Welcome to the 03-08-2018 update from your Pocono Summit Certified Financial Planner and retirement planner, Mike Savage. Today, Mike discusses the importance of learning from past mistakes and the potential for future booms and busts.
Those who don’t learn history are doomed to repeat it. This seems like a fitting statement for what is taking place across the globe these days.
Our President is touting tariffs as a way to “save” American jobs. That is likely true to some extent but these tariffs will also do two other things that he may not be counting on. It will make those items that are impacted by those tariffs more expensive meaning less people can afford to buy them. Since this would likely slow down economic activity there would likely be less demand for those goods.
This would not only impact our trading partners by reducing their economic output but would also curtail demand for goods that are manufactured here and also lead to far fewer jobs than anticipated.
Of course, a little research back to the 1920s and 1930s would show that the Smoot-Hawley Act which enacted tariffs greatly exacerbated the Great Depression as trade barriers popped up around the world and economies stagnated at a greater pace.
Another saying “Rising tides raise all boats” can also be turned around. Falling tides or declining economic activity globally makes each country’s piece of the economic pie smaller which could lead to far more than a trade war if the citizens get antsy and the governments need someone to blame. You know it could NEVER be them!
In China, where credit creation has been taken to a new level their leader Xi Jinping has had their constitution changed allowing for himself to be leader for life with no term limits. Ultimate power has led, more times than not, to ultimate corruption and the destruction of anyone in the dictator’s way.
As there are more and more stories coming out about problems in China’s banking system and bad loans in the shadow banking sector I wonder if Mr. Jinping is consolidating power to crush any attempts to question that power if the economy experiences a financial setback.
Even in Africa where in the 1970s Robert Mugabe took over and promptly took land from white farmers as reparations, others are contemplating the very same moves. At that time Rhodesia (now Zimbabwe) was the bread basket of Africa. Since the land was given to supporters and those that had little knowledge of farming the economy was decimated over time. To compensate, the Zimbabwe government went on a “printing” spree and for a while were able to give the illusion that all was still well. That they were still solvent. Of course, that “money” they “printed up” out of nowhere didn’t create ANYTHING. They had no assets left to trade with because all of that “money” gave only an illusion of wealth while it became less and less valuable as trading partners and merchants realized that the currency was virtually worthless.
South Africa is now embarking on this same type of folly. It appears to me that this is nothing short of legalized (by their government) theft. It appears to be ok because those in charge say it’s ok. Look for major problems in South Africa shortly if they don’t reverse the course the ANC is taking.
In Venezuela we are seeing the results of hyperinflation as in the same vein they “printed” money that over time has become virtually worthless because this “printing” not only created no real wealth but also made most basic necessities of life unattainable by the general population. This has led to crimes, murders and a breakdown of civil society. This is a great example of what happens when, as Margaret Thatcher (Former Prime Minister of England) said “The socialists run out of other people’s money”. The mantra “prosperity for everyone! Has been replaced with misery for everyone. There is no such thing as “something for nothing”.
This may have happened because many believe that there really could be “FREE STUFF! Does any of this sound a little too familiar as to what we are seeing in almost all of the developed economies today? Is this what our “students” are learning at our institutions today? It seems to be what I am hearing.
Those at the top appear to be getting away with rigging all markets, “printing up” unlimited amounts of “money from nowhere”, and handing out goodies to those that think it’s ok to sit around and let others worry about producing anything. Free Stuff!
Don’t get me wrong. There are many good people, formerly hard working people, who simply can’t find work. I am not talking about this group- some 95 million strong according to the USdebtclock.org. Is it any wonder why our President was touting the lowest jobless claims in 48 years last week? If you have millions of less people employed that can’t find jobs for years of course there will be fewer jobless claims as millions fewer have jobs to lose!
While what I consider to be a total illusion has gone on far longer than I could have anticipated there are many warning signs that should be heeded right now. This has gone on so long in part because the central banks have worked together in “printing money” and buying assets. As countries start to realize that other countries are getting ahead at their expense look for that cooperation to wane.
I am also seeing interest rates rising in many places even though the authorities are still throwing billions at the bonds to keep rates artificially low. Almost all of this manipulation relies on dead-low interest rates almost everywhere.
Even though central banks are continuing to purchase stocks there is increasing volatility in the US and many other global markets. Larger moves up and down are generally more likely in bear markets rather than in bull markets. Of course, the financial game shows gloss over that if they bring it up at all.
Financial assets have been artificially propped up and I believe this has led to real assets being artificially held down. This has gone on for longer than normal cycles would generally take to play out. It appears to me that if the idea is to buy low and sell high then real assets are what we should be looking at right now. This could include gold, silver, food, commodities, etc. as people realize that there are far more dollars, yen, yuan, euros, francs, etc. than there are real assets to go around- likely making real stuff far more valuable than it is perceived to be at this time.
There have been 3 booms and two busts in the last 20 years. I believe that a third and likely final bust in our lifetimes is likely in the near future.
Mike Savage, ChFC, Financial Advisor
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