Where is our economy really heading? Part 2

Following on from last week’s blog, did you see Peter Schiff on the ABC’s Four Corners program last Monday?

It was immensely depressing.

But please keep in mind when you sift through the end-of-the world headlines and doomsday forecasters like Schiff and Co. that this too, will pass!

Who really cares?

Does Peter Schiff have a financial crystal ball? Do you think he is an all knowing seer of the coming financial Armageddon? Does he have the age and experience along with the gift for capital allocation of the likes of Buffett, Charles Munger, Walter Schloss, Bill Ruane and George Soros?

What would Warren E. Buffett and fellow super-investors do, you ask?

Well I’ll tell you. For the most part Warren Buffett (and I know, here I go on the Buffett train again) and Soros, wouldn’t give two hoots whether we go into a recession, Depression or any session for that matter. He is constantly on the lookout for a disparity in the prices of assets he considers of quality issue with great long-term prospects.

He knows that the system ain’t broke and that businesses and their shares will continually march higher in the long run.

He always keeps some cash on the sidelines (and so should you) in case of such an event and knows that even if share prices reach Depression levels that they will only just reach a price that you and I would consider a reasonable multiple of earnings to pay for a business. By that I mean the price what you and I would pay as a sensible multiple of earnings if we were to buy an unlisted business such as one of our competitors.

He knows if that were to happen that a decline in share prices of quality businesses would, if only for a short time, present a small window of opportunity to buy some wonderful businesses at just barely a fair to good price, relative to the sum of all its parts and its future prospects.

Off the cliff!

One thing governments around the world will learn sooner or later is that the bailouts for inefficient businesses regardless of whether they are too-big-to-fail and the massive stimulus packages have to stop.

As scary as it might sound, but when we see the headlines such as “US house prices fall off a cliff” then and only then can the recovery process begin to start.
Then it’s time to get truly optimistic.

For the US housing sector in particular, you’ll never see a real recovery until prices fall to appropriate levels.

Let’s be real, this may well happen in the coming second half. Which will see Australian stock prices back on the roller coaster of doom and gloom, then revert quickly back to elation again.

There will always be people – whether it is friends, colleagues or professionals – that employ fear mongering as a way to express their philosophy. However, while I agree that our investing world has certainly changed, and the future uncertain, I disagree with the notion that returns will be dismal and that you must avoid stocks to ensure your financial safety.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.