Commentary

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

About Those Falling Commodity Prices

By, 10/21/2014
Ratings294.241379

Here is a scary story you may have heard this month: Commodity prices are tanking as Asia’s demand for crude oil and industrial metals dives, signaling a global economic slowdown. It has appeared, with varying degrees of detail and hyperbole, here, here, here, here, here, here and here. Some infer bad things from charts like Exhibit 1. Others use anecdotal evidence and rhetoric. We don’t think either approach—or the thesis—matches reality, however. Take a deep data dive, and you’ll see a far more boring, benign reason for falling prices: Supply is up way more than demand, which isn’t plummeting (contrary to widespread belief).

Exhibit 1: Select Commodity Prices Year-to-Date

Commentary

Fisher Investments Editorial Staff
Behavioral Finance

Amid Volatility, Beware Your Inner Investing Demons

By, 10/20/2014
Ratings224.659091

Ebola, deflation, the Fed (!), bond market liquidity, technical indicators and more. The media seems obsessed with hunting down larger explanation for recent volatility. The more obsessive they get, the more likely investors get caught up in all the noise, increasing the risk their brains get the best of them. Take note: Now is a time to be conscious of your inner investing demons—the kind that can cause you to act counter to your long-term goals. Recognizing these pitfalls is a key step to keeping them in check.

Year to date, the MSCI World Total Return Index has closed more than 1% up or down 18 days.[i] Of those 18, five came in October’s 13 trading sessions, and two had intraday swings of greater than 1% (one was greater than 2%) this tally doesn’t capture.[ii] Friday continued October’s choppy start, with the MSCI World jumping +1.3% (yes, big up is still volatility). At one point, the global gauge had fallen -9.3% from its peak.[iii] After Friday’s big bounce, global stocks were -8.1% below the peak.[iv] Will they fall further? No one can know, in our view. There is no way to tell if Friday’s bounce marked the end of the short-term dip. We’ll know if markets avoided the first technical correction since 2012 only in hindsight.[v] But we do know when volatility runs higher, it often triggers humans’ innate fight-or-flight instinct. This is a useful evolutionary reaction when you are trying to avoid being a wild animal’s lunch, but it isn’t helpful in markets, which require rationality. Maybe you’re above making such errors. That’s possible. But at the same time, it doesn’t hurt to review some typical mental errors so you can learn from others’ mistakes and hopefully avoid making them.

Recency bias is one pitfall many investors succumb to when markets get rocky. Recency bias is the tendency to take very recent market behavior and extrapolate it forward, sometimes to degrees most people would think irrational when coolheaded. It’s easy to see how you might get engulfed by this today, as headlines proclaim, “October’s Wild Ride Isn’t Over Yet” and attempt to explain “Why All This Market Volatility Is Here to Stay.”

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Did a Fed Waffle Cause Thursday’s Rebound?

By, 10/17/2014

This investor is putting Thursday’s market action under a magnifying glass. Photo by Comstock.

We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.…

Commentary

Christopher Wong

Four Tips for Retirement Investing

By, 10/16/2014
Ratings1174.200855

Retirement should mean more time to relax, not worry. Photo credit: Guillermo Murcia/Getty Images.

Retirement: the word strikes both joy and fear in the hearts of many long-term investors. Joy over the possibilities of post-working life: traveling, pursuing new hobbies and/or spending more time with family and friends. Fear due to all the unknowns: How much should I be saving?; Will I have enough to retire when I want?; What if I run out of money during retirement? The media exacerbates the fear with headlines screaming how unprepared Americans are for their golden years. But retirement investment needn’t intimidate. Now, ask most financial professionals how to prepare, and you’ll probably get a cliché answer—Save More! But here are four less-often-shared tips to get you started—tips equally applicable if you’re far from retirement or already in it.

