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| Adrian Mastracci, president
of KCM Wealth Management, comments "Reflect
on your progress. Scrutinize what you are
doing. Examine whether yesterday's plan will
perform in the future." |
For Immediate Release
Vancouver, BC (June 25,
2003): Adrian Mastracci,
investment counsel & president
of Vancouver's “fee-only” KCM
Wealth Management, comments on today’s interest
rate relief from the US Fed.
Wow, an even baker's dozen of interest rate
cuts! That brings us to the lowest levels in
45 years. But is it time to rejoice?
I can breathe much easier now than the US
Fed has continued the interest rate cuts. And
it has nothing to do with slowly getting rid
of my cold bug I caught earlier this month.
The cuts have a feeling of walking down the
stairs to the basement. However, after thirteen
cuts we are not there yet.
I do expect at least one more cut before we
feel bottom. Only to turn around and go back
up the staircase.
In Japan, the rate has just gone slightly
negative. Now there is a new chapter for the
school of modern economics.
A little perspective on the economy. The US
Fed is still cutting interest rates because
the data on the economy continues to sputter.
The US Fed hopes that lower rates will spur
more activity and assist the economic recovery.
For all consumers, investors and companies.
Now picture this. You are the CEO of your
favourite business. Is the latest US Fed funds
rate lower by ¼% sufficient for you
to spend that loan from your lenders?
I suggest that the better reason to borrow
is when you can see daylight on selling more
goods and services. Perhaps, heaven forbid,
at a higher price. Frankly, a little inflation
would be welcome now.
On the other hand, consumers look at the lower
rates as a blessing. I expect consumers to
keep on spending in view of the interest rate
bargains.
However, here comes the rub of the interest
double edge sword. The economy will pay for
the accumulated consumer debts when interest
rates begin to turn up. More personal bankruptcies
to look forward to will be one of the telling
tales.
The other group who is feeling a huge pinch
from interest rate cuts is the retired and
nearly retired crowd. A retiree requires a
dependable cash flow from financial assets
to sustain the standard of living.
Unfortunately, retirees will take on more
risk, knowingly and otherwise, in search of
investment returns to satisfy the appetite
for retirement income.
It becomes a vicious circle. Retirees need
income; they seek higher returns; take more
risks and increase the chances of incurring
losses that chip away at the retirement nest
egg.
Certainly, some retirement plans have been
put on hold. Others are being rethought.
Back to the US Fed. One relevant question
is whether all the rate cuts are having the
desired effects.
I am not convinced that they are. Thankfully,
we do not have far to go before we reach zero.
Hopefully, there will be no need to test that
bottom.
Well, what can one do to make the journey
less painful? These may assist:
- Reflect on your progress. Scrutinize
what you are doing. Examine whether yesterday’s
plan will perform in the future.
- Keep borrowings in check. The overuse
of debt is one of the biggest impediments
to achieving financial security.
- Retirees should revisit the retirement
assumptions and what the portfolio is expected
to provide.
- Business owners can assess the future
prospects, analyze the present business
plan and adopt the necessary changes to survive.
We are still experiencing reasonable economic
activity under the circumstances. However,
expectations of an economic recovery could
be further away.
Storm clouds on the horizon will eventually
have to be dealt with. Accumulated consumer
debts and teetering retirement plans are two
of them.
Sustainable economic activity will begin to
return when business capital spending starts
to rise again. Until then, the pain of volatility
will linger on.
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