Tuesday, 16 June 2009

Why predictions of worldwide economic recession are utter nonsense

Intellectual sedation can be sweet and reassuring, but it will destroy your capacity to think for yourself. Do not trust any magazine or television reports forecasting a worldwide economic recession. Those predictions are utter nonsense.

The only effect of such reports is to paralyse readers with fear. Emotions sell newspapers and frightened people tend to watch television for hours on end. All in all, a losing proposition for the audience.

Real estate prices are plummeting in some parts of the United States and Europe. This makes exciting news for television channels. How many interviews have they shown with borrowers who have lost their job can no longer pay their mortgage? Probably hundreds.

On the other hand, did you know that the building trade in Romania is expected to grow 6% in 2009. New apartment buildings, hotels, and shopping centres are springing up in every town of that small country.

The demand for new housing in Romania is so strong that builders are working Saturdays and Sundays. Suppliers of construction materials are expanding at the same speed. Hardware retail chains are opening outlets at a rate of one per month. Is that not amazing?

Of course, my point is not that you should pack and move to Romania, since that country has serious problems in many areas. What I am trying to underline is that markets are asymmetric. What we see close to ourselves is a small part of the global truth.

Unemployment in one city is irrelevant to the job market in a town located three hundred kilometres away. Traffic jams on one side of the road are irrelevant to those travelling in the opposite direction. Even the flu affects different areas with unequal severity.

An excessive number of software engineers in the south of Germany tends to lower the overall salaries in the profession, that is, until they begin to move themselves to another country where there is a high demand for their services.

In the global economy, nothing is what is used to be. The gross national product of many traditionally poor countries is posed for rapid expansion. The Internet is wiping out old professions, in particular intermediaries, and enabling all sorts of new businesses.

Markets are being redefined, some times consolidated, often fragmented. The only permanent truth is that change takes place at different speeds. No two currencies are the same and each is exposed to different risks. Not all car manufacturers have the same cost structure. Not all countries have a flourishing entertaining industry.

Turn off the scaremongers on television and read some foreign newspapers on the web. Look up the stock markets in other continents. Reality is much more complex than what a local view can portray. You have no time to waste on the fantasy of a worldwide economic recession. You have better things to do.


[Text: http://johnvespasian.blogspot.com]


[Image by Boy27wonder under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

Why predictions of worldwide economic recession are utter nonsense

Intellectual sedation can be sweet and reassuring, but it will destroy your capacity to think for yourself. Do not trust any magazine or television reports forecasting a worldwide economic recession. Those predictions are utter nonsense.

The only effect of such reports is to paralyse readers with fear. Emotions sell newspapers and frightened people tend to watch television for hours on end. All in all, a losing proposition for the audience.

Real estate prices are plummeting in some parts of the United States and Europe. This makes exciting news for television channels. How many interviews have they shown with borrowers who have lost their job can no longer pay their mortgage? Probably hundreds.

On the other hand, did you know that the building trade in Romania is expected to grow 6% in 2009. New apartment buildings, hotels, and shopping centres are springing up in every town of that small country.

The demand for new housing in Romania is so strong that builders are working Saturdays and Sundays. Suppliers of construction materials are expanding at the same speed. Hardware retail chains are opening outlets at a rate of one per month. Is that not amazing?

Of course, my point is not that you should pack and move to Romania, since that country has serious problems in many areas. What I am trying to underline is that markets are asymmetric. What we see close to ourselves is a small part of the global truth.

Unemployment in one city is irrelevant to the job market in a town located three hundred kilometres away. Traffic jams on one side of the road are irrelevant to those travelling in the opposite direction. Even the flu affects different areas with unequal severity.

An excessive number of software engineers in the south of Germany tends to lower the overall salaries in the profession, that is, until they begin to move themselves to another country where there is a high demand for their services.

In the global economy, nothing is what is used to be. The gross national product of many traditionally poor countries is posed for rapid expansion. The Internet is wiping out old professions, in particular intermediaries, and enabling all sorts of new businesses.

Markets are being redefined, some times consolidated, often fragmented. The only permanent truth is that change takes place at different speeds. No two currencies are the same and each is exposed to different risks. Not all car manufacturers have the same cost structure. Not all countries have a flourishing entertaining industry.

Turn off the scaremongers on television and read some foreign newspapers on the web. Look up the stock markets in other continents. Reality is much more complex than what a local view can portray. You have no time to waste on the fantasy of a worldwide economic recession. You have better things to do.


[Text: http://johnvespasian.blogspot.com]


[Image by Boy27wonder under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

How to invest in times of high inflation

The upcoming inflation is written on the wall. The recent sharp increase in the interest rate of 10-year bonds in the United States of America is an unmistakable indicator. Nobody knows when consumer prices will begin to go up across the board, but it might be a matter of months.

