You can’t put a price tag on confidence. Yet a lack of confidence can be a drag on the economy on a planetary basis. How such a seemingly un-financial dynamic can have such a profound impact on business is one of the more interesting paradoxes of our time. Yet if one thing is glaringly obvious, it’s that the world’s financial leaders have not come to grips with just how important it is to be predictable.
Like everything else in economics, we even have an index to measure confidence, or the lack of it. It’s known as the Economic Policy Uncertainty Index, and the higher the number, the more uncertain business leaders are about the effectiveness of economic policy. There’s also a related index, the VIX, which measures how volatile markets are also known as the fear index. Between the confidence index and the VIX, it’s possible to gauge how much fear that policy uncertainty is introducing to the markets.
Business Needs Certainty
Confidence may seem like a wispy, elusive quality that doesn’t fit in the dog eat dog world of big business. After all, aren’t most business executives almost pathologically confident?
It’s true, except that ultimately CEOs answer to shareholders and investors, who in turn demand revenue growth. Sometimes to grow revenues companies have to spend money to build new facilities, upgrade production lines or acquire businesses that bring value to the enterprise. But what really irks shareholders and investors is when companies spend on new growth that doesn’t materialize. That’s the kind of thing that gets CEOs tossed out. So, without confidence the global economy’s going to grow, there’s little incentive for business leaders to risk their cushy, eight-figure jobs with big investments or mergers.
Fading Faith in Our Leaders
There are a lot of factors that influence the global level of uncertainty, among these the current U.S. election, as well as fallout from the Brexit vote are frequently cited. While those are certainly contributors, the biggest factor by far is the general fear that the world’s financial leadership does not have the tools or the wisdom to navigate the current global climate. The world’s central banks seem to have only one tool in the toolbox, quantitative easing (QE). Calling an accommodative monetary policy QE sounds better than saying “printing money,” which is more or less accurate.
Rates Explore New Lows, Growth Stalls
Central banks act like the only tool they have in the policy toolbox is the QE hammer and the central banks in Japan and Europe are swinging it with gusto. Here in the U.S. the Fed tried putting the QE hammer down and started talking about interest rate hikes. The result was foreign capital came flooding into the U.S. Treasury, driving the dollar to new highs and ballooning our trade deficit with the QE cheaters, like Japan. The result of all this currency devaluation has been flat or near flat growth. The hammer isn’t working anymore but central banks don’t have any other tools.
Big Investors Have Had Enough
Really big investors are called institutional investors and those are organizations like pension funds and insurance pools. Growth has been stagnant so long that some of those institutional investors have started to change how they invest. Instead of investing in markets, which are driven by growth, many institutions have shifted their focus to tangible assets, like commercial real estate. That shift is a huge psychological step, especially for institutional investors that are by nature deliberate, conservative and cautious.
Follow Their Lead
Smaller investors would do well to follow the lead of the big players and shift some of your wealth into tangible assets. While you may not have the resources to acquire a business tower, you can still invest in multi-family housing, income producing machinery and liquid tangible assets like gold and silver coins.
The more uncertainty in the world, the better it is to have a percentage of your wealth in tangible assets.