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What's Wrong With This Picture

Economics Insights

“You can’t believe what you read in the papers
Or half the news that’s on TV
Or the gossip of the neighbours
Or anyone who doesn’t want you to be free”

The lyrics from Van Morrison’s song, “What’s Wrong With This Picture”, ring too true today. Or do they?

I’ve been racking my brain about what to write this month. Besides the fact that I’m one year older this week, (turning 29 again) I can’t find anything that I can create a teaching moment out of. Of course I know that good news doesn’t sell, so I’ve been trying to figure out what’s wrong with:

  • The Stock Market
  • The Economy
  • The Bond Market
  • The Fed
  • Politics
  • International alliances

But everything seems to be going along just as it’s supposed to!

I know that some of you will argue with me and say that things are “wrong”. But luckily I’m here to tell you that things are “as right as rain”. (Nothing wrong with a good rainy day)

Let’s break each of the above items down, shall we?

The Stock Market

Can you believe that the market is over 21,000? No? But I can!

If you understand the way corporations work, you will understand that the market CAN keep going up infinitely over time. It’s all about greed.

Pretend you own a company. Your goal would be to earn LESS money next year, right? NO! You would want to earn MORE money! Your goal is to GROW your company. Guess what happens when you grow a company? It becomes worth more! When it’s worth more, the “stock” in the company goes up.

Some years may not be as good as others, that’s why your company stock may go up and down. Over time, if managed correctly, your company should grow. And you bet you will do whatever you have to to make sure your company grows, even if it hurts.

The stock market runs on greed. Nothing wrong here!

The Economy

The economy can be compared to a private company, only much bigger. And the same principles from above still apply. What makes the economy a bit different from a private company is that the government runs it instead of a Board of Directors. (Also the fact that’s it’s a lot harder to quit a country and find another one) (Also if you’re a dictator, the analogy of hiring and firing takes on a whole new meaning)

Unlike a private company where you do your job and go home, citizens live in their economy and are directly affected by many decisions the government makes. Hence, everyone has an opinion about what the government should be doing to improve the economy; raise or lower taxes, free college education, benefits for illegal aliens.

But whether or not you agree with a Government’s methods, their goal is (or is supposed to be) to grow the economy and improve the welfare of its citizens. If they fail, they won’t get re-elected. Remember, some private companies take much longer than four years to show solid growth.

Many people have different ideas about how to run the economy. Nothing wrong here!

The Bond Market

Some would argue that low Interest rates are wrong, but that simply isn’t true. In fact, if interest rates were too high, that may be a signal that something is not right.

It’s true that (in general) if interest rates go up, bond values will go down. But bonds don’t always respond the way you think. Bonds also react based on their MATURITY and RATING. Anyone who sold their bonds in 2007 when interest rates “couldn’t go any lower”, missed one of the best bond rallies in history. A smart bond investor will create a bond ladder to hedge against all the above.

Bonds are affected by many factors. Nothing wrong here!

The Fed

What’s the Fed going to do? Well, they can raise, lower, or keep interest rates the same. They can issue Treasuries or buy them.

What the Fed does will have an impact on how your company from above (and also the economy) can lend or borrow money. This can affect profits. But as a good CEO, you’ll eventually figure out a way to grow your company DESPITE higher or lower rates.

You can hire or fire employees. You can expand or shrink inventories. You can relocate to other states or other countries for tax shelters. (Well, maybe not other countries anymore)

The Fed will do stuff and companies will react. Nothing wrong here!

Politics

Politics is polarizing because it’s personal. Just like the NFL, if your team wins, woohoo! If not, there are riots in the streets. In politics, there are also scandals. Remember, politicians are people, they do stupid things, that’s why it makes them so fun to watch, just like the NFL!

You wouldn’t assume the NFL had an influence on the stock market. Similarly, don’t confuse politics with economics. Politicians may set economic policy, but the politics you read about in the news, see on TV and vote on in the polls are generally sensationalist entertainment. (Donald Trump is a master of this!) Just ignore the man behind the Twitter account!

Private companies also regularly hire and fire CEOs in the hopes of moving their stock in the right direction. Like politicians, a CEO is sometimes little more than an expensive media image.

Politicians come and go and do some entertaining things. Nothing wrong here!

International Alliances

If you think our country is good or bad, there are always others who make us look downright rotten or absolutely genius. As a country, we play in a big sandbox with other countries. Some countries are more prosperous than others, some are bullies and others protectors. There are alliances and deceptions. (It’s like Survivor!)

If you are President, whichever alliances you choose to make or break, (Brexit anyone?) you do so because you believe it will be in the best interest of your country. The other countries will do what’s in their best interest as well. But remember, money talks! Your going to be friends with the kid who owns a car if you don’t have one.

International alliances are interesting. Nothing wrong here!

Without controversy, disagreement, mistakes, scandals, alliances, greed, etc, we as investors would not have the “opportunity” that we do. If no one was selling, we couldn’t buy. if no one was buying, we couldn’t sell. Investing is all about taking advantage of the normal workings of the world.

The only thing WRONG is not profiting from it.

“What’s wrong with this picture?
It’s only hanging on the wall
Why don’t we take it down and
Just forget about it ’cause that ain’t me at all”

Tom Wright & Next Investments © 2017


(804) 591-1657