February wasn’t all lovely and rosy to begin with. The mayhem began on February 2nd. The US Labor Department released pretty impressive data on the increase of hourly wages in the previous month. Higher wages for workers = higher prices on good, which in turn = a rise in inflation. Global markets tumbled that day, with the Dow Jones Industrial Average shedding an ominous 666 points, eventually falling more than 2,000 points from it’s highs. Bond yields jumped, with the US 10-year Treasury note hitting a four-year high. Here’s a run down.
- Workers are getting paid more, so more discretionary income.
- More money to spend on goods, thus prices go up. When consumer spending goes up, inflation increases. So the value of money decreases, you need more of the previous dollars to afford those same goods.
- An issue with this is that as inflation increases, the cost of borrowing money increases (interest rates). Say you bought a US 10 year treasury note paying you 2.10% interest. As inflation raises, you want to make more income to offset the effects of inflation. You (the creditor) would sell your bonds for higher yielding ones. The United States Government (the debtor) is obligated to issue you a lower priced bond as well as pay you more in interest. You are the CFO (Chief Financial Officer) of a company. You borrowed $100,00 at an interest rate of 2%. With interest rates on the rise, that 2% rate on the money borrowed will go up. Making payments on the bond more expensive. This will cut into the company’s profits, leading to dissatisfied shareholders selling shares of the company.
- The probability of delinquencies and defaults becomes a big problem for creditors. Quick facts! Some epic failures to pay back debt occurred not to long ago actually. Did you know the biggest private default in history is Lehman Brothers with over $600,000,000,000 when it filed for bankruptcy in 2008 and the biggest sovereign default is Greece with $138,000,000,000 in March 2012. OH HOW THE MIGHTY HAVE FALLEN!
- Global financial markets such as the Dow Jones Industrial Average, the S&P 500 (A much broader benchmark of 500 companies) and the Nikkei 225 (A benchmark of 225 stocks in Japan) fell drastically in points.
- This was a market correction. However as fear bogged down, hope arose in investors waiting for an opportunity of entering the market, purchasing at lower prices, to then enter the market. It was like Black Friday for those opportunists.
Sometimes the best course of action is to in fact stay the course! Don’t be troubled. Be solid with your investments whatever they maybe in. You know stocks, bonds, funds and digital currencies aren’t the only instruments in which you can invest in. Look at the community around you. The people within them. Your family and loved ones. Not to mention yourself. These are all tangible assets that are irreplaceable once they’re lost!
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