Interest Rates & the Price of Tea in China

Altoona, PA – The price of tea in China has been rising dramatically due to supply and demand. Some of the higher end teas are actually being hoarded after the price jumped 50% last year. Pu’er tea, a brew thought to have medicinal qualities, is grown in a remote southwestern province of Yunnan. At the Maliandao Tea Market, in south-west Beijing, Pu’er is sold in 350 gram cakes. Pu’er tea is considered to improve with age. A 64-year-old Pu’er tea sold for a million yuan, making it six times more expensive than gold. The price of newly harvested tea has gone up 30- 50% since a 6.4 earthquake hit the Pu’er tea growing region.

At this point you are probably asking what’s the price of tea in China got to do with our current economic state in America? I would agree, Nothing! According to Eugene Fama, a recent recipient of the Nobel Prize in economics, in the final analysis the vast amount of news that we get from financial sources is just noise.

Most of the sources I turn to for news the last couple weeks have been pounding on China being the reason we are having a very volatile month of August. The Federal Reserve and their lack of clarity has been touted as a compounding reason according to many of the pundits.

The reality is markets are random and unpredictable; all the available information is factored into the current price. Only new and unknowable information changes pricing and it happens instantaneously! The academics have made a very clear case that is supported by empirical research. There is a historical 2/3 bias, two out of every three years is up and one out of every three years is down. We never know what a year will bring until we have the benefit of hindsight.

Let us look at a balanced portfolio, 50% fixed and 50% equities, over the last several years based on audited returns, net of fees. No market timing, stock picking, or track record investing was utilized to get this result. Listed is the year, if it was an up or down year, as well as the leading asset class for that year:

Year                Status                          Leading Asset Class

2006                Up                               International Large

2007                Up                               International Large

2008                Down                          Long-term Bonds

2009                Up                               US Small Growth

2010                Up                               US Small Growth

2011                Down                          Long-Term Bonds

2012                Up                               US Large Value

2013                Up                               US Small Growth

2014                Up                               US Large Growth

2015                ?                                  ?

The market is a zero sum game; in order for you to win someone else has to lose. If we are all in the same market, at the end of the year, for example we’ve ALL got the same market growth minus the cost of investing.

My point, the opinion laden news encourages fear and greed, fight or flight responses, and the result, trading ensues. Trading on any news in a well-diversified portfolio would be nothing short of gambling. The better the spin of new items, the more trading, thus creating huge profit for the speculators by creating billions of shares of trading every day, making trillions for the industry regardless of whether the market is up or down.

Really there are only three rules to be a successful, prudent, long-term investor:

• Own Equities
• Diversify
• Rebalance