Commentary

Fisher Investments Editorial Staff
Inflation, Media Hype/Myths

Why We Don’t Fear Deflationary Doom Is Here

By, 10/16/2014
Ratings444.397727

Stocks had a wild ride Wednesday, with the S&P 500 Price Index down as much as -3% before climbing back to finish the day down just -0.8%.  Perhaps the correction many have long awaited is here—at one point, the S&P 500 Price Index was about one percentage point removed from correction territory (10% lower than a prior high point)—but it’s only clear in hindsight. Such moves are sentiment-driven and tend to come and go fast. There is usually a host of negative headlines, surrounding a spooky story or stories. But corrections can be caused by virtually anything. Or nothing. Such headlines abound today.

Let’s consider one of the day’s big fears: global deflation. To many observers, the evidence prices are about to spiral downward is stacking up. Chinese consumer inflation slowed to just 1.6% y/y in September—the lowest since 2009—and Chinese producer prices slid faster, hitting -1.8% y/y. September US producer prices fell -0.1% m/m. UK CPI slowed to 1.2% y/y, also the slowest since 2009. 10-year US Treasury yields briefly dipped below 2%. Oil prices continued tanking.[i] Market-driven future inflation gauges, including five-year US TIPS spreads and the eurozone’s five-year/five-year inflation swap, are falling. German inflation is stuck at 0.8% y/y. The eurozone’s final September inflation estimate hits Thursday, and no one expects improvement from the 0.3% y/y first read. 

Two primary interpretations emerged from this data bonanza. One, the slow ebb in prices will be a self-fulfilling prophecy, and deflation will choke off the global expansion. Two, low inflation/deflation will make debt more burdensome—another growth headwind. These are big, popular, scary stories, but we don’t think either carries much weight—problematic deflation doesn’t appear to be in the cards.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths

Return of the Euro Crisis’ Ghosts

By, 10/15/2014

With volatility back, many seek to explain what has amounted to quite a back-and-forth October. And it seems many settled on recent developments in Europe as the culprit. While possible, a quick glance at Europe’s recent headlines might have you thinking it’s 2011 or 2012. In our view, fears around the eurozone likely lack the teeth to materially bite this bull. The questions may be slightly different now: It’s more, “How does the eurozone avoid a ’lost decade of growth?” than warnings of the imminent collapse of the common currency. But most of the fears—and many of the specifics—are the same. These recycled false fears likely lack the surprise power to knock a global bull off track.

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Better Together, Spanish Edition

Commentary

Fisher Investments Editorial Staff

The US Federal Deficit: Choose Your Own Fiscal Adventure

By, 10/13/2014
Ratings514.372549

Last week, the Congressional Budget Office (CBO) released its final projection for fiscal year 2014’s US federal budget deficit. And it is down again! They estimate the feds ran a $486 billion deficit in 2014.[i] The direction, even the magnitude of the dip, isn’t all that surprising—the deficit has fallen for some time. However, it still managed to attract plenty of debate. Why? The deficit is a frequently kicked around political football, and this time there is something in it for everyone. But we’d suggest ignoring all the noise and taking the figure for what it is—a result of a growing economy!

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

This year’s reduction isn’t a new trend—aside from a teensy uptick in 2011, the deficit has been drifting since 2009’s peak—falling steeply in 2012 and 2013. Since 2009, the deficit is down 65.6%. Exhibit 1 shows the deficit’s progression over the past decade in dollars. Exhibit 2 shows it as a percent of GDP, down from 9.8% to 2.8%.[ii] (Exhibit 2)

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths, Behavioral Finance

Putting Stocks’ Zigzags in Broader Perspective

By, 10/10/2014
Ratings1934.062176

After a big, volatile bounce back Wednesday, in which the S&P 500 surged 1.8%, negativity struck US markets on Thursday, with the S&P 500 down 2.1% on the day.[i] Since October began, the S&P has swung more than 1% up or down five times (two up, three down). The back-and-forth is rather predictably spurring some eye-catching headlines. Here is a small sample so you get the flavor:

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

However, all these headlines look at either one day or this month’s seven trading sessions under a microscope. A broader view can add some very valuable perspective.

