The Death of Equities Redux

Monday, July 30th, 2012

by Patrick Rudden, AllianceBernstein

A famous Business Week article, “The Death of Equities,” concluded, “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.” Sound familiar? The article was published in August 1979.

The Business Week article discusses how, with “stocks averaging a return of less than 3% throughout the decade,” investors were fleeing equities in favor of cash and real assets such as property, gold and silver. “Further,” it states, “this ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries and booms….For better or worse, then, the US economy probably has to regard the death of equities as near-permanent condition.”

The primary economic problem back then was high inflation, which had devastated returns for  stocks and bonds but had greatly buoyed the value of real assets such as gold. Of course, Paul Volcker, then Chairman of the Federal Reserve, was soon to unleash his war on inflation, which set the stage for a prolonged period of strong equity and bond market returns.

But the article says other factors contributed to the death of equities: “The institutionalization of inflation—along with structural changes in communications and psychology—has killed the U.S. equity market for millions of investors. We are all thinking shorter term than our fathers and our grandfathers.”

Inflation (at least of the consumer-price variety) has not been the problem it was in the 1970s, but I would argue that structural changes in communications and psychology have been, if anything, more severe. We are all subject sooner and sooner to more and more information. And, as a consequence, we are thinking shorter term than our fathers and grandfathers and, I should add, mothers and grandmothers.

Equities are no more likely to be dead now than they were in August 1979. Indeed, the expected return advantage of stocks versus government bonds is unusually high at present, in our opinion. However, shorter-time horizons may require us to revisit our investment portfolios. In addition to longer-horizon strategies like value and growth, investors may need to consider shorter-horizon strategies, such as equity income or low-volatility stocks.

Finally, for those investors worried about the return of the inflation bogeyman, holding some exposure to real assets is a good insurance policy.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Patrick Rudden is Head of Blend Strategies at AllianceBernstein.

Copyright © AllianceBernstein

Tags: Bond Market, Booms, Business Cycles, Business Week Article, Chairman Of The Federal Reserve, Economic Problem, Federal Reserve, Gold And Silver, Grandfathers, Grandmothers, inflation, Institutionalization, Market Rally, Paul Volcker, Prolonged Period, Real Assets, Recession, Rudden, Stock Market, Stocks And Bonds
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Why Moving to Cash May be a Mistake (Koesterich)

Thursday, October 20th, 2011

by Russ Koesterich, iShares

To be sure, if there is a worsening crisis in Europe or we have another severe recession, investors will probably be better off out of the market for a period of time. But unless you feel confident that you can predict these events, it’s worth considering three reasons to keep some equity exposure.

1.) The Difficulty of Market Timing: Even for professional investors, market timing is extremely difficult. As the chart below illustrates, had you missed just the first 20% of the market recovery in 2003 — an achievement most professional investors would have been proud of — you would have underperformed staying invested in both the downturn and the recovery by nearly 10%, assuming an initial investment of $100,000 in March 2000 and investment period through February 2006.

2.) The Costs: Going to cash is not a costless transaction, particularly if you keep a large portion of your assets in cash for a prolonged period. Even in a low inflation environment, the dollar’s value will erode over time. Consider that since the mid 1980s — when inflation has averaged less than 3% — Americans have still lost 50% of their purchasing power through rising prices. While holding cash will protect the nominal value of your money, holding cash in today’s environment of zero interest rates means losing real value.

3.) The Valuation Argument: While there are no shortages of reasons to be pessimistic about the global economy, equity market performance is less about absolute conditions and more about how those conditions compare to expectations. In other words, if stocks are cheap enough, they may provide a good return even in the face of a lot of bad news. Today, global stocks are trading for around 12x trailing earnings. Historically, valuations have been roughly 75% higher. While a lot could go wrong, much of the bad news already appears to be reflected in the price of stocks.

While none of these reasons mean that markets will move higher in the near term, they do suggest that moving to cash is neither costless nor riskless. At the very least, moving a significant portion of your assets to cash will likely erode your purchasing power over the long term. At worst, moving to cash means you may miss out on a reasonable entry point, as stock valuations already appear to reflect a good deal of pessimism.

