Yahoo Finance 5 economics lessons for investors being played out in real time
I studied economics in university. At the time, I did not find the theories and examples overly exciting, and it is certainly not a degree that gets a lot of discussion at parties. But once out of school, things became more interesting.
Despite its dour nature, economics truly runs the world. There are daily real-life examples, both in your own family (dividing limited resources) and globally (countries managing debt). As a stock guy, I have to pay attention to economics whether it is exciting or not. For example, if you didn’t watch interest rates and inflation last year, you would be well behind the curve in the stock market today.
Let’s look at some real-life economic events happening in five countries right now. Lessons can be learned, and profits made — or, at least, losses avoided.
Greece
I recently spent a week in Greece. It was certainly beautiful, but there were abandoned or partially constructed hotels around the corner from every beach and on every island we visited. Investors are reluctant to spend capital thanks to a series of economic problems.
Greece never really recovered well from the 2008 financial crisis. The country defaulted on a US$2-billion debt to the International Monetary Fund in 2015. It staged a brief recovery and then COVID-19 hit, which was a devastating blow to a country almost entirely dependent on tourism. Unemployment is at 10 per cent, which is an improvement over prior years. Gross domestic product (GDP) in the world’s 53rd-largest economy is expected to grow about two per cent this year. Inflation has started to slow.
If we do not see a global recession, there is a chance that fortunes in Greece could turn for the better.
Argentina
Think we have high interest rates in Canada and the United States? Take a look at South America, where Argentina just raised its interest rate to nearly 100 per cent. The Central Bank of Argentina raised its key interest rate Monday by six percentage points to 97 per cent in an effort to tackle soaring inflation that has reached 30-year highs.
Central banks across the globe are struggling to rein in inflation, but it’s a particular problem in Argentina, where the annual inflation rate rose above 100 per cent last month. Interest rates at 97 per cent attempt to control price increases and attract investors to Argentina’s currency. But how about trying to get a mortgage at 100 per cent?
The economics lesson: Argentina’s problems can be attributed to factors such as fiscal mismanagement, unsustainable public debt levels, protectionist policies and a history of political and economic instability. It seems Argentina’s problems never really go away: I remember studying its inflationary spiral decades ago during yet another financial crisis the country had.
Turkey
Turkey could likely teach its own economics class given it is experiencing high inflation, a depreciating currency and a large current account deficit. The problems are influenced by factors such as an accumulation of external debt, political uncertainty, erosion of central bank independence and concerns over the rule of law.
The country’s unemployment rate at 10.2 per cent is not so bad, but, like Argentina, it has an inflation problem. Its inflation, however, is only 72 per cent. Several years ago, many predicted Turkey would be an economic powerhouse, with high GDP and rising per-capita income. Maybe one day, but it’s not there yet.
South Africa
South Africa is facing high unemployment, income inequality and sluggish economic growth due to factors such as structural issues within the economy, inadequate skills and education among the workforce, corruption, policy uncertainty and a legacy of apartheid. Power cuts and blackouts are a newer problem, and have a deteriorating impact on the economy.
Despite being Africa’s most industrialized nation, the country’s unemployment rate was 32.9 per cent in the first quarter of 2023. Compare that to Canada at only five per cent. High unemployment, of course, has an economic cost, but also severe social costs. GDP fell 1.3 per cent in the fourth quarter of 2022 and is not likely to get any better this year.
South Korea
I also visited South Korea earlier this year. It’s a model of growth and efficiency. Compared with the four countries above, it is an economic star, but there are hidden issues. The biggest may not be borne from economics, but it certainly has economic influences: the birth rate.
South Korea has the lowest birth rate in the world, at 0.78 births per woman. Young women prefer to work, move to urban centres and enjoy an improving lifestyle over having children. But it’s already causing problems. For example, pension plans are being forced to pay out members as there are not enough younger employees contributing to the plans.
A lower population eventually means lower tax revenue, which causes repercussions. Many countries are now paying women to have children, recognizing the very serious economic fallout that comes from a low birth rate. This was a big discussion topic all over the country while I was there. But governments are not exactly sure how to cure it. Immigration helps, but it is not happening fast enough to stem the economic consequences.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