Commentary

Fisher Investments Editorial Staff
Politics

Voting For Gridlock

By, 10/09/2014
Ratings374.162162

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

Midterm elections are less than a month away, and you know what that means: Cable pundits are earning some massive overtime. This is the home stretch! A time for grandstanding, blathering, mudslinging and other good old-fashioned family fun! Now if you’re into this sort of thing, it can be entertaining political theater. If you aren’t, you are quite possibly sick to death of the rancor and just want to know whether stocks will be happy with the results. If you are in the latter camp, we have good news: You can tune out the noise, because nothing in these final weeks means very much for stocks—whether campaign hijinks tip Congress one way or preserve the status quo, it is overwhelmingly likely we get more gridlock, which stocks love.

Over the next four weeks, you’ll see no shortage of articles or TV reports claiming the contest is certain to go one way. These are a guesses, and useless ones. Campaigns’ last legs have too many unknowns, and these races are too close to call. Take the House. On the one hand, Republicans would seem to have an edge since incumbents are hard to beat (Eric Cantor notwithstanding). The majority of the 47 total open House seats belong to the Republicans in the present House. However, of these 47, only about 18 Republican seats and 7 Democratic seats were really in play at the beginning of the year. Cantor makes 19. To seize the House, Democrats need to win all these open seats (or the lion’s share and knock off a few incumbents) and about half are in traditional Republican strongholds—the sweep is unlikely. Possible! But not probable. The Senate is sort of the reverse of this. Democrats (including Senators Sanders and King, independents who typically poll with the Democrats) have a 55-45 majority. The Republicans need six to win and have the structural advantage, with fewer seats to defend in traditional Democratic territory. But they’d need a near-sweep of vulnerable Democratic seats—two in states where they’re trying to defend a governorship (South Dakota and Alaska). They also have more state houses to defend in blue states—including three where they’re also trying to nab Senate seats (Iowa, Michigan and New Mexico). Those governors’ races could divert GOP funding away from the Senate races, perhaps counterbalancing their structural advantage. In short: The Senate could change hands, but it’s anyone’s guess whether it actually does.

Commentary

Fisher Investments Editorial Staff

IMF Sees 99% Chance Growth Continues, Projects Acceleration

By, 10/08/2014
Ratings384.552631

Why the long face? The global economy is growing! Photo credit: Bloomberg/Contributor.

“Big Supranational Sees Global Growth Pickup, Recession Risk Less Than 1%: Go World!” That would be the headline we’d plop on a report of the IMF’s updated global economic outlook, which forecasts a repeat of 2013’s 3.3% global growth this year and acceleration to 3.8% next year. However, this forecast happens to be a bit lower than the IMF’s last missive. And it’s titled “World Economic Outlook: Legacies, Clouds, Uncertainties.” And it’s published by an outfit whose leader says the world economy is entering the “new mediocre.” So the common interpretation runs the gamut from pretty blah to dire. But the IMF’s downward-revised forecast shouldn’t dampen investors’ view of a growing global economy—dour spin doesn’t equal dour reality.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths

Return of the Euro Crisis’ Ghosts

By, 10/15/2014

With volatility back, many seek to explain what has amounted to quite a back-and-forth October. And it seems many settled on recent developments in Europe as the culprit. While possible, a quick glance at Europe’s recent headlines might have you thinking it’s 2011 or 2012. In our view, fears around the eurozone likely lack the teeth to materially bite this bull. The questions may be slightly different now: It’s more, “How does the eurozone avoid a ’lost decade of growth?” than warnings of the imminent collapse of the common currency. But most of the fears—and many of the specifics—are the same. These recycled false fears likely lack the surprise power to knock a global bull off track.

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Better Together, Spanish Edition

Commentary

Fisher Investments Editorial Staff

The US Federal Deficit: Choose Your Own Fiscal Adventure

By, 10/13/2014
Ratings514.372549

Last week, the Congressional Budget Office (CBO) released its final projection for fiscal year 2014’s US federal budget deficit. And it is down again! They estimate the feds ran a $486 billion deficit in 2014.[i] The direction, even the magnitude of the dip, isn’t all that surprising—the deficit has fallen for some time. However, it still managed to attract plenty of debate. Why? The deficit is a frequently kicked around political football, and this time there is something in it for everyone. But we’d suggest ignoring all the noise and taking the figure for what it is—a result of a growing economy!

