Just How Strong is the Global Economy?

Much of what I do, both professionally and personally, is guided by, “By their fruits ye shall know them” (Matt 7:20).

Fruit is evidence of reality. The secular world may say, “follow the money”. Both these sayings remind us that it is easy to lie or at least not tell the entire truth, and be deceived by such words. It is much more difficult to deceive others (and ourselves) with nonverbal behaviors and through our actions (fruits).

“The Global Economy is Strong”

I hear this quite often. And there is evidence that demonstrates it. In the US we are experiencing a very low unemployment rate, low inflation and low taxes. Consumer sentiment is quite high. Regulatory oversight is generally favorable. Wages and benefits are increasing. The stock market has had a strong start to the year.

Sounds like nothing to worry about. Until you look at the big picture.

What Do the Fruits Say?

With the fantastic growth in the US economy, you would think the country’s financial situation is improving. Not so. Some of this growth is being fueled with deficits. The country has added more than $2 trillion to its debt during this great economic expansion and record tax revenue. Traditional economics dictates that we add to our debt during recessions and difficult times, and that we pay down our debt during good times. If the economy is strong, shouldn’t we be paying down some of this debt rather than expand it? At what point does the debt stop expanding and get paid down?

Interest rates in the US are historically low, but they aren’t zero. Globally there are many countries with zero and even negative interest rates. The Wall Street Journal recently reported that the ECB was planning on increasing rates toward zero this year. That has been put on hold. Doesn’t sound like a strong economy.

What to Make of It All?

One of the challenging things about investing is that no one really knows what will happen (yet many have confident predictions). There is almost always two sides to the story. Investors get in trouble when they listen to only one side, and ignore contradictory news. You can thank the confirmation bias for that.

Investing is largely a function of tradeoffs. Tradeoff future potential returns for safety of principal today. One of the worst actions an investor can make is an “all in” attitude based upon a news story or prediction. Whether that is “all in” stocks, bonds, cash or some other asset.

If you are unable to stick to your financial/investment plan, the next best action may to be take an incremental approach. Making minor adjustments to your portfolio may provide some emotional relief without significantly affecting your overall strategy.