By Professor Ricardo “Rick” Ulivi, Ph.D.
Let’s review some of the latest developments in the world of finance and see if they are surprises or if they are events that were expected–at least by me! Below is an analysis of some of them.
Un-Surprise # 1: China’s stock market meltdown
When you major in business administration in college, one of the first courses you take as a freshman is Macroeconomics 101. In that course, you will retain at least one lesson for life: business cycles occur pretty predictably every 3 to 5 years. In the capitalist system, success breeds excesses, which result in inefficiencies. Think about it; as you start making more money, what do you do? You spend more, and you often spend foolishly. You have problems? You just throw money at them. Eventually, these inefficiencies will cause growth to stall, or become a bit negative. Recessions are fairly predictable and are to be expected.
China has been growing non-stop, at very vigorous rates for nearly 30 years. Not one recession in all that time; c’mon guys, the excesses eventually will pop up, and that’s what we are witnessing now. Their impact is long overdue. What can we expect? Their stock market to drop significantly and this drop to spread like a disease among other stock markets in the world. You should have sold a lot of your stock at least a year ago, as I have been preaching!!!
Un-Surprise # 2: The USA’s stock market decline
Our market, according to traditional valuation indicators like the price/earnings ratio, has been overpriced for at least two years. The surprise is that it did not begin falling earlier. You can expect to lose money this year if you insist on remaining committed to stocks.
Why is the entire wealth management industry always so optimistic? That’s because the stockbrokers, financial planners and advisers, as well as the entire mutual funds industry, make money by managing other people’s money. It’s in their best interest to sound optimistic, even if the financial data suggests otherwise. Imagine if they told you there is a chance you might lose money. Who would invest with them? And there’s something else these guys know: if you eventually begin losing money you won’t take your account elsewhere. Instead, you’ll wait for years until you break even—and they’ll continue making money all that time too!
Be smart–don’t buy their never-ending optimism.
Un-Surprise # 3: The Fed raised interest rates
We have been expecting this for at least a year, so no surprise here. However, the Fed has indicated they expect to continue raising interest rates in 2016 if employment continues to grow, and if inflation accelerates. I doubt the latter will happen. That’s because raising interest rates will make the dollar rise in value with respect to other currencies, making our exports more expensive and imports cheaper. We would be producing less, creating more unemployment here, while giving more jobs to the foreigners who produce cheaper goods. However, if the Fed does raise interest rates as predicted, the era of cheap money would be coming to an end, and that will surely hurt.
What to do with your investments?
That’s easy! Call me at 714-771-6000 or email me for an appointment; preservation of capital should be the number one goal of most investors–at least those of us who are not multimillionaires. I can help you keep what you have and maybe make a bit more. Wouldn’t that be nice in today’s turbulent financial world?