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

This year’s reduction isn’t a new trend—aside from a teensy uptick in 2011, the deficit has been drifting since 2009’s peak—falling steeply in 2012 and 2013. Since 2009, the deficit is down 65.6%. Exhibit 1 shows the deficit’s progression over the past decade in dollars. Exhibit 2 shows it as a percent of GDP, down from 9.8% to 2.8%.[ii] (Exhibit 2)

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths, Behavioral Finance

Putting Stocks’ Zigzags in Broader Perspective

By, 10/10/2014
Ratings1934.062176

After a big, volatile bounce back Wednesday, in which the S&P 500 surged 1.8%, negativity struck US markets on Thursday, with the S&P 500 down 2.1% on the day.[i] Since October began, the S&P has swung more than 1% up or down five times (two up, three down). The back-and-forth is rather predictably spurring some eye-catching headlines. Here is a small sample so you get the flavor:

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

However, all these headlines look at either one day or this month’s seven trading sessions under a microscope. A broader view can add some very valuable perspective.

Commentary

Fisher Investments Editorial Staff
Politics

Voting For Gridlock

By, 10/09/2014
Ratings374.162162

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

Midterm elections are less than a month away, and you know what that means: Cable pundits are earning some massive overtime. This is the home stretch! A time for grandstanding, blathering, mudslinging and other good old-fashioned family fun! Now if you’re into this sort of thing, it can be entertaining political theater. If you aren’t, you are quite possibly sick to death of the rancor and just want to know whether stocks will be happy with the results. If you are in the latter camp, we have good news: You can tune out the noise, because nothing in these final weeks means very much for stocks—whether campaign hijinks tip Congress one way or preserve the status quo, it is overwhelmingly likely we get more gridlock, which stocks love.

Over the next four weeks, you’ll see no shortage of articles or TV reports claiming the contest is certain to go one way. These are a guesses, and useless ones. Campaigns’ last legs have too many unknowns, and these races are too close to call. Take the House. On the one hand, Republicans would seem to have an edge since incumbents are hard to beat (Eric Cantor notwithstanding). The majority of the 47 total open House seats belong to the Republicans in the present House. However, of these 47, only about 18 Republican seats and 7 Democratic seats were really in play at the beginning of the year. Cantor makes 19. To seize the House, Democrats need to win all these open seats (or the lion’s share and knock off a few incumbents) and about half are in traditional Republican strongholds—the sweep is unlikely. Possible! But not probable. The Senate is sort of the reverse of this. Democrats (including Senators Sanders and King, independents who typically poll with the Democrats) have a 55-45 majority. The Republicans need six to win and have the structural advantage, with fewer seats to defend in traditional Democratic territory. But they’d need a near-sweep of vulnerable Democratic seats—two in states where they’re trying to defend a governorship (South Dakota and Alaska). They also have more state houses to defend in blue states—including three where they’re also trying to nab Senate seats (Iowa, Michigan and New Mexico). Those governors’ races could divert GOP funding away from the Senate races, perhaps counterbalancing their structural advantage. In short: The Senate could change hands, but it’s anyone’s guess whether it actually does.

Commentary

Fisher Investments Editorial Staff

IMF Sees 99% Chance Growth Continues, Projects Acceleration

By, 10/08/2014
Ratings384.552631

Why the long face? The global economy is growing! Photo credit: Bloomberg/Contributor.

“Big Supranational Sees Global Growth Pickup, Recession Risk Less Than 1%: Go World!” That would be the headline we’d plop on a report of the IMF’s updated global economic outlook, which forecasts a repeat of 2013’s 3.3% global growth this year and acceleration to 3.8% next year. However, this forecast happens to be a bit lower than the IMF’s last missive. And it’s titled “World Economic Outlook: Legacies, Clouds, Uncertainties.” And it’s published by an outfit whose leader says the world economy is entering the “new mediocre.” So the common interpretation runs the gamut from pretty blah to dire. But the IMF’s downward-revised forecast shouldn’t dampen investors’ view of a growing global economy—dour spin doesn’t equal dour reality.

