Lots and lots of central bankers gathered at a yearly meeting in Jackson Hole, Wyoming over the weekend to discuss inflation and how best to get it fired up again.
The grand conclusion: it's not so easy.
The US Federal Reserve believes that economic growth will continue to improve in the 2nd half of 2015 and that with this growth, inflation will naturally re-assert itself.
Bank of England Governor, Mark Carney, is in the same camp, although he admitted that they need to pay attention to what is happening in China.
The public optimism they hold is intended to transcend into the psychology of markets and the economy in general, however according to Bloomberg:
"At Jackson Hole, academics effectively delivered a beating to central banks' confidence in their ability to predict and manage their key variable, by pointing out wide gaps in knowledge about how inflation works."
In Europe and Japan, extraordinary monetery policy easing has yet to positively impact inflation. The Euro economy has improved, Japan is still struggling.
Falling commodity prices, especially in energy, have been a significant contributor to the current lack of inflation and have complicated the experts ability to predict the outcome.
Why is this important?
Because the US Federal Reserve and The Bank Of England are going to start raising interest rates and if their timing is off, there is a risk that this could choke off the 2 economies that have been growing in a global economy that has been struggling: Europe, Japan, Canada, Australia and China have all been lowering interst rates or easing monetary policy with eatraordinary stimulus.
In fact, despite their optimism, the latest data on inflation from the US shows a rate well-below the Fed's target:
The uncertainty surrounding the timing of raising interest has been one of the catalysts that has created recent stock market volatility.
The real question on monetary policy, on the global scale is:
Is it wise to raise rates when there is so much global uncertainty? We believe it is not. The market odds on a September increase by the Fed are 36%.
Central bankers and finance ministers will gather to further discuss this further when the G20 meets later this week. We are of the opinion that it should not be a country by country decision (to raise/lower interest rates), but a joint decision considering the global outlook.
With this in mind, we remain cautious on the outlook for global financial markets and will continue to be defensive with our client portfolios.
Generally speaking, the 60/40 model (60% equity / 40% fixed income) should be basically close to flat on the year, however, it would depend on the weightings of the various sub-asset classes as to exactly how this would look at this moment.
My old model (2010-2014) is in fact down approx. 1% thus far this year.
Our new model (slightly adjusted earlier this year: increased cash position, reduced exposure to pref. shares, lower ETF costs among other changes) is up by approx. 1% on the year.
Europe, Australia and The Far East indexes (large and small companies) continue to be the best performers in the models.
The Canadian Preferred Share index is the worst performer.
Interestingly, the composition of the Canadian Preferred Share Index has been changing: as older, higher yielding issues are matured, they are being replaced by more recent, lower yielding issues (lower interest rates) which has reduced dividend distribution and made them a less desirable asset class.
Government and Corporate Investment Grade Bonds have made positive contributions, High Yield bonds are negative.
Also and interestingly, High Yield bonds are down less (thus far this year) than the S&P TSX and the S&P 500. This makes sense, because as I have pointed out in past blogs, Canadian High Yield offers better risk-adjusted returns than either of those 2 indexes over time:
As far as the equity markets contributions, as I have suggested earlier, non-North American (developed market) Indexes have out-performed, North American indexes are negative and Emerging Market indexes are basically flat (which, all things considered, is a bit of a surprise).
Remember, with a balanced portfolio, it is the re-balancing that will guide you on how next to proceed. Sell over-weight, out performing asset classes and buy under-weight under-performing asset classes. As the cycle progresses, out-performing assets will likely under-perform in time and under-performing assets will likely out-perform in time. Don't try to time the cycle, let the portfolio tell you when to trade.
Expect The Unexpected!
Equity Markets are cheaper:
S&P 500 is down 12.5% from its highs (May 2015).
Canada (S&P TSX) is down 15.5% from its highs (Sept. 2014).
Japan down 10.5% (Jul. 2015).
UK down 15% ( Apr. 2015).
Euro down 16.5% (Apr. 2015).
Australia down 13% (Apr. 2015).
So we have our correction.
Volatility hit levels not seen since 2009 on Monday (near 55 on the VIX) but closed back below the weakest levels in 2010 and 2011 yesterday (at 36 on the VIX).
Historically, higher volatility spikes early on, but volatility levels remain lofty for a period of time following the big spikes, but gradually decrease.
The S&P 500 should see some further buying support at last Octobers lows near 1820-40, if that holds, then we could possibly move back to the 2000 - 2100 level (as the next move).
Otherwise the up-trend line from the 2009 bottom will be the next test of support at or near 1700.
The 2007 high near 1600 follows that.
Until the up-trend line is broken, we are still in a long-term (secular) bull market.
Key Catalysts will be:
What will happen to the Chinese economy, will it be able to restructure and return to growth?
