By Dian Cohen
If you’re not an avid follower of economic and financial news, and even if you are, here’s some stuff you may want to ponder.
Although I am mindful that we are Canadians and have our own central bank and monetary and fiscal policies to fight inflation, right now we’re taking our lead from the Americans. The American central bank chairman recently told the world that there’s more inflation than he thought there would be and that there’s more to come. That’s why he raised the basic American interest rate by .75 per cent. That was a huge move by usual standards, yet not enough to convince American investors that the central bank can be trusted to get inflation under control. Along with the interest rate hike, the bankers are projecting that inflation will still be above their two per cent target in 2024. The stock market reacted by dropping significantly – theirs, ours and the rest of the world’s.
Time for you to take stock of your own balance sheet and cash flow statement, because if Americans aren’t convinced that their bankers can lick inflation, the bankers will double down when they next announce their interest rate intentions. There are no good choices. It will be higher interest rates or the inflation horses moving from canter to gallop. The situation is not quite like it was in the 1980s (when interest rates were pushed above 20 per cent and it took a decade and two recessions to kill inflation), but many of the investors who have to be convinced today of the bankers’ credibility were around then. We remember.
We’re not hearing much good economic news lately. With our negativity bias, the last many months have been a veritable feast. Lest you doubt the negativity bias, researchers the world over tell us we’re hardwired to fixate on bad news and remember it better and longer than good news. It’s an evolved survival instinct from the days when our ancient ancestors ran from snakes and big, hairy beasts. Had they not, you and I wouldn’t be here to talk about it. And that’s its purpose – to assess danger and change our behavior is a way that promotes our survival.
Some survival instincts? Concentrate on making, reviewing and honing your “know where you’re going” financial plan. Living with bad news is a lot easier when you have a strategy that includes short and long term goals based on your risk tolerance, where you are today, where you want to go, and how much time you have to get there. The “honing” part includes recession-proofing or belt-tightening your plan – especially if you rushed to get into the housing market in the last year or so. Do your homework to ensure that higher mortgage rates don’t scuttle it.
If you haven’t been a stock market investor, don’t try to figure out which “dip” to buy. Use this uncertain time to learn something about the vast opportunities stock market investing affords. It’s a perfect time to learn and if you want to take my word for anything it’s that the stock market is one of the few places where you can count on your money making money while you’re making it selling your time. If you’ve been in the market, use the volatility to your advantage. Dollar cost averaging works.
And please, cultivate a little perspective. There’s a lot of good news out there. Market busts beget market booms. High interest rates beget lower ones. And let’s not forget that interest rates are rising from just above zero. Think for a moment about how much easier and more convenient living is today than it was 150 years ago. No indoor plumbing. No electricity. Life expectancy was 41 – now it’s 82. Fully one-third of all children born didn’t live to see their 5th birthday. Today, just five out of 100,000 die – thanks basically to much improved sanitation, nutrition and the discovery of vaccines to immunize against disease. And there’s so much more to come.
Dian Cohen, C.M., O.M., economist