Source: Bloomberg

Tags: Bad News, Downturn, Equity Exposure, Global Economy, Global Stocks, inflation, Initial Investment, Investment Period, Large Portion, Market Performance, Market Timing, Mid 1980s, News Today, Nominal Value, Professional Investors, Prolonged Period, Purchasing Power, Recession, Valuations, Zero Interest
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Bursting the TIPs Bubble (Koesterich)

Tuesday, September 20th, 2011

Call #1: Negative TIPS in the long term; Maintain neutral TIPS in the near term

Recently, investors have been piling into US inflation-linked bonds, or TIPS, as part of their rush to safe-haven assets.

The buying has pushed the real return on TIPS close to negative territory.  In other words, investors have been willing to lock their money up for a decade with the promise of a zero after-inflation return. This makes no sense.

Starting with a bit of history, since the TIPS market was launched in 1997, real yields on 10-Year TIPS have averaged around 2.5%. This is consistent with the long-term historical spread between the yield on the nominal 10-year Treasury and headline inflation. It is also what most of the academic literature suggests is a reasonable real return and is much higher than today’s real yield level.

To be sure, for some investors, current nearly negative real yields are justified due to the anemic nature of the economic recovery. When growth is weak, as it currently is, there is less demand for capital so the price of money drops.

But even when you correct for economic growth, TIPS currently look expensive. Based on the historical relationship between real yields and unemployment, you would expect the yield-to-maturity on the 10-year TIPS to be around 1.10%, not zero. In fact, current real yields are actually suggesting a much more significant collapse in the labor market and an unemployment rate of roughly 12%. This begs the question: Is this a realistic scenario?

While I think the United States will suffer through a prolonged period of slow growth, most evidence still suggests that the United States is not entering a deflationary spiral similar to what has been going on in Japan for most of the past twenty years.

Starting with actual inflation, the path of US inflation looks very different than Japan’s own path a decade ago. In fact, by this point in Japan’s cycle, core inflation was already negative. Whatever is in store for the US economy, deflation appears to be less of a threat.

Second, while there is no lack of bad news for the US economy, there is a difference between a slow recovery and a death spiral. For example, from the peak of Japan’s deflationary spiral in 1990 through 2002, lending by Japanese banks collapsed for a dozen years.

In contrast, while US lending is still weak as consumers are trying to rebuild their balance sheets, it is starting to improve. Bank lending to commercial clients has risen for 10 straight months, and is now 6% above its level a year ago. It will take a long time for banking to return to a more normal environment, but the situation looks much better than it did a year ago.

The bottom line: By piling into US TIPS, investors are driving up prices and driving down yields to a point where these instruments now make little sense for long-term investors. As such, I’m changing my long-term view of TIPS to underweight. Still, I’m keeping my near-term view neutral given the anemic state of the economic recovery and the growing risk aversion in market places.

Call #2: Maintain overweight mega caps

Bonds, in general, are considered less risky than stocks. But I think investors can do better than a zero percent real return. While volatility is likely to stay high in the near term, instead of focusing on TIPS, a better alternative may be to consider focusing on a portfolio of large, dividend paying stocks such as can be accessed through the iShares High Dividend Equity Fund (HDV), the iShares Dow Jones Select Dividend Index Fund (DVY) or the iShares S&P Global 100 Index Fund (IOO).

Disclosure: Author is long IOO and DVY

Source: Bloomberg

TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, not iShares exchange traded funds.

There is no guarantee that dividends will be paid.

Tags: Academic Literature, Assets, Bonds, Collapse, Core Inflation, Decade, Deflationary Spiral, Economic Growth, Economic Recovery, Headline Inflation, Inflation Linked Bonds, Investors, Negative Territory, Prolonged Period, Realistic Scenario, Rush, Safe Haven, Treasury, Twenty Years, Unemployment Rate, Yield To Maturity
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Secular Outlook: Implications for Investors (PIMCO)

Wednesday, July 20th, 2011

Secular Outlook: Implications for Investors

by William R. Benz, PIMCO

​As the lines between interest rate and credit risk become blurred, finding sources of “safe spread” becomes even more critical – with investments based on traditional, broad sector classifications worthy of review.

At PIMCO, we believe more, not less, discretion is warranted when trying to navigate volatile global markets, avoid sectors affected by financial repression and hedge against inflation and/or adverse tail events.

Diversification is still as important as ever, but we believe investors need to look at risk factors rather than traditional asset classes when making asset allocation decisions.

To meet the challenges ahead, investors should rethink “risk-free” and “risky,” interest rate and credit risk, investment guidelines, investment benchmarks and asset allocation in their investment portfolios.

If we talk a lot about our secular (three- to five-year) outlook, it is because we feel it’s really important. First and foremost, it forms the cornerstone of our investment process and provides the key structural themes behind our cyclical positioning and bottom-up, relative value strategies in our clients’ portfolios. Our longer-term views also drive our business strategy, helping us to better anticipate and prepare for the changing needs of our clients. We believe there are wider implications for investors as well, not just in terms of strategic investment positioning but in broader positioning of investment portfolios.

We can sum up our secular outlook as follows: a world operating at multiple speeds, with relative strength in the emerging economies vs. worsening debt dynamics in the developed countries; growing income inequalities; political polarization, financial repression (i.e., governments seeking to impose negative real rates of return on savers) and experimental policy measures; continued bumps and fat tail risks; and a prolonged period of low or potentially negative real returns. We believe getting the proper investment positioning in this type of environment is critical.

Proper business positioning is also important. We have seen a movement toward more bespoke “outcome-oriented” solutions in recent years – ranging from absolute return to yield, income, liability matching, inflation protection, tail risk hedging and “smart” beta using improved benchmarks – with the current secular environment likely to only further the trend. This need for outcome-oriented solutions is the key driver behind PIMCO’s evolution beyond fixed income into asset allocation and other asset classes, including active equities. It informs other parts of our business strategy as well, such as our plans for more local talent resourcing and an even greater emphasis on providing solutions.

As for the broader investment implications, we have identified five main areas that we believe will continue to challenge conventional wisdom and historical precedent, compelling investors to rethink their traditional approach to managing and positioning their investment portfolios.

Implication #1 – Rethink ‘risk-free’ and ‘risky’
If you were asked three years ago to identify which two countries with similar economic fundamentals and initial conditions– Spain or Brazil –carried a greater degree of sovereign risk, you would probably have said Brazil without much hesitation. Spain, as part of the European Union supported by wider European policy measures, would surely have been considered “risk-free” – or at least relatively low risk. Brazil, on the other hand, as an emerging market country, would surely have been considered “risky” – at least relative to Spain. But fast-forward to today and most people would say the opposite – that Spain is clearly risky and Brazil, while not risk-free, certainly appears less risky than Spain and many other sovereigns. This is pointedly reflected in current credit default swap (CDS) spreads where the cost of buying protection for Spain today is dramatically higher than it was going into the eurozone sovereign crisis (see Figure 1).

The onset of the eurozone crisis has certainly caused investors to rethink the concepts of risk-free and risky. And with the continued deterioration of developed sovereign balance sheets – including that of the U.S. – this will likely be an even more important issue going forward. In other words, sovereign analysis matters.

Implication #2 – Rethink interest rate and credit risk
Tradition says that emerging market economies have historically been associated with credit risk while developed countries have been associated with interest rate risk. But that distinction is becoming muddled as a growing number of developed economies, especially in the eurozone, are saddled with larger debt burdens and weaker sovereign balance sheets, while emerging market economies continue to exhibit stronger fundamentals. This is best exemplified by Spain, or even more so Greece, vs. Brazil. But there are many other examples on both sides, with perhaps the most striking being the U.S. now under threat of a credit downgrade.

As a firm, we have been de-emphasizing interest rate risk in favor of credit risk and other potential sources of “safe spread” within our clients’ portfolios. PIMCO defines “safe spread” as sectors that we believe are most likely to withstand the vicissitudes of a wide range of possible economic scenarios, given the range of risks. These are securities backed by strong balance sheets and/or high-quality collateral, which we view as being less susceptible to financial repression, policy mistakes and tail events, and which provide additional yield over core (e.g., German, U.S., U.K.) government bonds. Investment grade corporate bonds of issuers with strong balance sheets, high-quality asset- and mortgage-backed securities and covered bonds form the bulk of our “safe spread” holdings. But higher quality emerging market bonds – both hard and local currency – as well as select shorter-maturity high yield bonds are also attractive in our view.

Tags: Asset Allocation Decisions, Asset Classes, Brazil, Business Strategy, Canadian, Canadian Market, Credit Risk, Developed Countries, Diversification, Emerging Economies, Financial Repression, Global Markets, Income Inequalities, India, Investment Guidelines, Investment Portfolios, Policy Measures, Political Polarization, Prolonged Period, Relative Strength, Relative Value, Risk Factors, Risk Investment, Value Strategies
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In Defense of the “Old Always”

Wednesday, January 5th, 2011

In Defense of the “Old Always”

by James Montier, GMO

The concept of the “new normal” abounds in markets these days. It seems I can’t open the Financial Times without at least one headline proclaiming the importance of the new normal. But what does it mean for the way we invest?

