• Argentina ousts leftist "Peronistas"
  • Chinese currency gains reserve status as US Dollar Index hits new highs
  • More easing to come in Eurozone as signs of global weakness abound
U.S. stocks continued their recent pattern of high volatility during the month of November. By mid-month, US stocks were down 4%, hitting bottom on Friday the 13th. From there they recovered into month end. International stocks did not fare as well: developed economies lost -0.8%, and emerging economies were off -2.5%. Commodities were also hard hit, with gold and broad commodities losing roughly 6.5% each. Bonds, the usual safe haven trade, showed weakness as well with the U.S. bond index losing -0.4% during November. This month's weakness across many major asset classes has left many markets in the red or close to flat for 2015:  
Gold continued its recent losing streak in November with 6 weeks of negative returns in a row. It has now lost 25% of its value over the last 5 years. The weakness is being attributed primarily to the recent strength of the U.S. Dollar Index, which is hitting highs not seen since early April. The dollar's upward move had a negative impact on all dollar-denominated commodities during the month as well. The dollar's strength will also come into play at year-end as a higher dollar acts as a headwind for multinational companies' earnings prospects.
Events in Paris dominated the news flow in December. Global terrorism resurfaced in a most heinous way, and reminded investors that a determined and fanatical enemy can impose its nihilist ideology anytime, anywhere. As much of Europe grapples with a crushing flow of refugees from the Middle East, the tension between maintaining collective security and preserving personal privacy and freedoms will be challenged as never before.
In Argentina, Mauricio Macri, the former mayor of Buenos Aires and a pragmatic centrist, won their presidential election, vowing to bring change and a new direction to South America's second-largest economy. Macri's victory ended twelve years of populist rule by Cristina Fernandez and Nestor Kirchner, a husband and wife team who were directly inspired by former leftist leader Juan Peron. Many leftist leaders in Latin America are suffering plunging approval ratings as the resource-rich region adjusts to the end of a decade-long economic boom spurred by high commodity prices. Macri's election is another example of the huge shift that is occurring globally as voters oust entrenched leaders who represent the status quo.
At the end of November, the International Monetary Fund (IMF) announced that China's currency (known as the Yuan) will be included in the Special Drawing Rights (SDR) beginning in October 2016. SDR's were created by the IMF in 1969 to form a core world reserve asset made up of the world's most important and freely tradeable currencies. Prior to the announcement, the US Dollar, UK Pound Sterling, Japanese Yen, and Euro made up the basket. With this announcement, China has effectively been anointed as a major global economic power.
Many were surprised at the relatively heavy weighting given to the yuan versus other currencies: 10.92% versus the Dollar at 41.7%, the Euro at 30.9%, the Yen at 8.3%, and the Pound at 8.09%. This announcement, while widely anticipated, is a pivotal moment in the evolution of the US Dollar's place in global transactions. It will now have a major Asian rival, and, more importantly, will force China to modernize its capital markets (especially its bond markets), while improving disclosure and transparency. The press release from the IMF is worth a read here:
Elsewhere last month, European Central Bank President Mario Draghi turned up the volume on the need to provide fresh stimulus to the eurozone's economy, saying policymakers would "do what we must" to return inflation from its current level of 0.1 per cent to their target of less than 2 per cent "as quickly as possible". Investors now expect action from the ECB this month, and anything less would prove a big disappointment.
Despite buying €582 billion in bonds out of a planned €1.1 trillion, eurozone growth remains lackluster, and inflation has failed to pick up as much as the ECB had hoped. Their FOMC (the governing council) is now saying it would carry on buying until their stated deadline of September 2016 "or beyond, if necessary". As in the US, QE is going to last a lot longer than most anticipated it seems.
As a reminder, the ECB became the first major central bank to lower rates into negative territory when it cut its deposit rate below zero last year:
After Draghi's comments, there is now concern that deposit rates may fall even further, especially since deeper cuts by central banks in Scandinavia and Switzerland are already on the books. This surreal situation underscores the fundamental challenge: why would any rational investor leave money on deposit in Europe when it is effectively being taxed with negative rates? No wonder the eurozone isn't growing! Whatever happens, another rate cut would almost certainly result in a weaker euro against the dollar. (Maybe it's time to plan that trip across the pond for next summer...?)
In the US, investors widely anticipate the US Federal Reserve to raise rates at its December 15-16 FOMC meeting. The bond market, as usual, adjusts to expectations in real time, and short term rates have already risen noticeably this year in advance of a rate hike, so there may not be much of a reaction in the bond market:                
As we publish this, the ISM Manufacturing Index was released, and it dropped below "50" to a two year low of 48.6, indicating recessionary "status" for the manufacturing sector. (The ISM is a national survey considered by many economists to be among the most relevant leading indicators in their toolkit.) The Fed initiated all of their quantitative easing programs (QE1, QE2 and QE3) when the ISM was below 50, and the current picture suggests another ease is in order:
It is hard to imagine the Fed would raise rates against this manufacturing backdrop, especially with the US Dollar rising, which will further dampen demand for exports produced by that same sector. Higher US interest rates also act like a magnet for overseas money, much of which is currently earning a NEGATIVE rate of interest. Capital flowing AWAY from the Eurozone, Asia etc. to the USA will LOWER the value of their currencies, reinforcing a DE-VALUATION that none of their governments want. You can bet that the Fed is getting the message loud and clear from foreign central banks that it would be "counter-productive" for them to raise rates at this time.
Notice also the "gap" between the ISM and the S&P 500 that has developed. Either the stock market is looking through a temporary period of weakness to a recovery, or it has not yet adjusted to a coming recession. Time will tell.
For these and all of the other reasons outlined above, we believe that markets are grappling with a time of transition. Signs of global weakness are increasing, but stock markets, especially in the US, do not seem to have adjusted appropriately. Therefore, caution is still in order for risk oriented portfolio holdings, and we favor minimal weightings in assets like stocks, commodities, gold etc. If price trends regain strength this month, we could envision gradually rebuilding risk positions, but the jury is still out.       
On a lighter note, we chuckled at this recent Wizard of Id cartoon, and hope you will too:
We've also updated the link on the top left border of this email to the 2015 version of "The Individual's Guide to Personal Income Tax Planning" published annually by the American Association of Individual Investors. It's a great summary and quick read of all things tax related.
Stay safe this holiday season, and enjoy the blessings of family and friends.
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