Commentary

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

Eight Charts to Show Why the Strong Dollar Won’t Knock Earnings

By, 10/07/2014
Ratings434.186047


King Kong wreaks havoc. “King Dollar” doesn’t. Photo by Hulton Archive/Getty Images.

Well that didn’t take long. Just three weeks ago, headlines were all “Rah Rah Strong Dollar U-S-A! U-S-A!” Now they’re like this: Surging dollar may be triple whammy for US earnings. King dollar question mark for earnings and stocks. The strong dollar’s risk to 4Q earnings and beyond. Surging dollar may destroy US company earnings. Latest threat to corporate earnings: the almighty dollar. Their logic: A stronger dollar makes exports more expensive, making overseas business less profitable for globalized firms.[i] However, historically, there isn’t much (if any) evidence backing this case: A strong dollar isn’t inherently bad for US earnings, trade or stocks.

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings823.890244

With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.

MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).

To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).

Research Analysis

Elisabeth Dellinger
Reality Check

Inside Indian Taper Terror

By, 11/08/2013
Ratings174.294117

When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.

The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.

Exhibit 1: Emerging Markets Foreign Equity Inflows

Research Analysis

Brad Pyles

Why This Bull Market Has Room to Run

By, 10/31/2013
Ratings884.102273

With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.

Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.

Research Analysis

Christo Barker
US Economy

Let’s Call It FARRP

By, 10/10/2013
Ratings93.777778

While the rest of the country fretted over taper terror, government shutdown and debt ceiling limits, the Federal Reserve tested its Fixed Rate Full-Allotment Reverse-Repo Facility (a mouthful—let’s call it FARRP) for the first time September 24. FARRP allows banks and non-banks, like money market funds and asset managers, to access Fed-held assets—i.e., the long-term securities bought under the Fed’s quantitative easing—via securities dealers’ tri-party repo (and reverse-repo) market for short-term funding. (More on repos to follow.) FARRP aims to address what many feel is a collateral shortage in the non-bank financial system caused by too much QE bond buying concentrating eligible collateral on the Fed’s balance sheet, where it doesn’t circulate freely. As a result, many private sector repo rates turned negative. But, should FARRP be fully implemented, the facility could actually hinder some assets (in this case, high-quality, long-term collateral like bonds) from circulating through the financial system—much like quantitative easing (QE) locked up excess bank reserves. A more effective means of freeing collateral in the repo market is tapering the Fed’s QE.

Repurchase agreements, or repos, are used to generate short-term liquidity to fund other banking or investment activity—a means to move liquidity (cash) from one institution to another. In a repo, one party sells an asset—usually long-term debt—agreeing to repurchase it at a different price later on. A reverse repo is, well, the opposite: One party buys an asset from another, agreeing to sell it back at a different price later. In both cases, the asset acts as collateral for what is effectively the buyer’s loan to the seller, and the repo rate is the difference between the initial and future sales prices, usually expressed as a per annum interest rate. The exchange only lasts a short while—FARRP’s reverse repos are overnight affairs to ensure markets are sufficiently funded. In the test last Tuesday, the private sector tapped the facility for $11.81 billion of collateral—a small, but not insignificant, amount.

FARRP’s first round is scheduled to end January 29, and during that time, non-bank institutions can invest between $500 million and $1 billion each at FARRP’s fixed overnight reverse-repo rates ranging from one to five basis points. A first for repo markets: Normally, repo and reverse-repo rates are free-floating, determined by market forces. Another of FARRP’s differentiating factors is private-sector need will facilitate reverse-repo bids instead of the Fed. Ideally, FARRP’s structure will encourage unproductive collateral to be released back into the system when it’s most needed—and new sources of collateral demand may help ensure this. Swaps, for example, are shifting to collateral-backed exchanges due to Dodd-Frank regulation—meaning more collateral will be needed to back the same amount of trading activity. Collateral requirements for loans will likely also rise.

