Economics and Toilet Roll
As another week passes, I just wanted to send on another quick update to you all as so much seems to be going on.
This week, we’ve seen the start of Government intervention to help stimulate the economies through the next year as the virus is managed. Australia were one of the first Government’s to lower the Base interest rate and were follow by major economies worldwide.
The US seeing gains of around 5% on two different days this week, as a major cut was announced.
On a broad level, the most reported impact of a reduction in interest rates, is to reduce the monthly payments of those people with mortgages, leaving them greater capital to spend within the economy. To those with savings in cash the returns get more pitiful and are further eroded by inflation. Does this change the human psychology to one’s cash savings? Certainly, we all feel less guilt in spending cash if ‘it’s not earning much anyway’ than when we receive better compensation for it being with the bank.
On a larger scale though, it helps businesses continue to stick to their own plans – any company that looks to upscale will need debt at some point to buy offices, import raw materials etc. so it helps keep that flow of money going, and to continue expansion.
Indeed, the stock market globally should always be considered a measure of human ingenuity – one of the main reason stock markets have always risen over the long term is that obsolete companies die and are regularly being replaced by innovators and disruptors who have all sorts of growth ahead of them. The global stock market has on average advanced (gone up) 75% of the time and declined 25% of the time, with major downturns (down turns of 20%+) happening on average every 5 years.
In return for the backing of investors who buy their stocks, the business owners must return either stock price growth or a share of profits (dividends) to their backers or they will fail.
The Negative Events World Service (NEWS) only ever report on the level of the stock market (and love reporting on ‘billions’ wiped off) and never consider the impact of dividends to investor growth. Although a dividend is never guaranteed, they continued to be paid by most major companies even during the GFC.
Any dividends you receive currently in your Supers and Portfolios are either being reinvested into buying the great companies of the world at a short-term discount or being used to help pay your regular pension payments.
Compounding is the 8th wonder of the world as Einstein said.
Stock markets will continue to provide the main engine of all your portfolios and we will get through this short-term volatility. I invest my own family’s savings in the same portfolios you use and feel the same trepidation sometimes when I open my online account.
Speaking of which, to end on some positive news, one of my clients this week joked that we ‘should be buying shares in Kimberly Clark’ following the weeks run (probably the wrong word) on Toilet Roll.
So out of curiosity, I looked it up – Kimberly Clark’s shares are indeed flying up nearly 9% in 5 days and 5% on Wednesday alone.
Every single one of you will own shares in this company via the International shares portion of your portfolios, as we spread your investments across the whole of the US stock market.
Each person you’ll see on the news with trolleys stacked high with Toilet Roll will be putting dollars indirectly into your pockets. Sit back, wash your hands and leave them to it.