As the second quarter of 2013 slips into history, investors are finding a few bumps in the road. The tectonic plates of the world economy are shifting. The yield on the benchmark 10-year Treasury is moving up as we hear hints from the Federal Reserve that there may be an end to QE (Quantitative Easing) 3, but not yet.
The assumptions behind the recovery of global markets has been based on the assumption that the US Fed would keep printing money, China would keep growing and Japan would stay mired in a decades-long slump. Any hints that these assumptions would change have triggered sudden gyrations.
The Fed’s hints that QE-Infinity will not go on forever has some people worried. There is also a question of how fast the Chinese economy is really growing. And Japan has suddenly embarked on its own QE program. Currency markets are jittery, and currencies have a significant impact on investors in foreign securities.
What’s ahead for the rest of the year? Answering this question now is impossible.
The prospect for slower growth in China is pulling commodity prices down. Japan’s stock and bond markets have been riding a roller coaster as attitudes shift almost daily about the new government’s economic policy. Emerging market currencies are also in decline. India, Poland, South Africa and Brazil are trying to prop up their currency. Meanwhile Europe remains mired in recession.
Economists at J.P. Morgan Chase have turned mildly hopeful lately that the U.S., Europe and much of the rest of world economy will shift into a higher gear later this year, in what would be a pleasant contrast to the midyear slumps seen in recent years.
The International Monetary Fund is more cautious about the rest of the world. Managing Director Christine Lagarde said “We could be entering a softer patch.”
Whatever comes our way, we are, as always, positioning our portfolios to participate in further market gains and to cushion any market declines. Over the long term the trend is up.
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BREXIT is a political crisis, not a financial crisis
We have a tendency to take a dispassionate view of world affairs. It helps us avoid getting caught up in the hype that the media sells when things happen. When the unexpected happens, as it so often does, the initial reports and the initial reactions are often the opposite of the truth and have little relationship to reality.
We have some insight into European affairs for personal reasons and have always felt that the EU was an artificial construct in a continent that is home to so many disparate cultures. So we are not surprised that the whole rickety structure is showing signs of coming apart. But Europe has been the home of little countries and big countries for millennia and has thrived over that time. There’s no reason to think that the EU is either critical or even necessary. It has its uses but it also has its failures and it’s the failures that have grown larger over time. So finally, when put to a vote, the people on an island off the coast of Europe has decided it was time to declare its independence from the EU and reclaim their heritage.
We also found the commentary from Jenna Barnard of Henderson Global Investors compelling and wanted to share it.
We will continue to watch and advise you to events as they unfold. As we write these comments on Tuesday morning the US stock markets are up over 1% and the European markets are up over 3%. Reality is overtaking panic. If you have questions, don’t hesitate to contact us.
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