Published February 10, 2017
Way back in what now seems like the dark ages, the world experienced a financial crisis. The crisis slammed every portion of the globe, and it persisted. From governments down to the bottom of the socioeconomic structure, both assets and jobs were lost. At about this same time, the Middle East was imploding in revolution. These two events would coalesce at a later date in worldwide turmoil.
The recovery from the economic crisis was slow and uneven. Many people who lost their jobs remained unemployed. The percentage of the workforce actually working stayed low. People at the upper end of the economic spectrum found that their assets recovered, as the Federal Reserve kept interest rates low by historical standards and kept them low for a long time. People out of work noticed the disparity. Those with good jobs and their own homes did not notice so much.
As the Middle East disintegrated, with country after country attempting to throw off repressive dictatorships, vast numbers of refugees were created. Many of these refugees sought new lives in countries with stable governments in Europe and elsewhere. Some countries said they would accept […]
Published January 9, 2017
The year 2016 started poorly, with the market dropping more in January than any other time in history. The equity market struggled throughout the year, continuing a trend which saw the S&P gain 1.9 percent from the end of 2014 through the first half of 2016. The California Public Employees Retirement System, the largest public pension fund in the U.S., with all its access to the best investment advisors, gained only 0.06 percent for the trailing 12 months ending June 30, 2016.
It’s no wonder that investors were unhappy with returns. They flocked to low-cost index funds in the belief they were better off, as low interest rates and no-growth policies sucked the gains out of the markets. Once interest rates start to rise and earnings return to the markets, stock pickers will regain the upper hand.
Fixed-income markets, coming off a 35-year bull market, saw massive drops after the election and two trillion dollars in market value in bonds was lost. So much for “low risk” fixed-income investments. Despite the poor performance of the equity markets, they were still the best place to be.
Everything appeared to change with the […]
Published December 12, 2016
November began with the impending U.S. election pitting Hillary Clinton against Donald Trump. Clinton was the odds-on favorite and the favorite of the market too. Investors had largely made their bets on a Clinton win. When Trump pulled the upset of the century, investors had to quickly redirect their investments. Equity investors switched from a risk-off scenario to a risk-on scenario.
As President-elect Trump gave a speech outlining his plans, the bond market had a heart attack. Two trillion dollars were wiped out within days. The Financial Times called it the worst bond rout since 1990. Interest rates jumped over 50 basis points within days – an astonishing move for a bond market, culminating in a move of almost 100 basis points since Sept. 1.
Additionally, the Federal Reserve had been signaling a rate hike of 25 basis points, with the futures market suggesting that the increase was more probable than not. Immediately after the Trump talk, the futures market’s certainty of a rate hike rose to 100 percent. The market did the Fed’s work for the Fed. Indeed, with the increase in interest rates of nearly 100 basis points, […]
Published November 14, 2016
In echoes of Brexit, Donald Trump rode a wave of dissatisfaction to win the Presidency of the U.S. His campaign was directed to white working class voters, formerly reliable Democratic voters. With the U.S. economy growing at a very slow pace, workers have not had a real pay raise in years. Many workers felt left out of the economy while the “elite” class prospered. Trump dispensed a bromide of nationalism and xenophobia which carried him to victory. It was the same message that worked in the Brexit vote to the surprise of pollsters and the ruling class. Although Trump had trouble staying on message, he eventually got his message across to unhappy voters who were willing to accept his approach.
The campaign was unorthodox, but that had an appeal to voters who saw themselves as left out. Voters wanted unorthodox solutions. The campaign was devoid of plans to solve the problems of the country and quickly descended into name calling. It stayed there for 18 months. Voters were fed up with the campaign. The country became deeply divided. Trump told a dark message. He portrayed himself as the only […]
Published October 10, 2016
As we head into the fourth quarter of this year, the outlook is decidedly mixed. European bank worries, the Federal Reserve and interest rates, elections and corporate profits all weigh on the economy. After a long period of negative interest rates, the European economy is softening and its banks are struggling. The negative rates have hurt those most intended to benefit. Bank profits have fallen, interest yields have collapsed and European economies have suffered.
The most notable bank to suffer is Deutsche Bank, with over 100,000 employees and 1.6 trillion euros in assets. Long a bulwark of the German economy and itself a large investor in German companies, Deutsche Bank has seen its market capitalization plummet. Other banks have declined to do business with Deutsche Bank, and hedge fund managers are shorting the stock. Market value has dropped dramatically. Nor is Deutsche Bank alone: Commerzbank, Germany’s number two bank, is laying off 10,000 workers, Greek banks have become penny stocks and Monte De Peschi, the oldest bank in the world, is barely surviving.
It is not just that Deutsche Bank is struggling, but that it represents great systemic risk – […]
Published September 12, 2016
Each week Fed leaders take to the luncheon circuit to speak in favor of higher interest rates. Each time they seem ready to raise rates something gets in the way. If it is not China, it is Brexit, or it is employment data. The one time the Fed did raise rates, the market corrected sharply.
Ever determined, the Fed speakers are again calling for rate increases. After Chairwoman Janet Yellen opened the door just a crack at the Jackson Hole economic conference, it seemed very likely that the Fed would raise rates in September. This contrasts with previous Fed expectations not to raise rates before December and maybe not at all this year. But a subpar jobs report showing hiring of 151,000 workers in August stunned the markets, again reflecting the weak economy. With 24,000 fewer jobs than expected, the jobless rate held steady at 4.9 percent.
The labor participation rate remained at a meager 62 percent. The report is likely to keep the Federal Reserve on hold when it meets on Sept. 21.
Furthermore, the Institute for Supply Management Non-Manufacturing Business Activity Index showed a surprise massive slowdown in growth […]