(Turn and face the strange)
(Just gonna have to be a different man)
— David Bowie
David Bowie, in addition to his musical and acting talents, was an astute businessman who understood that change is inevitable. He monetized his music earnings through a bond sale and cashed in before the music business fundamentally changed for the worse (at least for the artist).
As a nod to this legendary artist, I thought we should focus on understanding how “changes” may also be a key to understanding today’s volatile financial markets.
All things being equal, market values are higher in a stable environment. Stable means predictable, and a predictable earnings stream is valued at a different level than a sporadic one, even if the end result is the same.
For example, most people prefer a salary over freelance work whereby earnings will fluctuate. So too, if a rental property is in a stable neighborhood with a good school system, that property will be worth more than one where the neighborhood’s demographics are changing, even if the rental income is the same.
I believe the stock markets of the world are selling off for the same reason: changes. Although the overall income generated hasn’t declined — the aggregate earnings are increasing — the equilibrium established over the past five to six years has been changed. This uncertainty is causing investors to re-rate the level they are willing to pay for a given business.
At a lower level, buyers come in to buy bargains, and eventually a new equilibrium will emerge.
So what are the variables that have changed?
Oil has declined by around 70%, and most other industrial commodities and agricultural commodities have declined as well. And while buyers benefit as sellers suffer, the initial reaction is negative because some oil-dependent countries will have problems paying debts as their income sinks and their currencies plunge.
Since everything is interconnected, the possibility of disruption and the unknown outcomes feel similar to a “there goes the neighborhood” moment.
Interest rates have been raised by the Federal Reserve Bank, and the possibility of additional hikes has caused concern that too much money will flow to the dollar and further sink weakening currencies across the globe.
Another concern is that the global economy is weak and rate hikes will throw the U.S. into recession. On the other hand, perhaps the Fed will reverse course and not raise rates, or even resume cutting them again. It’s more uncertainty.
Once again, there goes the neighbourhood.
China’s rapid growth rate, which has driven demand for imported goods like copper and oil, is slowing down, although opinions vary on the true rate of deceleration.
Everyone agrees the nature of their economy is changing from export-led growth to internal consumption, which changes the global pattern of demand for goods and services.
Meanwhile, China has run up trillions of dollars in debt and built ghost cities and bridges to nowhere to keep citizens employed. Whereas these are real problems, markets are ultimately more prone to the surprises that few anticipate, such as the recent slide in oil, than by the highly anticipated disaster such as today’s China.
The bottom line is that the U.S. market has been propped up by low interest rates and relatively stable variables for the past five years. Many international markets came along for the ride. Now the focus is on a new set of unknowns, which are real concerns that will sort themselves out over the next year or two. The world is concerned that the neighbourhood is falling apart.
Change is inevitable, as David Bowie surely understood. And the neighbourhood can certainly prevail.
Article: NY Daily News
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