May, 2010 Archives

6
May

The New Paradigm – Risk Management

by Riaan Nel in Global Investments

The Greek crisis is a clear indication that the 2008 Global Financial Crisis is not over! The aftershocks of the crisis will be felt for a number of years to come. I agree with Paul Krugman (http://www.nytimes.com/2010/04/30/opinion/30krugman.html?partner=rssnyt&emc=rss ) that Greece might opt to leave the Euro-zone to regain sovereignty over its own currency. What the Euro experiment illustrates is the fundamental interconnectedness of politics and economics. It remains an open question if a single integrated monetary policy can work in the absence of an integrated political system? The fact that the European Union is not a single sovereign state make the issues of monetary and fiscal policy very challenging to say the least.greece_economic_crisis_741755

What are the implications for us in the US? First, the Greek crisis illustrates what a phenomenal job Ben Bernanke and the Fed did in managing the crisis. Yes, this is not a popular statement, but given the incredible circumstances they had to deal with, I think they did a stellar job. (This is my judgment today – the future will tell if my judgment bears validity).

Second, the crisis also shows that the US government performed better than the governments in Europe – in general.

Third, profligate spending in a slow growth environment will come back and haunt a nation and government. We are not close to where Greece is today, however, at some point we will have to address the sustainability of our entitlement programs. We are not going to grow ourselves out of our spending problems. Spending will have to be cut – period.

Fourth, I remain amazed by the US economy’s dynamism and ability to absorb the repercussions of the crisis.

Fifth, in terms of investment performance over the next half decade or so, risk management will become imperative. It is my contention capital markets will remain volatile. Alternative strategies to manage investment risk is the new investment paradigm.