The world was yesterday treated to the edifying spectacle of Barack Obama returned to the White House on a clear majority, despite pre-election polls forecasting a very tight election race.
The mandate Obama now has for his second term is mostly positive for the US economy, with fiscal and monetary policy likely to be more accommodative than it would have under any tea-stained administration of Mitt Romney. Yet for all the promises that Obama will better promote lower and middle-income consumption, avoid an unnecessary trade war with China, or prevent swingeing cuts to government spending beyond the Pentagon, markets nevertheless reacted with an increasingly typical myopia.
Focused instead on the impending fiscal cliff – where a Republican Congress threatens to stymie the administration’s reforms (usually it is the other way around) – traders effectively short sold the American dream overnight despite expectations, ours included, of a rally. But in a hyper-cynical, electronically mediated world, who could really blame them? We have, after all, seen this show before: hope, change and disillusionment. And to many Americans, unsurprisingly, four more years of that is not a tantalising prospect.
It is said that happiness is the difference between expectations and reality. If your reality is better than your expectations things are good, but if reversed, things are bad, no matter what may objectively be the case. Essentially, modern capitalism suffers this same ennui. A president who has by-and-large improved America’s reality has been re-elected, but because expectations were and are far loftier, this is nevertheless a great disappointment.
As with other recent economic events – the announcement of outright monetary transactions to stem the European liquidity crisis, the implementation of open-ended quantitative easing at the Federal Reserve, the turnaround in weakening Chinese data – enthusiasm has been short lived. Like a spoilt child at a birthday party, a cake that’s smaller than last year’s appears worse than no cake at all. A tantrum, naturally, ensues.
The problem though is that life isn’t always easy and great undertakings take a great amount of time. In an age of constant communications and instant gratification this is sometimes difficult to accept, but the United States will need a lot longer than four more years to right its economy and the world will take longer still to find a sustainable path of growth that doesn’t require large amounts of debt or harmful degrees of environmental degradation. Politicians, with only several years in office (two in the case of the cantankerous US Congress), must promise a short-range vision to get elected, but like a company CEO, such short-range leadership can be a very dangerous thing.
As an equities analyst, I was taught to look at the cash flows and balance sheet of a company as well as its profit and loss statement. What I learnt also was that the companies that delivered the greatest amount of profit growth also had some of the worst balance sheets and some of the most unsustainable cash flow.
The world, if it were a company, would be Enron. Its various divisions have, in the past 100 years or so, delivered blistering rates of growth, but its business model is structurally unsound and there is a massive disconnect between the gains of its executives and the returns enjoyed by all shareholders. Its administration is opaque, its financial measurement is flawed, its environmental record is awful and many of its managers are corrupt, incompetent or both. Some don’t even show up for work. Most of all, however, the world is largely borrowing from its future to deliver returns to the present. And while there’s no small amount of true innovation and genius in the mix, most of this entity’s economic performance, its profit line if you will, has been at the expense of its balance sheet: the earth.
America is the biggest operating unit of this planet-company and its re-elected boss is not a bad guy; some would even say he’s the best we have. But rather than demand ever-increasing dividends from a clapped-out machine, the world’s investors – all of us – should be looking at the balance sheet and start thinking about the structural issues that warrant major repair work.
Our obsession with bottom-line growth – gross domestic product – is ultimately going to harm our investment, just as it did to share market investors leading up to the financial crisis. Our inability to comprehend that growth is a careful balance of land, labour, capital and innovation – not a right that can be delivered sustainably through expedient means – will eventually leave us unstuck. The market’s refusal to comprehend politics beyond the trading day is evidence of a system that’s deeply flawed.
At Macro Investor we have been thinking hard about what stocks to invest in an Australia beyond the mining boom, which is the subject of a forthcoming special report, but the exercise also begs the question of how to be an investor in a world beyond growth.
There are finite limits to inputs like air, water, human capital and fossil fuels, therefore it follows there have to be finite limits to outputs like gross domestic product without some kind of quantum leap in technology. There are finite limits to our world’s balance sheet therefore there must be finite limits on sustainable economic performance. We ought to start judging our leaders by more than just a single bottom-line and start considering what constitutes genuine progress.
Michael Feller is an investment strategist at Macro Investor, Australia’s independent newsletter on stocks, fixed interest, property and superannuation. Click here for a free, 21-day trial. This is an op-ed run in the Fairfax press.