Global Growth

Get Ready for the Modest Economy

U.S. Federal Reserve Chair Janet Yellen (R) speaks with European Central Bank President Marlo Draghi at the Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 22, 2014. REUTERS/David Stubbs (UNITED STATES - Tags: BUSINESS POLITICS)
Investors shouldn't count on these two central bankers to push up their yields forever.
  • Why it matters

    Why it matters

    Investors and companies need to change the mindset that high growth is normal, or even desirable.

  • Facts

    Facts

    • The French economist Thomas Piketty pointed out that historically speaking, periods of high growth have been the exception, low growth is the rule.
    • There were often periods of high growth after major wars or after great inventions.
    • The Internet did not revolutionize the world like, for example, the steam engine, the railway or the automobile did.
  • Audio

    Audio

  • Pdf

The world has become a topsy-turvy place. On the political scene dangerous individuals are popping up all over the place, campaigning with catchwords inspiring hatred and fear.

The Britons voted to leave the European Union and began asking themselves the very next day what on earth they had done. In many parts of the world interest rates are below zero, and industrial companies cannot get out of crisis mode.

Monetary and fiscal policy experts in many countries have run out of ideas about how to keep the economy going. Some economists are calling for a last stand and demanding that countries which are not drowning in debt, come out with both barrels blazing. All of this is symptomatic of a structural crisis. The world has become too complicated, and that makes supposedly simple solutions sound attractive.

The fundamental problem: Our expectations of economic growth and actual growth are incompatible. The French economist Thomas Piketty pointed out something important: Historically speaking, periods of high growth have been the exception, low growth is the rule. There were often periods of high growth after major wars or after great inventions.

Fortunately, there are no major wars on the horizon right now. But the Internet did not revolutionize the world like, for example, the steam engine, the railway or the automobile did. And of course, we are neglecting the most important of all investments – in Germany too: bringing children into the world and raising them.

The world has become too complicated and at the same time, the economy permanently lags behind our expectations.

The bottom line: The world has become too complicated and at the same time, the economy permanently lags behind our expectations.

That is a mixture which repeatedly leads to political and financial crises. It is time to adapt to this reality – not just for politicians, but also for entrepreneurs and investors. And more realism also means more modesty. The good times with high levels of growth and hefty returns will not be back any time soon.

How can investors and entrepreneurs adapt to this new modesty? A few simple principles might help.

The first rule is: Keep it simple, look for simple rules and structures. The banks learned this the painful way, and some, like the Deutsche Bank, were very late to do so.

Anyone managing a company would do well to concentrate on what he or she really understands – that improves the chances of coming to terms with an overcomplicated world. The temptation is dangerous, especially in big companies, to invent a new department or function for every new problem. The only exponential growth that leads to is in internal communication.

The rule also applies to investors. A simple share portfolio with a few stocks which pay good dividends can still be a sensible solution. Or an investment in property to rent out has often proved resilient in times of crisis.

The second rule is to beware of excessive expectations. And that’s what the banks had to learn first of all: The promises of returns before the financial crisis were much too high.

Of course, low interest rates are a dangerous temptation for all companies. It is almost as if there had been a competition for companies to spend their own capital on share buybacks and replace it with cheap borrowed capital: a sure-fire recipe for weakening a company.

For investors, adapting to lower expectations means one thing above all: If you want to have real money in your old age, you have to begin saving early, and be realistic about how much you put aside.

The third rule is to take care of the simple things first, or, as the Americans say, pick the low-hanging fruit.

That often means eliminating superfluous costs, first of all, and many companies have already taken that on board. The same applies to investors: The trend toward cheap index funds, as opposed to expensive managed funds is proof of that. Of course there is always a danger of saving on the wrong items. Again, the Deutsche Bank is a negative example: For a long time it invested too little in technical infrastructure.

The fourth rule is therefore to keep an eye on long-term objectives.

That is actually easier for private than for institutional investors, who have to submit their reports every month. It is also easier for privately run companies than for listed joint-stock companies.

In any case, experience shows that changing strategy too often – whether in a company or a stock portfolio – usually increases costs above all, not to mention uncertainty on the part of everyone involved.

And that is why the fifth and perhaps most important rule is not to let yourself be driven mad: not by populist politicians nor economists or investment advisers who are notoriously pessimistic.

Yes, we live in a kind of ongoing crisis, but the world is not coming to an end just yet.

To contact the author: wiebe@handelsblatt.com

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