Updated: Jan 15
Indeed, 2022 was a rough year for stock markets. The S&P 500 dropped more than 18%, the index’s worst showing in 14 years and the fourth worst year since 1950 – and yet, balanced portfolios held up pretty well, buoyed by the largest increase in interest rates seen since at least 1980.
Many of Greenspan’s predictions in The Age of Turbulence, Adventures in a New World were fulfilled in 2022: the re-emergence of inflation and higher interest rates, the maturing and slowing of the Chinese economy, and the innovation that has created sustainability in the global food supply. There are FIVE THINGS you can do this year to make sense of the changes, survive them, and thrive in them.
Greenspan observed in 2006 that technological innovation had reduced the volume of raw materials and human capital that go into each dollar of GDP (Gross Domestic Product). He predicted that prosperity would follow not only this innovation but prosperity was also following the migration of rural workers to urban technology centers as machines replaced field and farm workers in emerging economies around the world, similar to the explosion of health and prosperity that followed the agricultural revolution in the 18th century. As an example, the Shanghai metro area has grown from 11 million people in 1980 to nearly 40 million in 2023 as nearly 30 million Chinese field laborers migrated from sustenance farming in the countryside to modern life in the city. This migration is taking place in emerging economies around the world, albeit slowing in China.
This rapid introduction of people globally to modern life, free markets, and into the middle class, due to the expansion of personal freedom and technological innovation, has created tumultuous economic conditions that are unsettling for the average saver and investor. Money moves faster than it ever has, and markets have become increasingly volatile with violent swings up and down—sometimes daily. This goes for all markets: currency, stocks, bonds, and commodities. It’s easy to see how this lightning-quick whipsawing of your investment account’s balance can leave you “freaking out”, or extremely nervous at best.
Here are Five Things you can do to survive, thrive, and make sense of the volatile economic and geopolitical times that have surrounded us as we ring in 2023:
1. Ignore the political drama. While the cultural, societal, and political issues that occupy the headlines are extremely important to most of us based on our personal values, their impact on your investment account is not as significant as you would presume, at least not in the near term. Government policy changes often influence economic conditions in long multi-year maturation cycles. For example, while Reagan’s policies had some near-term impact it was not until the 21st Century that we realized the extraordinary, poverty-eliminating impact those policies of freedom had on the world—lifting nearly a billion people around the world out of poverty.
The global economic cycle ebbs and flows in multi-year peaks and valleys but is not meaningfully correlated to which party is in office presently. Meaning, markets historically go up and down equally whether Republicans or Democrats hold any combination of the three branches of government: the White House, Congress, and the Supreme Court. These facts do not diminish the passion you have for the cultural and societal issues of our times; however, you should not make financial decisions based on who wins an election. In other words, don’t sell out of your investments when your candidate loses an election and go all in when he or she wins an election. Rather, stick with your long-term game plan.
2. Understand the current inflation dynamics. The inflation of 2022 was artificially induced and temporary. Perhaps I’m using a little hyperbole here—inflation is real and it is less temporary than it should be, but let’s look at the facts beginning with the definition of inflation: too many dollars chasing too few goods. Prices go up when the supply and demand relationship becomes imbalanced. The problem with our current inflation environment is that there is no broad-based and meaningful shortage of goods and no shortage of workers, albeit there is a shortage of willing workers. The current inflation condition is caused by massive missteps and interventions by the government. There is nothing structurally wrong with the global economy.
Today’s inflation is caused by interest rates held too low for too long by the central banks, historic levels of massive government spending, re-regulation, the obvious snap-back from the COVID lockdowns, and the destruction of competition and small businesses by the lockdowns. You, and I, and all of the hardworking folks around the world didn’t do anything wrong and the system is not broken! There is nothing wrong with the free markets or capitalism, nor are “greedy” business owners to blame. The inflation of 2022 was manufactured by government intervention and action.
It is temporary because there are no meaningful shortages of basic commodities: oil is down 60% from its high, and things like wheat are plentiful but prices were going up due to re-regulation (they are coming down now), labor and transportation bottlenecks, also caused by the government interventionism. According to Dr. CB (Bart) de Steenhuijsen Piters at Wageningen University, Wheat Is Not Scarce But Expensive.
Cropland sits idle around the world pointing to the fact that the ability or capacity to produce food is not in short supply, but the free market has been gummed up by government interventions, both civil and military. New regulations, lockdowns, and extraordinary government spending have first frozen, then fueled markets. Here is an example of excess capacity: North Africa and Turkey are the largest buyers of Ukrainian wheat, not because they can’t produce it themselves, but because it was cheaper than growing it locally.
Yes, inflation is real, and it has turned out to be less temporary than most economists had predicted but it is not systemic at the supply level nor implies fatal flaws in the global economy. Assuming that the government is less involved in the economy rather than more involved in the months and years to come, in the absence of pandemic-type emergency powers, the capacity to supply the world with essential goods and services is firmly in place and becoming more efficient every year.
3. Embrace the temporarily higher interest rates. If you had a well-diversified portfolio going into these changing times you should be able to take advantage of the rotation of outperformance in different asset classes, sectors, and sub-sectors. Income-producing instruments, which have had very little yield for the past 25 years are now paying higher interest rates and giving people a choice other than risk assets.
4. Stay focused on your long-term goals. Data suggests that investors fail to achieve their goals when they focus on the short-term and attempt to “time” the markets, jump in and out, or change their strategy in response to headlines or short-term fluctuations in asset prices. Instead, focus on saving systematically for the future, attempting to minimize the impact of taxes, and stick to the plan. If your goals change, try not to change your strategy in times of maximum stress or maximum euphoria—the extreme highs and lows will cloud your decision-making.
5. Spend your time and energy on the things that matter most. Every investment exists to serve a future need for cash, and that cash is usually converted into life! Whether it is a home, a vacation, a college education, or an inheritance. Pull your family together and talk about what is most important to you individually and as a family. Consider a Family Investment Policy, Values Statement, or Financial Plan to codify those goals and the ways in which you’ll pursue them.
As an Investment Advisor, my favorite part of the job is helping families and businesses align their finances with their life goals. You don’t need to be apprehensive about the process: I’ll help you find the answers to your questions and the solutions to the challenges you face.
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Photo by Engin Akyurt