The answer is in your brokerage statement. The amount of wealth destruction witnessed this year is beyond our wildest imagination.
Whether super-safe treasuries or the riskiest emerging equities, global markets have lost over a record $35 trillion in value so far in a wild selloff that’s engulfed assets right across the risk spectrum.
Thanks to the cost-of-living crisis - caused by the persistent and broadening inflation pressures, the slowdown in China and Central Banks tightening, asset values have dropped faster than Twista can say “cheech and chong”.
Research in the latest Allianz Global Wealth Report (2022) reminds us that the selloff is the first significant destruction of financial wealth since the Global Financial Crisis (GFC) in 2008.
Unsurprising, investor optimism is in short supply right now. The mood is downbeat and deteriorating.
What can I say? That's how markets work. But as the capitulation unravels, perhaps, we can take time and ponder over these issues: Have markets become the cornerstone of our happiness and achievement? Has our sense of security become directly tied to our possessions? And what is true wealth?
No doubt, wealth is a key component of the economic system. It is used as a store of resources for future consumption such as during retirement.
Wealth is also valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic such as the Covid-19, etc.
That said, wealth has got many “enemies” both external and internal. As an example of an external risk, financial wealth, which accounts for slightly over half of global wealth, will always be vulnerable to the forces of demand and supply.
This phenomenon may arise as a result of loose monetary policy, inflation, interest rates etc. A good example of an internal risk is bad management, corruption, poor strategy, etc. such as the case for equities.
As a result of this twin exposure, financial wealth in its nature fluctuates and sometimes violently. To, therefore, tie our sense of success to a “wildly swinging” instrument is setting ourselves up for major disappointment and misery.
The promise of the markets is not to guarantee our future and/or happiness. Markets are just that, markets - their main utility is facilitating exchange.
So as storm clouds gather, it is best to remind ourselves of this truism. This is vital considering there’s likely more pain ahead.
Central banks are in full fire-fighting mode, making clear they intend to raise interest rates further to douse inflation, even if that leads to economic recession.
The World Bank expects more than a third of the global economy will contract this year or next.
In such an uncertain environment, it’ll serve us well to remember that true wealth is being rich in good deeds, generous and willing to share with others.
To add to this, I’ll borrow the words of a great philosopher who cautioned, “Do not store up for yourselves treasures on earth, where moths and vermin (read: inflation) destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”
The writer is the MD of Canaan Capital.
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