As long as there have been financial markets, there have been cycles of fear and greed in those markets. The specific causes behind these cycles are always different, but they always come down to one simple variable – confidence in future economic growth. For investors (as opposed to traders), the most important concern is not the inevitable cycles, but the underlying trend.
At present, the forces driving global economic growth remain strongly positive, primarily due, I believe, to a series of societal revolutions. The capitalist revolution has unleashed what Keynes called the "animal spirits" of entrepreneurs all over the world, most dramatically in Asia. The technology and communications revolution continues to generate new products, new services, and higher productivity. The life sciences revolution is in the early stages of redefining health care as we know it, and the financial revolution has made capital available to entrepreneurs virtually anywhere in the world.
If you have been listening only to the self-serving, attention-seeking chatter of the media (and certain politicians) -- financial crisis, economic crisis, war, natural disaster, epidemic, terrorism, greed, injustice, corruption, pollution, and so on -- you might be surprised to learn how much progress the world has actually been making.
According to a recent report from the United Nations entitled "2007 State of the Future," the world is becoming:
- Healthier. Average life expectancy rising from 48 for those born in 1955, to 73 for those who will be born in 2025.
- Wealthier. Literally hundreds of millions of people have lifted themselves out of poverty within the past 30 years, with world poverty likely to be cut by more than half between 2000 and 2015.
- Wiser. Illiteracy has dropped from 37% in 1970 to less than 18% today.
- More democratic. The number of free countries grew from 46 to 90 over the past 30 years; 64% of them are electoral democracies.
- More connected. The number of people connected to the Internet is more than 1 billion, and rising rapidly.
- More peaceful. Warfare around the globe is in sharp decline, compared to previous decades.
Much, if not most, of this progress reflects a global awakening to the power of economic freedom.
As recent events in the financial markets demonstrate all too dramatically, all of this is not to say there are no risks, no problems and no challenges, but it will take something much bigger than the recent liquidity crisis that began with mortgage-related securities and credit default swaps -- i.e., insurance policies on the ability of companies to pay their debts -- to overcome the powerful forces that continue to drive global wealth creation.
To paraphrase the late management guru, Peter Drucker, what is happening in the world today is not as important as the Industrial Revolution -- it is far more important.