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What We're Reading

By , The Wall Street Journal, 10/22/2014

MarketMinder's View: Attention Social Security recipients: As noted in this article, you will receive a 1.7% bump in payments in the next 12 months, based on annual CPI-W! (That’s the Consumer Price Index for Urban Wage Earners and Clerical Workers, the basis for the Social Security Administration’s cost-of-living adjustments.) Huzzah? Whether you think that a paltry sum or a big windfall, it is largely based on the still-tame inflation rates experienced in many parts of the world lately. However, the thesis offered here to explain this phenomenon (slow economic growth results in tepid wage growth, which means little inflation) was debunked almost half a century ago by Milton Friedman in papers like this one. Headline inflation is being weighed down by falling commodity (energy, food, raw materials) prices. Core inflation, still slow, is being weighed down by slow loan growth, which is the result of monetary policy decisions like quantitative easing, which flattened the yield curve, reducing banks’ loan profits and, hence, their willingness to make loans. Inflation is always and everywhere a monetary phenomenon, and without loan growth, the money supply doesn’t grow.

By , Bloomberg, 10/22/2014

MarketMinder's View: So the hopelessly confused theory here is that now central banks' measures target weaker currencies so they can make their trading partners’ currencies rise, and we all know a rising currency is deflationary, so this is the latest fear-morph labeled a "currency war," a splashy name. But here is the reality: Most central banks' primary function is to target inflation, avoiding deflation and hyperinflation, if successful. So isn't this round of policy making just a (misguided) attempt to do that? Second, quantitative easing hasn't proven to be very inflationary in Japan, the US or UK. Why would it be different now? Third, inflation and currency values are not one-to-one, directly related. Inflation is an absolute phenomenon, currency values are always and exclusively relative. Hence, two countries could both experience high inflation or low inflation, yet one of the two would (assuming some movement) likely have a stronger currency than the other.

By , The Wall Street Journal, 10/22/2014

MarketMinder's View: Well, we are sure the sanctions are having an impact on Russia’s economy, which reportedly grew 0.0% in September. But we would humbly suggest that oil prices are a bigger deal than the largely toothless sanctions the West has put in place. When your economy is basically a one-trick pony, and that one-trick pony faces an enormous increase in the volume of tricks from other ponies, the price that pony can fetch for its trick likely falls. That is what is happening in the oil market today, and the oil industry is much more price sensitive than volume. This means the vast majority of Russia’s budget is hamstrung.

By , CNBC, 10/22/2014

MarketMinder's View: The short answer, from an economic and market perspective, is no. China cannot replace the West as an export destination for Russia, and Russia cannot replace America and the West with China. What’s more, the 30-year Gazprom deal signed between Russia and China may be denominated in yuan, but that isn’t negative for the dollar. The yuan is a non-player on the global stage in terms of transactions denominated in it or its share of foreign currency reserves. But even if it were, there is no sign that would be a real threat to the US. The British pound is alive and well, yet it pales in comparison the US dollar on the global stage. Ditto for the euro. And the yen! Moreover, not mentioned here but often connected to this reserve-currency fear, is the fear such a move would jack up interest rates on US debt. But this ignores the fact Japanese, German, French and UK rates are as low as or lower than US, and none have the primary global reserve currency. To the extent more countries can trade without converting to USD, that is an economic plus for the world. The US government doesn’t get a brokerage fee or tax on the trade, and there is a buyer and seller in every transaction. This is just a ghost story, pure and simple.

Global Market Update

Market Wrap-Up, Tues Oct 21 2014

Below is a market summary (as of market close Tuesday, 10/21/2014):

  • Global Equities: MSCI World (+1.5%)
  • US Equities: S&P 500 (+2.0%)
  • UK Equities: MSCI UK (+1.7%)
  • Best Country: Norway (+3.6%)
  • Worst Country: Japan (-1.4%)
  • Best Sector: Energy (+2.8%)
  • Worst Sector: Consumer Staples (+0.6%)
  • Bond Yields: 10-year US Treasurys rose by .02 to 2.21%

Editors' Note: Tracking Stock and Bond Indexes

 

Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.