Will the US economy lift off in the 2nd half of 2015?
Both of these resolved in a positive way should help commodity prices eventually find support.
This will assist developing economies.
Inflation will likely remain low for some time to come.
At this point we have not seen what the collateral damage has been and if there will be "knock-on" effects after the equity market melt-down.
Certainly the trillions of $ of realized and/or unrealized losses will leave investors a little less wealthy, but the impact on the market psychology will take a little while to determine.
So we shall be watching closely.
Remember, that these are all short-term phenomenon and despite all the doom and gloom that may be foisted upon us by the media in the next little while, we have to stay focused on the long-term:
Most importantly your future goals and managing the risk of not achieving them.
If you had cash to invest, yesterday was a brilliant day in the equity markets.
If you didn't, I suspect it was a bit gut-wrenching.
I believe that properly building an investment portfolio should take years (not days) to complete.
In the short-run, you may lag behind the "market", but different asset classes will have their "moments" when investors/traders give up on them because they are not performing and hit the sell button that sends them to very reasonable price points and if you have been patient, provides a great buying opportunity.
There have been 2 very decent buying opportunities in the equity markets over the past year:
Oct 15, 2014 and yesterday.
If you look back over my blog since its inception and have perhaps had the chance to listen to our weekly webinars, we (my business partner Paul and I) have been relentlessly (almost ad nausseum) beating the drum on how and why equity markets were expensive.
So we have been patient, until yesterday, when opportunity permitted us some great purchase opportunities for our clients.
I feel sad for those investors who's advisors put their money in to the market at any price, without some analysis of market trend, because not only did they miss yesterdays opportunity, but they also likely had to sit and watch while the value of what they owned (at higher price points) slipped further into the red.
That is where having a good, patient discretionary portfolio manager can be a real advantage: when opportunity arises, they can act quickly (of course within the parameters of your pre-established investment strategy) to adjust to changing market circumstances. That is added value. That is what you are / should be paying for.
An advisor who has to call you to get permission to make an adjustment may not be able to get to you in time.
Sometimes it pays to be patient and have cash ready for an opportunity when it arises and it may take months and sometimes years to get "fully" invested. Yesterday was a good day for those folks.
It is webinar Tuesday at:
Feel free to tune in to our recorded version at or about 5pm:
We will talk about the current state of financial markets and the global economy and other wealth management issues.
See you then!
I have been through many market "sell-offs" over the 35 odd years that I have been participating in financial markets and it amazes me how similar they all are.
For months and months upon months, markets remain over-valued (one extreme) and all of a sudden everyone comes to their collective senses?
Makes me shake my head in wonder.
In the early going, the most exposed traders, those who have gambled using borrowed money (leverage) are the first to liquidate (because they have to) as the assets that provide the collateral for the loan, fall to levels where the lenders demand more money to protect the loans. Traders must then sell more liquid assets to cover the required payment, further driving prices lower.
So we will get (quite quickly) to the other extreme.
Then we will need to assess the "collateral damage", both financially and psychologically on market participants.
There will be some potential for large highly leveraged institutions and hedge funds to suffer significant losses and that may exacerbate the situation, however, lessons learned from 2008 should likely limit this (although, there are many who, overwhelmed by their lack of good sense may get stung again).
There are under-currents in the global economy, as we have been suggesting consistently that have been less than positive and these may become more front and center as the weeks progress.
The S&P 500 will open another 3% (approx.) lower this morning and has blown through most minor support levels. There is strong support at last year's lows at 1820-1840.
It is August, so liquidity levels are less than normal and those traders who wish to capitalize on investor fears will be doing their very best to use the volatility to their advantage.
Have you heard from your advisor?
Traditionally, this is the time when advisors show that they care about you (or they don't). If they aren't calling to discuss your concerns, they don't really care.
Interestingly, it is also a time when discretionary portfolio managers can also add value.
Non-discretionary managers have to call you and ask you if they can place a trade (or even cancel an order). A large, non-discretionary practice has to call hundreds of families.
This can be daunting and leaves some clients (who do not get the first call) at a disadvantage.
In any event, remember that, like the swinging pendulum, we will see extremes, but eventually cooler heads will prevail, finding value and moving markets back to equilibrium.
Are all in this mornings financial markets news headlines.
Certainly these issues are front and center for their implications on developments for the global economy.
The key question (and there appear to be many opinions on the answer):
Is China in control? Are they being proactive or reactive?
This all remains to be seen, in time.
Emerging economies are getting caught in the fall-out (Chinese Yuan devaluation and equity market sell-off) there is currency, bond and equity market volatility and investors are moving away from that risk as a result.
Ever wondered what the (MSCI) Emerging Markets (Equiy) Index is comprised of?
