Why Noah built the Ark—and preparing for financial crises
Many readers will recall the biblical story of Noah’s Ark. This story reminds us of the planning that went on in order to survive the worst flood ever recorded. Planning for the future often involves making contingency plans, and sometimes we need to ask ourselves, do we have a contingency plan for a time when the world is in great turmoil?
There was no sign of a flood when Noah built the ark, and some would argue that there’s no sign of any impending calamity in the world’s investment markets at present.
A useful insight into world affairs
Recently I attended a Magellan Funds Management seminar in Melbourne. Former Director of the CIA, Michael Morrell addressed the audience.
During the September 11 terrorist attacks, Morrell briefed President Bush. He was also on hand to inform President Obama when the CIA found Osama bin Laden. ‘There are two powerful dynamics that drive Donald Trump and both concern anxiety,’ said Morrell.
The first dynamic concerns economic anxiety and the second is social anxiety.
Economic anxiety is: ‘A sense that your life is not going to get any better, and that your children’s economic lives are not going to be any better than yours.’ This is the destruction of the American Dream which, in a few words, is that it was once possible to be an unskilled worker in America and be in the middle class.
‘It’s no longer possible to be unskilled and be in the middle class.’ The modern economic world has left you behind if you are unskilled.
Social anxiety refers to a belief held by many Christian-Americans that their culture and values are being eroded by immigration, powerful minority groups and foreign countries.
Morrell made it clear that the USA is now involved in a ‘Cold War’ with China, and it isn’t backing down. ‘I see China as the number one security threat and challenge for the United States and our allies.’
He explained that America has three issues with China in the long term.
The first issue is an economic one. Twenty years ago the economies of America and China complemented each other: the US was capital rich; and China had plenty of labour. Times have changed and now both nations compete for the future of key industries such as technology.
The second issue is a military one. The Chinese military has grown in sophistication, and more than any other military in history. This comes close to home in Australia because the Americans and the Chinese both have a military presence in the Pacific.
The third issue and, perhaps the biggest, is about power. Arguably, America has been the status quo global power since World War 2, but no one would dispute that China is a rising power, and it wants a greater say in the world around it.
What happens next?
What happens next in financial markets depends a lot on China. We’ve recently seen a world-wide decline in stock markets driven by a jumble of anxieties. The Chinese stock market and the Chinese currency have been hit hard.
In the absence of a big shock, the outlook for global share prices will probably be dictated by how China reacts to the Trade War with the USA.
There’s the very real possibility that the next shock to investment markets may well come from the United States. The combination of a strong US dollar and rising interest rates may create a new set of vulnerabilities to the global financial and economic system.
We’re now in a period where we have very few historic precedents upon which to draw conclusions. We do, however, know that history repeats itself.
What shocks could trigger the next financial crisis?
As a general comment, we’re often let down by a failure of imagination. This simply means we can’t see some things. The things that we can see are:
- Rising interest rates
- A possible return to higher levels of inflation
- Potential disruptions to the supply of energy
- Cyber warfare (18 countries around the world have a cyber-ware division in their military regimes)
- Overvalued share prices in international markets
- The potential inability of China to manage their currency
- Trade wars and rising nationalism result in some winners and losers
How do you plan for a volatile future?
Most of the following are common sense.
- Develop good financial habits and a disciplined approach to saving and spending
- Reduce, when possible, debt including credit card debt
- Rethink your approach to available saving options that might include solar panels, better energy deals, and reduced health and general insurance costs
- Think about getting taxation advice for your family, not just yourself
It’s useful to have a disaster plan if you live in a fire prone part of Australia, and it’s useful to have a Plan B that demonstrates that you’ve considered the possibility that the future might look very different to the world we know today.
So how does history look back on what Noah achieved? Noah was the only man that ever floated a limited company when the rest of the world was in liquidation!
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi and Where to Retire in Australia.
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