Forget Trickle-down Economics: It Has Always Been Vacuum Up to the Elites

I have little time for most of the “talking heads” that appear on mainstream television and comment throughout the mainstream media, presenting themselves as all-knowing on economic and investing topics and seeing themselves as fulfilling a vital function in society telling people what they should think.

Often these people have developed a quirky or folksy persona, perhaps having modelled themselves on the ageing Warren Buffet, attempting to lull the audience into a sense of security harking back to a primordial feeling of safety and affection afforded by one’s grandfather. (Seriously, think about it and you will realise that there are quite a few media, investment and business professionals that fit the bill!)

I find it comical to watch or listen to segments where the audience interacts with these sooth-sayers especially after the advice-seeker has been given some food for thought from a dreaded “Doomsday Merchant”. 

Invariably “Poppa” immediately moves to, metaphorically, wrap his reassuring arms around the scared youngun (or not so young) and gently suggest that they just close their eyes and drive away that anxiety by listening only to his soothing and reassuring voice. 

In actual fact this attitude is very widespread in the financial services industry in Australia and these more visible members are just the tip of the iceberg. 

I was especially disappointed with a lecturer when I did a short course of subjects as a potential step towards becoming a financial planner. The lecturer had worked for one of the best known advisories in the country and she spent a great deal of time telling the (mostly young) participants in the class that a major aspect of the role is in calming clients particularly during times of market volatility, and she used specific examples of people who wanted to go to cash during the Global Financial Crisis.

We had a heated debate in class, with her stating a preference for it to occur outside of class so that I did not influence my class mates, while I ensured that it took place in the class as I knew it was important that they hear that there are different points of view to what was being taught. 

I said that an advisor investing so much of their subjective view on the actions of clients would leave themselves at risk of litigation in the case of a prolonged and severe downturn, and I highlighted the cases of the post 1929 US stock markets and the post 1980s Japanese stock markets which experienced very deep and prolonged downturns.

I also pointed out that somebody who goes to cash even after the market has fallen 50% is better off when the market retraces 90%! Just because it has not happened in Anglophone countries for many years does not mean that it will not happen, and as I explained in my assignment (and in my manifesto on this site) the job of the advisor is to fully equip the client with the opportunity to gain the knowledge and skills to make their own decisions, not to force one’s own views onto clients.

In the case study that this lecturer gave, her clients, of which she provided their actual portfolio at the time of the GFC, had been retired for a few years, and thus were at the most critical period for adverse “sequencing risk” involving a fall in the market price of their assets, and were fully invested in shares, and mostly Australia sharemarket funds! At the time that she delivered the lecture, in 2014, indices of the Australian sharemarket were still well short of the 2008 peak and they did not surpass those levels until very recently in late 2019. 

The lecturer said that she held their hand and convinced them not to go to cash, and instead encouraged them to obtain more capital to invest in shares for a bounce back which they did. The actual outcome for those clients will largely depend on how much new capital they used to purchase more share funds, and how early in the correction they invested that new capital, but there is no doubt that these clients were taking on a very, very high level of risk particularly given where in their investment lifecycle they were.

I leave it to the reader to decide whether the clients received good advice but I can assure the reader that it is not the advice that I would have given nor would my advice have suggested in any way that they should be fully exposed to sharemarket movements at their stage of the investment lifecycle.

So why do so many in the Australian financial services industry take it upon themselves to shout down any negative views, and cheerlead the lesser informed investors into continually buying the dip and/or continually providing a flow of funds into markets via dollar cost averaging?

As usual the answer lies in self-interest. All financial services industry members obviously are active in the markets themselves, and thus their aspirations are dependent on them, so they have a powerful incentive to maintain confidence in markets thus protecting asset prices. After all, the price of any asset is a function of the price paid in recent transactions. That is a serious conflict which produces widespread groupthink in an industry where most espouse a doctrine that markets over time will always move up so it is best to continually deploy your capital.

Of course, many in the industry, and especially the elites, profit more from flows in funds rather than the prices of the assets themselves. It’s the same in real estate, shares, bonds, various managed funds, ETFs, etc, etc.

In reality it is only the small fish – the Plebs – that are particularly dependent on the actual price of the assets. The really powerful interests have little concern for what happens with asset prices just as long as fund flows continue on which they can continue to clip the ticket or “tax” the transactions.

That is why I have come to consider the finance industry, including the capital markets, as essentially a massive funnelling or vacuuming apparatus where scraps continually “fall off” flows of cash which are then siphoned upwards and accumulated by the global elites.

So, while some describe the current state of our capitalistic system as being based on trickle-down economics, where scraps fall off the table of the elite down to the everyday person, I see it as quite the opposite.

I believe that it is incumbent on the everyday person to fortify themselves with knowledge and skill so that they can better secure their hard-earned nuggets of wealth lest they be rapidly siphoned up and off them and directed to the elites.

So if the elites do not really need asset prices to increase to maintain their wealth, why are the cheerleaders always putting a positive spin on asset markets, you might ask.

Well, just as Central Bankers have realised, what they are really selling is optimism and confidence which creates “activity”. Sure a correction or a bear market where people re-allocate and/or buy the dip creates capital flows, potentially strong flows. But the worst market is a dead market where nobody talks about asset prices and that will only be created by the depths of despair that are associated with a prolonged bear market which has not been experienced across developed markets in decades.

This would be the worst outcome for the elites and it is something to be prevented at all costs. 

I admit that the process is so systemic and embedded that very many consider these views, such as it is “time in the market not timing the market that is important”, to be truisms or facts. However, as the calls in to the “talking heads” show, many want to be ignorant to risks and they want people to tell them what they want to hear. 

There will never be a shortage of “experts” who will provide them with that illusory security.

Here is the simple truth – if you can not listen to anything and everything said about the markets and not be comfortable in your positioning, then something is wrong. If you are frightened or made to feel anxious by what you hear or read, then you need to question yourself on why that is the case. If on reflection you realise that you are taking on more risk than you are comfortable with, then you need to act. If you realise that you are insufficiently informed to be in your positions, then re-allocate to positions with which you are more comfortable.

We rarely become fearful unless there is an underlying real basis to our fears. If you find yourself fearful, then you need to act rather than go searching for a soothing voice who will help you to apply a set of blinkers and narrow your world! They have their own interests in mind, not yours, even if they have convinced many otherwise, and possibly even themselves.

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© Copyright Brett Edgerton 2019