January 31, 2013 | By Scott Minerd
At last week’s World Economic Forum in Davos, I witnessed a crystallization of the view that the financial crisis is officially over and a period of economic expansion lies ahead. The sentiment was so euphoric, in fact, that contrarians could interpret it as a concerning signal. Despite the bullish sentiment coming out of investors and policymakers at this point, significant structural problems persist in the world’s advanced economies. Global quantitative easing programs carried out by central banks over the last half decade have covered up a litany of short- and long-term economic ills, without addressing their underlying causes.
In the immediate-term, currency wars appear to be an ongoing risk. Germany is concerned with maintaining its export competitiveness, given Prime Minister of Japan Shinzo Abe’s stated intention to further depress the yen. Down the road, monetary authorities will have to address their strategies for reversing the vast accommodation that has been carried out since 2007. Before the central banks can contemplate tightening liquidity conditions, however, they will have to cease making large scale asset purchases. This is unlikely to occur in the near future, as these policies seem to have provided a window of continued economic expansion, which may last for two or more years. The investment take away from all this is that those who are still worrying about the financial crisis are probably too late, and those worried about a bubble in credit markets are too early.
The continued balance sheet expansion in certain major global central banks has resulted in a depreciation of these countries’ currencies over the past few months. Since last June, the trade-weighted Japanese yen, British pound, and U.S. dollar have depreciated 15.1%, 2.6%, and 2.0%, respectively. By contrast, the euro has appreciated 5.8% against its major trading partners’ currencies, corresponding with a contraction of 5.6% in the European Central Bank’s (ECB) balance sheet during the same time. The contraction in the ECB’s balance sheet was caused by European banks returning their loans from the central bank as a result of improving economic sentiment in the eurozone. Nevertheless, economic fundamentals in the eurozone remain weak, and most peripheral nations are still in recessions. The competitive devaluation in other major economies may push the value of the euro to growth-inhibitive levels, exacerbating the eurozone’s problems.
CHANGE IN CENTRAL BANK ASSETS VS. CHANGE IN TRADE-WEIGHTED EXCHANGE RATES (JUNE 2012 – PRESENT)
Source: J.P. Morgan, Bloomberg, Guggenheim Investments. Data as of 1/29/2012. Note: The trade-weighted exchange rate is calculated by J.P. Morgan.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2015, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Preparing for the market turbulence that typically occurs in the run up to a recession.
Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve’s signal at their peril.
Factors that have contributed to strong earnings growth this year will fade in 2019 and turn into headwinds in 2020, exposing leveraged corporate borrowers.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2018 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.