The Investment Industry: Confusion, Conflicts and Cash

Challenging popular thinking can invite ridicule and confusion. Over 500 years ago Christopher Columbus debunked the ‘flat earth theory’ that prevailed in European society. With what we know now it is easy to laugh at the mental image of a ship sailing over the edge. At the time it was Columbus who was the subject of society’s mirth.

Today the same ‘flat earth’ thinking applies to financial markets. Since the Second World War ended the global economy (driven initially by the developed world) has been on an upward trajectory courtesy of innovation, credit expansion and population growth.

Share and property values have reflected the economic expansion of the past seven decades. Personal wealth is now measured in billions and GDP (and public debt) in trillions. Unless of course you are in Japan, where public debt has broken through the one quadrillion yen barrier.

It is the developed world’s seven decade long expansionary phase that has created the unshakeable belief in ‘growth’ assets — shares and property (except in Japan, where share and property values reflect two decades of economic malaise).

The investment industry has built its foundations on the mantra of, ‘In the long term shares always go up.’ To question this belief is met with a slight toss of the head and a scoffing noise — both of which are meant to imply ‘you infidel’.

This air of superiority is a by-product of mob thinking. People who think outside the square are never that sure. They continually question their assumptions and are prepared to test the veracity of their belief.

My theory is the past seven decades of prosperity have in fact laid the foundations for a major upheaval — the likes of which haven’t been seen since The Great Depression. The GFC was a dress rehearsal for the main event.

It was famed economist, Hyman Minsky who said, ‘Stability leads to instability.

The credit expansion that commenced in the early 1980s and culminated in sub-prime lending happened because of the relative stability and steady prosperity created by the Great Depression generation in the decades immediately after the Second World War. The hard work of our forefathers was mortgaged to finance the greatest consumption binge in history.

The fact debt is being officially sanctioned to cure a debt crisis, shows just how detached from reality bankers, economists and treasury officials have become. Central bankers conjure up voodoo economics yet no one, least of all the investment industry asks, ‘Where are the emperor’s clothes?’

The following email from a reader goes to the heart of my concerns with how detached mainstream thinking is from what’s really happening out there.

I don’t have a self managed super fund, but I am able to direct the fund as to what I want in cash and what percentage in shares/property trusts etc.

At the moment all our super is in cash. The advice given to me was, to put part into p(roperty)/trusts, shares etc., to get it working for us. Or the alternative, is to take it out, and place in a bank term deposit.  This advice was given to us by our fund manager, because they say they can’t justify taking their fees from such small gains?  Our super is only about $250k worth.  Can Vern help with this?

I cannot give specific advice on an individual situation, however I can make some general observations — ones most people not familiar with the machinations of the investment industry may not have noticed.

Let’s look at the following sentence:

The advice given to me was, to put part into p(roperty)/trusts, shares etc., to get it working for us.

Note the terminology ‘get it working for us’. This is standard industry bias. Money in the bank (cash) is idle and lazy. On the other hand, shares and property trusts are industrious and you need to employ them.

On face value most people accept this as fact without any critical assessment.

Sure there are times when money in the bank could be better employed, however there are also times when ‘Cash is King’. Simply allocating a part of your capital to shares and property does not mean they will ‘work’ for you. In fact there are times when these assets ‘steal’ from you. Anyone who invested in shares in 2007 has been plundered to the tune of 25%.

The industry is very clever in its marketing — shares and property have been termed ‘growth’ investments. This is a misnomer. These assets classes can also ‘shrink’ in value, but don’t let the truth get in the way of a good story.

This is the sentence that said it all for me, ‘This advice was given to us by our fund manager, because they say they can’t justify taking their fees from such small gains?

This statement sums up the average mindset of the industry — we can’t make any money out of cash so you need to be invested in something that makes us look like we’re doing something to justify our fees.

Irrespective of whether those investments fall in half, at least it looks like we are actively managing your funds.

This is the conflict inherent within the industry — cash (even if it is the best investment for the conditions) is too difficult to charge fees on (especially with low interest rates). Whereas fees on ‘growth’ assets are more easily justified, even if those assets fall in value. This is a nonsensical approach to the provision of appropriate advice.

The investment world thinks because it was, it always will be. The western world was a beneficiary of the parabolic growth in debt. It is now time to correct the excesses and the future is likely to be the mirror-reverse rather than a repeat of the past.

To avoid your portfolio meeting the same fate as the ship above, stay safe. Remember we are seeking low risk/high return investments — no asset class fits this profile, yet.

Vern Gowdie
for Markets and Money

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From the Archives…

Richard Fisher’s ‘Super Easy’ Fed
23-08-2013 – Nick Hubble

US Stocks and the Timeless Wisdom of Izzy Stone
22-08-2013 – Chris Mayer

Bankers Profit at the Expense of the Broader Community
21-08-2013 – Vern Gowdie

A Bond Market Tantrum
20-08-2013 – Nick Hubble

Australia’s Economy: Complex, Fragile or Centralised?
19-08-2013 – Nick Hubble

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Vern Gowdie

Vern Gowdie

Editor at Markets & Money

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

He is a feature editor to Markets and Money and is Founder and Chairman of the Gowdie Family Wealth and the Gowdie Letter advisory services.

Vern Gowdie

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3 Comments on "The Investment Industry: Confusion, Conflicts and Cash"

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Mick from the hills

I think you mean exponential growth, not parabolic ……

slewie the pi-rat

last night i had a wild dream.
we’d all become lifetime virtual audience members of: The Price Is Right!

“slewie the pi-rat… COME ON DOWN!”
…wild applause…
[oh, boy! i hope it’s PLINKO! cash! cash! cash!]
[it IS!]
[sheeesh! i can’t see my hands!]

oh, man! i gotta get back to sleep and see how much cash i can win!

“Say the magic word and win $100!”
[wha…? Groucho…?]
“slewie! Tell us how you and Ann first got together!”
[i look to my left (and up) and there is Ann Coulter standing next to me.]

STRONG 4:09 AM coffee?
oh, boy! right away!

You don’t need to go very far in Australia to find what we are invested in. Over a third of the market cap is in the XXJ (financial institutions excluding real estate trusts). And what are their balance sheets soaked in? If you have a serious globally competitive exporting or import replacing business in Australia you do don’t go to the banks for finance, you go straight to the bond markets except in times of crisis. If you have a business that clips the ticket of unproductively guided investments in land price inflation rackets and the global laundromat for… Read more »
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