Blind confidence?
- Editor
âThe nature of the worldâs current problem is highly complex and the outcome will depend heavily on how individuals respond to uncertainty. We are clear that there was a great deal of fear factored into prices as we entered March..â. These were the words with which Platinum concluded the Platinum International Fund report for the March quarter.
As Kerr Neilson, Managing Director of Platinum has said, “this proved prescient and the massive intervention by governments bolstered confidence and led to a freeing up of the credit markets and a significant restocking cycle. Despite long experience, we were surprised at the way, in the absence of strong export markets, China has re-accelerated and this has been to the benefit of Asia through a knock-on effect. The subsequent boost to raw material demand has then rippled through to strong primary production countries ranging from Australia to Africa and South America.”
He went on to note that the fear has all but evaporated as investor confidence leapt in response to the lifting cloud of uncertainty. Many shares and even some country indices are trading at levels higher than those that prevailed before the Lehman collapse. He finds this puzzling given that the G7 nations have incurred vast public mortgages in exchange for private debt obligations and losses. Further, bank balance sheets are now deeply impaired and their willingness to lend is much reduced. In aggregate, the loan to deposit ratio of these banks is about 120%, while the current and potential debt obligations for G7 governments are in excess of 160% of GDP.
The surge in confidence can be seen in the forecasts of analysts. Neilson remarks that helping this process has been an astoundingly rapid reduction in the operating costs of businesses as management laid-off workers and removed capacity. He quips that there appears to be a high correlation between robust earnings forecasts and robust government stimulation!
He has been astonished by press enquiries on the first anniversary of the global financial crisis implying that the crisis was a complete surprise and the remedial action indubitably praiseworthy. He says that it is as though there has been a communal sigh of relief about a near miss and we can now go carefully back to our pursuits. However, there are two indicators that should be watched: employment levels and bank lending.
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