Too much government (or central control) oversight can be devastating.
You probably don’t need convincing. But let’s look at some recent examples just for fun.
Let’s start with the current basket case, Venezuela. Inflation in Venezuela will skyrocket by a million per cent by the end of 2018.
Yes, that’s right, 1,000,000%!
It will completely wipe out anyone holding cash.
Don’t be surprised to see pictures of 1920s Germany making a comeback. You know the ones. Men dumping wheelbarrows of money in the streets. Children play Jenga with bills worth millions of dollars.
What can you expect when the government privatises oil, puts general price caps on everything and uses all the money as handouts?
Then there’s old Trumpy in the US.
He’s handing out billions to famers. Why? Because China is doing exactly what everyone expected. They’re coming after Trump’s voter base and reducing their soybean imports.
Earlier this month, China cut their 2018/19 soybean import forecast by 2%.
Higher prices (due to tariffs) might encourage farmers to use alternatives when feeding their animals, China says.
As a result, Trump plans to give farmers $16 billion (which US tax payers will pay for one way or another).
Republican Bob Corker pointed out the policy ‘sends farmers to the poorhouse, then you put them on welfare, and we borrow the money from other countries.’
If there’s a lesson to be re-learned here, it’s that government is a terrible solution.
How trade tensions are effecting investors
This latest horn-lock between the US and China is exactly what investors needed.
You know the ones I’m talking about — those investors that look for any sign to run for the exit. Many have been pessimistic about asset prices for years.
Some have been saying the same thing for decades.
On some level you’d have to agree. Forget ratios and indicators. Just look at what central bankers have done to assets.
And because bond yields are so low, investors are still willing to paddle in the shallow end of the market, where expected returns are only a few per cent higher than 3%.
With trade tensions escalating, future uncertainty has become too much for some. Yesterday I wrote about fund managers like Magellan increasing their cash positions.
Magellan has not had this level of cash (18%) since 2009. Boss of the $4 billion fund manager, Hamish Douglass said:
‘In our view, a 20% to 30% global stock market correction in the next 12 to 18 months is conceivable.’
And it’s not just Aussie investors. A Singapore family office, Kamet Capital Partners is doing exactly the same.
The family office said ‘it’s hoarding cash as it waits for global asset prices to deflate amid geopolitical tensions and tighter U.S. monetary policy’.
Investors all over the globe now seem to be down on growth, when weeks ago it wasn’t a problem. This was from South China Morning Post yesterday:
‘With the world’s two biggest economies in an all-out brawl, it’s easy to miss important warning signs flashing in smaller ones.
‘Take Singapore and South Korea. Singapore’s economy just grew at the slowest pace in a year.
‘…That clash is beginning to take down giants, too. Japan, the world’s No 3 economy, is seeing a marked downshift in sentiment. In the latest three months, the Bank of Japan’s tankan survey of big manufacturers dropped to 21 from 24 in March.’
I’m sure there are some that lap this stuff up. They want to jump in and out of stocks, judging on how the global investment world is feeling.
But I urge you not to join that group. While I’m sure trade tension will have an impact. I’ll bet it’s a momentary market blip in the grand scheme of things.
Should you start holding cash?
Is it time you take everything out of the market and start hoarding cash?
I wouldn’t advise it. Even if the market does fall lower from here, look at it as a buying opportunity.
Rather than trying to time the market, why not try to buy investments you understand? If you understand what you’re getting into then you know exactly what you’re risking for some expected return.
You’ll also probably find that trade wars, political tensions and economic forecasts have little to no effect on most businesses over time.
Far more important is earnings and the growth of those earnings over time. And, if you can’t find anything you understand, then maybe it’s time to sit on your hands.
God knows Venezuela might have benefited from a bit of rational thinking.
Editor, Money Morning
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