Investing in times of inflation requires a shift in our mental patterns, since prices no longer serve as reference of value. If you have lived during the last decade in a country with 3% annual inflation, are you ready to cope with 10% price increases per year? What would you do if currency depreciation accelerates to 15% or even 20%? Here are some ideas:

1.- REDUCE YOUR CASH AND BOND HOLDINGS. When prices rise at a high speed, fixed-rate debt loses value equally fast. If you buy a treasury bond at 2% and interest rates go up to 4%, you will incur a substantial loss when you sell your bond. Cash is the worst possible holding during inflationary periods, since it loses purchasing power by the day. You will do better if you buy assets or products as soon as you receive money, since those items will be worth more tomorrow.

2.- SPREAD YOUR INVESTMENTS INTERNATIONALLY. Do not trap yourself into artificial restrictions. Nowadays, in most countries, citizens are allowed to invest their savings internationally. If you have doubts about the applicable rules, check with your lawyer or investment advisor. Even in the case of global inflation, currencies and assets do not depreciate at the same rate. You will be much better off if you diversify your risks amongst different territories.

3.- FOCUS ON SHARES OF GOOD COMPANIES. Traditionally, real estate is the investment of choice in periods of sharp currency depreciation. That is perfectly fine if you can cope with a situation of lack of liquidity, since in some areas, it takes several months to sell a house. Shares of good companies, spread in different geographical markets, offer the multiple advantages of liquidity, dividends, and risk diversification.

4.- COLLECT DIVIDENDS IN A STRONG CURRENCY. If you live in a country that is likely to experience high inflation during the next years, it might be a good idea to invest your savings in foreign shares that pay dividends in a hard currency. The Swiss Frank has maintained its purchasing power for years much better than other currencies, but it is not the only choice. Ask your investment advisor about the relative strength of different currencies and make an informed decision.

Do not build your future on the moving sand of inflation. There are plenty of choices available to ensure that the value of your savings will be maintained. Rapidly rising prices have many disadvantages, but they also represent opportunity. Instability brings about change. It is up to you to take the necessary measures so that change affects your investments in the right direction.

[Text: http://johnvespasian.blogspot.com]

[Image by Reinante aka Benquerencia under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

How to invest in times of high inflation

The upcoming inflation is written on the wall. The recent sharp increase in the interest rate of 10-year bonds in the United States of America is an unmistakable indicator. Nobody knows when consumer prices will begin to go up across the board, but it might be a matter of months.

Investing in times of inflation requires a shift in our mental patterns, since prices no longer serve as reference of value. If you have lived during the last decade in a country with 3% annual inflation, are you ready to cope with 10% price increases per year? What would you do if currency depreciation accelerates to 15% or even 20%? Here are some ideas:

1.- REDUCE YOUR CASH AND BOND HOLDINGS. When prices rise at a high speed, fixed-rate debt loses value equally fast. If you buy a treasury bond at 2% and interest rates go up to 4%, you will incur a substantial loss when you sell your bond. Cash is the worst possible holding during inflationary periods, since it loses purchasing power by the day. You will do better if you buy assets or products as soon as you receive money, since those items will be worth more tomorrow.

2.- SPREAD YOUR INVESTMENTS INTERNATIONALLY. Do not trap yourself into artificial restrictions. Nowadays, in most countries, citizens are allowed to invest their savings internationally. If you have doubts about the applicable rules, check with your lawyer or investment advisor. Even in the case of global inflation, currencies and assets do not depreciate at the same rate. You will be much better off if you diversify your risks amongst different territories.

3.- FOCUS ON SHARES OF GOOD COMPANIES. Traditionally, real estate is the investment of choice in periods of sharp currency depreciation. That is perfectly fine if you can cope with a situation of lack of liquidity, since in some areas, it takes several months to sell a house. Shares of good companies, spread in different geographical markets, offer the multiple advantages of liquidity, dividends, and risk diversification.

4.- COLLECT DIVIDENDS IN A STRONG CURRENCY. If you live in a country that is likely to experience high inflation during the next years, it might be a good idea to invest your savings in foreign shares that pay dividends in a hard currency. The Swiss Frank has maintained its purchasing power for years much better than other currencies, but it is not the only choice. Ask your investment advisor about the relative strength of different currencies and make an informed decision.

Do not build your future on the moving sand of inflation. There are plenty of choices available to ensure that the value of your savings will be maintained. Rapidly rising prices have many disadvantages, but they also represent opportunity. Instability brings about change. It is up to you to take the necessary measures so that change affects your investments in the right direction.

[Text: http://johnvespasian.blogspot.com]

[Image by Reinante aka Benquerencia under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]