Introduction

Every week I try to take noteworthy events and provide accessible commentary regarding the potential impacts of these events and my own personal interpretation. These comments are not necessarily the viewpoint of Newfound Research and solely represent my own personal perspective.

Week Ending: May 24th, 2013

This week reflected the resiliency of the global market rally. Even in the face of a severe Japanese Market decline, a contraction in Chinese manufacturing, and ambiguous remarks from Chairman Bernanke regarding the reduction of easing, the markets showed insignificant declines by week end.

The one persistent trend was decreased average correlations across asset classes, which is generally a sign of increased appetite for risk in the market. The graphic I created below shows the day to changes in return, volatility, and average correlations, with cumulative average values for listed asset classes on the right hand side.

5.24.13-daily_vals

Asset Class Proxy Used
Japanese Market EMJ
Emerging Market Bond EMB
High Yield Bond HYG
Investment Grade Bonds LQD
Long Term Treasuries TLT
Medium Term Treasuries IEF
TIPS TIP
Commodities GSG

Noteworthy Reads / Events of the Week

  • A Return of Japanese Consumption: The concern with any persistent deflationary environment is a decline in consumption from expectations that goods will only get cheaper. This has largely been the case with Japan for the past 20 years, however, there are signs that the bold new policies of PM Shinzo Abe are beginning to spur domestic consumption.
  • Why the US was Never Japan… or Might Have Been: The policies of Ben Bernanke and the Federal Reserve have been, and will continue to be quite controversial. Those offering praise cite the avoidance of a multi-decade deflationary cycle like Japan, whereas critics insist that the U.S. situation lies in stark contrast to that of Japan's. William Dudley, President of the NYC Fed gave a speech this week that provides a great summary of the Japanese situation and compares it to the United States. A quick read provides clear indication as to why Bernanke has sustained easing for so long… in order to not become Japan.
  • 'Tis the Week for Fessin' Up: It's pretty rare to see pundits and columnists crawl back to their audiences to make good on incorrect judgments they made in the past. This week I've read several articles by columnists who've extended the olive branch regarding their perceptions of high inflation as a result of the Central Bank's aggressive monetary policy -- namely there isn't any and they thought there would be.
  • A Bold Shot from a Big Shot: In the realm of Financial Economic commentary, there are few on par with the CEO and co-CIO of PIMCO, Mohammed El-Erian. So although the media is wrought with naysayers in the midst of a surging global market tide, it's kind of a 'big deal' that El-Erian has made the recommendation to begin to pare back risk assets (read: equity), in a "measured and disciplined manner."
  • Academic: The Federal Reserve Bank of New York published a great piece that lays the framework for how the current accounts of the Euro periphery countries can be used to glean insights surrounding foreign investment, domestic savings, and export growth.