“Recent years have seen the world get all the benefits of globalization without the cost.” So says Goldman Sachs analyst Peter Oppenheimer. Triangle Wealth Management clients have been apprised of an anticipated poor investment climate for some time now.

 
Central Bankers are now very concerned with fighting inflation and have shifted from the mode of supplying liquidity / dropping central bank rates to that of considering raising rates to stem inflation.

A prolonged period (several years) of slowly rising interest rates provides an environment where returns are hard to come-by because:

  • rising interest rates cause bonds to lose value
  • rising interest rates make the cost  of business higher and reduce profit margins -> causing stock prices to fall.
  • rising interest rates make other asset classes more expensive since they may involve debt financing e.g.,  real estate.

Just 5 months ago, analysts were forecasting 15% profit growth in the world’s largest economic unit – the EU. Now some analysts are forecasting a 12% drop in profits. This is a colossal swing for such a short timeframe. 

Receiving a paltry 4.1% for lending your money to the federal government for 10 years (purchasing a 10-year note), may sound terrible when you consider that inflation is 3.9%.  But how will you feel about earning 3.1% when inflation is 4.5%. 10 year treasuries paid 3.1% in June 2003. It almost makes earning 3% in money market look attractive.

Let us not forget the impact of our trade deficit. The weaker US dollar has helped our economy by making imports more expensive. This has caused Americans to buy less (live within their means), and has made American made products / services more attractive to the rest of the world. The good news is the US trade deficit for everything except oil has sharply declined in the past 2 years. The bad news is the increase in our trade deficit from oil imports has largely made up for the reduction elsewhere. A 6% trade deficit is not sustainable over a prolonged period- it will cause the currency to de-value (like what we’ve seen in the US dollar for the past 2 years).