Part of the difficulty in answering that question is the plethora of meanings that have become associated with the term “new normal.” For some, it is an environment of subdued growth in the developed markets (the result of ongoing deleveraging – similar in essence to the “seven lean years” that Jeremy Grantham, among others, has previously described). For others, it encapsulates a prolonged period of high volatility (in either economies or asset markets).

According to PIMCO, the coiners of the term, the new normal is also explained as an environment wherein “the snapshot for ‘consensus expectations’ has shifted: from traditional bell-shaped curves – with a high likelihood mean and thin tails (indicating most economists have similar expectations) – to a much flatter distribution of outcomes with fatter tails (where opinion is divided and expectations vary considerably).” That is to say, the distribution of forecasts has become more uniform (as per Exhibit 1).

Exhibit 1: The New Normal: A Flatter Distribution with Fatter Tails

For some economic variables, this is certainly an accurate description. The Bank of England provides us with a good example. It is one of the few central banks brave (or foolhardy) enough to provide us not only with their forecasts, but the ranges around those forecasts (the so-called fan graphs shown in Exhibit 2).

The first chart in Exhibit 2 shows the range of forecasts as of May 2009 going from -0.4% to around 3.5% annually. Fast forward to August 2010 (the second chart in Exhibit 2), and we see a wider distribution of outcomes, which range from -0.6% to approximately 4.5% annually. This is evidence that is clearly consistent with the description of the new normal provided above.

Exhibit 2: Bank of England’s Inflation Forecasts (May 2009 and August 2010)

However, the flatter distribution with fatter tails version of the new normal shouldn’t be taken as a universal truth. For instance, if we turn our attention from the Bank of England’s inflation forecasts to its GDP forecasts, we see something very different (Exhibit 3). The May 2009 forecast has a significantly wider distribution than that of August 2010. This is the antithesis of the new normal. Ergo, the concept should not be applied unconditionally.

But what concerns me more than this are some of the implications that proponents of the new normal seem to draw when it comes to investing. For instance, Richard Clarida of PIMCO wrote the following earlier this year, “Positioning for mean reversion will be a less compelling investment theme in a world where realized returns cluster nearer the tails and away from the mean.”

This certainly isn’t the first premature obituary written for mean reversion. During pretty much every “new era,” someone proclaims that the old rules simply don’t apply anymore … who could forget Irving Fisher’s statement that stocks had reached a “permanently high plateau” in 1929?

Mean reversion is in some august company in being well enough to read its own obituary. Men as varied as Samuel Taylor Coleridge, Ernest Hemingway, Steve Jobs, Rudyard Kipling, and Mark Twain were all recipients of the news of their own demise. Personally, I think Kipling’s response was among the best. Upon learning of his departure from the mortal coil while reading a magazine, he wrote to its editors, “I’ve just read that I am dead. Don’t forget to delete me from your list of subscribers.” With respect to mean reversion, I can’t help but say, in the spirit of Mark Twain, that reports of its death are premature and greatly exaggerated.

Exhibit 3: Bank of England’s GDP Forecasts (May 2009 and August 2010)

Why do I think that mean reversion is still very much alive and well? First, I fear that the concept of the new normal confuses the distribution of economic outcomes (and forecasts thereof) with the distribution of asset markets. As I pointed out above, for some (although not all) economic variables the new normal offers a good description of the current state of play. So, perhaps the world of forecasts will be characterized by a flatter distribution with fatter tails.

However, attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future. Even a cursory glance at Exhibit 4 reveals that economists are simply useless when it comes to forecasting. They have missed every recession in the last four decades! And it isn’t just growth that economists can’t forecast: it’s also inflation, bond yields, and pretty much everything else.

Tags: Accurate Description, Asset Markets, Bank Of England, Central Banks, Consensus Expectations, Curves, Economic Variables, Economists, Environment, Financial Times, Graphs, Invest, James Montier, Jeremy Grantham, Lean Years, Likelihood, Plethora, Prolonged Period, Snapshot, Volatility
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Not Much Out of the G20 (Rosenberg)

Tuesday, June 29th, 2010

This article is a guest contribution by David Rosenberg, Gluskin Sheff.

