we are in this mess because of the financial intervention when the banking system collapsed.  Politicians do nothing to defuse this misconception as it channels the public’s fury away from themselves.  So they are only too happy to have the bankers blamed for the pain.  However the truth is rather different from perception, again.  Without the financial intervention the true deficit would stand at £816bn.  So £9 out of every £10 of the true deficit has nothing to do with the credit crunch but everything to do with reckless and irresponsible government spending.  No wonder the politicians are so happy to see the bankers take the blame for this situation.

Growth?

The second buried fact is perhaps the most worrying of all.  In attempting to tackle this tip of the iceberg £149bn annual increase in debt, there is a third key element.  Over and above the spending cuts and tax rises there is an assumption of economic growth.  This is a big assumption, which is almost certainly flawed.  I suspect we don’t hear too much about this as it is probably already known to be flawed, yet the whole £149bn reduction is absolutely dependent upon this.  Yet basing your rescue upon growth is about as sensible as relying on a lottery ticket coming good.  It just isn’t going to happen.  At least you should not be banking on it, more treating it as a welcome surprise were it to materialise.

About 3 years ago a read a new book written by George Soros.  Well I say read, it was more like ploughed through with great difficulty as it was probably the most difficult book I have ever tried to read.  To the best of my ability I concluded from this a simple message – The world has experienced 60 years of almost uninterrupted economic growth.  That period is now at an end and there is no reason to expect any growth at all, on average, over the next decade or two.  In fact after such an extended period of growth, there is every reason to expect an extended period of no growth at all (at best!).  Traders might like to think of that as a retracement in an uptrend, but on a yearly chart perhaps.

He might be right?  He might be wrong?  If it was a politician making such predictions it would be guaranteed to be wrong.  But like him or loath him, this guy is no fool.  Our knowledge of market swings and even plain old common sense also support such a view.  So I would certainly not want to be relying on growth to fix the bulk of the country’s financial problems, yet wishful thinking seems to be about all we have left.

Don’t be a lemming

There may be an acceptance of tough times ahead, but there does seem to be a general consensus that the worst is now behind us.  Where this confidence is founded I can’t quite figure out.  From what I can see this is far from over.  In fact we don’t seem to have even finished the hors d’oeuvres yet.

As traders we are always getting bearish at the end of major bull markets and always getting bullish at the end of major bear markets.  In many ways it is our purpose in life to be taking the opposite view to that generally accepted by the public.  That is how we outperform the crowd over the long run.  Perhaps we are just wired differently?  Not to accept what we are told, to be forever suspicious?  The minute a room full of people agree with my view on the market, I know I am on the wrong side.

So I like being different, confrontational some might think, holding views that go against the grain.  There is supposed to be safety in numbers, but never forget the money is with the minority!  When people tell me “you have been way too pessimistic in the last few years” I have to tell them that 30 years ago I was a superbull.  You would never have found a bigger optimist at that time – a time where there was nothing to be optimistic about (mass unemployment, 3-day working week, power cuts, rubbish piling up in the streets etc.).

Markets move in cycles, life moves in cycles.  That always has been the case and always will be.  No I don’t buy into all this tripe about recovery that the masses are happy to swallow.  The facts simply point in a very different direction for the moment.  Once we really get into the pain of sorting out this mess, once the 25% spending cuts look like small beer, when there is real fear and desperation on the streets, when there is nothing to look forward to…then I’ll be bullish again.  I also know we will see the S&P back to 1650 and way beyond in the future.  I expect and hope that is in my lifetime, it just isn’t likely to be any time soon.

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