Ride the Wave or Prepare for the Bursting Bubble?

Global stock markets seem to be energised by steroids, otherwise known as quantitative easing (QE). At the first sign of a dose reduction equities plummet; so why is QE apparently reacting in contrast to the original intention? Are you adequately prepared if the bubble bursts?

Professor Einstein once wrote that the definition of insanity is doing the same thing over and over again and expecting a different result. I have never met anyone who disagrees with that sentiment. So why is it that central banks print more and more money and expect unemployment to decrease whilst simultaneously creating economic growth? In America the jobs market is still weak, with unemployment above the 7% mark. Growth has been minimal for a number of years now.

According to the Federal Reserve’s “survey of consumer funds and flow of funds”, the top 1% of wealthiest Americans have seen their net worth grow by 1.9% since 2008. This seems reasonable until we discover that the bottom 50% of US citizens have seen their real net worth decrease by 44%. The economy has added some 4 million jobs since the year 2000 but the Fed’s balance sheet has increased from $500 million to $4 trillion. That is simply phenomenal.

In creating quantitative easing the idea is to stimulate economic growth. It is intended that banks create a flow of funds into the economy by increasing lending to the private sectors and individuals alike. There is no evidence that this has even commenced. Instead the banks seem to get richer by pouring money into the stock markets and fueling the growth of equity assets. The man on the street does not feel any benefit or enjoy any upside.

Here in Thailand there have been some unnerving economic statistics revealed, according to a recent report titled “Thailand’s Bubble Economy is Heading for a 1997-Style Crash” on the Forbes.com website. This goes on to say that the country’s external debt has doubled in the last decade, making it vulnerable to external forces. Capital inflows have fuelled the increase in the stock market and the value of the Thai Baht. When investments elsewhere appear more attractive, these inflows will reverse and create problems. Internal matters have also created facets of a potential bubble. These include higher government spending arising from the first car tax refund; rice, rubber and fuel subsidy schemes; corporate tax rate decreases; student computer tablets; and government officials’ salary increases.

Household debt in Thailand has increased to one of the highest levels in Asia. At about 80% of GDP, it is almost at the same level as in the USA. Some are asking if this is sustainable. If interest rates increase, will borrowers be able to make their mortgage, car loan and credit card payments?

The global equity market music is playing loud and clear, so do you get up and dance as an individual, or should you sit this one out? If the music suddenly stops, will you find a chair to sit on or will you be one of the small fry left out in the cold with equities crashing down in value? The thundering surge is certainly a tempting ride to join. It is a difficult decision to make.

It seems that, at some stage, the Fed will begin to taper QE. If recent history is anything to go by, when even a hint of that happens, jittery markets will begin to decline immediately. Of course the object of this exercise is to stimulate growth, reduce unemployment and kick-start the economy so that once the momentum is there, tapering will theoretically become irrelevant. No one can be sure one way or another whether that will be reality.

So where are we headed? No one really knows. At one extreme there are some soothsayers who predict the collapse of society as we know it today. Others are at the opposite extreme and believe this will work in the long run.

Meanwhile what do you need to do as an expat with valuable assets and your own nest egg which clearly becomes your own personal life plan? If you can use the markets for your own gain, then all well and good. If you move in this direction, perhaps any sudden equity crash will wipe out your gains and maybe even more.

There is no perfect solution. Perhaps the answer is to be as diversified as you can and distribute your assets over a number of different classes and selective geographies so that the balance gives rise to steady growth.

 

As a sensible, committed, level headed adviser I will offer you practical advice. I will never get it right 100% of the time; no one ever can. But I am dedicated to working with my clients and I will do my best and use the expertise in our organisation to create a sensible picture for you to follow. I will work with you through bad times and will not give up on you if you work with me.

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.

One Comment to “Ride the Wave or Prepare for the Bursting Bubble?”

  1. PFS International 25 November 2013 at 3:29 pm #

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