Much of the pledges made are standard fare. The key takeaway is the acknowledgment of fiscal restraint, which will be the dominant macro theme for at least the next three years. This confab was in stark contrast to the pro-growth stimulus theme of a year ago. No mention of currencies in the aftermath of the Chinese announcement to revalue; at least moderately.

All in, the stress on fiscal consolidation implies the need for policy rates to remain at ultra-low levels for a prolonged period of time. This in turn limits the chance of any sustained rise in government bond yields.

In terms of any goals established, there is an objective to shave fiscal deficits in half by 2013, and to stabilize debt-to-GDP ratios with a 2016 deadline. But specific timelines are at the discretion of each government. Ditto on the issue of bank taxes and global financial regulations.

“THE THIRD DEPRESSION”

That is the title of today’s spirited column by Paul Krugman in the NYT’s editorial section. His arguments can be debated as we are sure the entire Austrian school (along with Robert Barro) would take him to task on the efficacy of even more government intrusion at this point. However, Krugman’s view on what this cycle is all about is right on the mark: a deflationary depression. In our view, the best medicine from governments is to prevent credit bubbles from occurring in the first place – it’s not as if the U.S. didn’t have warning signs once Fannie and Freddie morphed into de facto hedge funds. In any event, here are some snippets from the Krugman piece that the perma-bulls should consider (especially with the consensus still north of $96 on 2011 EPS projections):

“Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.”

“We are now, I fear, in the early stages of a third depression … primarily by a failure of policy.”

“There is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.”

“The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.”

“In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.”

“… both the United States and Europe are well on their way toward Japan-style deflationary traps.”

As we said before, this is a powerful indictment against the current policy stance. But many other entities do not share Mr. Krugman’s view, or that more government intervention will do much good. The BIS (Bank for International Settlements) just published a report that came to different policy conclusions (cited in today’s FT):

“A programme of fiscal consolidation – cutting deficits by several percentage points of GDP over a number of years – would offer significant benefits of low and stable long-term interest rates, a less fragile financial system and, ultimately, better prospects for investment and long-term growth.

Tags: Austrian School, Best Medicine, Bond Yields, BRIC, BRICs, Canadian Market, Confab, David Rosenberg, Deflationary Depression, Economic History, Editorial Section, Fiscal Consolidation, Fiscal Deficits, Fiscal Restraint, G20, Government Bond, Government Intrusion, Nyt, Paul Krugman, Prolonged Period, Recessions, Robert Barro, Warning Signs
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Yen Carry Trade Back in Play

Friday, January 22nd, 2010

This article is a guest contribution by Scott Boyd, OANDA MarketPulse FX.

One sure sign that some level of stability is returning to the global economy is an easing of the volatility we have seen with many of the major currency pairs. As any currency trader will tell you, volatility is a double-edged sword – it is possible to earn very attractive returns during periods of high volatility, but losses can be equally as spectacular. On the other hand, when exchange rates remain steady for a prolonged period, it may be easier to keep a lid on losses, but opportunities to profit are also limited. This is why when exchange rate volatility declines, many traders turn to the carry trade.

Bank of Japan

A carry trade strategy seeks to profit from the interest rate differential between two currencies. The approach is to select a currency pair where you sell (go short) a currency with a low interest rate, while simultaneously buying (going long) a currency with a higher interest rate. When you hold this currency pair open in your trading account, you must pay interest on the short position, while you receive interest on the long position. If you receive more in interest than you pay, this difference – known as interest rate carry or simply carry – is retained in your account as profit.

Now before you jump to the conclusion that this is as close as you can get to earning money for nothing, there is one important caveat you must consider. The entire time you hold the currency pair open in your account, the value of the trade itself is subject to changes in the exchange rate; this means that if the exchange rate moves against you, and even if you are earning positive carry during this time, you may actually lose money overall when you close the trade.

For much of the early 1990s, Japan had the lowest interest rates of the major currencies and entering into a carry trade using the yen to buy higher yielding currencies was very popular. The practice became less attractive during the mid 2000s and was put on hold entirely during the current economic crisis. In 2009 however, the carry trade came back with a vengeance, as Australia and New Zealand raised interest rates to 3.75 percent and 2.50 percent respectively, and this had many traders selling US dollars in order to buy aussie and kiwi dollars.

