Keep it in perspective, advises Michael Pascoe. Photo: Andrew De La Rue
You think what happened on Nasdaq last night was bad, just wait for this Saturday: investments in the vast majority of the horses racing at Randwick will be totally wiped out.
Caulfield and Doomben will be just as bad and Morphettville, poor Morphettville – I'm absolutely confident in predicting that punters betting on the nose will see a total loss of their investment from 17 of the 18 nags going round for the Marsh Port Adelaide Guineas. A bloodbath. Where's ASIC? Where's a Senate inquiry? Where's Marc Faber?
Oh, that's right, Faber is running his own race, continuing to predict another big crash, as he has been for many a year. Keep at just about any prediction long enough and eventually you'll be right – if you live long enough. Major corrections and crashes of over-priced assets happen often enough.
So Nasdaq is off a few per cent, but to put some perspective on it, last night's fall is "only" the worst since November 2011. I don't remember capitalism coming to an end in December 2011 or any month since then. It is also obvious that the US tech stocks are bubbling again – companies that make no profit being traded at silly premiums on the bet that one day they will. The Nasdaq nags can fall a lot further and still be overpriced.
And what does that mean to the vast majority of Australian investors (not day traders) with their savings in real companies making real profits paying real dividends and operating in an economy with sound fiscal and monetary policy and very reasonable prospects of growing at about its long-term trend rate? Not much.
Do you seriously want to bail out of your bank shares, just as a popular example, and incur a capital gains tax hit, brokerage charges and maybe miss out on a dividend payment or two while the euphemistically-named "momentum" stocks are sorted a bit? And what are the odds of you knowing when this wobble hits bottom and being smart/lucky enough to buy back in? No, it doesn't add up.
The traders can have their fun with volatility on any excuse, but reasonable investors have to be strong enough to keep some perspective about the daily noise. Remember all the scary headlines a month or so ago about however many billions were "wiped off" our market in a day? Since then we've reached a five-year high. So it goes.
Will a repricing of silly Nasdaq prices be serious enough to cause contagion throughout global equity markets? I don't know. I hope not and doubt it. In the meantime, if some solid Australian equities become a bit cheaper because of the noise, they will be easier to buy. That's nice.
By way of contrast with the Fabers and Harry Dents of the world, this morning I chaired Professor Warwick McKibbin addressing a Perth Institute of Chartered Accountants breakfast.
To greatly condense and paraphrase his presentation, the US is growing nicely, China will handle its challenges and do all right, but Europe remains a dangerous mess. Japan is taking a step forward towards firing its vital "third arrow" of reform – and Australia is growing quite well with our currency likely to cop upwards pressure over the next five years thanks to our relative strength and attractiveness for foreign investors.
Michael Pascoe is a BusinessDay contributing editor.