Time to swing to equities?

This past week will undoubtedly be singled out as the most turbulent in the financial markets since the Great Depression of the 1930s, which was only ended, luckily and inadvertently, by the Great World War II military expenditure.

This time round, matters have not been so bad simply because John Maynard Keynes had, in the meantime, founded the modern science of economics. This preached the fundamental principle of the consumption function, and did not point out a theory of inflation, if it had one at all, which demanded that in time of panic and gross financial misbehavior, financial strings must be pulled.

Society must be given time and money to correct its mistakes. Keynes introduced the dimension of psychology into economic analysis. This is exactly what the famous Alan Greenspan expanded upon in his Financial Times article this week about the measurement of risk in the shaping financial strategy. He emphasised that our systems - both risk and econometric - are still too simple. He said: "Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters' concerns should be not whether human response is rational or irrational, only that it is observable and systematic."

The FT has stated that Anglo-American banks will be shedding 15 per cent of their staff. Is this relevant to Malta? Is it true or false? It must be emphasised that Malta's banks are, for practical purposes, an integral part of the Anglo-American banking system. We are lucky to have HSBC in our midst, which a year ago, was the first great bank to admit its substantial American subprime losses. The result is that during this last week it has not been facing the crisis HBOS has been facing. The current bank crisis will not clear itself up before banks decide to go clean on their losses. It is also probable that they cannot do so before two years' time. There is no danger from the real side of the world economy. It is being propped up for the next 15 years by India and China.

We have to mention a man who, on the basis of his track record, was last week singled out both by Bloomberg and CNBC, as a voice worth listening to about the best financial investment strategy to be chosen in the present difficult circumstances of almost universal serious bank troubles.

He is Philip Manduca, who is defending capitalism as effectively as his noble ancestors defended the walls of Mdina against the Turks. Manduca was introduced by the Bloomberg TV staff with a sense of awe in their voice, and during the CNBC Squak Box discussion the other members of the panel were bending over themselves in an unmistakable body language approval.

Manduca's long-standing prediction of gold reaching $1,000 is well known. In today's CNBC programme, to the surprise of only those who do not know him too well, he was citing a new El Dorado. It was now composed of equities and not of gold.

Manduca, a former Rothschild banker, came forward with the following closely researched opportunity in the current investment crisis. It is indisputable that the flywheel of the world's economy is the US. This was now in recession. Falling industrial demand would pull down the price of commodities. Gold was to be excepted as it is recovering its old monetary reserve function.

A falling oil price would necessarily stimulate industrial production with the inevitable consequence of setting up the first stage of an equities boom. Manduca's stentorian voice, a product of nature, but also of intellectual conviction, was advising his listeners to swing to equities. My guess is that those who profited from his recent gold advice will be now paying serious attention to his words on equities.

This article is cultural and not advisory. John Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P; johnazzopardivella@hotmail.com.