In addition, both currencies also fared vary well against the dollar from an exchange rate standpoint as you can see in the following table:

* reflects the percentage change in the value of the non-USD currency compared to USD

2009 Carry Trade Winners

The chart confirms that both the Australian and New Zealand dollars were clear winners over the US dollar during 2009. If you had held the AUD / USD and NDZ / USD pairs open for the entire year, you would have gained 36.5 percent on the aussie trade, and over 25 percent on the kiwi position just on the exchange rate change alone.

In addition to these impressive returns, you would have also earned the interest differential, which for most of last year, was 3.5 percent for the Australian dollar and 2.25 percent for the New Zealand dollar. Interestingly, the Canadian dollar also earned nearly 16 percent over the US dollar on the exchange rate difference, but with a 0.25 percent overnight rate, the “loonie” offered little in the way of carry over the US dollar.

Now for the big question – is the carry trade still in play for 2010?

This answer depends very much on the strength of the recovery. If the economies of China and India continue to expand at their current rate, and if the US and Europe maintain at least some limited growth, the so-called commodity currencies (Canada, Australia, and New Zealand) are well-positioned to remain strong in comparison to these other currencies. Having said this however, it may well be time to find a new banker to provide the funding for these purchases.

By this I mean, instead of selling US dollars and buying aussie dollars for instance, it may be better to short the yen, and there are very good reasons for making this consideration. Firstly, the US dollar could gain in strength later this year, and if this were to happen, there is a chance that the Federal Reserve could raise interest rates by year’s end. Japan on the other hand, is fully committed to a policy of maintaining a weak yen for the foreseeable future.

Driving the value of the yen downwards is an attempt to make Japan’s exports more attractive to foreign markets – particularly the United States and Europe. The goal is to boost exports to help keep Japan’s all-important manufacturing sector busy and to prevent further job losses. For an export-dependant economy such as Japan’s, the trade-off of a weaker currency to preserve production levels (and by extension reducing unemployment), is a small price to pay.

Obviously, the Bank of Japan has used up its interest rate arsenal and can no longer simply cut rates in a bid to weaken the yen. Thus, the only option left for the Bank is to boost the supply of the currency by dumping even more yen into the system. If you listen carefully, you can hear the humming of the printing presses.

Scott Boyd has produced educational materials and conducted market analysis for several of Canada’s leading financial institutions. Scott now contributes articles to the OANDA blog and is keenly interested in the factors affecting global currency prices.

Tags: Attractive Returns, Bank Of Japan, Canadian Market, Caveat, China, Commodities, Currency Trader, Currency Trading, Differential, Double Edged Sword, Earning Money, Emerging Markets, Exchange Rate Volatility, Exchange Rates, Global Economy, India, Interest Rate, Major Currency Pairs, Marketpulse, Oanda, Prolonged Period, Scott Boyd, Short Position, Trade Strategy, Yen Carry Trade
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World trade improves, but no recovery in sight

Friday, July 31st, 2009

According to the Economist.com, world trade, which collapsed last year, is not yet showing signs of recovery. Global stimulus efforts have only succeeded at steadying the value of trade. It is too early to tell where trade growth will come from:

Consumption has yet to recover:

But for a sustainable recovery in trade, global demand has to recover on its own steam. It is not clear where demand might come from. American consumers have lost much of their astonishing appetite for goods ranging from clothes to iPods to computers. American households are now saving 5% of their incomes, up from essentially nothing a year ago. Unemployment in America and elsewhere will continue to rise. The International Labour Organisation estimates that the global jobless tally will increase by between 21m and 50m this year.

More people out of work will mean a further fall in global demand. China’s boom (GDP grew by 7.9% in the second quarter) is fuelled by government investment and by the stimulus, not a rise in private consumption. Nor are other consumers stepping in. Without a move towards more private consumption in countries such as Germany and China, the world is in for a prolonged period of slow growth and correspondingly sluggish trade.

Read the whole article here.

Source: The Economist.com, After the Fall, July 27, 2009

Tags: 50m, American Consumers, American Households, Appetite, Boom, Economist, GDP, Global Demand, Government Investment, Incomes, International Labour Organisation, Move Towards, Nothing A Year, Private Consumption, Prolonged Period, Second Quarter, Stimulus, Sustainable Recovery, Tally, Unemployment In America
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