Transcription of Finance News Network Interview with Risk Analyst and Author of "Extreme Money: The masters of the universe and the cult of risk”, Satyajit Das. Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today at the Port Phillip Publishing and Inaugural Investments Symposium, is global risk analyst and author, Satyajit Das. Now Satyajit you’ve just given a presentation on why you believe we need to reset the entire global system. What do you mean by the term ‘a reset’ and why do you believe it’s necessary?
Satyajit Das: Well I think reset is like basically pressing control/alt/delete on your computer, you reset the entire settings. And we are set to a world which is a high growth world which is driven by debt, and there are some other aspects to it as well. For instance, the fact that we don’t price pollution properly; we don’t basically price non-renewable resources like oil and water particularly well. So the whole economy was based on these premises where we could continue to grow and prosper, assuming those things. And the reset just means that old paradigm has ended and we have to reset and find a new way to run the real economy, which in a perverse way is not new. It’s back to the future. We’re going to have to go back to real engineering which is productivity, innovation, growth from those sources, rather than from the ponzi prosperity of basically a debt fuelled economy. So that’s what the great reset means.
Lelde Smits: Now the world has accumulated this debt over many decades. Can a global reset undo the damage and if so, how long would it take?
Satyajit Das: Well I think the question is not whether we can, it will either be something we do or will happen, because it will be forced on us. So it’s not about a choice here, it’s about how you do it. So I think it’ll take a long time, but the problem we now have is that we have very little life support system, because we’re trying to do these changes, adjust. And we’re doing it on a global scale, on a level which is not something the human race, and certainly the modern financial system has ever had to do. So it’s very, very challenging and the best way to describe it is we’re making up the rules as we go along.
Lelde Smits: So Satyajit you’re calling for the end to an aggressive accumulation of debt and risk. But if the consequences include lower growth and higher volatility, how do you expect your theory to be embraced by people or policy makers?
Satyajit Das: Well I don’t expect anything of anybody else; I just think it’s the reality. Because if you actually look at for instance, the tail end of 2011 - the second half of 2011 on something like 29/30 per cent of trading days, the stock markets moved by more than two per cent. So whether I say this or people believe me or not, the reality is actually in the numbers and the facts before them. And if you actually look at lower growth, it’s kind of humorous. The US grew by roughly say three per cent/four per cent from 2000 to 2007. When you strip the numbers out, you take out the effects of debt; it grew by about one per cent. So basically and now that we’ve stripped the debt out, basically you can see that the numbers are going to go back to those one per cent. And we can see in Europe that the growth is just eking out of the system, leaching out of the system. And even countries like China which have basically used debt strategically to try to prop up the economy, are finding their growth’s coming on. So whether people believe me or not, is irrelevant.
Lelde Smits: Now you mentioned some macro factors, let’s look at some in more detail. Greece has just secured another debt deal. To what extent do you think it’s prevented or eased the threat of contagion in the region?
Satyajit Das: Well firstly, Greece hasn’t solved anything. Greece has just lived to default another day, and this isn’t about the Greeks. I mean the most amusing thing about the whole round of discussions was – if I was the Greek, you know, Prime Minister and the Finance Minister and the Greek bureaucrats, I would have gone to the taverna to have an ouzo and said, once you guys have figured it out amongst yourselves, you can let us know and we’ll come and sign whatever we have to sign. It’s really about bailing out the European banks; it’s really about bailing out the European banks which have made the loans. And the absolute insult in all of this is it’s actually admitted in the end, because the money is not going to Greece, it’s going to go to go into a special account from which it will be basically directed straight back to the lenders. So it’s got nothing to do with Greece.
The second thing is, once you put this into place, what happens? Well Greece still has debt they tell me of 120 [per cent] but nobody reads the details here, which is quite amusing. The debt is actually 149 per cent of everything they produce in a year. It’s going to be 120 per cent in 2020, assuming all these heroic assumptions about growth and this’ll happen and that’ll happen. We all know that none of that’s going to happen. So basically Greece will grind itself to a default. Again if you give the Europeans any credit, the game is a very simple one which is, we know the Greeks can’t pay back this debt. We’ll just drag it out over a long period of time, so the banking system and the world can be better prepared for it. The real question now in Europe is not Greece. It’s what the recipe for cure that people have used, is going to work. It hasn’t worked in Greece, I see no reason it’s going to work in Portugal, I see no reason it’s going to work in Ireland and I see no reason it’s going to work in Spain and Italy.
Lelde Smits: In America we’ve recently seen trends of improving economic data, are we witnessing the US recovery from the GFC?
