It’s all going a bit wrong for central bankers as they head to Jackson Hole for their annual get-together. Despite their valiant efforts to right all the wrongs inflicted by COVID-19, global economies are still not quite responding in the way that they should. That has confused both stock and bond investors.
But that could be a good thing. We tend to pay a high price for assets when the future is both bright and rosy. On the other hand, bargains can often be aplenty when traders can’t see the woods for the trees.
Consider the US. Despite raising interest rates to their highest level in 22 years, they do not appear to be having the desired effect. Supply and demand in the US economy is still out of balance. Economic activity is expanding, job gains have been robust, and the unemployment rate has remained low.
Now consider China, which is second to the US in terms of economic might. It has a totally different problem. Rather than having to tame inflation, it is having to contend with deflation.
Prices are falling quickly as households grapple with declining house prices, instability in the banking system, and a currency that is losing its lustre. Youth unemployment is also rising. The number of young people in China who are jobless is so bad that Beijing doesn’t even want to report the figures anymore.
Meanwhile, China’s central bank has been easing monetary policy in the hope that it can somehow drive economic growth. It is hoping that cutting interest rates might just do the trick. But the problem isn’t about a shortage of cash. It is more about confidence, which seems to be in short supply.
Continued uncertainty about monetary policy and the structural changes in the global economy could cause unwanted volatility in the market. Problem is, experts continually flipflop between risk on and risk off with alarming speed. One week they believe that piling into shares is the right thing to do.
The very next week they think that fixed-income is better because they reckon that interest rates might be peaking. That is until they change their minds and advocate that equities are better than bonds.
We can easily lose sight of why we are investing, when the messages in the market are so mixed. But it is imperative to focus on our goals. Mine is salary independence. Yours might be something else. But whatever our goal, there are just three things you need to know about getting to where you want to be. And flipflopping is not one of them.
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