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The "Financial Planning Blueprint" Blog

  • Writer's pictureJason Flurry, CFP

Using an old concept to explain the new normal in today’s financial markets

Even if you don’t know much about economics, you likely understand the basics of how supply and demand work to affect prices. Over the next few minutes, I want to show you how the pattern of this principle is rippling through the financial markets right now and influencing almost everything we are seeing. Once you understand this, you can read between the lines more easily and make sense of how the current climate is affecting your savings. Let me explain.

The first example of supply and demand has to do with the unbelievable amount of money the government has in circulation right now. Because they can issue or “print” new money out of thin air (vs. having it be tied to a fixed asset like gold, for example), they have shown us that there truly is an endless supply of money available. I know you may not feel like that when paying your bills sometimes, but from a government’s perspective, there is no end to what they can issue. That’s why we’ve seen trillions of new dollars flood the financial system so far this year and more may be needed soon to help us avoid a deep recession.

While having a lot of money available sounds good, it is really the velocity of that money flowing through the economy that matters more. And unfortunately, we are seeing record low volumes of money flow in the economy despite the unprecedented levels of financial stimulus the government injected earlier this year. The “trickledown effect” of money moving from business to business and person to person - and the speed at which money moves through the economy are key variables in determining the health of the country’s financial system. As you’ll see from the chart below, we have a long way to go still before we can consider out country back on its feet in that category.

Another example of supply and demand is seen in the value of the dollar vs. other alternative savings vehicles, like gold, silver, bitcoin, etc. . With an unlimited supply of new dollars continually diminishing the value of each existing dollar, the demand for dollars worldwide is waning. That is one of the reasons you are seeing gold and silver prices increase so much lately. Holding money in dollars, or cash, is a losing proposition, especially when interest rates are as low as they are now. Savings accounts and bonds don’t even pay enough today to keep your purchasing power protected against inflation. So, you could say that with current policies in place, the government is basically forcing people to speculate with their money rather than save.

Think about it… If the masses and the mega corporations with hundreds of billions of dollars sitting in cash are going to have to eventually invest their savings somewhere, which option looks better?

  1. An endless supply of cash, bonds or CDs yielding 0% or close to it with no final payoff maturity date, or

  2. A different 0% yielding investment that has a limited supply, no maturity date, and a chance to increase in value, like gold for example.

The principles of supply and demand say that something with a limited supply and an increase in demand should increase in value – and that’s exactly what we’ve seen over the past year with gold, silver, and bitcoin. And the vast majority of these huge companies have not even begun to move their cash into these areas yet. Imagine the incredible boost that kind of strategic demand shift could have on prices if the leaders of some of the biggest companies in the world started putting some of their idle cash to work in these alternative savings vehicles. The growth in the prices of those vehicles would be unbelievable!

The third place you are seeing supply and demand influence the market more than normal right now has to do with correlations. Correlations are a fancy way of saying that “birds of a feather flock together.” And when it comes to investments, you want diversification and low correlations so that everything doesn’t move in the same direction at the same time. When one thing zigs, the others should zag to keep you balanced and protected from large losses when the markets go down, as they often do.

Having money invested outside of the stock market is supposed to serve as a way to reduce correlations between investments, but lately that hasn’t been the case. Because of the rotation of money from cash and bonds into these more limited areas, like gold again, there is more simultaneous demand than ever. And, because of the low interest rates that have people investing in stocks in search of higher yields, everything is moving up and down together more than it should. Corporations are buying back their stock and using it like money, which increases the stock's volatility. Some of the movement we see also is profit taking and some of it is due to pure speculation. Very little of it is based on the fundamentals that have guided investors for decades, which means you have to be willing to adapt in your approach so you don't get left behind.

It can be frustrating to see your investments being caught up in the current of what’s popular or urgent at the time only to see it swing the other way again only a few weeks later. Don’t let it get to you though. We are watching things closely to keep you moving forward financially so you don’t miss something important.

What’s next? Going forward, the demand for stocks is likely to continue, but there will always be a need to keep some money out of the market too. We’ll need a way to balance these demands as they look for opportunities (supply) to own. And the best strategy I can see that will help guide us through these unusual times is still the same one we’ve been using so far this year: Seek out well managed individual companies to invest in that are leaders in their field and who have abundant financial resources, loyal customers, and the ability to adapt to a quickly changing world. Also, we’ll continue to keep a close eye on the alternative options for your “out of the market” savings to help maximize returns and minimize risk.

There is still a lot to be determined with the economy, with the financial markets, with a vaccine, and with the election. And, until we can get some sense of normalcy back in our lives again, it’s it going to require us to think creatively to stay on track. Enjoy the journey and let us know if we can help you make it better along the way.


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