Global Equity Markets: A Year-End Review
As we approach the close of 2010, it’s important to assess the performance of the global equity markets. The overarching takeaway is that returns have been quite robust year-to-date. By November 19, various equity indices worldwide had shown respectable gains, although the specifics varied by benchmark. Naturally, this has fueled a wave of positivity among active equity managers, many of whom are proclaiming significant skill in stock selection. While some of this enthusiasm may be justified, the primary catalyst for these results remains the strong bullish sentiment that characterized the year.
Insights from Gary Shilling: Understanding the Economic Landscape
● The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation
By Gary Shilling
Video Interview with the author via Daily Finance
Economist Gary Shilling, known for predicting the financial crisis, has released a new book, The Age of Deleveraging. In this work, Shilling argues that deflation is a greater concern for investors than inflation. He discusses the likelihood of the U.S. economy undergoing a period of sluggish growth, shares his stock market outlook, and offers ten investment recommendations for the present climate.
Consumer Price Inflation: A Look Ahead
Yesterday’s report on consumer price inflation for October does little to dispel concerns about disinflation. Therefore, dismissing the risk of potential deflation in the future may be premature. While the likelihood of this scenario is low, primarily due to the Federal Reserve’s ongoing monetary stimulus, it remains a risk that hasn’t been sufficiently mitigated. Given the current global environment marked by unusually high debt levels and weak economic growth, the possibility of deflation cannot be ignored.
Testing the Fed’s New Measures
The crucial evaluation of the Federal Reserve’s recent phase of monetary stimulus, commonly referred to as QE2, is underway.
The Repetition Compulsion in Investing
The concept of repetition compulsion, as described by Freud, refers to a pattern in which individuals are compelled to repeatedly engage in detrimental behaviors. Observations suggest that this phenomenon is prevalent in the realm of investing.
Reconsidering the Gold Standard
The idea of reverting to a gold standard has garnered renewed interest recently. Advocates believe that anchoring the value of currencies like the dollar to gold could provide a remedy for ongoing economic challenges. This notion was echoed by the World Bank’s president last week, who suggested embracing a gold-based monetary system. Financial writer James Grant also expressed nostalgia for the classical gold standard in his recent New York Times article, stating, “The classical gold standard, which was in effect from 1880 to 1914, is precisely what the world requires now.”
Understanding the Financial Crisis
● All the Devils Are Here: The Hidden History of the Financial Crisis
By Bethany McLean and Joe Nocera
Review via Canadian Press
At its core, the story follows an alluringly American narrative surrounding the dream of home ownership, as explained by McLean and Nocera. The narrative allowed Federal Reserve Chairman Alan Greenspan to confidently argue against regulating mortgage securities and derivatives, citing that such actions would impede home ownership. Government-sponsored enterprises like Fannie Mae, Ginnie Mae, and Freddie Mac expanded beyond previous limits, seemingly prioritizing middle-class borrowers, even though the main beneficiaries turned out to be affluent institutional investors.
The Reflation Trade: Navigating New Challenges
The reflation trade that began gaining momentum in late August has shown promising results, shifting the economic outlook from negative to slightly positive. However, new obstacles have emerged. The recent optimism regarding the economy is encouraging and essential for addressing existing macroeconomic issues; yet, political debates are introducing a new layer of complexity. Even if political circumstances were ideal—though that is far from the case—the recent recovery for the U.S. economy remains tenuous. With political instability fueling uncertainty, the latter part of 2010 is likely to witness increased volatility in both capital and commodity markets.
Economic Updates: Inflation Trends
► Spike in China’s Inflation Necessitates Tightening
Aileen Wang and Simon Rabinovitch/Reuters/Nov 11
Chinese inflation surged to a 25-month high in October, alongside unprecedented bank lending figures, highlighting the challenges faced by Beijing in managing price stability. This data explains why the central bank increased reserve requirements recently and indicates potential further tightening measures, including interest rate hikes and yuan appreciation, in the coming months.
► Mervyn King: Inflation Won’t Prompt Rate Increase
Larry Elliott and Nicholas Watt/Guardian/Nov 10
The Bank of England predicts that inflation in the U.K. will exceed target levels for the entirety of the following year due to the upcoming VAT increase in January and rising import costs. Mervyn King, the governor of the Bank, acknowledged that inflation rates continue to exceed expectations, yet indicated no immediate intent from the monetary policy committee to raise borrowing costs.
In summary, the global equity markets have shown strong performance in 2010, driven largely by a bullish sentiment amid active management claims. As we look forward, factors such as inflation trends, monetary policy, and political dynamics will significantly shape the economic outlook. Understanding these elements will be crucial for investors navigating the complexities of the markets.