And here was me thinking pessimism belonged to recent times. Then I came across this quote by Adam Smith, the Father of Economics, who was born 1723. By 1776 he not only worked out how expanding trade allows the division of labour to create wealth and raise living standards, but he also realised how difficult it was for people to believe they are better off than previous generations. That was the year he discovered blinkered pessimism.

He said, "The annual produce of the land and labour is certainly much greater than it was a century ago. Few people doubt this, and yet during this period, 5 years have seldom passed in which some book or pamphlet has not been published pretending to demonstrate the wealth of the nation was fast declining, the country depopulating, agriculture neglected, manufacture decaying, and trade undone. Nor have these publications been all party political pamphlets. Many have been written by very candid and very intelligent people who wrote nothing but what they believed, and for no other reason but because they believed it." Sound familiar?

Today there's plenty intelligent people who insist the average person's standard of living has barely budged in decades. They tell us apparently only the rich are living better and the life of everyone else is stagnating. But nothing could be further from the truth.

Last week there was a debate on CNBC on the topic of stagflation - the combination of stagnant economy and rampant inflation. A former adviser to the UK Government argued we are in a far far worse situation than in the 1970s, and further predicted we are facing a massive Recession. The host, Larry Kudlow disagreed. It's all about money supply he reckoned. Money supply statistics in the US (and it's the US we are all worried about) supports Kudlow, not the stagflationists. The growth of M1 money supply during the peak of stagflation of the 1970s, the 85 month period from December 1974 to December 1981 saw it growing by 60%. In the 85 months from January 2001 to January 2008 it has grown only 24% and for the last 3½ years it has been flat.

Stagflation ain't gonna happen. My good friend Mike Williams, from New York, sent us some statistics that adds perspective. He asks if we woke up after a 2 year sleep and were told the following bad news what would we reckon would have happened to the stockmarkets?

Oil has gone from $60 to $100 a barrel. Worldwide banks are getting pounded with losses already clicking towards $100 billion. There's record levels of petrol prices, in the UK over £1 a litre and in the US almost $3.50 a gallon. Trillions in dollars and market cap have been erased over the sub-prime scandal. US core inflation has gone over the 2% target year on year, the US Federal Reserve is dropping interest rates, already down to 3%, likely on the way down to 2%, to encourage stability and return of confidence.

Private investor sentiment is at lows not seen in years, worse than the bear market lows of 2002 and 2003. Calls for Recession are commonplace. Some are calling for a financial Armageddon.

So tell me, if you'd been asleep, for the last couple of years and I'd told you all that bad news, what would you think would have happened to stockmarkets? More particularly what would you think would have happened in the US, to the Dow Jones Index? As I write this the Dow Jones Index is 12380. I asked a few clients, even a few experts off the top off their head, what they thought the Dow Jones Index would have been 2 years ago.

Everybody I asked said, given these circumstances they'd expect the Index to have fallen heavily. But here's the rub. 2 years ago the Dow Jones Index was 11061. Over these 2 years of one economic problem after another, the Index is up 12%!

When it comes to money we tend to lose ourselves when stress is at the highest. And much of that stress is down to headlines focussing on bad news burying good news. Somebody made a good point recently reminding me it's only in the last few years when we seem to have financial news rammed down our throats on television, with quite a few channels supplying information 24 hours a day.

Now apparently the latest monster that's going to bring us down is the credit crisis. Economists tell us credit is contracting through the banking system, and as a consequence Recession is all but inevitable. Isn't it odd then in every measure compared to 2 years ago, credit is rising.

Take commercial and industrial loans in the US. Between the last quarter of 2004 and the last quarter of 2007, lending was 44% higher. For consumer loans over the same period, figures were 22.6% higher, and for mortgages 34.6%. How's it a credit crisis when lending is still rising?

I know this is a scary time. I know it's not easy to remain rational when you are bombarded by predictions of financial Armageddon, but this too will pass. At least we now know this obsession on blind pessimism has been with us for 232 years, if not longer. Thank goodness for the generations of optimists who bring us through these times.


Alan Steel


This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.