Financial planning is both a science and an art. When choosing effective strategies for creating and preserving wealth, you’ve got to understand the numbers — not just the figures in your own family budget, but the vast amounts of data that provide a glimpse into where the overall economy is headed.
Beyond that, there’s a special skill that’s required, a certain type of intuition. After all, if numbers alone told the whole story, we could all turn our financial worries over to an algorithm. Not even leading-edge artificial intelligence has reached the point where it has made its creators perpetual winners in the stock market.
With that in mind, certified financial planners such as Canada’s Nathan Garries point to an iron law of physics to explain the road ahead for North American economic activity — the principle that every action has an equal and opposite reaction. According to the Edmonton-based wealth preservation professional, the progressive monetary tightening by central banks worldwide has and will continue to have significant effects that are being felt at both macro and micro levels.
When you make money more expensive, ultimately you reduce and restrict economic activity. Interest rates of auto loans go up, dissuading families from buying a new car. Interest rates of credit cards go up, taking a large chunk out of the discretionary power of the average family.
People buy less in general, and as a result manufacturers produce fewer goods and service industries such as restaurants employ fewer workers. Soon, every consumer begins to feel the effects of tighter monetary policy.
Most significantly, mortgage rates go up, which leaves housing units sitting on the market without many buyers willing to pay high rates. In the worst case, this may lead to a cratering of home prices, similar to what happened during the housing crisis of 2008 to 2009. In various markets in Canada and across the U.S., softening of housing demand and a dip in prices have already been seen, although prices have not dropped off the cliff in any major region.
“What this means for investors is that caution is warranted, but not timidity,” says Garries. “We all know the famous adage by Warren Buffet, ‘Be greedy when others are fearful, and fearful when others are greedy.’ I’d refine that a bit to say: ‘Be especially alert for opportunities when others are showing irrational levels of fear.’”
Right now, the trick is gauging whether greed or fear is ruling the day. There’s certainly a large segment of the market that remains on the sidelines, fearing a dramatic decline in equities may be on the horizon. Nonetheless, major indexes, including the Dow Jones Industrial Average and the NASDAQ, have been holding up well. It’s not exactly greed, but there does seem to be an element of euphoria involved, especially with some of the AI-centric stocks.
For optimists, there are statistics that suggest that even the interest rate environment is not as gloomy as some observers believe. For example, in Canada the key interest rate set by the Bank of Canada was much higher in the 1980s. Even in the early part of the twentieth century it was about 10 times higher than the current rate. Of course, many Canadians and Americans alike remember how difficult it was to buy a house or even find steady employment in 1981 or 1982.
“It’s the age-old quandary, is the glass half empty or half full?” notes Certified Financial Planner Nathan Garries. “And yet, sometimes there’s a third option, a much more practical choice. It may be that the glass is simply twice as big as it needs to be.”