Repeat of the 1930’s?
Currencies have been vacillating wildly these past few weeks. The Swiss Franc’s intense movement last month was due to ending their “peg” to the Euro. This has allowed the Franc to be valued at its true value and not an artificial level “pegged” to a set Euro value. Looking beyond Switzerland, there is a larger move in governments around the world towards easing. The move towards easing their monetary policies to help drive growth in their economies has increased. The key problem is a global decrease in economic activity. Governments are burdened by debt taken on during the boom years and are trying to increase economic activity to help drive growth to increase tax revenue to escape it. They are failing to generate the goals they seek in trying to stop deflating prices and obtain some moderate level of inflation to help.
In the 1930’s, leading up to World War II we were faced with a similar situation with a dramatic effect. The world economy shrunk consistently following the Great Depression, whose impact was felt around the world. Governments tried to increase their economic engines by adjusting their currencies – making their currencies less expensive so other countries will buy their goods because they are cheaper and thus increasing their economies. This served as more of a race to the bottom than anything else, by exporting deflation to other countries.
In today’s world, many countries are trying desperately to ease their currencies to generate some sort of growth. Europe, Switzerland, Denmark, Canada, Australia, Russia, India, Singapore and Sweden have all made efforts to ease their internal lending. There have been 514 moves to ease currencies in the past three years by several governments. This has helped drive money to the stock markets but can it last?
Oil is now at $60 per barrel, a significant discount from its $107 peak in June, but also higher than its recent low of $45.22 per barrel. Oil is helping aid the argument of global deflation. Prices decreased and are low because of a few reasons, although the quick drop still has many people trying to make educated guesses. The trend might be toward stable or lower oil prices. US economic growth has been 2.3 percent per year since the middle of 2009, resulting in lower oil demand. China is seeing slowing growth, as is the rest of the world. Output in oil has increased as the US ramped up production with technologies like hydraulic fracking and horizontal drilling. At the same time, fuel efficiencies are increasing. In total, US imports of oil have decrease 41% since 2007. This has helped in non-OPEC supply increasing by more than 1.5 million barrels per day. Demand for oil is also increasing less, from 1 million barrels per day from 2010 through 2013 to an increase of 700,000 in 2014. Oil prices are lower and the US is less dependent on foreign oil now than they were. This seems like good news for the US economy.
Greece & Ukraine
Greece, even after electing a government sworn to free that country from some of its debt burdens, last week was saying they will make nice and work with their creditors. This is soothing to those creditors, who span the globe, because it appears that they will actually pay their debts (at a renegotiated rate) as opposed to just defaulting. This has helped the markets as people are now more comfortable with Greece. As of January 17th, word is coming in that they might actually not be as willing to negotiate as hoped. Anyone want to guess on this? Ukraine, the true hotbed of Europe at the moment, has reached a truce that has given some people comfort in the hope of a lasting truce. Time will tell if this is a lasting peace.
In January, stocks were declining as bonds were rising. January was down 3% (SPY) which, based on past experience would mean the rest of the year will be down as well. The Stock Trader’s Almanac declares that 89% of the time this has been true from 1950 to 2013. In 2014, just last year, however, the market returned 11.4% with a loss of 3.6% in January. History does repeat itself but never like anyone thinks.
Amongst all the talk of interest rate worries and the calamity coming to bond markets everywhere, the iShares 20+ Year Treasury Bond returned 9.8% in January. This is interested as most people were saying bond prices will be falling as interest rates will rise. Many are now saying rates won’t rise this year, or even next. Of course, the fed could also surprise us as they have in the past. It seems like the economy isn’t yet on a firm enough ground though to sustain an increase in rates.
Quote of the Week:
“Whoever heard of a poor man spending himself into wealth? It’s dumb. But we try stimulus spending all the time. Who ever heard of an economy being taxed into prosperity? The only place you can find this is among professors at Princeton. It’s crazy!” – Arthur Laffer, creator of the Laffer Curve
A note about the report:
I have, for as long as I can remember, been fascinated by the economy and the stock markets. Nearly my entire life I have been trying to interpret both. I have my Bachelor of Arts in Economics, but have found the cold, hard experience of working on a trading floor and my own accounts has been a better teacher. In putting pen to paper I hope to inform others about where I see the economy and the market, and perhaps some insight into where they are headed. This is not financial advice. Enjoy.
Our Source Material:
Barron’s Vol. XCV No. 7 – February 16, 2015
Barron’s Vol. XCV No. 4 - January 19, 2015
The Wall Street Journal – February 15, 2015
The Wall Street Journal - January 18, 2015
Bloomberg View, February 16, 2015
CNBC, February 17, 2015