Columns

 FEBRUARY 2015 INVESTMENT JOURNAL: DEPRECIATION DECLARATION
 
  • G20 meets in Istanbul and endorses currency depreciation to promote growth
  • Middle East war drums beat louder as Obama asks Congress for War Powers
  • Troika agrees to four month extension for Greek bailout terms
  • JP Morgan announces negative interest rates for large depositors 
        
After a weak January for U.S. stocks, a reversal brought returns into positive territory for February and the year to date. International equity markets continued higher, extending their move into refreshingly positive territory for the year. Bonds were down during the month, a reaction to the February 6th employment report, which showed stronger job growth than most expected. International bonds suffered from sharp currency adjustments versus the strong U.S. Dollar. Commodities gained back the majority of their losses from January, but it is still too early to confirm the beginning of a new uptrend in this space. Gold had poor performance in February, but is still positive for the year after a very strong January:
     
    
          
The last 12 months have produced a wide difference in returns when looking at the broad asset classes. Most world equity markets have averaged low single-digit returns over the last year. The lion's share of volatility has been seen in hard assets (in pink on the chart below) like gold, silver, natural gas, crude oil, copper, and lumber. All of these are negative over the last 12 months, with crude oil leading the way, down 50% over the period. The old saying, "the trend is your friend" has held true the past year, as U.S. stocks have continued to lead other asset classes higher:
                           
     
On the news front this past month, finance ministers and central bankers from the G20 met in Istanbul February 8-10 to consider the no growth / slow growth conundrum of the world's major economies. Among a laundry list of items in their post-meeting communique was a declaration that strongly supported aggressive easy-money policies as a tool for promoting growth. Lowering official interest rates has long been understood to be an effective tool to depreciate a currency so, in effect, the G20 just endorsed currency depreciation as a means of stimulating their economies.     
     
The envisioned path forward, therefore, is one in which exports are made more affordable for foreign buyers via currency devaluation. Some have called this a "race to the bottom", "beggar thy neighbor", and "currency wars", but any way you slice it, deflation (lower prices) will be the outcome. Countries will move aggressively to protect their home markets, like the U.S., which this month saw a bill introduced to place increased tariffs and duties on certain categories of imported goods. Large exporters, like China, will act quickly to protect their competitive currency rate, as they did the last day of February by announcing a surprise cut in interest rates. All in all, it suggests still lower interest rates are coming, not higher.
              
On the geo-political front, President Obama asked the U.S. Congress for a new resolution to conduct military operations against ISIS, including the use of ground forces, on February 11. Congress has yet to approve a resolution, but it may mark the start of a re-escalation of this age-old conflict that is essentially an Islamic Civil War. Throw in a new Saudi Arabian King, a crash in global crude oil prices, and a militant Shiite Iran that is encircling the Sunni countries, and you've got a toxic mix that is heading to a boil. Markets have already factored in lower oil prices, but seem complacent about this volatile area of the world. That's usually when surprises happen and volatility explodes higher.
          
The new Greek government didn't take long to show their true colors, as they accepted a four-month extension of the current "bail-out" under terms set by the IMF, European Commission, and ECB ("Troika"). National parliaments voted for approval, most notably Germany, even though the vast majority of people in both countries oppose further concessions. The language of the bail-out was vague, but it contained some classic "spin": "In the commission's view, this list is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review, as called for by the euro-group at its last meeting." It does nothing but kick the can down the road. In the meantime, we will see how the Greek people react to being sold out once again by the politicians. It's shaping up to be one "hot" summer in Athens.
         
Lastly, in a little noticed move, JP Morgan announced at month end that it would begin charging large depositors to hold their money. This is an expansion of a policy begun in Europe called NIRP (negative interest rates). The bank cited new regulations and low interest rates as the reasons, and is targeting a $100 billion reduction in deposits. The effect may be small to start with, but others are sure to follow. The result will be to further dampen economic activity via the "multiplier effect", as less money gets lent out. There is certainly no incentive to earn a negative interest rate, so the turnover ("velocity") of money, already at decade long lows, will remain floor-bound:
        
 
                      Source: St. Louis FRED

                

All in all, February revealed several important markers for the road ahead. Currencies will remain at the center of competitive jockeying in the global trade arena. This makes it less likely that the U.S. Fed will raise interest rates, since it would drive the U.S. Dollar higher and make our exports uncompetitive. Interest rates will continue to drift down, especially in countries that have above average yields (emerging markets). The U.S. will continue to be seen as a safe haven as military conflicts fester globally, leading to more capital coming into U.S. markets. That should be supportive of stock prices.
              
We'll continue to monitor global price trends, which evolve and change over time just like the seasons. It's been a snow-filled month here in NC, so hopefully, spring is just around the corner and we can all put the snow shovels away! Have a great month of March, and remember to celebrate the Irish in us all!
         
       

        

 

2015 Stratford Advisors, Inc. All Rights Reserved.

This publication is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or sell or trade in any securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Stratford Advisors, Inc., or any of its officers, directors, employees, affiliates or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. All investments are subject to risk which should be considered prior to making any investment decisions. The firm may hold for its clients, Principals or employees, positions in any securities mentioned herein, and may buy or sell such securities at any time without prior notice.   

© 2018 • Stratford Advisors • Investment & Invested in your Future