By Professor Ricardo “Rick” Ulivi, Ph.D.
I just dusted off my crystal ball to see what it’s predicting, and it’s foggy. So I went to my back up–my tea leaves. There is a tempest in my tea cup, so it’s impossible to read their predictions either. Perhaps they are telling me something . . .that the near future of the economy, and of the financial markets, is uncertain!
Why so much uncertainty?
Last December, the Fed announced that it was likely to raise interest rates four times in 2016. Yet at the start of 2016, data began showing that the economy had decelerated significantly and corporate profits were down compared to a year earlier. Therefore, the Fed switched course. A few weeks ago they announced that they are not likely to raise interest rates as much as they had previously planned. Kind of a flip flop–so no wonder we are confused.
The stock and real estate markets add uncertainty
Around August of 2015, the stock market plunged 10%. Wow. Then by the end of the year it had recovered, but it still ended 2015 with no noticeable gain. Is this crazy volatility telling us anything? At the beginning of this year, the market quickly plunged 10% for the second time, and then reversed its course so that by March 31 it was at a breakeven. What’s causing all this incredible volatility? Uncertainty about the future. That’s what my crystal ball and tea leaves were implying!
What about real estate prices? We all know these have gone up dramatically in the last few years. Yet, sales of U.S. commercial real estate plummeted in February. Just $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands last month, compared with $47.3 billion in the same month a year earlier, according to deal tracker Real Capital Analytics Inc. What are these figures suggesting?
Commodity prices add to the confusion
Last year saw a collapse of commodity prices. Yet, this year gold is up 15%, its biggest three-month gain since the third quarter of 1990. The price of soy beans had its biggest gain since last August, and even oil prices have firmed up from this year’s lows. Why this rebound? Are these increases suggesting that we are going to experience a continuous resurgence of commodity prices, and therefore, an acceleration of inflation?
We are at an important crossroad
We are either heading toward a new period of ever rising inflation, or we are headed toward a deflationary period. How do we benefit, or protect ourselves, if either of these scenarios occur?
If inflation is about to strike again, forget about owning any fixed income instruments. Go ahead and buy assets and finance their purchase with fixed rate loans. A good example of this would be to buy real estate. Stocks could offer a reasonable protection against inflation too, especially owning those companies that have a strong international presence. That’s because the value of the dollar will drop in an inflationary period, and translating foreign earned profits into US dollars raises their value.
If we are going to experience a new deflationary period, do the opposite of what I just suggested. Stay away from real estate, taking on new debt, and buying stocks. Instead I would recommend buying bonds that pay a fixed rate and I would also recommend cutting your own spending.
The winning bet accurately predicts the future
It’s tough to place a winning bet today because there are as many reasons to suggest a bout of deflation is about to begin as there are reasons to suggest a new inflationary spiral. The best strategy is to raise your cash position until the cloud of uncertainty is removed. That will allow me to more clearly anticipate what is likely to happen to the economy and the financial markets.
If you’d like help planning your retirement finances, give me a call at 1-714-771-6000 or reply to this email. I will be glad to schedule an initial free appointment to review your concerns and outline how I can help you.