Yesterday is a cancelled check. Today is cash on the line. Tomorrow is a promissory note. – Hank Stram
It’s been a number of years since I really looked at markets. I’m starting to take an interest again, because I think I need to understand what’s going on with the world and the years are passing by far too quickly.
I was brought up to be quite conservative around money, to count my pennies and keep track of my spending. There were rules around how much you should borrow, what a sensible amount was and why you shouldn’t extend yourself. For example, you shouldn’t borrow more than 2.5 times your income to buy a house.
What was odd when I was ready to buy a house was that the banks were offering crazy amounts of money. I thought anyway. I was sensible, I borrowed what I thought was the right amount to borrow, rather than what was on offer. And then the financial crash happened and all those overextended borrowers had a rather good time, as interest rates crashed and their mortgages came down. My five-year fixed rate suddenly seemed a poor deal – except that it was affordable and I could get on with it.
Now, back in 2008 the Financial Times said something like all the debt that governments are taking on will take years to sort out. We’re looking at low interest rates for fifteen years. That’s because countries around the world put money into their economies. But what exactly is this and how do you understand what happens?
Robert Kiyosaki had this image of helicopter money. The central bankers fly around and essentially throw money out of the window. The money is so cheap it’s effectively free – so what happens to it. Well, it floats down and piles on top of things. Usually real things – like houses and businesses. So, the price of those things goes up because there’s all this money chasing real things and so people pay more. That explains why house prices rise so fast – if money is cheap then you’ll be willing to borrow more and spend more to get the house of your dreams, as will everyone else. And so you bid the price up and up.
The people this affects most is the ones who are looking for a return on their money – often older savers. Then again, these are the same people who have benefited from a rise in the value of their properties. Low interest rates seem to act like a form of wealth transfer, moving money from savers to borrowers. And if you’d invested your savings over the last five to ten years you’ll have done just fine.
I did that six or so years back, following the advice on a blog called Monevator. It seemed a cool thing, to construct my own portfolio and out an investment plan together. As you’ll see from the Monevator update it’s worked out ok. Returns have been on the order of 7% or so annualised, which is pretty good in a close to zero interest rate world. But I’d have done better, much better, if I hadn’t tried to do anything at all and just invested in a whole world tracker, as Monevator points out.
Now, it appears that there could be issues with inflation. All this extra money in the system as a result of the pandemic could end up pushing prices higher, not to mention the other issues around supply chains and fires and Texas outages. It seems like when one crisis ends another one comes along to make sure life stays interesting.
Anyway, to answer the question I started this post with – what’s history good for? Well, with investing and markets and what’s going to happen next – I think we’ve been blindsided much of the time. The pandemic hasn’t crushed business. If anything it’s shown us that we can do better business. And maybe we can have fun too when we’re allowed out again.
If you have to bet on anything, bet on the possibility that humanity will, on the whole, make things better in the future.