When the indexes are sold as a whole, many very solid companies may be taken lower in price as a result, but in time as value is recognized they will "bounce" back in price as investors uncover the value that was created. This unfortunately, may take time to happen.
So it is important to remember that the purpose of owning this index (or any index for that matter) is for long-term growth and from time to time there may be short-term downward pressure on prices, but that eventually, as the good companies remain solid, they will bring the index back to realistic growth levels.
Today is "Webinar Day" at
We will post a recorded version of it at approx. 5pm (EDT), so feel free to tune in at:
and now that I am on the "bandwagon"
The rise of Sirius (the dog star) late in the night sky in the constellation Canis Major, has historically been identified with the hottest and most humid days of summer and hence the expression: "Dog Days".
Most folks are in "vacation mode" (in the Northern Hemisphere anyway) and traditionally financial markets experience low volumes of activity.
It is a great time, before the rigours of "back to school" kick in and we get sidetracked by Blue Jay fever (even I have jumped on the bandwagon) to take stock of your situation and assess where you are as we enter into the last phase of 2015.
Best way to do this?
Lounge in your beach chair, cast out your fishing line, hoist the main sail, line up your put (or whatever you may be relaxing with) and as you do that, give thought to all of the things in life that are important too you.
Take all those important things and determine what it is that you need to do to make sure that all those important things remain as your life's key goals and objectives.
Family, professional, charitable, financial, health, travel and any other priorities that you might have.
If you can, write them down and list them in order of the timing in which you might want to achieve them.
Then, put them away (for now) and go enjoy the last few weeks of summer. We can pull them out again in September and start to work on how you are going to make them all happen.
This is the crucial argument for the foreseeable future and one of the key reasons why we believe that we are in a low return environment and will be for some time.
For most central banks, their monetary policy is mandated to maintain "price stability". In the US, the Federal Reserve has a dual mandate which adds "full employment" to the equation.
The going rate for most central bank's targets for "core" inflation (excluding the more volatile food and energy components) is 2%.
Currently, core inflation is running well below targets on a global scale.
However, it is not just the current status of inflation that we need to be concerned with. We also need to think about what the future holds.
Traditional economic theory instructs us that economic growth breeds the demand for goods and services that push prices higher (and hence consumers demand higher wages to continue to be able to afford those higher costing goods and services).
With that in mind, the US Federal Reserve expects growth in the US economy to pick up steam in the 2nd half of 2015, which in turn would (according traditional economic theory) infer higher rates of inflation in the future.
That would justify their desire to raise the Fed Funds rate in September by 1/4%.
However, their are other forces at work:
If we look at the global economic picture, it is not so rosy:
Today's data show that Europe continued to struggle in the 2nd quarter of 2015:
However, Euro Area core inflation picked up slightly in July:
New data on US Producer Prices released this morning also show continued low inflation:
Meanwhile commodity prices continue to decline and historically, commodity prices have been a strong indicator of future inflation (or deflation):
We can say that there is certainly a likelihood of continued low inflation.
However, US manufacturing data released this morning showed better than expected growth :
This may add to the Fed's expectations of improved economic growth.
All the new economic evidence/data continues to balance the argument:
Inflation is currently low, likely will remain so in the near future and economic growth, while improving slightly in the US, remains subdued globally.
We continue to monitor developments.
Retail Sales for July were higher by .6% and May and June's data were revised higher as well, based on higher auto sales (+1.4%) and restaurants (+.7%).
I have continued to expound, regularly, on the changing demographic of the consumer and while this latest data does not change our longer-term outlook, it may encourage the US Federal Reserve, giving their forecast on better US economic growth for the 2nd half of 2015 greater credibility (although data revisions can and may make these numbers less reliable in the short-term).
Even though there may be some better US domestic data, there are still global forces at work and recent economic activity in China (slowing export growth and currecy devaluation) and other developing economies as well as lower inflation data in Europe are all necessary considerations for the Fed in its September policy deliberations.
While many believe that a 1/4% increase in the Fed Funds rate will not be significant, it does have the ability to add uncertainty to an already struggling global economic situation.
This may or may not come as a shock, but for the forseeable future folks, we are "oficially" in a low return environment:
Low economic growth, low revenue growth, low earnings growth, low commodity prices, low wage growth, low inflation and low interest rates = low returns.
So we have added this to our list of Themes for 2015.
Almost every chart that I popped up on yesterdays webinar had a "down" arrow for the recent direction of that particular price or economic statistic.
And there were many more.
As I have said often enough, recently, we have had multiple years of above average returns and this next part of the cycle is inevitable as we move back to the average.
What investors need to guard against is taking on greater risk in order to attempt to continue to get better returns.
If you have a plan and strategy, stick with it.
Ensure that your asset allocation is balanced and / or re-balanced and sit tight.
If you have new cash to add, be patient.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist