The Yin-Yang of Your Money

If your crystal ball about money is dim and cannot shed light to the future, then chop it in half and balance them like the Yin-Yang. Let your gut feeling weigh which side should be bigger. But never put all your weight on one side.

If you could have a crystal ball about the economy and which direction the money is heading, you’d probably be on Wall Street making a big impression. Fair enough - nobody has that crystal ball. All economists and mutual fund managers can say is “On one hand this, on other hand that.” But nobody can predict which will be the upper hand.

1. Need a Head Bigger Than the Skull

In reality, the number of factors influencing the economy exceeds the simple, magic number of 2.

Change of Consumers: Population change such as baby boomers directly impacts supply-demand.

Change of Technology: New inventions (e.g., Internet) may open new markets and create different life styles.

Change of oil (gas) price: Oil is the blood of economy, need I say more?

Change of world affairs: Global economy, chain reactions. Chinese has a saying “pull one hair and the whole body feels it.”

Change of Environment: Watch out the Mother Nature’s unpredictable temper, e.g., Katrina.

Change of Interest Rate: Guess who is the most powerful party in the US? Bush or Greenspan?

Change of Psychology: Living within ones means used to be basic human dignity. Now many live beyond their means in a big house.

There are gazillions of other factors impacting the economy and your money. The weight of each factor is difficult to assess. Even though science and technology have advanced to the state of predicting the weather, no computer can predict the economy yet (at least not publicly). Mankind as a whole needs a head bigger than the skull to predict its own behavior.

2. Simplify to Your Gut Feeling

The Chinese ancestors invented a simplification mechanism called Yin-Yang, or Female-Male, or Moon-Sun. The late Chinese Chairman Mao had a famous saying: “Divide 1 into 2”. The English version of the same philosophy is “on one hand… on the other hand…” I guess all such thinking mechanisms originated from the simple fact that we each have two brains (left and right hemispheres), two hands, two feet, two parents….

Now let’s group the major economical factors into two sides: Deflation and Inflation – the Yin and Yang of money.

On the Yin side, if consumers spend less, or if technologies fail to create new markets/demand, or oil price decreases, or wars in the world discourage people/companies to travel and spend/expand, or…. then we’ll likely have deflation. Things will be cheaper and interest rates will drop. In this scenario, housing bubble may pop and economic depression may prevail. If you believe this will be the future, you’d better hold on to your cash, put it in CDs, bonds, or other fixed income; because your money will be worth more later.

On the Yang side, if consumers spend more, or if new technologies successfully create new markets/demand, or oil price increases, or the world peace encourages people/companies to travel and spend/expand, or…. then we’ll likely have inflation. Things will be more expensive and interest rate will go up. In this scenario, you’d better buy gold, or real estate, or anything that will not decrease value as the money paper would. If you believe this will be the future, you may want to get a big loan now; because the money you pay back later will be worth less (now think who has the biggest debt in the world?)

3. The Art is in the Balance

It’s up to your gut feeling which side you want to put more money on. You don’t get that gut feeling by digesting hamburgers alone, you need to read and study economic history, news, and world affairs. But no matter how your gut feels, never put all your money on one side. Reasons:

a) The reality may not always agree with your gut feeling.

b) Yin and Yang interact with each other and inter-flow with time. E.g., gas price goes up, inflation heads up; then people travel less and spend less, demand will decrease, inflation will calm down, and deflation may head up. Economy has its own self-adjusting mechanism similar to your body temperature. A fever of any type cannot last long, otherwise the whole system dies.

c) There are fundamental mathematical reasons why diversification can decrease risk. This should be a separate topic next time.

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