The capital markets of the last quarter century have been incredibly generous to us. Since
mid-1982, the S&P 500 index has advanced at a solid 13.9% annual clip, while 10-year
Treasury bonds have posted annualized returns of 9.8%. With annual inflation averaging
just over 3%, this means that investors have seen their real wealth double every seven
years in stocks and every 11 years in bonds.
But, past is not prologue.
Would a bond investor, looking at 25-year returns of 10% and current long bond yields of
5% be foolish enough to expect the next 25 years to deliver 10%? Of course not. They’d
recognize that yields started in 1982 at 14% and had plunged to 5% over the next 25
years, earning hefty capital gains on top of a yield averaging 7% over this span. With
current yields of 5%, they’d expect 5%....Complete Article
So, what’s happening in the global economy? Let’s start with the weak dollar. As Fed policy tilts toward loosening, the already weak dollar hits a 15-year low, and is less than 2% from an all time low. The carry trade currencies, the yen and the Swiss franc, rallied the most during the dollar sell-off. (Here’s a good summary article on the carry trade.)
It’s not that foreigners are fleeing the dollar (unlike this article), though Treasuries are getting less attractive, because the dollar-based investments must be bought by someone. That doesn’t mean the exchange rates don’t shift down in the process, though, and exports seem to be improving because of the weaker dollar. Also, the idea that China would try to ruin the US through selling all of their dollar-based reserves is unlikely, though not impossible. China is too big of a holder to sell without driving the dollar down massively, which would force down the value of their remaining holdings, and harm their ability to export to the US.
Besides, what would they trade into? The US has the largest, most diverse debt markets in the world. One reas
on why the US is the world’s reserve currency, despite all of its flaws, is that there is no other economy with a currency capable of filling the role. Perhaps this article should have been titled, “Why isn’t the dollar falling more?” because the dollar has been falling, yet there are some things good about the dollar, and the US economy.
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BHP Billiton affirms future growth of demand for commodities
Charles Goodyear, CEO, BHP Billiton Ltd. in the company's August 22, 2007 Annual Fiscal Conference Call, excerpted below.
"...We believe that the industrialization and urbanization that has driven China’s growth will continue for several decades, as billions of people strive for a better quality of life. This growth is resource intensive, and it represents a step change in resource demand. Once people get a view of a better way of life, and governments see that as a good thing, it’s very difficult to put the genie back in the bottle. And while we talk about China, India has a number of fundamental drivers that are quite similar. We also say that we see India as being ten or fifteen years behind China, but as you can see from the chart, they’ve begun that journey...
...Now while the U.S. market remains important, it’s certainly not as important to commodity markets, as we saw 10 or 20 years ago. The growth that we’ve seen in India and China dwarfs the incremental movements in commodity demand in the United States...
...Many investors have simply failed to appreciate that China and India are domestic economies...
...but when you talk to people in China and India, they’re focused on strong demand growth, they’re focused on the shortage of raw materials, they are focused on their domestic market. Their fundamentals remain very much intact...
The MSCI World Index shed 11.0% between its high on July 19, 2007 and August 16, with the S&P 500 Index declining in similar fashion by 9.4%. At that stage high-yield debt markets had completely stalled, investment funds had blocked redemptions and the VIX had reached a high not seen since October 1987.
However, rescue was at hand as the world’s central banks – the Fed, the ECB, the Bank of Canada, the Bank of Japan and others – let it be known that they were dumping money into the system. The Fed went one step further and announced a discount rate cut of 0.5% on August 17.
Calmed by the central banks’ actions, stock markets around the globe staged a rebound. By Friday last week (September 7) the MSCI World Index and the S&P 500 Index were respectively -6.8% and -6.4% below their July highs.
