Issue: 439
Sent: 19-04-2011 11:48:07
In this issue:

Supercycle: What's In a Word?A How To Book Of Self Managed Super FundsMinisterial Compensation for Small Super FundsEmail Marketing For Planners
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin

Supercycle: What's In a Word?

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Despite all the analytical firepower available to investment markets, its language is often loose and designed to appeal to some of the least analytically capable.

Investment markets are replete with analytical concepts difficult to grasp without some training. Theories dealing with options, portfolio construction, corporate valuation and explanations of monetary transmission mechanisms, for example, contain ideas that may not always be intuitively obvious and frequently use language which might be uncomfortable for the uninitiated.

At the same time and often among the same practitioners, populist language can be used loosely, erroneously or, in some cases, to deliberately elicit a specific response to an argument.

"Negative growth" is a much used term despite the two words being essentially contradictory. Users usually mean there has been a contraction in GDP. The equivalent terminology to GDP growth of 2% should be a GDP contraction of 2%.

Negative growth is a shibboleth to hide bad news. We still had growth. It just happened to be negative. Feel better?

Then there is simply the technically flawed use of language when, for example, people often fail to distinguish between a level, the rate of increase in the level and a change in the rate of increase.

News reporters are particularly vulnerable to this pitfall. Thus an increase in Australia's GDP, for example, is represented as an increase in Australian growth. Similarly, a rise in prices is frequently described as an increase in inflation despite a clear analytical distinction between the price level, its rate of increase - inflation - and a change in the rate of inflation.

The rate of inflation could be falling even as prices are rising. Pity, then, the CNBC business commentator who expressed dismay that inflation could have fallen when so many prices at the supermarket seemed to have increased.

Other language is used as a metaphor to undermine an otherwise legitimate policy position. Discussions about the U.S. budget deficit are intensifying among policymakers in Washington. There are those who are clear advocates of a plan to make a meaningful cut in the budget deficit to permit private sector growth, support the exchange rate and contain inflation. On the other hand, there are those intent on "kicking the can down the road".

Large cuts to government spending could affect economic activity detrimentally. There is a case for arguing against them in the early stages of an economic recovery. Nonetheless, those set against spending cuts now are depicted as playing a game. Worse, they are playing an anarchic, self indulgent game without any goals or defined rules.

Sometimes, a word or phrase is repeated so frequently that its use extends well beyond those who might have originated the term. The term commodity supercycle, now in wide use among serious analysts, policymakers and the popular press, has become a potent policy weapon.

Use of the term by its promoters is designed to convey a sense of indefinite expansion. This cycle is longer and stronger than others. It differs structurally from earlier cycles. It is more reliable and less prone to retracement.

Believing this, it is a small and logical step to conclude that the surge in taxes associated with high commodity prices can be spent on programs with an ongoing claim on fiscal resources. A supercycle supports a belief that future government borrowings will be much lower than if there were to be a normal cycle. A supercycle would also permit a more activist and reform minded government to initiate new spending policies.

By the time a market phenomenon (e.g. higher commodity prices or rapidly rising prices for internet stocks) is given a name, we have most likely entered an investment danger zone in which careful analysis has already been given over to emotional sloganeering.

The resources industry, underpinned by strong commodity prices, might offer some excellent investment opportunities but we should understand clearly why this is the case and what conditions must prevail for these investment outcomes to persist. Glib phrases like supercycle (or internet boom) are a salesman's ploy to deter sound analysis and promote a preconceived investment decision.

Share this article
Click to share this article on Facebook Click to share this article on Twitter

Previous article         Next article

If you liked this article and would like more by email, subscribe! It's free.

[Bold fields are required]

Your details

Your alternate email address is used only if messages to your primary email address are returned to us.


Do you work in the financial services industry?

This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

Site design by Raycon