global economy

Why 2018 Could Be a Turning Point for the Global Economy

2018 has been an interesting year for the global economy. To begin with, the markets have taken a tumble across the world. The sharp movement in the bond market has been just as remarkable, but for a different reason.

What has changed all of a sudden?

For a long, long time, the West was marked by low inflation rates and low interest rates. This has been the case in the United States, Australia, Canada, Germany and the UK.

But the events of the past few months suggest that this is not going to be the same for much longer.  Let’s start with the United States. The U.S. Treasury bonds have gone up by 3 percent recently, for the first time in 4 years. This was 2 percent last year.

In Germany too, 10-year bond yields have doubled in just a year. What’s happening is that Central Bankers in the West are trying to get the inflation to the 2 percent level. The Central Bankers want to get away from the low interest rate – low inflation regime.

The reason for that is that low interest rates are generally a sign of economic weakness. Governments nudge the central bankers to keep the interest rates low to encourage investment.

For the interest rates to be moderately low is very healthy, but when they are so low that they are negative, as has been the case in Japan – that points out to stagflation –  economic stagnation combined with inflation.

What does this mean – are higher interest rates/higher inflation good for the world economy?

Well, that depends on which country you’re talking about. For a country like India, which has historically struggled with high inflation, any increase in inflation beyond the present 4% can be dangerous. For Japan, where the inflation has been negative for a while, a rise in inflation could help boost the economy.

What you want is the right balance between economic growth and inflation. This is not so easy to find. But many countries are moving towards this direction.

Regardless of the sharp fall in the global stock markets, it has been clear for a while that most of the large economies around the world were doing very well over the last few years. The economic growth rates are up, not only in the United States, but across Europe, Australia and Asia.

There is hence a strong demand for raw materials, oil and other commodities. The imposition of tax cuts in the United States and a possible trade war in the making between the U.S. and China will mean only one thing – higher inflation. And to tackle the higher inflation, we expect the central banks to increase the interest rates.

This is good for the bond market, but what does it mean for you if you have a sizeable investment in stocks?

Well, high interest rates/high inflation means higher volatility in the stock market. Stock markets never do well in an environment of high interest rates.

One of the reasons why interest rates have been kept down in the United States for so long was to encourage stock market investment. That could change with more money going out of stocks and into bonds.

This will not only affect the stock markets in the United States, but also in emerging economies such as India, Brazil, China and Turkey, as the smart money moves from stocks to bonds, leading to further volatility. Interesting times are ahead!

2 Things That Stop You from Achieving Financial Independence

The United States is the richest country in the world. But did you know that 78% of Americans live paycheck to paycheck? Why is that? And what’s stopping you from achieving financial independence?

Well, the simple rule of personal finance is to earn more than what you spend and invest the surplus in good, income-generating assets. As long as you do this on a consistent basis, you will achieve financial independence sooner or later.

Financial-Independence

But what stops you – and so many people – from achieving financial freedom?  

Bad financial habits

There are bad financial habits or routines that are probably wearing you down. Do you, for example, have this habit of eating out or ordering takeaways every so often?

Do you have an addiction of some sort, such as a gambling addiction, for example? Do you go on a shopping binge every time you feel down or depressed about life?

Do you spend tens of thousands on buying things you don’t really need online? That has to stop. You know that already, don’t you? Here’s what you should do.

Track everything you spend, write it down and analyze if it adds value to your life or not. It the expense is an essential one, such as your internet bill, then don’t worry about it – consider that an essential business expense.

But if you find that you’re spending a couple of hundred dollars on cable TV every month, for example, cut that out and replace the cable connection with something cheaper, such as Amazon Prime.

Instead of having coffee at Starbucks every day, buy a coffee maker and make your own coffee. Control your temptation and exercise self-discipline in your life.

Bad advice/Getting overly influenced by the media

I know how it is like to receive bad financial advice. In my younger days I remember buying so-called “hot” stocks based on the advice of experts on CNBC (I won’t name them, but you know who they are!) I learned my lesson after losing over $25,000 of my hard earned income on such investments.

Understand – there is far too much bad advice coming from so-called experts on television, financial newspapers and the internet, and these days from the social media. The only way to make sure that you don’t get affected by that is to cut yourself off from all the noise.

The thing about the media is that they make you panic, and try to control your mind. They make you do things that you otherwise wouldn’t had you been thinking rationally. Don’t give the talking heads from the media so much power over yourself.

Stop watching TV all the time – even if you want to watch TV, watch a light entertainment program or football. Stay away from the news. Stay away from news websites, cancel your newspaper subscription and use the social media only to interact with friends and family.

Pick up a healthy habit instead, such as reading a good book everyday or working out at the gym. Learn a new skill, such as technical analysis. Do your research and think carefully before making an investment and be objective about it.