Why the global financial system cannot fail

An old joke about the peculiarities of the global financial system goes something like this: A $100,000 bank loan would require you to beg the banker for it; so why not borrow $100,000,000 instead and have the banker beg you to repay it? With interest, of course.

It is funny, because to some degree, it is true. The global financial system is a plutocracy, unofficially governed by the very wealthiest people and institutions in the world. Relatively smaller players like us exist in their universe as mere specks of cosmic dust to their planetary gravitational fields. We are, for the most part, at the mercy of their whims and fancies.

Ironically however, it is precisely because of this world order that gives me reason to be sanguine in the midst of our current economic turmoil. My reasoning is that if such a relatively small group of individuals have such a huge stake the world’s collective wealth, there is no reason whatsoever that they would not do everything in their power to protect their assets. And these are powerful people with their hands on the world’s political, industrial and economic levers of power. Talk of the global economy collapsing is therefore hollow; the powerful have too much invested to allow that to happen. And it is precisely because of this that our assets, which exist in the same economy as theirs, are protected as well. Their value may fluctuate, but by and large, they are safe - if you know where to invest them.

As a case in point, our current global recession is actually more serious than the 1929 market crash, in terms of absolute wealth wiped out. However, its psychological impact has been less damaging because of the US government’s more-than US$700 billion bailout package. The US, as a market, is too big to fail. The world’s wealthy have too much invested in it to allow that to happen.

So let the financiers worry for themselves. By doing so, they are also indirectly looking out for us. On our end, we should instead look out for how to position our assets so that we can ride on the bandwagon when the market rebounds.

I’ll end off with a story to illustrate an aspect of our investment approach. A motorcyclist friend of mine got into an accident and vowed never to ride a bike again. A few weeks later however, I learnt that not only was he riding again, but he had gotten an even faster bike model and was back to his old ways. Old habits die hard. The profligate US consumer who indirectly caused the subprime mortgage crisis which triggered the recession, will not soon change his or her spots. The present economic discomfort may have a sobering effect. But my guess is that it will only be temporary. The credit cards will once again be flashed and bundles of cash will change hands once the pain of the crisis is forgotten in several years’ time.

That in fact, bodes well for the rest of us. The appreciation of our assets are dependent on the growth of the global economy which has as its engine, the over-spending US consumer. While their habits are fundamentally unhealthy, we can’t change them. What we can do is to be prudent opportunists and ride the wave without getting pulled under ourselves. For sure, there will be another major crisis caused by the usual suspects. But using history as a gauge, it will not be for several decades yet. Between now and then, we shall continue to identify both opportunities and pitfalls, and move ahead cautiously. But armed with correct information and disciplined investment fundamentals, we can do so confidently as well.