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November 9, 2011

 

Title: The uncertainty business

Sub-title: Don’t let worries over Europe, US budget talks or asteroids affect your financial decisions.

 

If you’ve been watching the news lately you’d be forgiven for feeling nervous. With all that’s been happening this year; financial turmoil, wars, earthquakes, Tsunamis, disruptions at Japanese nuclear facilities, you’d think that the apocalypse was nigh.

 

This month alone, stock and bond markets fluctuated wildly due to increased program trading volumes, uncertainties regarding European sovereign debt repayments and budget negotiations in the US Congressional “super committee.” As if that wasn’t enough, on Tuesday, the largest asteroid to approach earth in decades, came within 201,000 miles of us, before veering off.

 

The nervousness that events like these cause, comes at a price say experts. However those that can look past the daily jitter when making money-related decisions, ranging from buying or selling a home or car, investing, to starting a new business, stand to profit in a big way.

 

A deer in the headlights

 “Uncertainty affects financial markets,” says a recent Desjardins Economic Studies report.  In it, senior economists Jimmy Jean and Hendrix Vachon, note how news of a proposed referendum in Greece on the recent European bailout plan destabilized markets, which were only later soothed when the consultation was canned.

 

Yet it isn’t just markets that get frozen during times of uncertainly. Pretty much everyone does. Businesses invest less and stop hiring, and consumers freeze up, hesitating before making major moves, such as buying major appliances or taking and expensive trip. Fear even affects the housing market, notes Marie-Claude Guillotte, an economist at Laurentian Bank Securities. “The current climate of uncertainty could incite future buyers to delay purchases,” she notes.

 

There are few good measures of uncertainly in the overall economy. The Chicago Board Options Volatility Index, the VIX, which measures implied volatility in index options, is one, but applies to only a narrow field of activity. Less formal, but possibly more reliable, is the number of economists that mention the words “volatility” or “uncertainty,” in their forecasts. And while there are no formal measures of that either, anecdotal evidence shows that these are on the rise.

 

The fear business

One of the first steps inherent in looking past fear in making your financial planning decisions is to study two of its major sources, politicians and the media, both of which profit from fear. Politicians have long known that the public rallies around leaders during times of uncertainty and stress. Many useless wars have been entered into by countries whose leaders stroked popular sympathies, in order to boost their personal popularity. In short, politicians have long learnt to fan up problems and uncertainty everywhere.

 

A perfect, but often overlooked example is in political negotiations, which are always dragged out to the last minute, to keep the other side off balance. This is playing out right now in the European sovereign debt talks and the US Congressional “super committee,” haggling, which like the debt ceiling negotiations a few weeks ago, are designed to create maximum uncertainty. This enables politicians to come in at the last minute, as saviours, to sign accords, which soothe a relieved public. 

 

The news media too are guilty of fanning public fears. Just like a politician’s main job is to get re-elected, a reporter’s main job, is to get the public to come back for more news tomorrow. The best way to do that is by scaring the living daylights out of them as to what will happen in the next 24 hours.

 

As a result, a reporter’s stories will always elbow their way to the front page, if the creator can find a way to get the worried, whether it be about an economic crisis, or a rash of cars “endangering public safety” by doing 40 kilometres an hour in a 30 kilometre per hour municipal zone.

 

Look past the noise.

However while journalists joke that “if it bleeds, it leads,” if you want to be smart with your finances, you’ll need to look past the noise, and to focus on events that really matter. Assess coldly about how important Greece, which comprises a small percentage of the European economy, really matters in the overall scheme of things.

 

Those that take a few steps back will note much of the bad news we get often balances itself out. For example the latest Labour Force Survey noted that Canada lost 54,000 jobs during October. However those that look back, will note that the economy created almost exactly that many jobs the month before.

 

In fact, despite the turmoil we are told exists, Canadians continue to live in the best times, in all of history. Rarely, have we been richer, safer from war, has there been less crime and have our exports (such as oil and natural resources) been in greater demand.

 

In short, follow the news and keep market uncertainties in mind, when you plan your next financial move.  But remember the big picture too.

 

Peter@peterdiekmeyer.com

 

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