Throughout my decades in the financial markets, and ever since, I have been amazed at how little most brokers and other “experts” seem to know about the global economy, and the environment in which our own markets operate. Without some understanding, at least, of the major world economies, general oversimplifications can be quite misleading. But, that is how things are, at least in America.
Various investment themes have been packaged into baskets of securities in order to make it easier for clients—and the brokers, no doubt—to understand. That approach, however, just encourages clients to accept recommendations regarding a wide array of investments, such as: developing markets; gold; commodities; market-based CDs; foreign exchange; high-yield (“junk”) bonds; etc. Through that strategy, the securities firms don’t appear to have given much thought as to the capacity of the target market clients to understand the products, and the potential risks involved.
Above all, the explosion of China onto the global financial scene is the biggest flash-point. A couple of years ago, people began to notice that its growth was slowing; but, without giving much thought as to how its economy had skyrocketed so quickly, why that came about and what the continuing slump might lead to in the future. Last August, China unexpectedly devalued the Renmimbi, which it has done again since. The Shanghai Composite Index dropped precipitously. The cause, which truly rattled global markets, was the Communist Central Party’s manipulation of the overall economy for its own purposes. That wreaked havoc on global markets; but, no one seemed concerned, and the markets just rebounded soon afterward
Aside from China, the various global problems, which were evident before this past year, still remain: economic stagnation in Europe, perhaps due to mandated Austerity; Russia is still causing anxiety in Ukraine, Finland and the Baltic States; the Sunni-Shia Schism continues to disrupt any sort of Peace Initiative in the Middle East; Syria has gotten even worse; China concerns its neighbors as it builds islands along major waterways in the South China Sea; South America remains a highly corrupt and commodity-dependent region; and Africa has never recovered from being raped of its natural resources by European Colonialists over there past two centuries.
Perhaps the markets grew too much, and too fast. As of today’s market close, the Dow Jones Industrial Average was at 16,153.54. Although early last year, it had risen just over 18,000, today’s close is still more than double its Great Recession lowest close of 6,547.05, on March 9, 2009. When you consider that rebound, even after the recent slump, the Dow is still some 148% higher than it was just a little less than seven years ago. So perhaps we were too optimistic about that rebound awhile back.
As time goes by, assumedly intelligent investors seem to shirk-off the known problems, and then they move-on to react to, and rebound from, the newest ones. That’s why I suggest that many people fail to have any context in which to analyze and react to existing volatility before they move on to the next big bump, which is surely coming. Truly understanding our financial markets also involves understanding what goes on in the world around us.