If you have an interest in cycles and the context of the current social and political mood, 'The Fourth Turning' by William Strauss and Neil Howe published in 1997 is an interesting read:
'In modern history lies a remarkable pattern: over the past five centuries, Anglo-American society has entered a new era – a new turning – every two decades or so. At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future. Turnings come in cycles of four.
Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history's seasonal rhythm of growth, maturation, entropy, and destruction:
- The First Turning is a High - An upbeat era of strengthening institutions and weakening individualism, when a new civic order implants and the old values regime decays.
- The Second Turning is an Awakening - A passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime.
- The Third Turning is an Unravelling - A downcast era of strengthening individualism and weakening institutions, when the old civic order decays and the new values regime implants.
- The Fourth Turning is a Crisis - A decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one.
Each turning comes with its own identifiable mood. Always, these mood shifts catch people by surprise.'
The last Fourth Turning was the period between the two World Wars, which includes the Great Depression of the 1930s. We are again in a period characterised as a Fourth Turning, a time as evidenced by increasing political dysfunction, lack of faith in our institutions be it government, military, religion, and financial, rising frustration from working class people against the political and financial elites, rising geopolitical tensions around the world as the US retreats from foreign affairs, and distressed financial markets.
There is a lot of commentary about income inequality, what in fact has occurred is that the forces of globalisation have increased the wealth of developing economies at the expense of the middle class in the developed world. A recent study in the US has found that the middle class barely exists anymore, they effectively are living just above poverty.
The bigger impact in terms of social mood is that the middle class can't get ahead, aspiring to a higher standard of living is nearly impossible to achieve with youth unemployment high.
Many in the agricultural sector have been subject to the competitive forces of global trade and bureaucratic regulations for many years now, while other sectors of the economy (which have been protected) are now feeling those forces. It generally adds up to declining profit margins.
The social mood of uproar over recent milk price announcements for dairy farmers is all well and good, but will Australian consumers pay a higher price for their milk so a dairy farmer can make a profit?
Distress in the European banking system is growing. The recent "Brexit" vote creates uncertainty, however bigger short term issues are bad loans at Italian banks, and Deutsche Bank being regarded as the biggest risk to the global financial system. The Deutsche Bank share price is now trading at a price lower than during the GFC of 2008.
For banks, bureaucrats are focusing on banks holding more capital, a main reason why share prices for banks around the world have been under-performing other sectors on global share markets. However, in a financial crisis, capital is not an issue - it is liquidity - the flow of capital that creates the crisis. In a financial crisis the flow of capital stops, there is no confidence or trust between parties. A topic for another day.
The plunge in interest rates continues to new record lows, even negative interest rates in many large economies, which distorts basic investment decisions, and is devastating for retirees who require income to fund living expenses. Investors are being forced to chase income in riskier asset classes.
We are living in challenging times of low economic growth, record low interest rates, high and rising government debt, high household debt, and genuine concerns about the stability of the financial system as we know it.
Yes, risk exists in the financial and property markets. It's never going to be easy, however the alternative for stepping out into the unknown is the known of never building your wealth. Don't invest. Don't save. Allow fear to control your financial decisions. Any sort of plan is better than none.
The cycle lives on! You have to invest.
This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Cameron Diffey is a Director and Financial Advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory.
Cameron is a Chartered Accountant Financial Planning Specialist, has completed a Bachelor of Business (Accounting/Economics) and a Graduate Diploma in Applied Finance with FINSIA. He has been working in financial and business services since 1995.