Satyajit Das: Well the best thing about America, I think is that it’s not Europe and the Americans have quite a degree of flexibility. Don’t forget the Europeans, because of the euro and the problems with single currency and also the other debt problems that they have, have got themselves into a position where their policy options are increasingly limited. The American economy is improving, there’s no doubt about that and there’s a couple of reasons for that. One is they’ve systematically devalued the dollar and the devaluation of the dollar has several benefits. One is the quantum of debt is going down all the time. So the poor Chinese, the poor Japanese, the poor Middle Eastern countries which have invested their money in US dollars, are seeing a net loss of wealth. But the most important thing about that process is it also brings about greater export competitiveness. And we are now starting to see some, it’s anecdotal and I wouldn’t get terribly excited about it, is manufacturing coming back into the United States. Because the combination of a cheaper dollar, plus higher oil prices means outsourcing manufacturing and so forth, to other parts of the world – is less attractive. And so that’s all coming back into the United States which is giving some boost.
The other important thing about the United States is the government has maintained a hugely expansionary budget. They’re basically running a budget deficit of about a trillion dollars, which is around between six and eight per cent of GDP [gross domestic product]. And the central bank has interest rates at zero, and they’re basically going to do successive rounds of monetary accommodation. Under those circumstances if the US wasn’t doing well, you’d start to wonder whether there is any sort of prospect of life in the US economy.
Lelde Smits: Satyajit, if we can take a look at China: The nation’s been unable to shrug off growth concerns, so are we headed for a hard or soft landing?
Satyajit Das: I would say the chances are it’ll be harder than people think but most importantly, its repercussions will not be felt within China. It’ll be felt outside of China.
Lelde Smits: And what would be the repercussions for Australia and the world?
Satyajit Das: Well in Australia I think you’ve got several headwinds, the first is China’s going to slow. Its biggest trading partner is Europe and we’re starting to see signs of that. And that automatically means your commodity prices come down and your volumes come down. The second thing is the Australian economy because of the inflated value of the dollar, because of the commodity cycle, has meant that essentially most of the growth we’re getting - 80/90 per cent of the growth is in the mining sector, which is dependent on this endless investment cycle. The problem with the investment cycle is, a) you need demand for your product, and b) you need to be able to finance it, and demand is definitely softening. In terms of financing it, the real problem is the European debt crisis is the first of a series of sovereign debt crises we’ll face. So capital will become scarcer for us, so that’s going to also affect us. And effectively the domestic economy is going to be mired in the fact that this two track economy, the mining sector does well and everybody else is in strife. So retail is going to be weak, the property sector is going to be weak and we need to improve productivity and so forth, which we’ve never done.
And the real problem I see is all of that can conspire in a deadly cocktail of a perfect storm. And Australia, people forget, is a very highly levered economy in terms of movements outside of Australia. So if anything goes wrong outside of Australia, it has an exaggerated affect in Australia. And if all of this happens and the housing market starts to meltdown and then that affects the banking sector, and you get knock-on and knock-on. And it’s very, very quick to see the Australian economy slow down and face serious headwinds.
Lelde Smits: Finally Satyajit, you painted a sombre picture for global growth and shared a number of warnings. How do you suggest individual investors keep safe and position themselves for growth?
Satyajit Das: Well I think it’s important to keep everything in perspective. Money is always made in all environments. You just need to understand that the environment you’re facing is very difficult and it’s very different to the one that existed before. I mean in the 1980s if you basically bought stocks and went to sleep for 20 years; you woke up a very wealthy man or woman. That’s not going to happen now. We’re going to have this resetting going on, we’ll have enormous volatility. So you need to reprioritise your investment. The first thing I would say is capital preservation is key, I joke that flat is the new up. The second thing is you need to have income because most people rely on capital gains. And capital gains I’ve never really understood, they’re on paper and I’m sitting there going, ‘give me cash any day of the week’. So you’re going to have to reprioritise those. And then what I talk about is the u-shape portfolio, which is, you put most of your money into very secure assets. Because let’s be honest, most individual investors can’t afford to and don’t want to lose money.
So you put all your money into what you consider to be secure and producing a reasonable amount of income, and then what you want to do is buy a few out of the money bets. You know, for what I call the melt-up and the melt-downs, because we’re going to get melt-ups and melt-downs and you need to trap that. And you can do that in a variety of ways. But the most important thing is to get very clear in your mind, a) the world has changed, and to remember the advice of an American comedian, Will Rogers. He once said he was more interested in the return of his money than the return on his money, and that’s advice that we could all pay a good heed to. And people have unrealistic expectations of returns, you know, you can’t make 10/15/20 per cent every year. I think history shows that if you made five or six per cent returns over a prolonged period, it’s a very, very good outcome.
So you’ve got to rein in your own expectations and you’ve got to become very, very careful. And the last piece of the thing I would say is you only trust yourself. Everybody will give you advice and the comedian Woody Allen once had this wonderful line. He said a financial advisor is somebody who will give you advice, until you have nothing left to invest. And that’s the problem, people have to take charge of it and understand these issues.
Lelde Smits: Satyajit Das, thank you so much for your insights today.
Satyajit Das: Thank you for asking me.
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